The Market Today

A Powell Put? Not Likely


by Craig Dismuke, Dudley Carter

TODAY’S NEWS

New Home Sales Expected to Pull Back After May Jump:  Mortgage applications for the week ending July 20 fell a meager 0.2% as purchase apps dropped 1.0% and refi apps rose 0.9%.  Refinance apps remain very depressed with their 4-week average now down to its lowest level since 2000.  Purchase apps (4-week average) continue to grind higher but remain well below their volumes from 2000 to 2009.  At 9:00 a.m. CT, the June New Home Sales data is expected to show a 3% pullback after May’s 6.7% increase.  New construction indicators, while taking a hit in some recent reports, continue to be the primary bright spot for the housing sector.

 

Juncker to Visit White House:  European Commissioner Jean-Claude Juncker is scheduled to visit the White House today to discuss trade.  President Trump has expressed admiration for Juncker’s style.  Headlines for the market are unlikely to be, but could be, relevant for the markets.

 

TRADING ACTIVITY

Overnight – Earnings and Trade Negotiations Make Autos a Wednesday Focus: The auto sector will be major focus for investors Wednesday as GM and Ford both report earnings and leaders from the EU arrive at the White House for trade discussions. Already this morning, GM’s quarterly earnings topped the street’s estimates but the Company cut its full-year 2018 forecast, in part to adjust for the expected impact of higher steel and aluminum costs. The company said that materials costs for the full year will be almost twice what they had expected. Shares of GM were down more than 5% earlier in pre-market trading. The sector’s Wednesday spotlight will reach from Wall Street to Washington as European Commission President Juncker heads to the White House to meet with President Trump (WSJ link). The already-implemented steel and aluminum tariffs and those proposed by the U.S. on imported autos are sure to be near the top of the agenda. The Stoxx Europe 600 was down 0.2% with the auto sector near the bottom. Equities in Germany, a major constituent in the auto tariff debate, were off 0.6%. Fears of a trade war could also be a driving force behind a key economic sentiment indicator in Germany dropping to a 16-month low. In addition to the automakers, U.S. equity investors will be inundated with earnings releases, including Facebook and Visa. U.S. equity futures are weaker with the Dow down the most after Boeing reported better-than-expected revenue and earnings but a large unexpected charge on a project for the U.S. Air Force. The Treasury curve is 1 bps flatter with the 2-year unchanged at a cycle-high 2.65% and the 10-year yield up 1 bps to 2.94%.

 

NOTEWORTHY NEWS

A Powell Put Against a Yield Curve Inversion?: As discussed in a Bloomberg article this morning, some policymakers on the Fed are hoping to get assurance from Chair Powell that he will be responsive to the risks of an inverted yield curve.  As we discussed, in length, in our 3Q Economic Outlook Webinar, the Fed could easily adopt a policy that gives deference to the risk of an inverted yield curve given that inflation expectations remain contained.  While Powell seems unlikely to embrace an unconditional plan for future policy decisions, he certainly empathized with the concern in last week’s congressional testimony.

 

According to the Bloomberg article, “When Alan Greenspan ruled the Federal Reserve, investors became convinced the central bank could be counted on to prevent a stock market collapse — the so-called Greenspan put. Now, Chairman Jerome Powell is under pressure to adopt what would amount to a put of his own, except this time it would be tied to the bond market. … Some Fed regional bank presidents want the central bank to be cautious in raising interest rates to prevent short-term Treasury yields from rising above long-term ones — providing a kind of comfort that Greenspan gave equity investors. Those policy makers argue that such a yield-curve inversion has proven to be a reliable harbinger of past recessions.

 

White House to Assist after Trade Disputes Weigh on Farmers:  According to WSJ, “The Trump administration is extending $12 billion in emergency aid to farmers as U.S. agriculture feels the impact of escalating trade disputes. The U.S. government plans to provide incremental payments to support prices of some of the hardest-hit commodities, including soybeans, sorghum, cotton, corn, wheat and pork… It’s a short-term solution for a sector that’s taken a series of hits. China, a huge market for U.S. agricultural exports, has applied tariffs on $34 billion worth of U.S. goods, including soybeans and pork. Other places applying retaliatory tariffs include allies such as Canada, Mexico and the EU.”

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, LLC
775 Ridge Lake Blvd., Memphis, TN 38120