The Market Today
Treasury Yields Rise as Data Continues Strength
by Craig Dismuke, Dudley Carter
This Week’s Calendar – As Busy as It Gets, Including a FOMC Decision: This week’s calendar is a rarity in just how loaded it is. It kicks off this morning with December’s personal income, spending, and PCE inflation reports (more below). Tuesday brings the most followed home price report (S&P CoreLogic) and the Conference Board’s Consumer Confidence report. On Wednesday, the ADP Employment report will preview Friday’s BLS labor reports, followed by the 4Q Employment Cost Index (arguably the best indicator of wage growth and future consumer price inflation). Wednesday afternoon brings the Chairwoman Janet Yellen’s final FOMC decision as Chair. The Committee is not expected to raise rates (only a 2% chance according to Fed Funds Futures – March futures are pricing in a 95% chance). Thursday will see a range of economic reports covering nonfarm productivity and unit labor costs, December’s Construction Spending tally, The ISM’s report on Manufacturing sentiment, and January’s vehicle sales. Friday’s calendar includes January’s Nonfarm Payroll Report (exp. +180k), the Unemployment Rate (exp. 4.1%), and Average Hourly Earnings (+2.6% YoY). In addition, the University of Michigan will release its report on consumer confidence. Throughout the week, we will be looking for signs that the consumer remains optimistic, that spending was not excessive in December (implying a pullback in 1H18), that the labor data remains strong even though job growth is naturally slowing, and that all of the other sectors of the economy are continuing to hold firm.
This Morning’s Data – Is the Low Savings Rate Becoming a Concern?: As for this morning’s batch of data, individuals saw better income in December than expected, better holiday spending than expected, and ran their savings rate down to the lowest level since 2005. Personal income rose 0.4% MoM, a reasonably strong month for income gains. Wages, specifically, grew 0.5% in December, a strong month, bringing the YoY rate of weal wage growth up to 4.1% with solid momentum going forward. Spending rose 0.4% in December, in-line with expectations, although November’s revision higher from +0.6% to +0.8% means December’s actual spending beat expectations. After adjusting for inflation, real personal spending was a healthy 0.3%. However, the savings rate was drawn down to just 2.4% which, in historical context, gives us some consternation (see Chart of the Day). Core PCE inflation rose 0.2% MoM keeping the YoY rate at 1.5% in December.
Overnight Activity – The 10-Year Yield Broke Last Week’s Yield Top to Lead Overnight Rise Around the Globe: An uneven and uneventful overnight session for global equities has put the focus on a rise in sovereign yields that finally brought longer Treasury yields into the fold. After avoiding pressure from a jump last week in European yields, longer U.S. Treasury yields are notably higher this morning and appear to be leading a rise in the global tide based on the timing of the initial jump. The 10-year yield rose 3 bps around 7 p.m. CT just after trading in Asia opened. Some traders are pointing to a technical nudge after yields took out last week’s top and sparked more momentum selling. Ahead of this morning’s important spending and inflation data, the 10-year yield was up 6.4 bps to 2.72%, a new high since April 2014. The 5-year yield had risen 5.5 bps to 2.52%, its highest level since April 2010. The 2-year yield had added a smaller 3.2 bps to mark a new cyclical high of 2.15%. Higher Treasury rates added additional pressure to European yields which finished up last week on the ECB’s latest decision. The German 10-year yield rose another 6.4 bps Monday to 0.69%, the highest since September 2015, while France’s 10-year yield added 5.8 bps to yield 0.96%, the most since last March. U.S. yields trading at the top end of multi-year ranges sharpens the risk for this week’s packed and important domestic economic calendar to create more rate volatility. In other markets, the Dollar stabilized, crude prices pulled back from a more-than-three-year peak, and U.S. equity futures weakened.
ICYMI – January 26, 2018 Weekly Market Recap: Last week continued to encapsulate the idea that the start for markets in 2018 has been a continuation of the major trends from 2017: record stock prices, a declining U.S. currency, and flattening of the yield curve resulting from rising short-yields and a relatively anchored long end. A three-day government shutdown ended late Monday evening and ultimately had little effect on market sentiment. Next time could be different depending on how long Treasury can push the debt ceiling debate out through use of certain extraordinary measures. Stocks rose more than 2% on the week and combined for a total of 11 record highs. According to Reuters, more than 80% of S&P 500 companied who have reported earnings in January have posted better than expected results. The 2-year Treasury yield added more than 5 bps to a new cycle-high of 2.12% as the 5-year yield finished at 2.47%, its highest mark since April 2010. The 10-year yield was more stable and barely moved from the prior week’s 2.66%. The Bank of Japan pledged to “continue tenaciously” with its easing of monetary policy while the ECB’s Draghi sounded more optimistic about achieving its inflation mandate. Japan’s 10-year yield remained tied near the 0.00% peg while the German 10-year yield reach its highest level since December 2014. Jay Powell was confirmed by the full Senate and will take over for Chair Yellen when her term is up on February 3. Powell will inherit an economy that closed 2017 by posting its second best domestic spending tally since 2010. Looking through the 2.6% quarterly growth figure, which was hit for 1.8% by weakness in inventories and trade, real final sales to domestic purchasers rose at a 4.3% pace. Click here to check out the full recap.