The Market Today

Trade Talk Continues to Be Focus as Income and Spending Disappoint, but Remain Solid


by Craig Dismuke, Dudley Carter

July’s Income Data Weighed Down by Weaker Benefits, Spending Slightly Short but Still Modest: July’s Personal Income and Spending data were slightly weaker than expected.  Incomes rose 0.31% MoM versus expectations of a 0.4% increase.  The result was also 0.08% below the 12-month growth trend.  Disposable income also disappointed, rising 0.34% versus the 12-month trend of 0.43%.  The weaker headline income along with an anomalous bump in tax payments (+0.11% versus 12-month trend of +0.05%) contributed to the weaker disposable income growth.  On a brighter note, wages still rose 0.4% MoM; but, weaker growth in employee benefits weighed on the headline figure.   Personal spending also disappointed expectations, rising 0.35% MoM versus the 12-month trend of 0.42%.  In the details, weaker auto sales were primarily to blame with new auto spending down 1.8% MoM and weakness in furnishings and gasoline. On a positive note, spending on apparel jumped 1.0% and food service spending (eating out at restaurants) rose another 1.1%, bringing the 3-month growth to 4.9% which marks the strongest growth in at least 40 years.  The slightly stronger spending relative to income pushed the savings rate down from 6.8% to 6.7%.

 

PCE Inflation at Fed’s Target, Unless You Carry the Decimal: In the PCE inflation report for July, Core PCE rose from 1.923% to 1.984%. still just shy of the Fed’s 2.0% target as it has remained for all but 5 months (2012) since the recession.  However, the core index does round up to 2.00%, temporarily justifying the Fed’s precautionary rate hikes which began when core inflation was still down at 1.25%.  As such, the Fed is likely to continue with their path of gradual rates hikes, in the short term at the very least.

 

Labor Data Keeps Momentum: Initial jobless claims continued their streak of surprisingly low readings.  Claims rose from 210k to 213k for the week ending August 25.  The 4-week moving average for new unemployment claims is now at its lowest level since 1969.

 

TRADING ACTIVITY

Yesterday – Keep the Records Coming: U.S. stocks kicked it into gear about an hour into U.S. trading as tech stocks lifted the S&P 500 0.6% and led the Nasdaq to a day’s best 1.0% gain. Those moves pushed each index to their fourth consecutive record high. The Dow trailed with a 0.2% improvement. Within the S&P 500, the 1.0% gain in the information technology sector was outpaced only by a 1.1% rally in shares of consumer discretionary companies. Internet retailers led the latter as shares of Amazon rose more than 3%. Before markets opened, Morgan Stanley raised its price target for Amazon as well as Alphabet Inc. (i.e. Google). Shares of Alphabet closed up 1.5%. While stocks were consistently strong throughout the session, Treasury yields ebbed and flowed. Longer yields were pressured higher in the initial jump for stocks but pulled back to closed little changed. The 10-year yield ultimately rose 0.4 bps after adding as much as 1.6 bps intraday. The 2-year yield rose 1.0 bp and finished near its high of the day, flattening the curve for the first time this week. The Dollar languished except for a gain against the Yen, but a rally in the British pound drew the most currency-related headlines. The EU’s top Brexit negotiator said in a press briefing that the EU was ready “to propose a partnership like there has never been before with any other third country,” that could include “an ambitious free trade agreement.” Against the Dollar, the Pound strengthened 1.2%, its biggest daily gain since January to its highest level since August 1.

 

Overnight – Trade Remains All the Talk: Global equities moved lower and U.S. futures are under pressure following four consecutive daily gains and record closes for the S&P 500. While there have been some positive near-term developments on trade between the North American countries, uncertainty still hangs over the U.S.-China relationship. China’s CSI 300 fell more than 1% to lead the global weakness with the U.S. comment period on proposed tariffs on an additional $200B of Chinese imports set to end next week. A Chinese official said, the U.S. should “take note of the calling from businesses and consumers in both countries, the fact that both countries are linked closely in the supply chain and the fundamental interest of the two peoples to make the right decision.” Trade was also a focus in Europe, although other factors, including ratings activity, appeared to be behind the Stoxx Europe’s 0.3% decline. The EU’s top trade official said Thursday, “We said that we are ready from the EU side to go to zero tariffs on all industrial goods,” and “we are willing to bring down even our car tariffs down to zero…if the U.S. does the same.” Back home, President Trump said “We’re doing really well” on progress towards Canada joining the updated agreement with Mexico while Canada’s PM Trudeau said “We’re seeing if we can get to the right place by Friday.” Hidden beneath the other trade headlines, the U.S. has decided to offer “targeted relief” to Brazil, South Korea, and Argentina from quotas on steel they ship into the U.S. Ahead of this morning’s busy U.S. calendar, Treasury yields inside of 30 years were down roughly 1 bp.

 

NOTEWORTHY NEWS

Pending Home Sales Signal Continuation of Slower Housing: Pending home sales slipped unexpectedly in July as contract signings in the South slowed 1.7% to offset smaller gains in the lower-volume regions. Total seasonally adjusted pending sales edged down 0.7% and were weaker on a YoY, non-seasonally adjusted basis for a seventh month out of the last eight. Sales in the West dropped 0.9% while activity in the Midwest moved up a modest 0.3% and deals in the Northeast, which accounted for the smallest share of existing sales volume in July at just over 10%, improved 1.0%. “It’s evident in recent months that many of the most overheated real estate markets – especially those out West – are starting to see a slight decline in home sales and slower price growth,” said the NAR’s Chief Economist, who added “The reason sales are falling off last year’s pace is that multiple years of inadequate supply in markets with strong job growth have finally driven up home prices to a point where an increasing number of prospective buyers are unable to afford it.” The disappointment was just the latest indicator of slowing housing activity and signals more softness for actual closings in the months ahead.

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