The Market Today
U.S. Markets Continue Low-Key Response to Quiet Weekly Economic Calendar
by Craig Dismuke, Dudley Carter
Jobless Claims Drop Again: Initial Jobless Claims for the week ending August 4 fell from 219k to 213k, back down to the third lowest reading of the cycle. The 4-week moving average is back down to 214k, its second lowest reading of the cycle. The labor data continues to show strength.
Producer Price Gains Slow But Core YoY Rate Highest Since 2011: The producer price index, an important indicator of cost pressures on inflation, rose 0.3% MoM in July when excluding the volatile categories of food, energy, and trade. This was a slightly firmer-than-expected result which brought the YoY rate up from 2.7% to 2.8%, its highest level since 2011. The more volatile categories showed weaker price pressures with food prices down 0.1% MoM, energy prices down 0.5%, and trades prices down 0.8%. When those categories are added back to the tally, final demand producer prices were unchanged in July versus June’s level. Taking all of the moving pieces into account, the recent increase in producer price pressures has weakened in the last few reports and is consistent with a pullback in PCE inflation.
At 7:45 a.m. CT, the August Bloomberg Survey of Economists is scheduled for release. At 9:00 a.m., the June Wholesale Inventories report will be revised. And at noon, Chicago Fed Bank President Evans is set to speak to reporters.
Yesterday – Stocks Remained Quiet Despite New Trade Tariffs: U.S. stocks were quiet again Wednesday despite the U.S. and China moving forward with tariffs on the final $16 billion of imports of the $50 billion originally proposed, beginning August 23. The S&P 500 industrials and materials sectors, considered barometers of the market’s trade war fears, fell 0.3% and 0.4%, respectively. Faring worst were shares of U.S. energy companies which fell 0.7% on average. Energy commodities collapsed Wednesday beneath the weight of the trade threats and supply-heavy weekly petroleum report from the EIA. Crude prices sank more than 3% while contracts for gasoline dropped more than 4% after the EIA reported a smaller than expected draw of crude inventories and an unexpected increase in gasoline stocks. Gains for tech companies and financials offset those losses with 0.3% gains, keeping the broader index afloat at -0.03% for the day. In a year-to-date context, the last two sessions have been eerily quiet. The S&P 500’s cumulative two-day, high-to-low range of 0.59% is the lowest of the year. The Treasury market was similarly subdued, with the 2-year yield ending almost unchanged and the 10-year yield closing down 1.3 bps. Yields on the 10-year yield fell despite some softness in demand metrics from the day’s $26 billion auction, the largest amount ever auctioned.
Overnight – Volatility Continues in China, Energy Weighs on Europe, U.S. Assets Are Little Changed: Global equities have moved in opposite directions and sovereign yields held close to unchanged for the day in response to a slower news flow. After falling 1.6% yesterday, Chinese equities swung back 2.5% in the other direction to lead a mostly positive day in Asia. The swing marked a seventh consecutive session with a greater-than-1% change, the longest since a tumultuous 22 days stretch that ended in July 2015. Trade tensions have been in focus this week as the U.S. and China moving forward (effective August 23) with 25% tariffs on another $16 billion of imports from one another. European equities are weaker and the energy sector was leading the 0.3% decline for the Stoxx Europe 600. Energy companies have struggled over the last 24 hours after oil prices sank on Wednesday. U.S. WTI and Brent prices stabilized overnight. Pre-market futures trading was signaling another quiet start for U.S. equities and Treasury yields had ticked lower with the 2-year yield down 0.6 bps and the 10-year yield 0.2 bps lower.
Barkin Looks Through Risks to Favor Fed Moving Forward at Gradual Pace: Richmond Fed President Barkin (2018 voter) spoke Wednesday, with his comments seemingly putting him in the camp of those supportive of the Fed’s current one-per-quarter pace for rate increases. Barkin acknowledged several risks that the U.S. economy currently faces; he singled out tariffs, supply chain constraints, geopolitical instability, market volatility, and the ripple effect of higher rates. However, “at least for now, though, businesses and consumer seem to be looking through” them and Barkin believes the Fed should too. He said “It is difficult to argue that lower than normal rates are appropriate when unemployment is low and inflation is effectively at the Fed’s target. …We don’t want to risk the credibility of our commitment to low and stable inflation. …the economy calls for moving back to normal levels, …we should follow through. …Given the strength of the underlying economy and the recent additional fiscal stimulus, the risk of normalization is reduced. How high rates will ultimately need to rise depends on economic growth.”