The Market Today
U.S. Airstrike Kills Iranian Commander Sending Investors for Cover
by Craig Dismuke, Dudley Carter
ISM Manufacturing Index Expected to Be Stabilizing; FOMC Minutes to Give Insight into Evolving Policy Approach: Today’s economic calendar will bring some important reports, including the November construction spending report (proj. +0.4%), the December ISM Manufacturing Index (proj. +0.9 to 49.0), December’s vehicle sales data (proj. -90k to 17.00 million), and the December 11 FOMC Minutes. The ISM Manufacturing index has been in contractionary territory for three consecutive months now. Expectations are for the rate of decline to have stabilized and the index begin moving back above the 50-threshold. The FOMC Minutes may contain indications of how Fed officials are considering changing their approach to monetary policy and inflation targeting.
Fedspeak: Five different Fed officials are on the tape today, the heaviest calendar of Fedspeak since the December policy decision. Barkin (Richmond, Non-Voting, Moderate), Evans (Chicago, Voting, Dove), Daly (San Francisco, Non-Voting, Moderate), Kaplan (Dallas, Non-Voting, Moderate), and Brainard (Governor, Voting, Moderate) are all scheduled to speak. The majority of speakers appear to be in the middle of the policy spectrum and should give some insight into the thoughts of that coterie.
U.S. Airstrike Kills Iranian Commander Sending Investors for Cover: So much for the risk-on mood that defined the first day of trading in 2020. Three hours after yesterday’s market close, news broke that an U.S. airstrike killed Iran’s top military commander Qassim Soleimani. Soleimani was the leader of the elite Quds Force in the Revolutionary Guard. Early this morning, Iranian Foreign Minister Mohammad Javad Zarif warned that Iran would retaliate against the U.S. News of the killing sent investors fleeing to safe haven assets such as gold and Treasurys on fears that a larger dispute could erupt, and drove oil prices immediately higher. Crude is up 3.9% since the event, adding to the 18% gain oil has already seen since the beginning of October. Gold futures rose another 1.4% while the 10-year yield dropped as low as 1.79%. As of 7:15 CT, the 10-year yield is back up to 1.82%. Dow futures are down 262 points or 0.9%. The stock boards globally are in the red and 10-year sovereign yields are broadly down 4 to 9 bps. While the event may stir up some short-term volatility, history indicates that it is likely to be short-lived (presuming a mild response from the Iranians). The markets are not paying attention to the data overnight, but it is worth noting that France and Germany’s December CPI inflation data were firmer than expected.
Bonds Rally, Stocks Roar in 2020: Stocks roared into 2020 with the Dow, S&P 500, and NASDAQ all setting new, record-high closes. There were few discernible catalysts for the record runs apart from the PBOC’s January 1 announcement that it would inject $115 billion into its banks via lower reserve ratios. That news gave more support to the belief that central banks will continue being active in pumping up sentiment despite slow economic growth. There was also speculation that holiday shopping may have been strong, helping boost some key retailers such as Apple which broke above $300 per share (split-adjusted) for the first time. The Dow jumped 1.2%, the S&P rose 0.8%, and the NASDAQ climbed 1.3%. Treasurys also enjoyed the rally with yields on longer bonds dropping. The 10-year yield fell from 1.94% in overnight trading to 1.88% by the end of the day. Markit’s U.S. manufacturing PMI for December was revised down two-tenths to 52.4 in its final revision, failing to grab investors’ attention.
WSJ: Fed Governors’ Influence at Central Bank Has Declined, Paper Says – Pay issues, the political landscape and moves by regional Fed bank presidents have diminished the Board of Governors’ power, Penn scholar finds
Reuters: U.S. muni bond funds post record inflows in 2019: “Investors seeking to dodge risk and ease their tax burden poured a record $94.05 billion into U.S. municipal bond funds in 2019, according to preliminary data from Refinitiv Lipper on Thursday. … Last year’s fund flows beat the previous record set in 2009 when they totaled $81.06 billion, said Tom Roseen, who heads research services at Lipper, which has been collecting weekly net flow data since 1992.”