The Market Today

TODAY’S CALENDAR

2Q GDP Revised Higher on Better Business Investment and an Even Smaller Trade Deficit: The economy expanded an even more impressive 4.2% in 2Q according to the first revision from BEA, up from an initial estimate of 4.1%.  At the core level, the report was largely unchanged with real final sales to domestic purchasers holding at 3.9%.  Personal consumption was revised down from an exceptional 4.0% increase to a very strong 3.8%.  That was offset, however, by a bigger increase in business investment, up $7.4 billion from $47.5 billion (+7.3% QoQ, SAAR) to $54.9 billion (+8.5% QoQ, SAAR).  Inventories were largely unchanged from the initial reading.  Government spending was notched $1.7 billion higher on increases in federal defense and state and local spending.  The trade deficit was revised even lower by $6.2 billion on a decrease in exports of $1.1 billion but an even larger, $7.3 billion decline in imports.  Cumulatively, external trade boosted the 2Q GDP report by an even more sizeable 1.24% versus the initial estimate of 1.14%.  Going into 3Q, the trade deficit is likely to rebound (as already evidenced in the first look at the July goods trades deficit), an inventory rebound should help offset an potential increase in the trade deficit, government spending is set to be accretive once again, and the consumer and business investment are likely to continue at a solid rate.  We continue to expect GDP growth of near-3-percent for the 3^rd quarter.

 

July Pending Home Sales Expected to Break Streak of Declining Sales Data:  At 9:00 a.m. CT, the July Pending Home Sales report is expected to show a 0.3% MoM increase in existing home sales going under new contracts.  Any sign of life from home sales would be welcomed news.

 

TRADING ACTIVITY

Yesterday – Stocks Get Credit for Quiet Record While Treasury Yields Move Up Consistent with Global Momentum: U.S. stocks had another record day Tuesday but the bigger moves were saved for shifts higher by global sovereign yields. The S&P 500 added only 0.03% but will still get credit for its third consecutive record close. Only four of 11 sectors finished higher than they opened but gains in the heavily-weighted tech, consumer discretionary, and health care sectors absorbed losses elsewhere. The Dow also inched higher by 0.06% while the Nasdaq crept a slightly larger 0.15% higher to a third record close of its own. The lack of excitement in the equity space left investors focused on the shift higher and steeper of the Treasury curve. Traders pointed to a big day of bond issuances in Europe that had driven European yields higher as a driver of the early rise in Treasury yields. And while it didn’t affect the intraday charts, the U.S. Treasury also auctioned $37B of 5-year notes with a softer bid-to-cover result.  However, the charts did reflect a pop after the better-than-expected consumer confidence survey (more below) and yields held that momentum to close near their highs of the day. The 2-year yield added 2.0 bps to 2.67% while the 10-year yield rose 3.4 bps to 2.88%. The 5-year yield added 3.2 bps to 2.77% and the 30-year yield added 3.7 bps to 3.03%, with both pushing back above their 50-day moving averages.

 

Overnight – U.S.-Canada Trade Negotiations Ongoing: Global equities were mixed in a quiet overnight session that saw sovereign yields move modestly in opposite directions ahead of an update to 2Q U.S. GDP. Treasury yields had pushed back up close to unchanged ahead of U.S. trading, with the upward pressure again seemingly coming from higher yields across Europe. The absence of any new news is likely to keep markets focused on Washington and any headlines related to the ongoing trade conversations between the U.S. and Canada. Already, there has been mixed messaging related to Canada’s stance on a key issue related to dairy trade. Canadian PM Trudeau said Tuesday afternoon “My position on defending supply management [the framework used to protect Canadian dairy farmers] hasn’t changed, we will defend supply management.” Later in the evening, however, a news outlet cited sources that said the country may be willing to compromise on some of its dairy trade rules in order to keep Chapter 19 of NAFTA. The new agreement with Mexico strikes Chapter 19, which allows for NAFTA panels to assess the legality of import tariffs from a partner. The Canadian Dollar was weaker overnight but remains up 0.6% for the week. Also on Tuesday, supporting the continued fluidity of the trade negotiations, several news outlets said the deal announced Monday with Mexico would allow the U.S. to add tariffs to excess volumes of autos imported from Mexico, an aspect previously unreported in the initial wave of headlines.

 

NOTEWORTHY NEWS

Consumer Confidence was Hot in August: The latest consumer confidence report from the Conference Board stood in stark contrast to the previously-released data from the University of Michigan. Where the University of Michigan’s preliminary August index dropped to an 11-month low, the Conference Board reported an unexpected surge in sentiment to the strongest level since October 2000. The headline index, which was expected to slip to 126.6, jumped 5.5 points instead to 133.4 on big gains in both the current assessment and future expectations. On the present situation, the spread between the number of consumers who see business conditions as good versus bad rose to 31%, the highest since December 2000. The labor market differential, which tracks how consumers gauge current employment opportunities, rose to its best level since 2001. Looking out six months, consumers expect both business conditions and employment to show further net improvement but expectations for income stood out. The net difference between those expecting higher incomes versus lower incomes jumped to its highest level since 2000. Plans for purchases of homes and autos also recovered but remained subdued relative to previous strong readings. Despite all the optimism, inflation expectations pulled back, as did the number expecting higher interest rates. Overall, the report will help to offset the disappointment in the Michigan data and aligns with continued strength in recent labor data and consumer spending in the months ahead.

 

Powell, Brainard, Quarles Get a New Comrade: After more than four months in limbo, the U.S. Senate confirmed Richard Clarida to fill the Vice Chair vacancy on the Federal Reserve Board. On April 16 President Trump announced the Columbia University economist and managing director at PIMCO as his nominee on to replace Stanley Fischer, who stepped down last October for personal reasons. Clarida held a role at the Treasury Department during the Bush administration and on the Council of Economic Advisers during the Reagan administration. He has been heavily involved in research around the neutral policy rate and, like NY Fed President John Williams and others at the Fed, believes the neutral rate to be lower than previously thought. Previous comments indicate that Clarida would likely support a September hike but also showed him to be cautious around signals from the yield curve. In a Bloomberg interview last November Clarida said, “I’ve been following markets in different capacities for 30+ years and one of the very few reliable rules of thumb is that when the U.S. yield curve inverts, a recession happens in the next 12 months. And that’s really an infallible indicator with very few false signals. So I would be very worried with an inverted yield curve.” Clarida’s confirmation fills one of four vacancies on the Fed Board, with nominees Goodfriend and Bowman still waiting Senate confirmation.