The Market Today
Yields Continue to Fall as Global Risks Rise
by Craig Dismuke, Dudley Carter
Hot Consumer Inflation Report Complicates Fed Decision, Flattens Curve: Consumer price inflation proved hotter than expected in July, flattening the yield curve further in the market’s initial response. Headline CPI rose 0.3% MoM, aided by a 1.3% increase in energy prices, bringing the year-over-year rate up from 1.6% to 1.8%. Core inflation also rose 0.3% MoM on broad-based strength and particular strength in medical care inflation bringing the year-over-year rate up from 2.1% to 2.2%. This marks the 17th consecutive month that core CPI has been at, or above, the Fed’s 2.0% inflation target. Of the big three core components, housing (ex. energy) and transportation (ex. energy) saw trend-like price gains rising 0.28% MoM (12M trend: +0.27% MoM) and 0.07% MoM (12M trend: +0.09% MoM), respectively, while medical care prices more-than doubled their 12-month average rate of growth. Medical care inflation rose 0.48% MoM in July (12M trend: +0.21%). Apparel, education and communication, and other goods and services prices were all notably firmer than their 12-month-average growth rates. Overall, the July inflation data were broadly firmer than recent reports and are likely to complicate the Fed’s policy decision in September.
Small Business Optimism Jumps on Economic Outlook and Sales Expectations: Small business optimism improved in July with the NFIB’s survey rising from 103.3 to 104.7, beating expectations for an increase to 104.0. The increase came as expectations for future sales jumped 5 points and compensation plans dropped 4 points. Small businesses dialed back their compensation plans as filling jobs continues to be a challenge, ironically. Jobs-hard-to-fill rose 3 points and finding quality labor as an obstacle jumped to its highest level of the economic cycle. The general business conditions sub-index, reflecting the overall economic outlook, rose 4 points. While confidence is not back to its 2018 highs, it has been surprisingly resilient in the face of all the trade-related uncertainty plaguing the markets this year.
Yesterday – Treasury Curve Hit Flattest Level of the Cycle as Hong Kong and Argentina Added to Market Worries: Longer maturities led a sharp rally across the Treasury curve and stocks sold off as anxieties about uncertainty in Hong Kong and Argentina were added to already-existing concerns about the global economy. The yen rallied and gold jumped 1% to its highest level since April 2013. Hong Kong protestors took over the airport ahead of the U.S. session, leading to the cancellation of more than 100 flights on Monday. Hong Kong’s Hang Seng dropped 0.4% on the news, weakening sentiment across both Europe and America overnight. The risk-off intensified as political uncertainty in Argentina was ratcheted higher after a surprise weekend election. The incumbent President Macri was dealt a blow, which left him 15%-points behind his challenger and gave investors reason to dump Argentinian assets ahead of the official vote in October. The country’s bond yields surged and its peso tanked 17% to a record low of 53 per U.S. dollar. Added to the recent deterioration in in the U.S.-China trade situation, Monday’s events sent equity investors into a selling frenzy that dented all 11 sectors within the S&P 500 and cut 1.2% from the broader index. Treasurys rallied in flattening fashion with the 2-year yield falling 6.3 bps to 1.58% and the 10-year yield closing 9.9 bps lower at 1.65%. The nervousness knocked 3.6 bps off the related spread, which ended at a new cycle low of 5.8 bps.
Overnight – Equities Remain Weak as Global Worries Remain High: Monday’s market themes and driving forces remained mostly intact overnight, leaving investors in search of safer assets for a second day. Ahead of this morning’s U.S. CPI inflation report, gold prices strengthened with the yen and bid for sovereign debt duration, while global equities added to yesterday’s losses. Shorter Treasury yields rose, however, after small business optimism bounced back more than expected in July. China’s CSI 300 drifted down 0.9% as the PBOC weakened the yuan for a ninth day, but Hong Kong’s Hang Seng cemented its position as Tuesday’s worst performer. The index slumped 2.1% to a seven-month low as ongoing protests in the country disrupted departing flights for a second day, leading to hundreds of additional flight cancellations. While Argentinian assets showed some signs of stability, the country’s bonds cheapened up again overnight, keeping upward pressure on other emerging market dollar borrowing costs. Germany’s 10-year yield was down 1.6 bps to a new record low of -0.61% following a report that confirmed Europe’s largest economy remains anemic. A survey of the current economic assessment and future expectations both tumbled to their weakest levels since at least 2011. Tomorrow’s preliminary GDP estimate is expected to show activity contracted 0.1% in the second quarter. Around 7 a.m. CT, futures on the S&P 500 were 0.2% weaker while Treasury yields had moved off their lows to leave the 10-year yield essentially unchanged. After the firmer-than-expected inflation data, the 2-year yield rose to up 2.8 bps on the day, flattening the spread between it and the 10-year yield to just 3.4 bps, a new cycle low and nearer to inversion.
August 2019 Economic and Interest Rate Projections, and Bloomberg Survey – Trade Discussions Take Outlook to Brink: For the third time in four months, we have lowered our short- and medium-term interest rate expectations as trade negotiations have devolved more than expected and global uncertainty has increased. Click here to view the survey.