The Market Today
Trade Talks Resume; Brexit Uncertainty Continues; Investors Remain Focused on Yield Curve
by Craig Dismuke, Dudley Carter
Record Run of GDP Acceleration Ends with Final Revision to 4Q Growth: The economy expanded 2.2% in 4Q according to the GDP report’s final revision ending the record run of consecutive quarters of year-over-year growth at nine. The year-over-year rate fell from 3.00% to 2.97% after the lower revision. The 4Q tally was revised down from the previous report’s 2.6% on lower readings on personal consumption (+2.8% to +2.5%), business investment (+6.2% to +5.4%), residential investment (-3.5% to -4.7%), federal non-defense (-5.6% to -6.1%), federal defense (+6.9% to +6.4%), and state and local government (-0.3% to -1.3%). The only positive aspect of the final revision was a $7.5 billion narrowing of the trade deficit as exports were revised up $1.3 billion and imports were revised down $6.2 billion. While the lower revision is disappointing, 2.2% growth remains a positive result given the amount of market volatility seen during the quarter.
Jobless Claims Give Reason for Continued Labor-Market Optimism: Initial jobless claims for the week ending March 23 fell from 216k to 211k, matching the lowest level since last September. After a period of inflated initial filings, we have now seen six consecutive reports back in an encouraging range. The 4-week moving average is now down to 217k, its lowest level since November.
Pending Home Sales and Regional Manufacturing Activity: Pending Home Sales are expected to fall 0.5% in the February report, scheduled for release at 9:00 a.m. CT. Sales jumped 4.6% in January after falling 12% over a 21-month period that included 17 monthly declines. Also scheduled for release is the Kansas City Fed’s March report on regional manufacturing activity. It, also, is expected to decline, albeit fractionally.
Fedspeak: There is plenty of Fedspeak on the calendar today, although much of it will be focused on topics other than monetary policy. Fed Vice Chair Clarida is slated to speak in France at 8:30 a.m. CT. New Fed Governor Bowman is scheduled to discuss agriculture and community banking at 9:00 a.m. Atlanta’s Bostic speaks at 10:30 a.m. and St. Louis Bank President Bullard will speak in Madison, Wisconsin at 4:20 p.m.
Yesterday – Continued Curve Inversion Kept Stocks from Second Day of Gains: U.S. stocks faltered Wednesday and Treasury yields resumed their rapid decline as worries about the global economy continued to weigh on investor sentiment. The S&P 500 opened higher but quickly fell into negative territory where it floundered to a -0.5% finish. Ten of eleven sectors slipped amid the selling while strength in transportation companies, primarily the airlines, lifted the industrials to a modest 0.1% finish. While overall consumer discretionary companies weakened, the household durables sub-sector outpaced even the strength in airline stocks. Home builders rose after a Lennar Corp’s new orders topped estimates and the Company’s Chairman said lower mortgage rates and slower price gains have helped its business. Data earlier in the day showed home purchase applications picked up 6.4% last week and next week’s new home sales report is forecasted to show activity recovered in February. The broader weakness for equities, however, was consistent with the continued bid for global bonds. Treasury yields resumed their precipitous push lower that drove to the 10-year yield below the 3-month T-bill last Friday for the first time since 2007, sparking fears of a possible recession. The 10-year yield fell 5.7 bps Wednesday (-25 bps in the last six days) to 2.37%, closing below the 3-month T-bill (2.42%) for a fourth day. The 2-year yield slipped even more, down 6.4 bps to 2.20%. Fed Funds futures intensified their recently adopted prove-me-wrong mentality on monetary policy, pricing in a small probability of two rate cuts by the end of the year. Fed officials said last week they expect no rate increases this year, down from two last December, but still see one increase in 2020.
Overnight – Trade Talks Resume But Investors Can’t Take Their Eyes Off the Yield Curve: U.S. futures rose with shares across Europe overnight and Treasury yields ticked higher on hopes the resumption of U.S.-China trade talks can settle a key headwind holding back the global economy. Top U.S. officials arrived in Beijing Thursday with aims to advance a deal and ease months of tensions that have been blamed for slowing global economic momentum. A working dinner Thursday will be followed by meetings on Friday, but was preceded by a Reuters report that “China has made unprecedented proposals…on a range of issues including forced technology transfer.” A subsequent report from the WSJ echoed a similar tone, saying China was considering allowing foreign firms to own high-tech data centers. However, the resultant optimism remained held in check as investors continued to eye an inverted U.S. yield curve and an increasingly tenuous Brexit situation. The 10-year Treasury yield fell as low as 2.338% overnight and remained below the yield of a 3-month T-bill for a fifth day. While U.S. and European yields were backpedaling Wednesday, UK yields actually rose on hopes PM May’s pledge to resign if her deal is passed might garner enough ayes to move the agreement forward. However, a lack of support from allies outside of her party and Parliament’s voting down of eight alternative Brexit plans late yesterday dashed those hopes for clarity. The UK’s 10-year fell 4.3 bps overnight to 0.97%, the lowest since June 2017. Also in Europe, the European Commission’s economic confidence indicator for the Eurozone drifted for a ninth month to its lowest level since October 2016. After a slight downward revisions to 4Q U.S. GDP growth and surprisingly strong jobless claims, the 2-year (2.20%) and 10-year (2.37%) Treasury yields both held around unchanged for the day.