The Market Today

10-Year Fails to Breach 3% Despite Very Strong Data, Hawkish Fed


by Craig Dismuke, Dudley Carter

THIS WEEK’S CALENDAR

Quiet Calendar for Data, Focus on Housing: This week’s calendar will offer a respite from last week’s deluge of data.  It kicks off this morning with the June report on homebuilder confidence which remains very high.  May’s housing starts and building permits are scheduled for Tuesday, existing home sales for Wednesday, and the FHFA home price index on Thursday.  Also scheduled for Thursday is the release of the Fed’s most recent round of bank stress tests.

 

Fedspeak, OPEC, and Trade Negotiations to Dominate Market Focus: Apart from all of the housing data, there are several Fed speakers on the tape, including comments from the new New York Fed Bank President (permanent FOMC voter) Williams today.  A hat-trick of central bank chiefs will speak on Wednesday, Powell, Draghi, and Kuroda. OPEC meets on Friday and is expected to raise supply caps which has already pushed oil prices down 10% from their May peak of $72.24 per barrel to $64.96 this morning.  Perhaps most important to the markets, the tit for tat trade tariffs between the U.S. and China will remain in the headlines along with NAFTA negotiations.

 

TRADING ACTIVITY

Overnight – Trade Worries Continue to Weigh on Markets: Global equity markets have started the week on their back foot but have created only a modest bid for safer global sovereigns. The U.S. administration slapped tariffs on $34 billion of goods imported from China last Friday, will take effect July 6, and said they are considering a similar action on another $16 billion. China responded with an equal action which spooked global equities last Friday (more below) and has affected sentiment to start this week’s trading. Several markets in Asia were closed for a holiday but those that were opened dropped 0.7% on average. Europe’s Stoxx 600 was down around 1.0% with Germany’s DAX leading losses. Sovereigns were bid but the yield declines were modest. The German 10-year yield was down 0.5 bps while the 10-year Treasury yield had fallen 1.1 bps to 2.91%. Combined with the 0.2 bps move down for the U.S. 2-year yield, the spread between the two set a new cycle-low of 36 bps. Oil prices will be in focus this week with OPEC set to meet Friday and speculation building that they could raise the current supply caps. After falling nearly 4% on Friday, U.S. crude was up 0.2%, significantly better than the overnight lows of -2.3%.

 

NOTEWORTHY NEWS

ICYMI – June 15, 2018 Weekly Market Recap: Last week’s economic calendar was one of the busier ones this year. It started (failed G-7 summit) and ended (U.S., China tariff announcements) with concerns around trade and had a bit of everything else sprinkled in the middle. The economic data began in earnest on Tuesday after President Trump signed an agreement with North Korea’s Kim Jong Un aimed at denuclearization of the Korean peninsula. The NFIB’s Small Business Optimism Index jumped to its second highest level in 45 years of records and an unexciting May CPI inflation (2.8% headline, 2.2% core) report is unlikely to derail the Fed’s updated ambitions announced on Wednesday. After hiking to 1.75% to 2.00% as expected, the SEP median 2018 dot was updated to show four total hikes this year (two more). The quicker projected pace was presumably in response to their projecting the unemployment rate to fall to 3.6% by year-end and 3.5% in 2019 and 2020, a full percentage point below where the estimate unemployment. But a more rapid pace of growth should enhance their confidence. Retail sales over the three months ended in May rose at an annualized 6.6% pace, near the top end of this cycle’s range. The short-end of the Treasury curve rose 5 bps last week in response. But despite the solid signals from the U.S. data, longer yields pulled back. The ECB announced plans for a possible end to QE this year and set the stage for a potential rate hike after next summer. Still, markets read the nuance of the wording changes and Draghi’s press conference as notably more dovish than expected. The Euro had its worst day since Brexit. That sent yields lower on Thursday before tariff announcements between the U.S. and China on Friday sent markets into the weekend on a cautious note. The net result was a new cycle-low of 37 bps for the spread between 2s and 10s. Click here to view the full recap.

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