The Market Today
Yields Up for a Third Day as Firm Inflation Increases Upward Pressure from Potential Government Deal, Trade Hopes
by Craig Dismuke, Dudley Carter
January CPI Inflation Shows Broad Firmness: Headline CPI was unchanged in January versus December’s report, although December’s rate of price gains were revised higher than initially reported (from -0.1% MoM to +0.0%). As such, headline inflation came in as-expected for the month of January. On a YoY basis, headline prices rose just 1.6%, down from 1.9% in January and all the way down from 2.9% back in July. The drop in energy prices has had an obvious impact on the headline figures and will likely begin to weigh on the core readings. At the core level, prices rose an as-expected 0.2% MoM in January keeping the YoY rate at 2.2%. Shelter prices (+0.3% MoM), the largest component of the CPI calculation, firmed up after a softer December report. This was driven by another strong gain in lodging prices (+0.5% MoM) and a rebound in owners’ equivalent rents (+0.27% MoM). Medical care prices also outpaced their 12-month trend growth rate, rising 0.22% MoM on a strong gain in the price of professional services. New and used car prices rose 0.1% MoM on a good month for new car prices (+0.21% MoM). Looking beyond these bigger ticket categories, consumer prices were generally firmer than the trend rates of growth. Bottom line: rent, medical care, and prices were all stronger than trend along with firmer base inflation from the smaller categories. After inflation has shown to be weaker-than-anticipated in recent months, this report will be positive news to Fed officials who are hoping to see consumer price gains stick near 2.0% YoY.
Mortgage Applications Pullback Despite Lowest 30-Year Rate in 11 Months: Mortgage applications for the week ending February 8 fell 3.7% on a 6.4% decline in purchase apps and a 2.3% drop in refi apps. According to MBA’s data, 30-year mortgage rates fell 4 basis points to 4.65% for the reference period while 15-year mortgage rates dropped 7 basis points to 4.04%. At 4.65%, the 30-year mortgage rate is now at its lowest level since March 2018 having dropped from a high of 5.17% back in November. The applications data still point to a good month for home sales in January but a pullback in February.
Fedspeak: Cleveland Fed bank President Mester and Atlanta Bank President Bostic are both slated to speak at 7:50 a.m. CT this morning. Philadelphia Bank President Harker is scheduled for comments on the economic outlook at 11:00 a.m.
Yesterday – Markets See Stronger Odds for a Deal on Trade, Government Spending: U.S. stocks rallied on hopes the President will sign a bipartisan spending deal and his top trade negotiators can make enough progress with Chinese officials to prevent a tariffs increase on March 1. Futures strengthened Monday evening as news broke that a bipartisan group of U.S. lawmakers had agreed in principle to a spending deal. Treasury yields also popped higher on the headlines during Asian trading. While President Trump later said “I’m not happy” about the funding deal, which includes $1.38B for a boarder barrier instead of the $5.7B he had requested, he also said “I don’t think you’re going to see a shutdown.” In addition to his comments on the funding agreement, when asked about the March 1 trade deadline (when 10% tariffs on $200B of Chinese imports go up to 25%), President Trump said that if U.S. trade negotiators are close to making “a real deal” with China by the end of the month, he could see himself “letting [the deadline] slide for a little while.” Stocks rose throughout the morning session and held the early gains during afternoon trading. The Dow ended 1.4% higher while the S&P 500 rose a slightly smaller 1.3%. The materials sector rose 2.3% while seven of the remaining 10 added more than 1%. The Treasury curve ended higher and steeper with the 2-year yield up 2.0 bps to 2.51% and the 10-year yield 3.4 bps higher at 2.69%. The strong risk-on tone was enough to end the Dollar’s win streak, with the currency closing lower for the first time in nine days.
Overnight – Stocks Strength on Hopes of Less Uncertainty, Yields Kept in Check by Data: For a third time this week, U.S. markets will open against a generally positive backdrop for risk assets. U.S. stocks rallied Tuesday on hopes the government will avoid a second shutdown and that President Trump will extend the trade deadline past March 1 if negotiators make progress but can’t finalize every detail of an agreement by the end of the month. That positivity has carried over into Wednesday’s session and pushed stocks up across both Asia and Europe. This week’s run extends a steady recovery that has pushed the MSCI Asia Pacific index up more than 10% from its late-December low and to its highest level since early October. The Stoxx Europe 600 was 0.4% higher and less than 1% from early October levels. Sovereign yields’ weekly increase, however, has cooled overnight. Ahead of this morning’s U.S. inflation report, Treasury yields had recovered from Europe-session lows; shorter yields were modestly higher while longer yields were little changed. The 10-year yield tracked European yields lower after data there continued to disappoint. A handful of reports from the UK missed estimates and industrial production for the Eurozone in December dropped 0.9%, more than double the 0.4% decline expected. The 4.2% YoY decline was the largest since the financial crisis. Yields moved to their highs of the day after core CPI inflation unexpectedly held at 2.2% after another month of firming.
Another Signal that December Uncertainty Didn’t Derail U.S. Labor Market: Despite fears of a government shutdown and elevated uncertainty about global growth, caused in part by ongoing U.S.-China trade tensions and reflected in front-end inversions of the Treasury curve and the S&P 500 registering its worst December since the Great Depression, certain sectors of the U.S. economy continued to look to for workers. December’s JOLTS report showed an unexpected increase in total job openings to a new all-time high for the series. The 7.3MM openings compared to 6.3MM unemployed persons, a tenth month of the ratio showing fewer than one worker per open position. Manufacturing openings declined more than average amid signs global manufacturing was slowing and federal government openings fell by the most in 23 months ahead of what would become the longest government shutdown in history. However, an above-average month for construction, business, education, health, and leisure more than offset that weakness. In the other key metrics, the hires and quits rates were unchanged just below their best levels of the cycle while layoffs ticked back down to near its cyclical low. The JOLTS data confirmed the labor market remained a bright light in what was a dark December for economic outlooks and the markets.
Powell Doesn’t Feel Recession Risk is “At All Elevated”: Fed Chair Powell’s Tuesday remarks were unremarkable with respect for any new insights into the outlook for the U.S. economy or monetary policy. At his first of two appearances before audiences in Mississippi, Powell told students at a local university that the U.S. economy appears to be in good shape and unemployment remains near its lowest level in 50 years. He admitted, however, that the aggregate recovery evident in national metrics were not necessarily representative off how different regions of the country had fared. The national unemployment rate was 3.9% in December compared to Mississippi’s 4.7% level. He concluded that “we don’t feel the probability of recession is at all elevated.” His second speech included more of the same.
Consumer Debt Growth Fueled by Non-Mortgage Categories: The New York Fed’s Quarterly Report on Household Debt and Credit showed total outstanding debt rose $32B in the fourth quarter of 2018 to $13.54T. Mortgage balances were essentially flat from the third quarter and homeowners continued to pay down HELOC balances. The February report showed HELOC balances fell to $412B, the lowest level since the second quarter of 2004. The rate of mortgage origination slowed, consistent with the weakness that has been clearly evident across the entire universe of housing data. Away from mortgage debts, auto loans rose $9B, credit card balances grew $26B, and students took out a net $15B. Overall delinquencies were stable in the fourth quarter while transition rates for autos and credit cards continued their deteriorating trends.
Tuesday Evening Fedspeak: Similar to her comments last week, Cleveland Fed President Mester said the economy is in a good spot and underlying inflation is essentially at the Fed’s target. As a result, the Fed Funds rate may need to be nudged higher if incoming data meet her baseline outlook. However, she noted the Fed doesn’t need to do anything preemptively and fully supports the new plan described at the January meeting to wait and watch the data. In more forward looking remarks, she said she expects the Fed to finalize its plans for the balance sheet at upcoming meetings and indicated the uncertainty inherent in the dot plot needs to be stressed in upcoming communications. In mid-January, the Fed’s most hawkish member said she saw reasons to pause interest rate normalization. On Tuesday, Esther George again noted that she’s comfortable with the new plan for patience. “The economy is doing pretty well and inflation is not rising,” she said, adding “Let’s step back and see what happens.”