The Market Today

TODAY’S CALENDAR

1Q GDP Unchanged as Better Business Investment Offsets a Weaker Consumer: Economic growth in the first quarter was unchanged at 3.1% in the third GDP estimate, as an unexpected negative revision to consumer spending was offset by stronger business investment, housing activity, and government consumption. Growth in personal consumption was revised down from 1.3% to 0.9%, keeping 1Q as the second worst quarter for consumer spending since 2013. The downgrade was driven by spending on services, as goods purchases were actually notched higher, and was also affected by slightly firmer inflation estimates. The core PCE price index rose 1.2% in 1Q, up from the previous 1.0% estimate. The net result knocked nearly 0.3% off the 1Q growth tally, an amount that was more than offset by better-than-estimated business investment. While investment in equipment was roughly unchanged, outlays on structures and intellectual property were greater than previously thought. Government spending was modestly firmer, which combined with other revisions pushed final domestic sales growth up from 1.5% to 1.6%. The growth effects of external trade and inventory accumulation, which accounted for 1.5% of growth last quarter and are expected to be headwind to the 2Q calculation, were cumulatively 0.1% softer.

Initial Jobless Claims: Initial jobless claims rose more than expected last week, totaling a seven-week high of 227k. While still solid, the slightly higher claims nudged the four-week average up just over 2k to 221.3k. Continuing claims also rose slightly more than expected to 1.69MM.

Later Today: At 9 a.m. CT, the National Association of Realtors will announce how many existing homes went under contract in May. Economists expect the report, which leads actual closings of existing home sales by a month or two, to show activity recovered 1% last month after falling 1.5% in April. An hour later, the Kansas City Fed is expected to report manufacturing activity slowed across its District in June, extending a disappointing run for Fed surveys that have shown trade tensions have continued to weigh on economic activity.

TRADING ACTIVITY

Yesterday – Trade Hopes, Tech Gains, Oil Rally Lifted Stocks and Yields: Divergent sector performances kept the major equity indices largely unchanged on Wednesday, while hopes for progress on trade at this weekend’s G-20 summit and a tailing 5-year note auction pressured Treasury yields higher. S&P 500 energy companies led all gains as energy commodities rallied on U.S-supply related news. U.S. WTI jumped more than 2% after the Department of Energy reported crude stockpiles contracted 12.8MM barrels last week, a much bigger drop than the 2.9MM barrel dip expected and the largest weekly drawdown since September 2016. Gasoline prices rallied more than 4% as inventories dropped nearly 1MM barrels and officials confirmed the Philadelphia refinery that exploded last week, one of the largest in the Northeast, will shut down permanently. Treasury yields briefly gave up an overnight bounce from Treasury Secretary Mnuchin’s positive trade comments, but gradually recovered and moved to new highs after an auction of 5-year notes tailed by 0.006%. The 2-year yield rose 3.7 bps to 1.77% while the 10-year yield added 6.2 bps to 2.05%. Higher rates were little help to U.S. financials which slipped 0.2% but hurt rate-sensitive utilities and real estate companies, the biggest daily detractors.

Overnight – Market Sentiment Weakens after the WSJ Lists China’s “Preconditions” for a Trade Deal: An upbeat overnight session was interrupted by a Wall Street Journal report that indicated China’s Xi plans to hand President Trump a “set of terms the U.S. should meet before Beijing is ready to settle” the ongoing trade dispute. While Chinese stocks had closed higher amid widespread strength in Asia, European indices and U.S. futures both reversed into negative territory on the news. Based on its Chinese government sources, the report said China will insist restrictions on Huawei be removed, the punitive tariffs be unwound, and requests for an even greater increase in purchases of U.S. goods be dropped before a deal can be reached. The same officials, however, said Xi won’t “take a confrontational tone,” but rather “sketch out he envisions as an optimal bilateral relationship.” President Trump said yesterday a deal is “absolutely possible,” but noted he’s “very happy where we are now.” Global yields reversed lower as equities turned back on the reminder of the difficulties of negotiating such a complex trade treaty, with Treasury yields down roughly 1 bp across the curve around 7 a.m. CT. European yields tracked a similar path, as the trade headlines followed more disappointing data from the region. Economic confidence in the Eurozone fell more than expected in June amid increased global worries, settling at its weakest level in almost three years. In other markets, oil prices gave up a portion of yesterday’s jump while gold dipped for a second day.