The Market Today
Trump and Xi Meeting Unlikely before March 1
by Craig Dismuke, Dudley Carter
Quiet Calendar: There are no reports scheduled for today’s economic calendar. With the Trump/Xi meeting likely delayed beyond the March 1 deadline, attention will be on corporate earnings reports (no major names announcing today) and signs of progress on a government funding resolution. Anxiety is growing that another shutdown could occur next Friday when the current, short-term deal concludes. On the corporate earnings front, 66% of S&P 500 companies have already reported with 59% beating on revenues and a more impressive 72% beating on earnings. The bigger story has been the weaker forward guidance from many companies that are concerned about slower global growth, specifically uncertainty over China.
Fedspeak – Daly: San Francisco Fed Bank President Daly is scheduled to speak on a panel in the Bay Area today with no Q&A. Of interest, researchers at the San Francisco Fed published a widely critiqued report earlier in the week arguing that allowing the Fed Funds rate to “drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential.”
Yesterday – Concerns About Trade and Growth Weighed: Trading sentiment started off on the wrong foot Thursday, with U.S. futures weakening well ahead of U.S. trading after a string of events reignited concerns about global growth. Global stocks slipped first on another weak data point from Germany. That report was closely followed by the European Commission’s updated quarterly forecast, which included a steep cut in growth expectations for the Eurozone. Shortly after, the Bank of England lowered its expected forward rate path and cut its growth outlook for the UK. The net result was the Stoxx Europe 600 ending 1.5% lower in its steepest daily decline of 2019. Against an already shaky backdrop, increased uncertainty about trade ensured a down day for U.S. equities. The S&P 500 slid to new lows after a top economic advisor to the White House said there is a “pretty sizable distance to go” before a trade agreement can be reached between the U.S. and China. Several hours later, trade hopes were hit a second time after President Trump said he won’t meet with Chinese President Xi before the trade truce expires on March 1. A possible meeting between the pair was mentioned a week ago at the conclusion of a meeting of top cabinet officials from both countries. Treasury yields followed European yields lower overnight and the trend picked up steam after a solid 30-year auction stopped on the screws with good interest from direct bids. For the day, the 2-year yield fell 4.5 bps to 2.48% while the 10-year yield lost 3.8 bps to 2.66%.
Overnight – Markets Remain Cautious as Concerns About Global Growth and Trade Persist: Another day of negativity has weighed on global risk markets on Friday, creating an uphill battle for U.S. investors to right the ship after two days of declines. Thursday’s concerns about global growth and trade persisted on Friday, pressuring most major global equities lower in the week’s final day of trading. Japan’s Nikkei posted its worst trading day since the start of 2019, slumping 2% to its lowest level since January 10. The German economy received a piece of good news overnight, a recent rarity, as exports rebounded 1.5% in December, stronger than the 0.4% gain economists expected and the most in seven months. However, the positivity was drowned out by the recent deluge of disappointing economic news from the EU. The German 10-year yield was down another 1.2 bps overnight to 0.10%, the lowest yield since October 2016. European stocks slipped for a second day, the first two-day decline in more than two weeks. U.S. futures recently hit their lows of the day with tech leading losses. Nasdaq futures were 0.8% lower while contracts on the S&P 500 had dipped 0.5%. Treasury yields had flattened lower, with the 2-year yield (2.48%) down 0.4 bps and the 10-year yield (2.65%) 1.1 bps lower.
Consumer Credit Growth Slowed in December: Consumer credit grew in December at its weakest pace in three months, as both major credit types cooled after strong activity in October and November. Total credit expanded $16.6B in December, or at an annualized pace of 5.0%, pushing total outstanding above $4T for the first time. Nearly 90% of December’s increase came from the nonrevolving credit types, a category consisting primarily of lending for autos and student loans, which grew by $14.8B (6.0% SAAR). With December’s retail sales still delayed because the government shutdown caused disruptions in the data collection process, the revolving category was of interest as a proxy for consumers’ spending on credit cards. Revolving credit growth slowed to a disappointing 2.0% annualized rate in December, or $1.7B, and may portends consumer activity may have joined a host of other sectors that slowed into the end of 2018.
Thursday’s Fedspeak: Dallas Fed President Kaplan spoke on his economic outlook Thursday morning, offering a take closely aligned with an essay titled “The Value of Patience” that he published Tuesday (and was discussed in Wednesday’s Market Today). Kaplan was asked about the potential for negative policy rates in the U.S. and answered that he’s skeptical about whether they are a “viable option.” The question was potentially stirred up by a WSJ write-up earlier this week on a San Francisco Fed staffer’s paper contemplating additional benefits such a policy could have provided during the Great Recession. While Kaplan was speaking, Fed Governor Clarida offered separate remarks at an appearance a little farther to the northeast. At a conference in Prague, Clarida discussed global factors that were keeping real interest rates low by historical standards, despite the U.S. economy being at or near full employment, current growth presumably above trend, and inflation near the Fed’s target. St. Louis Fed President Bullard spoke Thursday evening and said the yield curve shows investors don’t see inflation pressures building and signals the Fed should proceed cautiously. He added the Fed should be worried about inflation being too low, not too high, and believes the Fed should rethink the dot plot. “I think it has become too prescriptive about the interest rate path. …it caused us problems in December,” Bullard said.