The Market Today

Central Bankers Appear to Be Pivoting

by Craig Dismuke, Dudley Carter

Today’s Calendar – 1Q Revised GDP Revised up on Slower Inflation: First quarter GDP experienced an unusual phenomenon, actually being revised higher from the initial release to the final revision.  GDP, initially reported as expanding 0.7% in 1Q, was revised up in this morning’s final read to 1.4%.  Driving the final revision was a significant cut in the quarterly price deflator from 2.2% to 1.9%.  Personal Consumption was revised up from 0.6% to 1.1%.  Business investment was revised down from 11.4% to 10.4%, residential investment was revised down, and the drop in inventories was larger than initially reported.  Government spending was revised to be less-negative and external trade was slightly better.  Going into 2Q, personal consumption does not look to be rebounding quite as strongly, business investment appears to be slowing its growth, but the early inventory data points to a rebound which should help drive growth.


Also released this morning, initial jobless claims for the week ending June 24 rose from 242k to 244k.  While 244k is an excellent claims report historically, it is weaker than recent reports.


Overnight Trading:  Yields Rise Overnight Weighing on Stocks – Except Financials: Shortly after the U.S. equity markets closed, the Fed announced that it had approved all 34 of the largest banks’ capital plans, allowing them to all share profits with shareholders for the first time in the seven-year history of the bank stress tests. The KBW Bank index was up 1.7% yesterday anticipating the results and bank stocks are likely to benefit in today’s trading.  The KBW index is now up 28.7% since November 4, just prior to Trump’s election.  The better results from the stress test will likely put some wind behind the sail of those pushing for rolling back parts of Dodd-Frank.  Coming into this morning, U.S. stock futures are mixed as Treasury yields moved higher overnight. The 10-year Treasury yield is up 5 bps overnight to 2.28% in pre-U.S. activity.  Eurozone stocks are mostly down with the lone exception of the U.K. market as Eurozone sovereign yields rose across the board.  The German 10-year yield is up 6.5 bps to 0.43%.   


Yesterday’s Trading – Central Bankers Driving the Train: Markets continue to be driven by central bank commentary which began on Monday when ECB President Draghi sounded a more hawkish tone than normal.  The German 10-year yield rose from 0.24% to 0.41% after his comments.  After an ECB official hit the take-it-back button yesterday morning, the 10-year German yield fell back to 0.33% before retracing back to 0.37% by the end of trading.  Longer Treasury yields rode the same roller coaster with the 10-year Treasury ending yesterday at 2.23%.  Despite the fluctuations, the risk-on mood was set after the ECB walked back the comments, sending U.S. stocks higher.  The DJIA rose 144 points yesterday while the S&P climbed 21 points to its second-highest close on record.  However, that risk-on mood appeared to fade as the day progressed and the reality set in.  Adding to the drama, Bank of England’s Carney (0.9% QoQ, SAAR 1Q growth) and Bank of Canada’s Poloz (3.7% QoQ, SAAR 1Q growth) both signaled the possibility of rate hikes yesterday sending both the Canadian dollar and the pound higher.  Not one to miss a party, Bank of Japan’s Harada affirmed a dovish position saying that there was no need to lower the bank’s inflation target despite the Japanese economy’s ability to hit the target.


Given Draghi’s willingness to sound a more hawkish tone (despite the walk-back), the FOMC’s apparent mission to hike despite the economic data, and the comments from the BOE and BOC’s chiefs; the markets are wrestling with a shift in the general posture of central bankers.  Most financial news headlines this morning deal with this trend, “Signals on Stimulus Roil Global Markets” (WSJ).  Financial market conditions argue for tightening given their recent resilience.  Economic trends arguably support more patience.  Global inflation definitely supports more patience.


Pending Home Sales Fall Short in May: Positive momentum from last week’s new and existing home sales reports failed to carry over into yesterday’s pending sales data. Pending sales of existing single family homes fell unexpectedly in May and a negative revision to April’s result further widened the divide between the leading indicator for sales and actual sales activity. The 0.8% drop last month (exp. +1.0%) and a negative 0.4% revision (to -1.7%) for April bode poorly for actual existing sales in coming months. Contract signings were weaker in three of the four regions while the level of pending transactions in the Midwest was unchanged.

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