The Market Today
Weak Data, Coronavirus Fears Lead to Re-Inverted Yield Curve
by Craig Dismuke, Dudley Carter
Coronavirus Update: Friday morning’s data out of China included the largest one-day increase in confirmed cases and deaths reported. An additional 1,981 cases were confirmed in mainland China and 43 new deaths were reported. The total number of confirmed cases of coronavirus now exceeds all the confirmed cases from the SARs pandemic. Fortunately, the case fatality rate remains below the SARs rate. While confirmed cases outside China remain below the SARs confirmations at this point, the growth rate of those cases has turned higher. (See Coronavirus Update Charts)
Savings Rate Inches Down as Spending Outpaces Soft Income Growth: Personal income growth was softer than expected in December, up 0.2% MoM along with a -0.1% revision to November’s income growth. Disposable incomes grew slightly less than 0.2% MoM but fell 0.1% when adjusted for inflation. Personal spending, however, grew 0.3% MoM in December as expected. With spending outpacing income, the savings rate fell 0.2% to 7.6%, matching its lowest rate of the year.
Core PCE Inflation Ticks Higher, from 1.53% to 1.58%: Along with the income and spending figures, December’s PCE inflation was slightly firmer than expected after yesterday’s GDP data. Headline prices rose 0.3% MoM and core prices gained 0.2%, both firmer than expected. The increase brought the year-over-year rate of core consumer inflation up from 1.53% to 1.58%, still well below the Fed’s target.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan will release its final revision to the January report on consumer confidence.
Brexit: The U.K. is officially no longer part of the Eurozone.
Impeachment Trial Likely to Conclude: The impeachment trial of President Trump is expected to conclude today without calling new witnesses and with an acquittal.
Sentiment Rebounds after W.H.O. Declares Global Health Emergency: U.S. stocks were down sharply yesterday morning as a soft 4Q GDP report and fears over the coronavirus continued to drag sentiment lower. Adding to the anxiety, the C.D.C. confirmed the first case in which a U.S. person had contracted the virus through human-to-human transmission. As longer Treasury yields continued to slide, the 3-month / 10-year Treasury spread inverted for the first time since last fall. The brief inversion added to investors’ anxieties. The World Health Organization held a press conference mid-afternoon declaring the coronavirus situation a global health emergency, thereby freeing up additional resources to help contain the outbreak. The announcement bolstered sentiment pushing yields and stocks prices higher into the close. The DJIA gained 375 points from its lows to close the day up 0.5% while the S&P gained 0.2%. The 10-year Treasury came into the day at 1.584%, fell as low as 1.533%, but closed back at 1.586%. The long bond tested 2.00% before the yield climbed back to 2.05%.
Investors Wrestling with Potential Economic Damage of Coronavirus, EU Data Disappoint: Shortly after U.S. markets closed, Amazon’s earnings report blew out expectations with sales up 21% and earnings per share beating analysts’ expectations by 57%. Prime subscribers rose from near 100 million at year-end 2018 to over 150 million. At its overnight peak, Amazon joined the rarified air of the four-comma club with a market valuation over $1 trillion. However, any boost Amazon’s earnings gave the broader indices was short-lived after the U.S. State Department issued a statement saying, “do not travel to China due to the novel coronavirus.” The potential economic damage of the outbreak is growing. Also overnight, the Eurozone economic data were dreadful. France’s economy unexpectedly shrank 0.1% in the fourth quarter and overall Eurozone GDP growth fell from +0.3% in +0.1%, softer than expected. German retail sales unexpectedly contracted 3.3% in December. Eurozone stocks are down 0.5% and sovereign yields are down 1.3 to 2.1 basis points across the region. The 10-year Treasury yield has also dropped 3.9 bps from yesterday’s close re-inverting the 3M/10Y spread.