The Market Today

Yield Curve Continues Flattening Trend as Fed Remains in Gradual-Hike Mode

by Craig Dismuke, Dudley Carter


PCE Inflation, Income and Spending, Housing, Trade, Consumer Confidence…: This week’s calendar will bring reports on pending home sales, personal income and spending, the trade balance, consumer confidence, and PCE inflation.  Tuesday brings the July Advanced Goods Trade Balance for July which is expected to show the trade deficit beginning to expand again.  On Wednesday, 2Q GDP is expected to be revised down from +4.1% to +4.0%.  On Thursday, the Fed’s preferred measure of inflation is expected to show a decrease in the YoY pace from 2.3% to 2.2%.  Also on Thursday, July’s Personal Income and Spending data will be important to economists and analysts as an indicator of how strong the consumer remains.


Chicago Fed National Activity Index Shows Weakening Inflation Pressure: As for this morning’s data, the Chicago Fed’s National Activity Index fell from +0.48 to +0.13.  The CFNAI is an aggregation of 85 different economic indicators including reports on 1) production and income, 2) the labor market, 3) personal consumption, 4) housing, and 5) sales and inventories.  For context, when the CFNAI’s three-month average is above +0.70 following an expansion (or a one-month reading above 1.00), a period of more rapid inflation is expected to occur.  The 3-month average for the CFNAI has now pulled back from +0.53 in March to +0.05.


At 9:30 a.m. CT, the Dallas Fed Regional Manufacturing Index is scheduled for release.



Overnight – Risk-On Resumes After Weekend Break Following Friday’s All-Time High for the S&P 500, Nasdaq: Futures were pointing to more gains for U.S. equities on Monday after the S&P 500 and Nasdaq set new records on Friday. Treasury yields responded by moving higher and steeper while the Dollar was essentially unchanged. The strength underlying U.S. stock futures started in Asia and persisted through the first half of the European session. China’s CSI 300 was up 2.4% and leading all gains as the yuan held its hefty Friday gains. Last Friday, the PBOC reintroduced the counter-cyclical factor into how banks price the currency against the Dollar, a step analysts say should help stabilize the recent slide. The yuan held near its strongest level of the month overnight. After hiding away for a week-long holiday break, the Turkish Lira weakened again overnight, potentially causing European equities to lag overnight and giving investors another item to keep an eye on this week. Also likely to capture some headlines, officials from Mexico and the U.S. will resume talks this morning after indicating over the weekend that two sides are close to reconciling some key differences. The Mexican peso was stronger overnight. Ahead of U.S. trading, the 2-year Treasury yield was up 1.7 bps with the 10-year yield 2.3 bps higher, steepening the curve for the first time in six sessions.



ICYMI – August 24, 2018 Weekly Market Recap: Stocks ended a busy week with the S&P 500 at a new record high while the Treasury curve closed at a cyclical low of 19 bps between 2s and 10s. There were several reports on housing that continued to disappoint expectations, a strong read on business investment, and a couple of Fed communications that teed up another rate increase for September. Click here to view the full recap.

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