Economic Uncertainty Builds as Consumer Spending Rises, Inflation Cools

 

Equities Move Sideways, Volatility Remains High

Investors continued to digest a whirlwind of trade and geopolitical headlines during today’s volatile session. President Trump cancelled his meeting with Vladimir Putin at the G20 summit after Russian forces seized 24 Ukrainian sailors off the coast of Crimea.  Speculation also increased that a trade deal may soon be reached between the U.S. and China, but we’ll have to wait until at least the dinner between President Trump and Chinese President Xi Jingping tomorrow night.  While equity markets didn’t react strongly on either headline, the uncertainty kept the VIX Index, a measure of the premium investors will pay for protection, elevated going into its third straight month.  Major US stock indices finished the day marginally lower, as the DJIA snapped its streak of three consecutive winning sessions.  US Treasurys saw a strong rally from the open, as yields/swap rates declined as many as 5bps across the curve before retracing a portion of the movement following the releases of the FOMC minutes from the December meeting.  The 10-year note yield finished the day near its lowest levels of the past two months at 3.03% (-3bps).   

 

Strength in Income, Spending Data While Price Pressures Ease​

Today’s report from the Commerce Department on personal income and consumer spending for October captured the majority of attention amongst key economic data releases, especially given the dovish comments from Fed Chair Jerome Powell yesterday afternoon which rattled global financial markets overnight.  Personal income rose a robust 0.5% (+0.4% expected), marking the largest monthly rise since January.  Expenditures at the household level similarly outpaced expectations, growing 0.6% in October and led by spending on prescription medication and utilities.  Both figures assisted in building the case for a December rate hike by the FOMC, the likelihood of which currently resides near 80%, as per Fed funds futures.

 

 

On the other hand, the inflation data in the report muddied the rate hike outlook heading into 2019, as the core PCE price index (Fed’s preferred inflation measure) rose 0.1% in October after a +0.2% reading in the prior month.  Compared to a year earlier, the gauge of core prices climbed 1.8% — below the Fed’s 2.0% inflation target and its lowest annual reading in the past six months.  Looking into 2019, Fed funds futures are only indicating one quarter-point hike throughout the year, while forecasts by market pundits range from one to as many as four rate increases.

 

 

Crude Bounces Back​

Today energy markets reacted to the news that Russia may coordinate crude oil supply cuts with OPEC, as WTI crude settled 2.3% higher to $51.54/barrel.  Also guiding oil futures higher was a report that Saudi Arabia would participate in efforts to diminish the extremely volatile price action in the commodity as of late.  OPEC and other oil producing companies may make an announcement as soon as next week’s meeting in Vienna.