The Market Today
2Q Economic Data Heating Up
by Craig Dismuke, Dudley Carter
Business Investment Showing Signs of Strength: The May preliminary durable goods orders report from the Census Bureau showed a significant jump in business investment in the second quarter. At first blush, the headline figures were disappointing. Durable goods orders fell 0.6% MoM and dropped 0.3% MoM when excluding volatile transportation items. However, April’s figures were revised significantly higher with core durable goods orders up from +0.9% to +1.9%. Even with May’s decline, total orders reported in May were 0.19% higher than expectations. More importantly as a proxy for business investment in equipment and software, the May figures were also softer than expected, with orders falling 0.2% (exp. +0.5%) and shipments dropping 0.1% (exp. +0.3%). However, the story was, once again, the big April revision. Orders were revised up from +1.0% to +2.3%. As such, core capital goods orders ended May, after the preliminary reading, 0.59% higher than expected. It does appear that business investment is beginning to ramp up in the wake of tax reform, cash repatriation, and an extremely strong sales outlook.
Trade and Inventory Data Boost 2Q GDP Outlook: Also released this morning, the May advanced goods trade balance report showed a $4.2 billion smaller-than-expected trade deficit while the June revision showed a $0.9 billion smaller-than-initially-reported deficit. Like the strong business investment report, this data will boost GDP projections for 2Q. Also boosting GDP expectations, wholesale inventories for the month of May rose 0.5%, beating expectations of a 0.2% increase.
At 9:00 a.m. CT, the May Pending Home Sales report is expected to show a small bounce after April’s disappointing 1.9% decline. Federal Reserve Vice Chair for Supervision Quarles is slated to speak at 10:00 a.m. but his comments will likely stick to regulations. If they veer into monetary policy, they will be worth making note of.
Yesterday – Stocks Recovered on Higher Oil Prices But Financials Fell for a Record 12th Consecutive Session: U.S. stocks rallied back Tuesday in large part because of significantly stronger pricing for shares of energy-related companies. That sector of the S&P 500 moved up 1.4% following a notable jump in the value of crude oil. Brent crude gained 2.6% while U.S. WTI outperformed with a 3.8% rally on headlines that the U.S. would pressure allies to cut-off all oil imports from Iran by November 4. Not doing so could subject those countries to U.S. sanctions. The targeting of Iranian crude comes after the U.S. withdrew from the Iran nuclear deal in early May and moved to re-impose sanctions on the country. Technology companies also recovered Tuesday and were among several sectors that improved to help push the overall index up a modest 0.2%. But financial companies failed to join in on the rebound. The S&P 500’s financial sector slipped 0.4% and has now (stealthily) declined in 12 consecutive sessions, the longest streak on record. Over that 12-day stretch, the slope between the 2-year and 10-year Treasury yields has flattened in 10 sessions. While the curve saw hardly net change on the day, the 2s (2.533%) and 10s (2.877%) spread touched a new cycle low.
Overnight – Trading in China Becomes More Bleak as Assets Elsewhere Bounce on Report White House Won’t be as Harsh as Feared on Tech: Oil prices continued to strengthen overnight as recent undersupply concerns have overshadowed OPEC’s pledge last Friday to pump more. A major oil facility in Canada will be down through the end of July due to a transformer outage and conflicts in Libya have raised questions about output disruptions there. In addition, the U.S. wants the world to stop buying oil from Iran. Higher oil prices have helped lift shares of most energy companies which has helped keep equity sentiment afloat amid worries around global trade. Asia closed weaker on Wednesday as losses for Chinese stocks deepened. China’s CSI 300 dropped more than 2% and all three major indexes are now in a bear market and at their lowest levels in over a year. Also, the Chinese yuan fell to a six-month low. After initially succumbing to the downward pressure, Europe’s Stoxx 600 and U.S. futures spiked to their highs of the day on a CNBC breaking news alert that “Trump’s tech crackdown on China less restrictive than expected”. According to a White House official, the U.S. will rely on CFIUS to review deals case-by-case as opposed to a broad-brushed block of any and all potential transactions. As stocks recovered, Treasury yields moved up. After falling and flattening to 32 bps between 2s and 10s, the curve moved back up to essentially unchanged for the day.
Consumer Confidence Cooled on Less Optimism about the Future: Consumer confidence cooled unexpectedly in June according to the Conference Board’s latest release but remained near its strongest levels of the cycle. The headline index dropped from 128.8 (revised up from 128.0) to 126.4 (expected 128.0) in response to some softening of future expectations. The present assessment was essentially flat near its highest level since 2001 but the expectations index dipped to just below its 18-month average. Since surging after the November 2016 election, the expectations index has essentially moved sideways within its best range of the cycle. Moderation in the outlook was caused in part because consumers expected some worsening of business conditions but also because fewer believed they might receive a bump in their pay. The difference between those expecting higher incomes and those expecting lower incomes narrowed for a third month to its lowest level since January 2017. That may help explain why fewer said they planned to buy a new car (lowest since October 2015) or major appliance (second lowest since February 2016).
Fedspeakers Out and About
Bostic Bets Trade War will be Painful: Atlanta Fed President Bostic (2018 voter) said Tuesday that the Fed is attempting to keep the U.S. economy on a stable and sustainable path and wants to avoid the build-up of some excesses that have caused problems in past decades. However, the Fed’s task is being made more difficult because of the uncertainty that has surfaced around global trade. He added that it’s too soon to pick a winner that but the disruption of a trade war would be “painful” for the U.S. economy.
Kaplan Sees Fiscal Boost Fading, Says Fight China Not Friends: Dallas Fed President Kaplan (2020 voter) said he estimates the economy will grow around 2.8% in 2018 but that the pace will ease up once the effects of fiscal stimulus fades. He also spoke on trade, saying “lets fight what I think is actually a really big threat, which is the relationship with China. But I think we’d be much more potent in fighting that battle if we weren’t fighting five other battles with our friends.”
Barkin Says Tax-Cut Effects Uncertain, Participation Trends Keeping Wages In-Check: In a one-pager published on the Richmond Fed’s website yesterday, recently appointed President Barkin (2018 voter) briefly discussed possible effects of the tax cuts passed at the end of last year before noting that “Given these many uncertainties, the Federal Open Market Committee has been cautious when assessing the future impacts of the recent tax legislation.” He also spent a paragraph on labor participation trends and why they could keep wage growth in check. His narrative included links to several research pieces on each topic.