Market Snapshot January 7, 2019
Good Monday A.M.,
Friday saw a spike in bond yields for two reasons. Leading up to Friday, bonds had had a crazy run up, stocks a crazy run down, and it was just time for a pullback/correction. Markets need that to reinforce the current trading pattern and extend gains (or with equities, losses). In the overnight market in Asia and Europe Thursday night, we started to see that correction. Then Friday anomalously strong Labor Department report just sped up the process. Comments from Fed Chair Powell that the Fed will be flexible on policy including rate increases and the reduction in the balance sheet also gave way to big gains in stocks. The Dow climbed 747 points with the fourth-best point increase in its history. Through Friday the Dow has increased 1,641 points since Christmas Eve. The 10-year yield closed Friday around 2.66% versus the Thursday close around 2.56%.
This morning the markets opened fairly stable with the Dow up 220 the still leaking to 2.68%. Various government reports are scheduled for release this week, however some have already been postponed due to the government shutdown (now the third longest in history). Today did have the release of the Institute for Supply Management non-manufacturing index. This report tracks various components within the services sector that accounts for approximately 80% of the U.S. economy. The index was 57.6 versus forecast of 59 and the lowest since July. An index above 50 indicates the non-manufacturing sector economy is generally expanding. The index was 60.7 in November.
Additional key reports this week would include Job openings on Tuesday, FOMC minutes on Wednesday, weekly jobless claims on Thursday, and probably the most impact on Friday with Consumer Price Index and Core CPI. The Fed is looking to raise and control inflation around 1.9% for 2019. Strong employment with moderate inflation are the cornerstones for the U.S. economy that is almost 70% driven by consumer spending. Strong employment typically creates higher wages that in turn create more disposable income and ultimately higher consumer spending. Higher consumer spending creates higher demand for goods and increases the price of goods. The correlation with increase wages and prices are the keys in driving inflation.
That is about it for now, one thing to watch is that the Chinese foreign minister stated that China and the U.S. are interested in working together and that China is ready to resolve trade disputes on equal grounds. No resolution yet.
Bonds are in great shape and despite the recent pullback, I think we are playing with house money. With lock desks not yet pricing in the full improvement over the holidays, I am more inclined to float but with that, I am also keeping watch. As long as the 10-yr stays below 2.72%, we are quasi safe. Above 2.72% and things can get a but rocky.
Make today great!