The Market Today

Washington Building Consensus to Kick the Can Once Again, ECB Leaves Policy Unchanged

by Craig Dismuke, Dudley Carter

Today’s Calendar – Harvey Hits Economic Data; Fedspeak:  Initial jobless claims spiked 62k to 298k for the week ending September 2, the result of Hurricane Harvey.  While all of the state-level claims data will not be available for another week, the Labor Department did report a 51k unadjusted increase in claims from Texas for the week.  As discussed two weeks ago, there are a handful of economic reports which will be impacted by Harvey with the jobless claims data being impacted the most.  Based on the impact from Katrina in 2005, the claims data are likely to be elevated for several weeks before falling back to their trend rate (see Chart of the Day).


Also released this morning, nonfarm productivity for 2Q was revised up from 0.9% to 1.5%.  Productivity remains stuck at a very low rate historically, averaging just 1.3% QoQ annualized growth since the recession ended.  The higher revision to productivity necessarily pushed unit labor costs down from +0.6% to +0.2%, another weak indication for inflation.  The Fed’s Mester, Dudley, and George are on the schedule to speak today.  New York Fed Bank President Dudley is most likely to have an impact on the markets.  He has most recently been confident in his expectations for rate hikes to continue given the “above-trend growth” and accommodative financial conditions.  Any deviation from this position would get the markets’ attention.


Overnight Activity – ECB Makes No Changes, Investors turn to Draghi for Color: As markets awaited this morning’s ECB policy decision and post-meeting press conference, global equities firmed but sovereign yields moved in multiple directions. Equities rose across Europe lifting the Stoxx 600 by 0.4% before the central bank’s announcement. The fate of the ECB’s QE program will be today’s hot topic due to the bond-buying program’s impending December expiration. Regional sovereigns were mixed as yields in France and Germany inched higher while those on Italian and Spanish notes edged lower. The Euro strengthened in front of the policy announcement. The common currency’s strength as of late – a 2017 rally has taken the Euro to a 32-month high against the Dollar – has been highlighted as a likely concern for the ECB because of its negative impact on European export activity and inflation. In the U.S., Treasury yields have fallen back from yesterday’s rise with longer yields down just over 2 bps. U.S. equity futures were mixed and the Dollar had returned to its second lowest intraday levels since January 2015. After the ECB announced no changes to policy in an entirely unchanged statement, those moves held. In his early remarks, ECB President Draghi characterized the medium-term outlook as “broadly unchanged” and cited recent volatility in the exchange rate as a source of uncertainty. He noted economic growth has been better than expected but said that, despite a moderate uptick, underlying inflation measures have “yet to show convincing signs of a sustained upward trend”. As such, the ECB believes a substantial degree of accommodation is needed.


Yesterday’s Trading Activity – Washington Looks to Push Fight Over Debt-Ceiling and Spending to December: Markets moved quickly in response to news that the President and key Democrats had reached an agreement that would help pay for government relief efforts in Houston as well as extend the debt ceiling and government spending authority through the middle of December. Senate Majority Leader McConnell said he would add the spending and debt ceiling extension to a Harvey relief bill passed by the House earlier in the day. The Treasury curve steepened swiftly in relief with longer yields rising the most. The 2-year Treasury yield rose 1.2 bps to 1.30% while notes longer than 5 years rose more than 4 bps. The 5-year yield finished at 1.68% and the 10-year yield closed at 2.11%. The markets did not take the potential deal as a complete “all clear”, however, they just simply pushed the risk of a possible government shutdown further out. The yield on the T-bill maturing on October 12 fell 14 bps while yields on those maturing in mid-to-late December increased roughly 7 bps. Stocks cheered the news and gained 0.3% Wednesday. The Dollar erased an earlier loss to end unchanged on the day.


ICYMI – August Monthly Review: Treasury yields fell in August on a mix of geopolitical concerns and growing questions about how successful Republicans will be at implementing their pro-growth reforms. Longer yields declined the most in a flattening pattern that knocked the spread between the 2-year and 10-year Treasury to its lowest level in twelve months. Growth in 2Q was revised stronger and momentum behind consumer and business spending is somewhat firmer than initially thought. Inflation metrics remained weak in the most recent readings, however, which muddies the water for the Fed and complicates their desire to continue with gradual rate increases. However, the consensus among Fed members and market participants is for an announcement at the September meeting about when the central bank will begin normalizing its balance sheet. Click here for the full review.


ISM Rebounds But Misses: The ISM Non-manufacturing index rebounded less than expected in August but there were some positive signals in the underlying indices. The headline index rose from 53.9 in July (the lowest since August 2016) to 55.3 (expected 55.6) which marked the third weakest level of 2017. Within the report, the important employment and new orders indices improved with business activity and several other metrics. The softer spots of the report related to inventory activity. Although the weak inventory growth in 2Q GDP created space for a 3Q rebuild, respondents reported slower growth of their inventories because a greater number reported a belief that current inventory levels are too high.


Fed Vice Chair Fischer Announces Resignation: Federal Reserve Vice Chairman Stanley Fischer unexpectedly announced early Wednesday morning that he would be resigning effective mid-October. Mr. Fischer, generally considered to be a centrist voice on the FOMC, cited personal reasons for leaving his post before his scheduled departure next June. His exit will leave four vacant positions on the Federal Reserve board. One of those positions, the Governor and Vice Chair of Supervision, has a pending nominee under consideration by the Senate.


Fed’s Beige Book Shows Stable Growth, Tight Labor Market, Modest Wage Growth: Economic activity was upgraded marginally in the Fed’s September Beige Book. The report characterized the expansion in July and August as “modest to moderate” compared to “slight to moderate” in May and June. Consumer spending was said to have continued increasing across most Districts with autos specifically singled out as a soft spot. The September report went further in its discussion of the auto industry, saying “contacts in many Districts expressed concerns about a prolonged slowdown in the auto industry.” Low inventories of homes for sale were again reported as a headwind for sales activity. Overall loan demand rose modestly, a slight improvement from July’s “steady to increasing” characterization. Hiring was reported to have slowed, the labor market was seen as tight, worker shortages affected “numerous industries”, but “majority of Districts reported limited wage pressures and modest to moderate wage growth.” On overall inflation, prices were reported to have risen just “modestly”, consistent with the pace reported in July. The report also included a special note discussing economic disruptions caused by Harvey, primarily in the oil and gas industry. The takeaway was that growth remains stable and the labor market continues to tighten. Discouragingly, however, these forces continue to create only disappointing wage growth.

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