The Market Today
BoJ Gives? U.S. Data Remain Strong While Inflation Remains Modest
by Craig Dismuke, Dudley Carter
Strong Income and Spending but Slightly Softer Inflation Data than Expected: This morning’s slate of economic reports continued the broad themes seen over the past two years: strong economic activity, softer-than-expected inflation, and firmer-but-softer-than-expected wage growth. June’s income and spending data showed another solid 0.4% gain in personal income along with an equally solid 0.4% gain in personal spending. Incomes were hit a touch hard by a 0.3% increase in tax and non-tax payments (what appears to be a simple normalization after the unusually large drop in May’s report) but disposable incomes still managed to grow 0.4%. When adjusting disposable income for inflation, one of the better indicators of future consumption patterns, real disposable personal income rose at a 3.1% YoY rate, a solid indicator for future activity. On the spending side, the 0.4% June increase was even more impressive given the revision to May’s data from +0.2% to +0.5%. The savings rate was unchanged at 6.8%. Also released this morning, the June PCE inflation data showed core prices rise 0.1% MoM. Mays core inflation data were revised lower to bring the YoY rate down from +2.0% to +1.9%. With June’s +0.1% gain, the YoY rate held at 1.9%, once again below the FOMC’s target. The Employment Cost Index showed a slightly weaker pace of compensation, up 0.6% QoQ in 2Q. Economists expected the ECI to rise 0.7% following 1Q’s 0.8% increase. The YoY rate of gain increased from 2.71% to 2.77% and points to slightly firmer inflation readings in future months.
Home Prices, Consumer Confidence, Beginning of FOMC Meeting: The S&P CoreLogic Home Price Index is expected to show the pace of annual house-price gains slow from 6.6% to 6.4% at 8:00 a.m. CT. The Conference Board’s report on consumer confidence for the month of July is expected to show continued strength for consumer confidence at 9:00 a.m.
The Federal Reserve begins its two-day meeting today with a policy decision scheduled for tomorrow afternoon. It appears unlikely that the Fed will hike at this meeting and investors will be primarily focused on tweaks to the Official Statement. Fed Funds Futures currently project less than a 2% chance of a rate hike tomorrow but over an 80% chance of a September 26 hike.
Yesterday – Tech Led Stock Slump that Pulled Treasury Yields Off Daily Global Road Higher: Stocks slumped throughout the morning session with the S&P 500 twice touching its daily bottom just before and after the lunch hour. The index closed off its lows but down 0.6% after stabilizing during afternoon trading. Only 38% of companies within the index finished higher than Friday’s close with strength largely limited to just two sectors. Telecommunications companies rode a 3.0% day for AT&T to close up 2.0% on average while higher crude prices boosted valuations of energy companies. The energy sector rose 0.8% after U.S. WTI added more than 2% on a weaker Dollar and concerns about certain global supply outlets being cut off for now. But it was continued pain in technology names that made the most headlines. The S&P 500’s tech sector fell more than 1% for a third day in a row, matching a trend that has taken the Nasdaq, which fell 1.4% on Monday, to its lowest level since July 5. Treasury yields finished off their highs following the disappointing day for U.S. equities but the curve steepened for the first time in five sessions. The 2-year yield slipped 0.8 bps to close at 2.66%, its low mark for the day. The 10-year yield rose 1.9 bps to 2.97%, relatively modest compared with earlier shifts seen across Europe (U.K. +6.3 bps, Germany +4.2 bps, Spain +5.5 bps).
Overnight – BoJ Keeps Foot on the Easy Pedal: The Bank of Japan announced its much anticipated monetary policy decision overnight, with the market response reflecting that the reality of the update fell short of more hawkish speculation that had been priced in over recent trading sessions. The central bank elected to leave unchanged its negative overnight rate of -0.1% and widen the acceptable trading range for the 10-year government yield instead of moving the current peg of 0.00% (more below). After the decision, global yields pushed lower with Japan’s 10-year yield out front, Japanese stocks rose, and the yen weakened against every major currency. Also during the Asian session, China’s official PMIs were reported slightly weaker than expected for July. In Europe, data showed a slower-than-expected growth result for the second quarter and a quicker-than-estimated July inflation rate. The Eurozone economy expanded 0.3% QoQ, 2.1% compared to a year ago, versus estimates of 0.4%. Headline inflation rose 2.1% (2.0% expected) while core prices lagged at up 1.1% (expected 1.0%). The net effect of these events and this morning’s U.S. releases on the consumer and inflation have been relatively modest on U.S. assets. The 2-year Treasury yield was up 0.4 bps to 2.67% while the 10-year yield tracked global yields down 1.7 bps to 2.96%.
BoJ Still Easing With Slightly Different Parameters: While the BoJ elected to leave its policy rates unchanged, there were some changes worth highlighting. In its statement, which it titled Strengthening the Framework for Continuous Powerful Monetary Easing, the central bank introduced “robust” forward guidance “with a view to persistently continuing with powerful monetary easing.” Policy rates are expected to remain low “for an extended period of time”, although it’s lowering the balance its -0.1% rate is applied to. It added a caveat to its 10-year peg to clarify that “yields may move upward and downward to some extent mainly depending on developments in economic activity and prices” but pledged to intervene “promptly and appropriately” if yields rise too fast. Governor Kuroda later clarified that range would be roughly between -0.2% and 0.2%, double the previous corridor. They expect to continue on this path “as long as it is necessary for maintaining [2% inflation] in a stable manner,” which they believe could “take more time than expected.” Kuroda was more specific in his press conference, saying he doesn’t “have a calendar for reaching 2%.” They cut their inflation forecasts through fiscal 2020 and said risks to that outlook “are skewed to the downside.” Bottom Line: Kuroda captured the essence off the complexities of the nuanced changes simply and most effectively when he said they “have seen more need to continue easing policy longer.”
Pending Home Sales Offer Glimmer of Positivity in a Recent Run of Unspectacular Housing Data: Pending home sales, counted when contracts on existing homes are signed, rose in June for the first time since March. Total pending sales, a leading indicator for actual existing sales, rose 0.9% last month and offered a glimmer of hope for some stability in existing sales in the months ahead. Contracts signed in the Northeast and Midwest rose at a slower pace than in May but pending sales in the South, the largest region by volume, rebounded 1.1% from the prior month’s 3.5% decline. Activity in the West was relatively steady. While the monthly improvement certainly provides a positive data point, less sanguine longer-term trends show how disappointing overall activity has been in recent years. In addition, key headwinds remain that should make a more lasting turnaround tougher to achieve. Freddie Mac data showed the average 30-year mortgage rate offered to borrowers remains near the top of a seven-year range, 4.54% for the week ended July 26, and June’s existing sales report from last week showed prices at new records.