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Jan 3, 2019

Markets: Inflation Was a Bad Bet Last Year

The Wall Street Journal.
Markets Bear logo.
Get ready. It's shaping up to be a busy day. I’m Jessica Menton, walking you through this morning’s market moves as U.S. futures point sharply lower.
Apple shares are down in premarket trade after the technology titan lowered its revenue outlook for the crucial holiday quarter on tepid sales in China. The yen surged against the dollar as Apple's rare move renewed concerns over slowing global growth. Bristol-Myers Squibb has also agreed to acquire Celgene in a deal valued at about $74 billion.
Wall Street is also monitoring the new Congress, which will convene as a partial government shutdown enters its 13th day. Manufacturing and auto-sales data are also on tap. 
Meantime, our Daniel Kruger explains the factors reducing investors' appetite for inflation-protected bonds.

Markets in a Minute

Markets Data

Overnight Developments


Muted Inflation Makes Owning TIPS 'Painful'

Daniel Kruger, bonds reporter
Investors entered 2018 expecting strong economic growth to fuel inflation. A year later, they're still waiting for higher consumer prices.
Despite early-year concerns about rising prices that hurt demand for bonds, Treasury debt indexed to the rate of inflation returned less than conventional U.S. government debt in 2018. That’s because inflation hasn’t taken flight, even with wages rising at the fastest pace in almost a decade and unemployment near a 50-year low.
Total returns for Treasury inflation-protected securities slumped in the fourth quarter to end 2018 down 1.4%, counting price changes and interest payments, while those for fixed-rate U.S. government debt climbed 1.9%, according to Bloomberg Barclays data.
The negative returns in TIPS marked a reversal from earlier in the year, as mounting concerns about the pressures weighing on global economic growth cut into inflation expectations.
Owning TIPS “has been a bit of a painful trade,” said Donald Ellenberger, head of multiasset strategies at Federated Investors, which holds the debt.
While faster inflation poses a threat to the purchasing power of a conventional bond’s fixed interest and principal payments, it typically leads to increased demand for inflation-indexed debt. Holders of TIPS receive a small yield as well as an increase in their principal equal to the annual change in the consumer-price index.
As expectations for inflation have declined, fixed-coupon government debt has become more attractive. Trade tensions and tightening financial conditions have also spurred stock swings and gains in the U.S. dollar, denting investors’ appetite for risk and expectations for growth while reducing appetite for inflation-protected bonds. 
The Fed’s December decision to raise interest rates and to pencil in two more increases this year is likely to keep inflation expectations lower, analysts and investors said. The consumer-price index rose 2.8% in May from the prior year, according to the Labor Department, the fastest pace since 2012. Since then, however, it has moderated, slipping to 2.2% in November.

Market Facts

  • Apple could become the fourth-largest U.S. public company by market value for the first time since 2010 with a sizable drop today, according to Dow Jones Market Data. If its premarket drop holds and Apple falls 7.3% to $146.45 while other tech companies maintain their values, the iPhone maker could fall behind Google parent Alphabet. It already trails Microsoft and
  • Investors yanked a net $84 billion from U.S. mutual funds and exchange-traded funds that track stocks over the last two months of 2018, with $75.5 billion of those outflows coming in December alone, the biggest exodus from stock funds in a single month ever, according to Lipper data going back to 1992.
  • On this day in 2001, the Fed surprised investors and lowered the fed-funds rate from 6.5% to 6%. Analysts who one year earlier insisted that rates were irrelevant to the value of tech stocks declared the cut in the cost of borrowing to be significant. The Nasdaq surged 14% and its daily-trading volume surpassed 3 billion shares for the first time.

Key Events

U.S. auto sales for December are expected to decline to a 17.2 million annual pace from 17.5 million a month earlier.
The ADP employment report for December, due at 8:15 a.m. ET, is expected to show a net gain of 178,000 private-sector jobs.
U.S. jobless claims, out at 8:30 a.m., are expected to rise to 220,000 from 216,000 a week earlier.

The Institute for Supply Management releases its December manufacturing-activity index at 10 a.m.
U.S. construction spending for November, also released at 10 a.m., is expected to rise 0.2%.

Must Reads

The S&P 500 fell 6.2% in 2018. Above, the New York Stock Exchange. PHOTO: SPENCER PLATT/GETTY IMAGES
The battered bull market is limping into 2019. With few expectations that the dramatic swings will subside soon, given uncertainty over the economic and interest-rate outlooks, many investors are bracing for further turbulence in the coming weeks.
Investors bet the Fed will pause on rate increases in 2019. In a sign of diminished confidence in the economy, investors expect interest rates will end 2019 no higher than where they started.
The twilight trading hour strikes currency markets again. The one- to two-hour period when U.S. traders are heading home—but market hubs in Singapore and Hong Kong aren’t yet fully up and running—is when normally stable currencies can suddenly go haywire.
Fracking’s secret problem: Oil wells aren’t producing as much as forecast. A data analysis of about 16,000 locations operated by 29 of the biggest producers in Texas and North Dakota reveals that many are yielding less than their owners projected to investors. Such projections can create an “illusory picture.”
Wall Street’s big landlords are so hungry for houses they’re building them. Millennials aren’t the only ones having a hard time finding houses to buy. So is Wall Street, prompting some big rental-home companies to start building new ones themselves.

What We've Heard on the Street

“China’s economy is in trouble. Unless policy makers permit a meaningful rebound in the shadow-banking sector...or take the more difficult steps to improve private-sector access to bank credit, things could keep getting darker for a while.”
—Heard on the Street columnist Nathaniel Taplin

Stocks to Watch

ArconicShares of the aerospace manufacturer closed up more than 10% Wednesday after Bloomberg reported late in the session that Apollo Global Management is in talks to buy Arconic for about $22 a share in a deal that could be reached by mid-January. 
GrubHub: Financial-services firm Stephens named the delivery service as its top pick in the restaurant sector in 2019 with a stock-price target of $155, which is 102% above its year-end closing price.
Sempra Energy: The company plans to sell its U.S. natural-gas storage facilities to private-equity firm ArcLight Capital Partners for $322 million in cash. Sempra's stock is down nearly 8% since early October. 

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