The Market Today

All Eyes on Powell Testimony


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications Finally Jump: Mortgage applications for the week ending July 9 jumped 16.0%, finally.  The average 30-year mortgage rate dropped 6 bps to 3.09%, its lowest level since February.  Purchase apps rose 8.3% for the week and refi apps jumped 20.4%.  However, both types of applications remain significantly lower than their pre-virus levels, -19% and -26% respectively.

Producer Prices Rise More than Expected: Producer prices rose more than expected in June with final demand items rising 1.0% MoM, almost double the expected rate of increase, and core items rising 0.5% MoM.  The details show the tone is broadly firmer across categories. Health care PPI, which is an input into the Fed’s preferred PCE inflation measure, showed modest gains. Auto-related categories and building materials made large contributions once again.  Trade items showed particularly strong gains, up 2.1% MoM.  Reflective of the margins received by wholesalers and retailers, this reflects the friction within the supply chain and should bolster the argument that some of the price gains will eventually prove temporary.

Chair Powell Faces Congressional Gauntlet in Explaining Current Policy Stance: Fed Chair Powell will deliver his semi-annual testimony to the House panel this morning at 11:000 a.m. CT.  With headline inflation at 5.4%, 6.7 million jobs still unrecovered, and questions about financial stability growing; he is likely to face questions that require a complex logical framework.  And easy missteps.  Former Treasury Secretary Mnuchin has added to the complexity this morning with a CNBC interview saying the Fed’s policy posture is wrong and they should slow asset purchases now.


24 HOURS OF MARKET ACTIVITY

Hot CPI Report Lifted Front-Half Yields While Weak 30-Year Auction Boosted the Back End of the Curve: Treasury yields were especially volatile on Tuesday as a couple of separate developments impacted different maturities along the curve to varying degrees and at different times during the session. The swings started immediately after another CPI inflation update proved much firmer than was expected. Monthly gains of 0.9% for both headline and core prices drove the respective year-over-year rates up to 5.4% and 4.5%, respectively. The 2-year Treasury yield shot higher and held its gain, while the 10-year yield fluctuated up and down and up and back down again as investors parsed the details of the CPI report, attempting to categorize the heat into categories that may be more persistent and those that are expected to prove transitory. With most of the pressure coming from categories falling into the latter bucket, the 10-year yield settled lower for the rest of the morning session. However, it was longer yields that leapt the most after a weak auction of 30-year Treasury bonds. The 10-year yield spiked above 1.40% to new daily highs after the auction tailed by 2.3 bps on a weaker bid-to-cover and a larger forced award for primary dealers. By the end of the day, the 2-year yield had closed up 2.6 bps to 0.25% and the 5-year yield had added 5.1 bps to 0.85%, both impacted most heavily by the CPI report. The 10-year yield finished 5.2 bps higher at 1.42% while the 30-year bond rose 4.9 bps to 2.05%, both jumping after the softer Treasury auction. The major stock indices all ended the day down around 0.4% from Monday’s record closes.

Equities and Yields Partially Reverse Prior Moves Overnight as Investors Await Powell: U.S. equity futures had unwound a portion of those declines just before 7 a.m. CT and the Treasury curve had flattened lower, partially reversing Tuesday’s jump. Bank earnings continued to roll in with results from Bank of America, Wells Fargo, and Citigroup released earlier this morning. Better-than-expected bottom line earnings were accompanied by mixed results for other metrics, including sluggish loan demand, leading to mixed pre-market trading for the trio. The focus, however, will be on Fed Chair Powell’s testimony later today and any commentary he provides on yesterday’s inflation surprise. Data overnight showed uncertainty about the longevity of firmer inflation and central bank stimulus isn’t contained within the borders of the U.S. Inflation in the U.K. was hotter than anticipated and New Zealand’s central bank announced that it would end its QE bond purchases next Friday. Before this morning’s PPI data, the 2-year Treasury yield was down 0.8 bps to 0.245% and the 10-year yield was 3.4 bps lower at 1.383%. S&P 500 futures were 0.2% firmer, splitting gains for the Dow and Nasdaq.


NOTEWORTHY NEWS

Bloated 12-Month Deficit Deflates a Bit As Record June 2020 Drops Out of the Calculation: The federal monthly budget deficit increased from -$132.0 billion in May to -$174.2 billion in June, reflecting a pick-up in expenses and a small drop in revenue. Compared with June 2020, however, the deficit was down nearly 80%. The monthly deficit exploded last June to -$864.1 billion, the largest monthly deficit on record and primarily reflecting the impact of implementing the Paycheck Protection Program. Replacing last June’s record deficit with last month’s more tepid increase, the 12-month deficit fell from -$3.32 trillion to a still-bloated -$2.63 trillion.

Fed’s Daly (2021 Voter) Doesn’t Flinch as CPI Data Heats Up: San Francisco Fed President Daly, the first official to make public remarks after June’s sizzling CPI data, indicated she was not concerned by the most recent figures, which showed the firmest core inflation since 1991. Daly said she expected the “pop” in prices and continues to believe that the recent readings, which have printed well above the Fed’s 2% target, are being driven most heavily by categories still recovering from a drop during the pandemic or that are dealing with supply chain issues. “Several months of this doesn’t mean that it’s not transitory,” she said, cautioning, “don’t read too much signal out of any month of data and let’s get through this volatile period so we can really see where the economy is.” Longer-term inflation expectations are still holding steady, she said, and monetary policy is in a “great place.” However, the Fed will “probably be in a good position to taper at the end of this year or early next.”


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