Stocks Fall as Treasurys Hold Steady Amid Policy Concerns, Strong Economic Data

Consumer spending and income for December led off this week’s heavy calendar of economic data releases that concludes with nonfarm payrolls this Friday.  The volume of purchases made by consumers grew at the fastest pace in three months, as a report by the Commerce Department revealed a 0.5% rise last month, in-line with expectations.  Spending in December was primarily concentrated in durable goods, specifically automobiles (18.3 million annualized rate), capping off a record year in the car industry that saw total motor vehicle sales of 17.55 million.  Personal income rose moderately last month, reporting a 0.3% rise vs. expectations of +0.4%, with November’s level being revised 0.1% higher as well.  Total income growth for 2016 was +3.5%, the reading’s smallest increase in the past three years.       

The first FOMC meeting of 2017 kicks off tomorrow, with futures currently pricing in a 96% chance of the Fed Funds rate being held in the current 50-75 bps target.  Of much interest to investors will be discussions surrounding the shrinking of the Fed balance sheet, a hot topic lately as the US economy approaches fulfillment of the Fed’s dual mandate and potential fiscal stimulus on the horizon.  In a speech given January 19th, Janet Yellen acknowledged that the economic benefits from the Fed’s bond purchase program were beginning to wane, however market reaction will be of primary concern given the delicate nature of investor sentiment, as seen in the “taper tantrum” reaction of 2013.  The US central bank currently holds $4.45 trillion in mortgage and government debt, compared to less than $1 trillion the Fed held prior to the 2008 financial crisis.  Abroad, the Bank of Japan is also set to meet this week, with the expectation that the nation’s lending rates and monetary stimulus will be held steady.  Global investors are expected to be focused on BOJ Governor Haruhiko Kuroda’s speech afterwards, especially with regard to his views of the Japanese economic outlook in relation to US trade policy.

All three major US equity indices tumbled today, weighed down heavily by airline and technology stocks whose outlooks worsened following President Donald Trump’s executive order on immigration this past weekend.  The NASDAQ index finished down more than 0.8% while both the DJIA and S&P 500 declined 0.6%.  It seems that both investors and businesses are becoming increasingly concerned with the protectionist measures to be implemented by the Trump administration and their potential to overshadow other pro-growth initiatives. The VIX, a commonly used market volatility gauge, bounced 1.3 percentage points higher, after hitting its lowest levels since 2014 last Friday.  US Treasurys held steady throughout the session however, with yields/swap rates holding in a 1-2 bps range, leaving the yield on the 10-year note just below 2.49%.  In commodities, crude oil declined 0.5% to 1.0% on excess supply concerns while gold futures rallied 0.6% on the day.