The Market Today

Better Data Hasn’t Distracted Fed Officials Focused on Increased Uncertainties


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications Drop on Fewer Purchase Inquiries: Refinancing activity recovered 1.5% last week from the prior week’s 6.5% drop, but overall applications fell 1.1% on weaker purchase activity. Purchase applications cooled 3.8% as the MBA’s 30-year mortgage rate estimate edged up to 4.12%, a four-week high but still a full percentage point below last November’s peak.


Multi-Family Weakness Overwhelms Better Single Family Starts and Permits: Housing starts were nearly in line with expectations while building permits tumbled unexpectedly to their weakest level in more than two years, both impacted by steep declines in multi-family activity. Total housing starts slipped a larger-than-expected 0.9% in June, but the prior two months’ activity was revised up, pushing June’s annualized pace to 1.25MM units, close to the 1.26MM pace economists had expected. Building permits, however, plunged 6.1%, the largest one-month drop in more than three years, to 1.22MM annualized units, the weakest pace since May 2017. The details showed the disappointments were entirely concentrated in the volatile multi-family category, while the single family series actually strengthened. Multi-family permits tumbled 16.8% in June and starts contracted 9.2%, while single family permits inched up 0.4% and starts strengthened 3.5%. The roles reverse in the YoY data, which show the multi-family categories up from June 2018 while both single family series remain lower than a year ago.


Later Today: At 12:30 p.m. CT, Kansas City Fed Bank President George, a current-year policy voter, will give an update on her economic outlook and answer questions after her prepared remarks. During her remarks, the Federal Reserve will released its latest Beige Book at 1 p.m., which may offer a detailed glimpse into the concerns and caution officials say they’re hearing about the outlook from the business contacts across the country. Weakness in business investment and the negative effects of trade tensions on business sentiment are key factors behind why the Fed has signaled its likely to lower rates at its meeting later this month.


TRADING ACTIVITY

Yesterday – Fed’s Powell Seemed Unmoved by Another Solid U.S. Data Report as Trade Uncertainty Remained In Focus: The push and pull on markets from stable U.S. economic activity, an uncertain trade picture, and expectations for easier monetary policy was on display in Tuesday’s intraday chart of Treasury yields and the S&P 500. Treasury yields popped higher after a solid retail sales report showed the recent pick-up in household spending strengthened in June despite continued uncertainty. However, equities opened lower in spite of the optimistic optics of a healthy consumer and slipped further as President Trump signaled at a cabinet meeting there remained a long road to travel with China on trade. He again said the tariffs had been a boost to the U.S. and could still be increased if he felt it was necessary. However, less than an hour later, the major equity indices turned higher after Fed Chair Powell told a group in Paris that the case for cutting rates had strengthened, in part because of the continued uncertainty around trade (more below). Treasury yields, which pulled back from their post-retail-sales pop on the President’s remarks, ended even lower after Powell’s remarks, which were surrounded by other dovish Fed takes (more below). While the evident consumer strength cut into the likelihood of a half percent cut at the upcoming meeting, Fed Fund futures continued to price in a 100% chance of an ease later this month. The S&P 500 ended down 0.3% while the 2-year Treasury yield, halfway off its high, ended up 2.1 bps at 1.85%. The 10-year yield rose 1.4 bps to 2.10% after earlier climbing as high as 2.14%.


Overnight – Global Yields Inch Lower as Stocks Struggle: The winds of the second quarter global corporate earnings season have begun to blow but the underlying current driving markets continues to be concerns about increased economic uncertainty. Stocks in Europe and Asia were little changed, but weaker on the margin Wednesday following yesterday’s trade-related decline for the major U.S. indices. European government bond yields have moved lower in response and were outpacing a smaller retreat in Treasurys. The 10-year German bund was 3.8 bps lower at -0.29% while the 10-year U.K. gilt yield dropped 4.4 bps to 0.77%. Brexit has come back into focus as renewed talks of the risk of a no-deal exit handed the British pound its largest daily loss since March on Tuesday, which pushed the currency to a more-than-two-year low. U.S. equity futures were positive around 7 a.m. CT, but off their highs after Bank of America announced quarterly earnings. While profit hit a record, thanks in large part to strength in its consumer business, the bank’s net interest income came up short of expectations, echoing JPMorgan’s message of how lower rates could crimp margins at U.S. banks. Before this morning’s housing data, the 2-year Treasury yield was little changed at 1.85% while the 10-year yield had edged 1.1 bps lower to 2.09%.


NOTEWORTHY NEWS

Utilities Weakness Weighed on Industrial Production as Manufacturing Strengthened: A weak month for utilities output, an industry that ebbs and flows with weather, weighed on overall industrial production and offset a solid month for manufacturing activity. Total industrial production was unchanged in June with utilities output down 3.6% “as milder-than-usual temperatures in June reduced the demand for air conditioning,” according to the Federal Reserve’s discussion of the results. That weakness offset a solid month for U.S. manufacturing activity, with total factory production up 0.4%, the best month of 2019, on solid gains for both durables and nondurables. Autos were among the strongest categories for a second month.  Before the prior month’s 0.2% gain, U.S. manufacturing output had slipped in the four months through April amid global weakness caused by worries about slowing global growth. Despite manufacturing activity contracting for a second quarterly period in 2Q, recent momentum looks more positive and is a welcome sign in the face of continued economic uncertainty.


Home Builder Confidence Bumped Up in July: Despite two months of weakness in new home sales, home builder confidence ticked up one point unexpectedly in July. The NAHB’s Housing Market Index recovered to 65 in July as indices tracking current sales expectations, expectations for transactions from six months from now, and prospective-buyer traffic all rose one point from June. The gains were concentrated in the South and West. Most measures of 30-year mortgage rates have leveled off early in July as longer Treasury yields have risen on a recovery in hiring, firmer inflation data, and expectations for a Fed rate cut later this month. Freddie Mac’s Survey Commitment rate has printed 3.75% in both weeks to start July after averaging 3.80% in June and 4.07% in May, a positive trend that seems to be supportive of stability for housing.


Powell Carried the “Act as Appropriate” Tagline to Paris: Fed Chair Powell’s message to a group in Paris on Tuesday was quite similar to the one he told U.S. lawmakers last week in his semi-annual congressional testimony. A strong U.S. labor market is positively affecting groups previously on the fringes of the recovery, Powell said, and supporting the economy at a time when “uncertainties about [the positive baseline] outlook have increased.” In a long list of worries, Powell pointed out that business investment and manufacturing in the U.S. have been weak, key trade relationships remain tense, global growth is suspect, the U.S. national debt is quickly approaching its limit, Brexit is still up in the air, and inflation’s shortfall may last. While some had worried a strong U.S. jobs rebound, a firmer consumer inflation report, and an impressive retail sales print could keep the Fed from cutting rates, Powell didn’t push back on expectations for an ease later this month. Instead, he reiterated that the concerns had caused many at the Fed to judge “the case for a somewhat more accommodative stance of policy” had strengthened.


Kaplan Said Inversion Could Cause Him to Support a Rate Cut: Quotes from Dallas Fed President Kaplan published by the WSJ upstaged a live lunchtime appearance at a conference in Washington. In comments published just ahead of his speech, Dallas Fed President Kaplan said he’s “open-minded” to the idea of lowering rates in response to the prolonged yield curve inversion. He also said he’s “been surprised at how much air came out of the economy” in response to trade concerns, saying the lingering effects of the brief threats against Mexico may be weighing on businesses’ investment decisions, because of the perpetual uncertainty they stirred up. Against a backdrop of his expectation for growth to remain stable, however, and because easy monetary policy can lead to financial imbalances, Kaplan said any adjustment lower should be “restrained” and “limited” and considered “a tactical adjustment—not a change in strategy, not the beginning of a rate-cutting cycle.”


Evans Eyeing Inflation-Boosting Rate Cuts: Chicago Fed President Evans said the U.S. economy is “really quite solid” but believes “a little more accommodation would be helpful.” He signaled his current expectation is for a couple of 25-bps rate cuts before the end of the year, simply because of the weakness in inflation. “In order to get inflation up to two-and-a-quarter percent over the next three years I need 50 basis points more of accommodation. And in fact, maybe that’s not quite enough,” Evans said. He later told reporters “Because inflation expectations seem to be below our 2% objective and it’s been stubborn…it tells me our current setting for policy is on the restrictive side.” While his current forecast is for two 25-bp rate cuts this year, “There is an argument that if I think that it takes 50 basis points before the end of the year to get inflation up, then something right away would make that happen sooner,” an explanation of the case for a 50-bp rate adjustment instead.


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