The Market Today

TODAY’S CALENDAR

1Q GDP Revised 0.1% Lower: A busy morning calendar was headlined by an update on some old news, which showed economic growth in the first quarter was marginally softer than initially estimated. The advance estimate of 3.2% was revised down 0.1% to 3.1% as a smaller boost from inventories, trade, business investment, and housing offset firmer consumer spending and an almost-imperceptible tick higher in government spending. Weaker business investment in equipment and small lift from intellectual property offset stronger structures outlays, while each category of the consumer was positive changes. Stripping out the effect of inventories and trade, final sales to domestic purchasers was notched up from 1.4% to 1.5%, a still-modest quarter for the core pillars of the economy. Also aiding the headline figures, both key price indices were revised down in yet another sign inflation pressures remain modest. Because of the backward-looking nature of the GDP report, the importance of today’s revisions is primarily its role as a benchmark for estimating how the economy is likely to fare in the second quarter. The smaller boost from inventories and trade will be a net positive for 2Q growth estimates while the weaker momentum in business spending and the firmer consumer activity will have offsetting effects on the expected growth trajectory.

Initial Jobless Claims Remain Solid: Initial jobless claims remained solid last week, edging up 3k to a still-impressive 215k for the week ended May 25. The four-week average fell to a four-week low of 216,750. Continuing claims, which lag the initial claims by a week, fell more than expected, also hitting their lowest level in four weeks. The jobless claims data continue to show that the indigestion trade tensions and global growth worries is creating for investors has yet to derail the solid U.S. labor market.

Trade and Inventories: After a big boost in the first quarter, inventories and trade are expected to be a headwind for growth in the 2Q GDP calculation. In a first look at U.S. trade activity for the second quarter, the goods trade deficit widened less than expected in April to -$72.1B, a four-month high. The details showed total trade flows declined for the month as trade tensions between the U.S. and China remain elevated. Total exports fell 4.2% last month while imports decline 2.7%. In the inventories data, both retail and wholesale inventories grew by more than expected.

Later Today: At 9 a.m. CT, an update from the NAR is expected to show pending sales of existing homes edged 0.5% higher in April. Purchase applications were weaker in April than in March and the housing data has remained mixed, despite mortgage rates falling back to their lowest levels since early 2018. At 11 a.m. CT, Fed Vice Chair Clarida will speak to the Economic Club of New York.

TRADING ACTIVITY
Yesterday – Stocks Recovered Above 200-Day Moving Average as Treasury Bid Faded Late: Bond bulls were enjoying another rally for most of Wednesday’s global session before a lousy lunchtime auction of 7-year Treasury debt broke up the party, pushing yields higher off their technically-stretched lows and leaving the curve little changed on the day. Global market sentiment had weakened overnight as trade tensions continued to fester. After President Trump said Monday the U.S. isn’t ready to make a deal after China reneged on key commitments, official media outlets in China indicated rare earth exports to the U.S. could be used as a “weapon” of retaliation. Rare earth imports are used in a range of products, including inputs into equipment used by the U.S. military. The continued tension between the two countries had earlier pressured the Stoxx Europe 600 down 1.4% to its lowest close since February 21. The S&P 500 opened lower and spent the entire session in negative territory, falling as much as 1.3% and briefly breaking below its 200-day moving average after Special Counsel Mueller’s statement sparked conflicting partisan calls of exoneration and the need for impeachment. However, the index recovered to lose just 0.7% as a bid for Treasurys faded in the afternoon. Treasury yields bottomed with equities, the day’s rally interrupted by a weak auction of 7-year Treasury notes that pushed yields higher into the close. The auction tailed by nearly 2 bps and the bid-to-cover dropped to 2.3, both the weakest since February 2016, while primary dealers were forced to take down their largest share of the award since March 2018. The 10-year yield opened at 2.266%, dropped 5.8 bps to 2.208% during U.S. trading, but jumped back to finish down just 0.5 bps at 2.260%. The 2-year yield charted a similar path to end essentially flat at 2.109%.

Overnight – Global Risk Selling Lets Up on Thursday: Global market sentiment perked up during European trading after another disappointing day across Asia knocked an additional 0.6% off China’s CSI 300. A top official in China’s Foreign Ministry recycled a common line used by leaders from the communist country that, “We oppose a trade war but are not afraid of a trade war,” calling the U.S. actions in recent weeks “naked economic terrorism, economic chauvinism, economic bullying.” Trade tensions have been May’s major market theme and this week dragged global equities and bond yields to technically tenuous levels. After closing at three-month low on Wednesday, the Stoxx Europe 600 recovered 0.3% overnight. The German 10-year yield added 1.0 bp to -0.17% after ending yesterday less than 1 bp from its all-time low. Just before 7 a.m. CT, ahead of a busy U.S. economic calendar, U.S. futures were pointing a positive open that would lift the S&P 500 off of a 12-week low. The Treasury curve had given up a modest overnight rise and was back down close to unchanged for the day.