The Market Today
Trade Progress, Weak Global Data, Mixed U.S. Data
by Craig Dismuke, Dudley Carter
Savings Rate Remains Elevated As Personal Income Outpaces Spending: The savings rate jumped 0.3% to 8.1% in August as income gains of +0.4% MoM outpaced the 0.1% increase in personal spending. On a year-over-year basis, income continues to grow at above a 4% growth rate as it has done since 2017. However, personal spending has slowed to 3.7% YoY, failing to rise back to its 2018 trend when it averaged over 5.0% growth. Regardless, spending remains positive, just not as strong on a relative basis. Looking at real personal spending from July and August, consumption is currently poised to grow 2.2% in the 3Q GDP report with one month of data remaining. Additionally, with the savings rate back above 8%, consumers are sitting on plenty of powder and do not appear over-stretched.
PCE Inflation Shows Softer-than-Expected Results in August: The Fed’s preferred measure of inflation, core PCE, rose a softer-than-expected 0.1% in August. This was still enough of an increase to bring the year-over-year rate up from 1.7% to 1.8%. Looking at the details, goods inflation fell 0.3% MoM, the largest monthly drop of 2019. Additionally, the soft August inflation was evident throughout most durable goods groupings, excluding autos. Excluding the transportation services category, each major services grouping showed the same or softer pricing pressures from July. One key contributing factor to the monthly discrepancy between the hot CPI inflation data and subdued PCE print related to methodology differences in tracking the cost of the important health care category. Medical care costs rose 0.7% in the CPI data but were flat in the PCE calculation.
Mixed Report on Business Investment Continues Theme of Uncertainty: Durable goods orders rose 0.2% in August and 0.5% when excluding volatile transportation items. A bit discouragingly, core capital goods shipments rose 0.4% MoM and, through two months of data, continue to point to a second quarter of contraction this year for business investment in equipment. On a positive note, core capital goods orders, an indicator of future business investment, fell 0.2% MoM in August and July’s 0.2% gain was revised down to show no gain.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan will release its September final report on consumer confidence.
OVERNIGHT TRADING ACTIVITY
Meeting Of Top Trade Officials Set for October 10th-11th: Global sentiment remains supportive of equities Friday as weekly trade developments have shown calmer demeanors on both sides of the U.S.-China spat. Stocks across Asia were mixed but generally weaker while European markets strengthened alongside firming U.S. futures. After markets closed yesterday, headlines hit that the ministerial level trade negotiations expected to take place early next month had been officially scheduled for October 10th and 11th. Earlier in the day China’s foreign minister had said the U.S. had shown goodwill by exempting tariffs on certain products and as a result, China was willing to buy more U.S. goods.
Global Data Continue To Reflect Uncertainty: Global economic data released ahead of a busy calendar in the U.S. showed uncertainty continues to weigh on activity. Inflation in Japan softened and continued to show a potential loss of momentum while corporate profits in China fell and remain weak. Consumer spending and inflation data for France were weaker than expected and confidence measures in Italy came up short of estimates. For the Eurozone as a whole, overall economic confidence fell more than expected to its lowest level since February 2015 on concerns about the general business climate and weakness in its industrial sector. Before this morning’s influx of U.S. economic data, the 2-year Treasury yield had added 2.0 bps as the 10-year yield rose 2.6 bps.
YESTERDAY’S TRADING ACTIVITY
Stocks Weakened Amid Political And Trade Uncertainty: Stocks opened down and spent most of Thursday’s trading session in negative territory after the release of the whistleblower complaint tied to a phone call between President Trump and Ukraine’s Zelensky shifted focus back to political uncertainty around the impeachment inquiry. Another sharp drop on the S&P 500 came just before 10 a.m. on a headline that the U.S. was unlikely to extend the temporary waiver it previously granted related to U.S. companies transacting with China’s Huawei.
Treasury Yields Closed Lower: Uncertainty on the political and trade fronts have been in the headlines this week following the official announcement of an impeachment inquiry that was temporarily overshadowed by some optimism on the trade front. Treasury yields fell with the decline in stocks, leaving the curve lower and flatter. The 2-year yield settled down 2.4 bps at 1.66% while the 10-year yield dropped 4.5 bps to 1.69%.
Pending Home Sales Perked Up More Than Expected To Extend Choppy Uptrend: Pending home sales rose more than expected in August in strength in all four regions, rebounding 1.6% after falling 2.5% in July. Pending home sales have been in a choppy uptrend this year, and the rebound last month is positive for existing home sales in the months ahead. The housing data has broadly improved in recent months as mortgage rates have continued their declines since last September.
Kansas City Fed’s Manufacturing Index Recovers But Outlook Remains Weak: The Kansas City Fed’s Manufacturing index rebounded more than expected, but contracted for a third month in a row near its lowest levels the first half of 2016. The improvement was heavily concentrated in strength in new orders and production, as employment actually weakened to a 43-month low and export activity continued to be weak amide trade uncertainty. Additionally, expectations for the next six months fell to the softest level in 42 months.
Early Fed Comments Were Benign: In his prepared remarks Thursday, Dallas Fed President Kaplan told reporters that business investment had been sluggish in response to trade uncertainty, a widely accepted repercussion of the U.S.-China trade tensions. In a separate appearance, Fed Vice Chair Clarida said rising wages weren’t yet feeding back into faster inflation. While some of his colleagues disagree, his view is that the current level of inflation expectations is consistent with stable inflation.
Kashkari Said He Called For Steeper Cuts Due Uncertainties And Lack of Evidence Economy Is Overheating: Minneapolis Fed President Kashkari said that job growth has been strong, but it appears to be slowing alongside investment outlays from U.S. businesses. As a result of this mixed outlook, and because he doesn’t see any signs of the economy overheating, he has argued in favor for steeper rate cuts than what the Fed has so far carried out. “There’s no reason why we should have interest rates trying to hold the economy back,” Kashkari noted. On the balance sheet, Kashkari said recent post-crisis regulatory rules put in place at U.S. banks “is probably part of [overnight funding rate volatility],” but “it’s not something…we need to overreact to.”
Barkin Has A “Balanced” Approach To Outlook for Policy: Richmond Fed President Barkin said “things are good” for the U.S. economy, largely because of a strong consumer, but it does face several headwinds from abroad. Barkin noted, “Overall, I think it’s safe to say the economy is giving us conflicting signals. The strength of the labor market might be saying ‘hold’ or even ‘raise rates,’ while inflation and the bond market might be saying ‘lower rates.’” As a result, the Fed has cut rates twice to insure against downside risks. He added that, “This doesn’t mean a recession is imminent, nor that we are in a prolonged period of easing.”