The Market Today
Central Banks Tilting Dovish; U.S. – Iranian Tensions Brewing
by Craig Dismuke, Dudley Carter
Vice Chair Clarida Says Case for Easing Has Increased: Fed Vice Chair Richard Clarida spoke early this morning with Bloomberg TV echoing comments from Chair Powell’s press conference. Citing increased uncertainties, he said “the case for providing more accommodation has increased” and that “we have the tools necessary.”
PMIs, Home Sales, and Fedspeak: The U.S. Markit manufacturing and services PMIs are scheduled for 8:45 a.m. CT. The indices sparked concern last month when they showed a steeper drop in service-sector activity than expected. May’s existing home sales data is scheduled for 9:00 a.m. and is expected to show a 2.1% increase. There are a few Fedspeakers on the tape today including Brainard (11:00 a.m.), Mester (11:00 a.m.), and Daly (2:00 p.m.). Daly is somewhat of an unknown as it relates to how her policy preferences will evolve as the data changes.
Yesterday’s Trading – Gold Hits Six-Year High as Central Banks Go Dovish, Iran Shoots Down U.S. Drone: The confluent, dovish tilt of the four most influential central banks and geopolitical unrest helped propel almost every asset class higher yesterday. The ECB kicked off the wave of dovishness Tuesday followed by the Fed’s Wednesday decision driving yields markedly lower. The 10-year yield fell to 2.03% Wednesday afternoon. News of Iran shooting down a U.S. drone over the Strait of Hormuz and the Bank of Japan signaling a readiness to ease policy helped push yields even lower, down to 1.97% overnight. Bank of Japan Governor Kuroda said, “If the economy loses momentum toward achieving our price target, we’ll of course consider expanding stimulus without hesitation.” The Bank of England also reversed communications yesterday. They had previously discussed the need for raising rates but ultimately did not, and instead lowered their growth forecasts for 2Q19 to zero citing global uncertainties and the risk of a no-deal Brexit. While the Iranian tensions could have dampened stock gains, President Trump was somewhat dismissive of the event in a mid-day press conference. The S&P 500 managed to set a new record-high close at 2,954 (+0.9%) while the Dow ended just 75 points below its record-high close from October. Gold, responding to easier monetary policy and geopolitical risks, neared $1,400 ending the day at $1,388, its highest closing price in six years.
Overnight Trading – Retaliatory Strikes Against Iran Called Off; Better Data in Eurozone Boosts Yields: There was speculation throughout Thursday’s trading that the U.S. may had approved of military strike in retaliation against Iran. Shortly after U.S. markets closed, that speculation cooled as reports emerged that the President had called off the strikes at the last moment. Japan’s May inflation data showed core consumer prices rose 0.8% YoY, down from 0.9% in April but slightly firmer than expected. However, the Bank of Japan remains under pressure to add accommodation given the strengthening yen and expectations that prices will soften further. The June Markit PMIs for France, Germany, and the Eurozone beat expectations, perhaps showing that the worst of the uncertainty has passed. France’s manufacturing and service-sector PMIs both rose to their highest levels of the year. The German PMIs both beat expectations. And the Eurozone indices were mixed, but the broader service-sector report was notably stronger. Both the service sector PMI and the composite PMI rose to their highest levels of 2019. The stronger PMIs helped push sovereign yields higher overnight with Germany’s 10-year up 3 bps to -0.29% and France’s up a similar amount to +0.04%. Coming into U.S. trading, the 10-year Treasury yield is trading slightly higher at 2.03% and U.S. stock futures point to a mildly lower open.