The Market Today

THIS WEEK’S CALENDAR

From 0 to 60 in 24 Hours: No U.S. economic reports are scheduled for release today, but the next four days will offer more-than-adequate payback for Monday’s peace and quiet.

 

The highly anticipated meeting between President Trump and North Korea’s Kim Jong Un will take place in Singapore on Tuesday and could be the first of several volatile days for markets this week as it is sure to draw potentially market-moving headlines. More important to the economic fundamentals, however, will be May’s U.S. CPI report. The latest look at inflation will be meaningful for the markets and give the Fed a last data point to consider as they convene in Washington.

 

The FOMC is expected to announce on Wednesday another 25-bp increase in its target range to 1.75% to 2.00%, although the IOER rate is likely to be set at 1.95%. More important will be changes to the Statement, the updated projections, and any color given by Chair Powell in his press conference. The data has firmed a bit since the Committee last met and could support a modest upgrade to the Statement’s current assessment. More interesting and impactful will be any changes to the forward-looking language. Are the risks still roughly balanced or has there been enough improvement to remove the caveat? Will they continue to say “policy remains accommodative”? Will they still forecast that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” The SEP experienced notable changes in March for growth (stronger), unemployment (lower), inflation (modest overshoot), and the interest rate path (still 3 hikes in 2018, but +1.5 additional hikes by 2020). Considering the unemployment rate already matches the Fed’s year-end expectation, they may opt to lower it again. That could also be a factor in determining if one of the eight officials who in March expected three or fewer hikes this year raises their 2018 dot. This would be enough to move the median expectation up to four hikes for the year. Powell will undoubtedly be asked about any and all of these in his post-meeting conference.

 

Thursday will keep up the pace, with the ECB scheduled to announce its latest policy decision prior to U.S. trading and the release of U.S. retail sales for May. ECB officials pushed yields higher last week after several said they would discuss when to end QE at this week’s gathering. They also seemed comfortable with market speculation that it could occur by the end of this year. The headlines from that decision pose risks to rates inside and outside of Europe. May’s retail sales report is expected to show another solid month for the U.S. consumer and confirm personal consumption has bounced back from a winter lull.

 

Friday’s focus will be on the updated outlook from the BoJ, June’s preliminary consumer confidence index from the University of Michigan, and the U.S.’s trade relationship with China. The White House has said they will release a detailed list of $50 billion of Chinese imports it plans to subject to a 25% tariff.

 

TRADING ACTIVITY

Overnight – G-7 Leaves Little Lasting Impact on Markets: Global equities were firmer ahead of Monday’s U.S. session and sovereign yields also reflected a risk-on attitude. Peripheral European yields had moved lower while those for Germany and the U.S. had risen. The positive underlying tones unfolded despite the G-7 summit falling apart in the final hours and failing to put to rest concerns around U.S.-involved global trade. While there appeared to be signs the summit might secure signatures from all seven leaders, President Trump decided not to join the others in signing the final document. The change of heart, he tweeted, was in response to remarks from Canada’s PM in a post-summit press conference. Except for a weaker Canadian currency, the markets have shown little lasting response. Italian stocks have rallied to start the week and are leading all global gains. Italian bonds also responded positive to the new finance minister saying “Not only do we not want to leave the euro; we will act in such a way that there are no conditions approaching that could put into discussion our presence in the euro.” In the U.S., equity futures are mixed but little changed and the Treasury curve is just under 2 bps higher across the curve.

 

ICYMI – June 8, 2018 Weekly Market Recap: Treasury yields rose modestly last week and the S&P 500 moved up the most in four weeks. Productivity for 1Q18 was revised down, consumer credit expanded at its slowest pace since September, the trade deficit narrowed more than expected in April, and household net worth crossed over $100 trillion for the first time. However, there were two reports that stood out. The April JOLTS report confirmed a hot labor market. Job openings rose to a new record while the number of unemployed was shown to have ticked down. There is now less than one unemployed person per open position. Also, the ISM non-manufacturing index rose more than expected, primarily because of slower supplier deliveries. That is presumed to reflect a pick-up in activity which was confirmed by the concerted improvement in the activity index. But despite the steady, and mostly solid, economic data, markets were focused elsewhere. The timing of the biggest moves more aligned with headlines from Italy’s new PM, ECB officials, tech stock weakness, and emerging market concerns. Click here to see the full recap.