The Market Today

Yield Curve Continues to Flatten; German Growth Beats; Small Businesses Struggle Hiring

by Craig Dismuke, Dudley Carter

Today’s Calendar – Fedspeak; Small Business Optimism Improves in October; PPI Shows a Little More Price Pressure: Finally, a morning with a few economic reports.  The October Small Business Optimism index increased from 103.0 to 103.8 as the sales outlook improved (a positive short-term indicator) along with the general perception of economic activity (a positive longer-run indicator).  As it relates to challenges facing small businesses, taxes continue to be the leading challenge, as they almost always are.  However, poor sales are no longer a major concern and government regulations and red tape have dropped from the biggest challenge in 2013 to the third largest challenge today.  A growing concern is quality of labor which is reflected in the job openings being hard-to-fill index at its highest level since 2000.  According to the NFIB press release, “The tight labor market got tighter for small business owners last month, continuing a year-long trend. Fifty-nine percent of owners said they tried to hire in October, with 88 percent of them reporting no or few qualified applicants.”


Producer prices for the month of October rose 0.4% MoM at the headline level and 0.4% when excluding food and energy.  Both measures showed faster inflation growth than expected.  On a year-over-year basis, headline PPI rose 2.8%, its largest rate of gain since 2012.  Services prices rose a strong 0.5%, half of which was driven by a 24.9% increase in margins for fuel retailers.  It is entirely possible that this is another knock-on effect of the hurricanes that will dissipate going forward.  While there is more price pressure in the production pipeline, core PPI rose 2.3% YoY and points to just a modest increase in consumer price pressure.


FedSpeak – Mnuchin Looking for Community Banker; Evans and Bullard Question Rate Hikes: Treasury Secretary Mnuchin spoke last night saying the Administration is looking for a community banker to fill the Fed Vice Chair position and is not worried if they are an economist given the vast resources at the disposal of the Fed. Chicago Fed Bank President Evans spoke overnight saying that Fed needs to rethink its policy framework and that missing their 2% inflation target presents a credibility challenge. Fed Chair Yellen spoke on a panel with the BoJ’s Kuroda and the ECB’s Draghi overnight and made some high-level observations of the central bank’s success in using extraordinary measures (including increasingly transparent communications).  St. Louis Fed Bank President Bullard spoke in Kentucky this morning questioning why the Fed continued to hike with inflation below target.  Atlanta Fed Bank President Bostic is scheduled to speak at 12:05 p.m. CT today, specifically addressing the economic outlook and monetary policy.


Overnight Activity – Better German Growth Boosts the Euro but Yield Curves Continue to Flatten: Global sovereign yield curves have flattened on slightly lower yields overnight amidst continued weakness in equities and notable moves in European currencies. The short ends of the U.S. and German yield curves are essentially unchanged from Monday’s finish while the respective 10-year yields have drifted lower by just over 1 bp. The U.S. 10-year yield recovered from its lows after this morning’s above-estimate producer price data. Global equities weakened in Asia and Europe and U.S. futures are signaling a similar stagnation at the open. Asian equities fell after a handful of economic reports from China (retail sales, fixed investment, and industrial production) slowed in October and missed estimates. That likely impacted sentiment in Europe but the timing of the Euro Stoxx 600’s drop coincided with a surge in the Euro. The common currency is Tuesday’s top performer and hit its strongest level against the Dollar since October 25 after better-than-expected GDP data in Germany. The German economy grew at a 0.8% QoQ pace in 3Q (3.2% annualized rate), faster than the 0.6% QoQ pace expected. A panel discussion of heaving-hitting central bankers – Yellen, Draghi, Kuroda, and Carney – has created very benign headlines and appears to have had little measurable impact on markets; the comments seem more conceptual in nature instead of being focused on the current outlooks in the various countries represented.


Yesterday’s Trading Activity – The 2-Year Yield Keeps Climbing: U.S. equities dropped at the open but turned positive after just thirty minutes of trading. The Dow dropped 79 points in the first four minutes of the session but recovered and spent most of the day hovering just above break-even. The index ultimately gained 17 points, or 0.07%, on Monday. The S&P and Nasdaq followed similar paths to equally modest gains of 0.10%. Within the S&P, seven of 11 sectors and just under 57% of all companies within the index closed higher Monday. Utilities was the top performing sector. In the Treasury market, yields rose Monday and were led higher by the short-end of the curve. The 2-year yield was roughly unchanged overnight but began to creep higher in early U.S. trading. For the day, the 2-year yield climbed 2.7 bps to 1.68%, a new nine-year high (1.70% on October 20, 2008). The 2-year yield has risen in 33 of the last 47 sessions (since yields reversed higher on September 8 to begin their most upward channel). The 10-year yield had dropped 3 bps to 2.37% but clawed back to essentially unchanged (+0.7 bps) at 2.40%. Monday was the first day for the 10-year to close above 2.40% in November and just the sixth time since March. With the 10-year yield almost back to where it began the year, the 53 bps of net flattening in 2017 (between 2s and 10s) is the result of the 2-year yield’s cumulative 49 bps increase. In the absence of a clear catalyst for the turnabout in yields, market reports speculated it could have been related to similar move higher by European yields in the final hours of trading there.

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