The Market Today
Trade Talks, Soft U.S. Data, Another Brexit Vote
by Craig Dismuke, Dudley Carter
Income and Spending Softer Than Expected, Illustrate Need for a Rebound in Upcoming Data: Personal income and spending both disappointed expectations in this morning’s data covering February incomes and January spending. Income rose 0.2% MoM after falling 0.1% in January bringing the year-over-year growth rate down from 5.0% in December to a less-impressive 4.2% in January. On a positive note, wage growth remained at 0.3% MoM but the headline income figure was dragged lower by a 1.7% decrease in interest income. Higher income tax bills weighed on the disposable income figures in both January and February, bringing real disposable income down 0.2% MoM in February and matching its lowest month since 2013; but, those income tax payments should take a positive turn in March. While there is some noise in the income data thanks to a one-off boost to December’s farm income (tariff-related payment from government), the recent trend is certainly on the weaker side. On the spending side, the data continue to be delayed because of the government shutdown. January’s spending showed a softer-than-anticipated 0.1% gain after falling 0.6% in December. Through only one month of the quarter, real personal spending currently points to consumption (GDP) running close to zero. While it is only one month and likely to change in coming months, this marks the weakest quarterly tracking of real spending since the Great Recession, highlighting just how important it is to see a rebound in upcoming data.
Softer Inflation Justifies Fed Pause, Likely to Raise Speculation about Rate Cut: PCE inflation, the Fed’s preferred measure, was softer than expected in January, falling from 1.8% YoY to 1.4% at the headline level and from 1.95% to 1.79% at the core level. This adds yet another to the tally of months with inflation softer than the Fed’s 2.0% target. While food prices were firmer, energy prices fell 3.2% in January following 2.8% pullbacks in both November and December. Lower energy prices are expected to weigh on the YoY calculation for most of 2019. Core inflation was also soft, up 0.07% MoM, the weakest month since August 2018. Absent the drag from energy, most categories of goods were firmer than in December while services was dragged down 0.1% by a drop in the cost of financial services and weaker airfares. The report will give the Fed additional comfort that they can remain patient in the face of muted inflation. Additionally, a further move below the Fed’s 2% target could stoke already-elevated investor concerns about a potential rate cut.
New Home Sales, Consumer Confidence, Brexit Vote: At 9:00 a.m. CT, the February New Home Sales report is expected to show a 2.1% increase after falling 6.9% in January. The University of Michigan will also release its final read on consumer confidence in March. Worth noting, a third vote on Prime Minister May’s Brexit plan is slated for today (more below).
Yesterday – Stocks Rose on Trade Meetings in Beijing and Treasury Yield Recovery: The Dow and S&P 500 both gained 0.36% Thursday as high-level trade talks resumed in Beijing and Treasury yields ticked up from more than one-year lows. A team of top U.S. officials landed in Beijing for a working dinner Thursday and Friday packed with meetings aimed at reducing current trade tensions between the two countries. Sentiment shifted higher ahead of U.S. trading after Reuters reported that China had made “unprecedented proposals” related to tech transfers and the WSJ subsequently echoed an optimistic tone on the topic, a sticking point in ongoing negotiations. Later in the day, White House economic adviser Larry Kudlow said talks could be extended for months if needed and hinted that the U.S. could remove some of the tariffs previously placed on China. The trade-sensitive materials and industrials sectors finished in first and third place and were split by solid gains for financials. Financial companies rose for just the second time in the last eight days as Treasury yields recovered from more than one-year lows on Wednesday. The 2-year yield rose 3.6 bps to 2.24%, the 5-year yield added 4.8 bps to 2.21%, and the 10-year yield recovered 2.8 bps 2.40%.
Overnight – Hopes for Trade Progress Lift Spirits, Brexit Speculation Lifts Yields: Hopes for a breakthrough in U.S.-China trade negotiations supported U.S. equities Thursday and have lifted spirits globally in March’s final day of trading. Treasury Secretary Mnuchin tweeted Friday that his team had “concluded constructive trade talks in Beijing. I look forward to welcoming China’s Vice Premier Liu He to continue these important discussions in Washington next week.” Chinese equities rallied 3.9% Friday to lead more modest, widespread global gains. Despite China posting its worst economic growth in nearly 30 years in 4Q18, the Chinese index rose 29% in 1Q19 amid hopes for a trade fix, the best performance among the majors and its strongest since 2014. Germany’s DAX was leading in Europe, up 0.9% after February retail sales topped estimates and unemployment fell to a new all-time low of 4.9% in March. Weakness in recent German data has added to worries about a slowdown in Europe. Brexit remains a focus with Parliament set for a third vote on PM May’s Brexit deal. UK yields were higher, helping push Treasury yields up, on speculation the trimmed-down version may receive more support than in prior attempts. Ahead of a heavy and important slate of U.S. data, Treasury yields rose more than 2 bps and U.S. equity futures were stronger. A positive day for the S&P 500 will cap off its strongest quarter since 2009. After the early data missed, yields pulled back to reflect just modest daily gains.
Pending Home Sales Pulled Back Following Impressive January Jump: Pending home sales slipped more than expected in February after surging in January by the most in more than eight years. Pending sales, counted when contracts are signed and a leading indicator of existing sales in the months ahead, fell 1.0% last month. January’s impressive jump was revised slightly lower from 4.6% to 4.3%. Averaging through the monthly volatility, pending sales are up 3.2% from December but down 5.0% from a year ago. Regionally, the results were mixed as an unusually weak month for activity in the Midwest offset smaller gains in the South and West. Contract signings tumbled 7.2% in the Midwest, the largest drop (by 2.9%-points) since June 2010, while signings rose 1.7% in the South and 0.5% in the West. Recent housing data have been mixed, but purchase applications appear to have perked up recently, potentially the positive effects of lower mortgage rates. Despite an impressive 11.8% spike in February’s existing sales report last week, the second largest on record, the negative month for pending sales portends a more consistent recovery in home sales may still be some months off.
Kansas City Fed Manufacturing Index Bounced Back: The Kansas City Fed’s manufacturing index bounced back strongly and unexpectedly in March. The 9-point monthly gain, the strongest since December 2016, pulled the index up from a two-year low to its best level in four months. Except for softer readings on current pricing trends, both paid and received, each of the key underlying metrics, including production, new orders, and employment, firmed up in both the current assessment and for expectations for six months from now.
Thursday’s Fedspeak: Fed Vice Chair Clarida highlighted several downside risks currently affecting global markets, “including Brexit, a sharp slowdown in global growth prospects, and trade tensions.” “U.S. policymakers can hardly ignore these risks,” Clarida said, adding “In the presence of these risks and with inflation pressures muted, we can afford to be patient and data dependent as we assess in future meetings what adjustments in our policy rate might be necessary.” Earlier in the day, Kansas City Fed President George cited a similar argument as to why she supports the Fed’s current wait-and-see approach to policy. Just after lunch, New York Fed President Williams said, “Monetary policy is around neutral,” but “Any development in the economy, whether it’s on the employment side or on the inflation side, that moved in a persistent way away from our objectives, one way or the other, would be a reason to rethink the path of policy going forward.” “I still see the probability of a recession this year or next year as being not elevated relative to any year,” Williams said. On the recent curve inversion, “There’s a lot of reasons to think that it has been a recession predictor for reasons in the past that kind of don’t apply today, …I think it’s telling us that growth will be pretty modest.”