Virus Scare Continues to Drive Rates Lower

Jan 27, 2020
Image of dozens of cranes over a plot of land

FOMC Rate Decision & GDP Headline Busy Week

This Wednesday’s FOMC rate decision is not expected to carry much drama. No rate change is expected and the meeting won’t provide an updated rate or economic forecast. What we will get is the post-meeting statement and press conference from Chair Jay Powell. The market consensus is that the Fed will continue to characterize the economy as strong and with a positive  outlook given the trade deal with China, and Brexit moving towards its next chapter.  Two bits of possible intrigue, Interest on Excess Reserves may be bumped to 1.60% from 1.55% as that rate is causing the effective fed funds rate to rest at 1.54%, close to the 1.50% lower bound. Investors will also be attuned to any virus-related comments.  The first estimate of fourth quarter GDP is due Thursday with the consensus calling for a 2.1% annualized print which would match the third quarter rate. The Atlanta Fed GDPNow model has it slightly lower at 1.8% while the New York Fed’s model is predicting an even lower 1.2% rate. Other first-tier reports for the week include December Personal Income and Spending along with Durable Goods Orders. The personal income and spending numbers are expected to be slightly lower than November’s while durable goods orders are expected to post sizeable increases over the November numbers.  


Treasuries
Treasury Curve Today Week Change
3 Month 1.51% -0.03%
6 Month 1.51% -0.04%
1 Year 1.50% -0.03%
2 Year 1.45% -0.09%
3 Year 1.42% -0.13%
5 Year 1.45% -0.14%
10 Year 1.62% -0.17%
30 Year 2.08% -0.17%
Short-Term Rates
Fed Funds 1.75%
Prime Rate 4.75%
3 Mo LIBOR 1.80%
6 Mo LIBOR 1.81%
12 Mo LIBOR 1.88%
Swap Rates
3 Year 1.444%
5 Year 1.439%
10 Year 1.560%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Jan 27 New Home Sales MoM Dec 1.6% 1.5% 1.3%
Jan 28 Durable Goods Orders Dec P 0.9% 0.4% -2.1%
Jan 28 S&P CoreLogic CS Home Price YoY Nov 2.40% 2.40% 2.23%
Jan 28 Conf. Board Consumer Confidence Jan 128.0 128.0 126.5
Jan 29 Goods Trade Balance Dec -$65.5b -$65.0b -63.2b
Jan 29 FOMC Rate Decision Jan 29 1.5%-1.75% 1.50%-1.75% 1.50%-1.75%
Jan 30 Fourth Quarter GDP (Annualized) 4Q

2.2%

2.1% 2.1%
Jan 31 Personal Income & Spending Dec 0.3% 0.3% 0.4%
Jan 31 PCE Core Deflator YoY Dec 1.6% 1.6% 1.6%

calendar icon Top 5 Events for the Week

January 27-31, 2020

1. FOMC Rate Decision –Wednesday
2. Fourth Quarter GDP –Thursday
3. December  Personal Income & Spending –Friday
4. December Durable Goods Orders–Tuesday
5. January Consumer Confidence –Tuesday

 

1.  FOMC Rate Decision —Wednesday

This Wednesday’s FOMC meeting is not expected to carry much drama. No rate change is expected and the meeting won’t provide an updated rate or economic forecast. What we will get is the post-meeting statement and press conference from Chair Jay Powell. The market consensus is that the Fed will continue to characterize the economy as strong with a positive  outlook given the trade deal with China, and Brexit moving towards the next chapter. With two of the larger uncertainties removed, or at least taken off boil, the Fed is likely to emphasize staying on the sidelines for the near-term given that outlook. In one bit of drama, the Interest on Excess Reserves may be bumped to 1.60% as the current rate of 1.55% is causing the effective fed funds rate to rest at 1.54% which is precariously close to the 1.50% lower bound.

 

2.  First Estimate of Fourth Quarter GDP –Thursday

The first estimate of fourth quarter GDP is due Thursday with market consensus calling for a 2.1% annualized print matching the rate in the third quarter. The Atlanta Fed GDPNow model is calling for a slightly lower 1.8% rate while the New York Fed’s model is predicting an even lower 1.2% rate. Consumer consumption, which comprises two-thirds of the economy, is expected to be 2.0% versus a more robust 3.2% rate in the third quarter. The inflation reading from the report, the Core PCE QoQ annualized rate is expected to soften to 1.6% versus 2.1% in the third quarter. In summary, a decent showing is expected for the quarter but with moderating consumer spending and inflation forecasts. Bloomberg consensus is calling for further slowing in the first quarter with a 1.6% annualized rate.

 

3.  December Personal Income and Spending —Friday

Given we’ll get fourth quarter GDP on Thursday, we’ll already have a good idea how consumer income and spending were in the fourth quarter, but the December Personal Income and Spending report will give us a clearer indication as to the trajectory of both as we make the turn into 2020.  For the month, income is expected to have increased 0.3% versus 0.5% in November.  Spending is also expected to have increased 0.3% versus 0.4% in November. The Fed’s preferred inflation measure, core PCE, is expected to increase 0.2% for the month matching the increase in November while year-over-year it’s expected to increase a tenth from 1.5% to 1.6%. That expected uptick will still keep the rate well under the Fed’s 2% benchmark, which will allow the Fed latitude to cut again if economic numbers start to weaken from current levels.

 

4.  December Durable Goods Orders —Tuesday

The manufacturing sector has been in a recession for nearly a year what with the global slowdown and trade uncertainties weighing on the sector. Also, the much publicized problems that Boeing is having is also creating headwinds given the high value of aircraft in orders and trade numbers. For the month, overall orders are expected to increase 0.4% versus a –2.1% decline in November. Orders ex the volatile transportation sector are also expected to be strong at 0.3%versus –0.1% the prior month. Shipments of nondefense ex-aircraft (a proxy for business investment) are also expected to be positive at 0.2% versus –0.3% in November. In summary a positive report is expected for December and something the Fed will surely take note of if it comes to pass.

 

5.  January Consumer Confidence–Friday

With consumer spending constituting two-thirds of the economy, assessing the confidence of said consumer is a key indicator of future spending trends. Declining confidence typically means reduced spending while stable to increasing confidence usually means more robust spending. For the month, confidence is expected to improve to 128.0 versus 126.5. Other indicators within the report, expectations (97.4 in December) and present situation (170.0) will also get attention. The negative disparity in readings between expectations and current situation is one nagging issue in recent reports (see graph below). To date, the drop in expectations hasn’t materially curbed spending.

 

Consumer Expectations and Present Situation Graph

 


bar graph icon  Yield/Duration Matrix

 Yield/Duration Relationship 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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