The Market Today

TODAY’S CALENDAR

Waiting for Housing Data to Turn Higher with Mortgage Rates Near Two-Year Lows: Mortgage applications fell 1.9% in the week ending July 19 on a 1.6% decline in purchase apps and a 2.1% increase in refis.  Mortgage rates fell during the reference week with the MBA 30-year rate falling from 4.12% to 4.08%, back to within 4 bps of the recently set, two-year low.  The 30-year rate is now down 1.09% since November.  Despite the precipitous drop in rates, housing activity has struggled to reignite with most of the major sales and price metrics remaining sluggish.  On a positive note, the 4-week moving average for mortgage purchase applications is up 20% since November and the average for refis is now up 127%.  Nonetheless, activity remain tame versus historical norms.  At 9:00 a.m. CT, the June New Home Sales report is expected to show a 5.1% increase after May’s 7.8% decline.

 

Markit PMIs Expected to Remain Depressed with No Trade Resolution Yet: The Markit manufacturing and service sector PMIs are scheduled to be released at 8:45 a.m.  Expectations are that the indices will show slightly more traction than they did in the June data, both having dropped significantly recently.  The manufacturing index turned lower last May at trade uncertainty took a toll on confidence while the service sector index was not affected until early-2019.

 

TRADING ACTIVITY

Yesterday – Stocks and Yields Rose on Earnings Beats and News Trade Negotiators Will Meet: U.S. stocks rallied Tuesday on signs the corporate earnings season may be stronger-than-anticipated and the U.S. and China could make progress on trade just as the Fed and other central banks move to support growth with easier monetary policies. Stocks opened higher amid a solid day for global equities and after major U.S. companies Coca-Cola and United Technologies posted quarterly financial results that exceeded expectations. Treasury yields moved up quickly with the major indices’ fast start, but both reversed lower after a couple of key economic reports soured the mood (more below). Existing home sales declined more than expected and the Richmond Fed Activity index slumped sharply, a reminder that despite some firmer data recently, global uncertainties are weighing on economic activity. Those uncertainties are a major reason why markets expect the ECB to contemplate easing policy on Thursday and the Fed to adjust down the Fed Funds rate by a quarter-percentage point at next week’s meeting. Investors hope that the weakness those easier policy adjustments are aimed to address may not be as severe as feared (e.g. some upbeat corporate earnings reports) and could be remedied with possible progress toward a trade deal. Equities popped to new highs just after lunch on a headline that U.S. trade negotiators would travel to China for the first face-to-face talks since Presidents Trump and Xi agreed to a truce at the June G-20. The S&P 500 and Dow both closed 0.7% higher while the 10-year Treasury yield rose 3.5 bps.

 

Overnight – Global Yields Fall as Earnings and Economic Data Re-Up Worries about Global Growth: Global equities have traded in different directions Wednesday despite yesterday’s news that a team of top U.S. trade negotiators will head to China next week to resume in-person discussions in search of a deal. Those reports led to stronger stocks in Japan and China while the rest of Asia moved mostly lower. Stocks were also mixed across Europe, keeping the Stoxx 600 roughly unchanged, as corporate earnings continue to roll in and data showed that economic weakness in the Eurozone worsened in the July. On the back of weaker manufacturing and services reports in both France and Germany, the Eurozone’s composite PMI fell more than expected to 51.5, matching the weakest reading since January (which was the lowest since 2013). Germany’s manufacturing PMI fell from 45 to 43.1, its lowest reading since July 2012 and a seventh month of contraction. Those reports come one day after the IMF lowered its forecast for global growth in 2019 and 2020, both by 0.1%. Sovereign yields in Europe dropped quickly on the EU PMIs, sending the German 10-year yield down 2.1 bps to -0.38%, just above its all-time low of -0.40%. Treasury yields fell with European yields and made another move lower after equity futures weakened on a drastic earnings disappointment from Boeing and a downbeat outlook from Caterpillar. Equity futures were already under pressure after a post-market headline yesterday said the Department of Justice was opening an antitrust review of major U.S. tech companies.  At 7:30 a.m. CT, S&P 500 futures were down 0.2% and the 10-year Treasury yield was 3.1 bps lower.

 

NOTEWORTHY NEWS

Existing Home Sales Dropped More than Expected in June: Existing home sales were weaker than expected in June as higher selling prices offset the affordability benefits of mortgage rates declining gradually throughout the month. Sales of existing homes slipped 1.7% to 5.27MM units in June, a worse result than the 0.4% decline to 5.32MM units economists expected. Regionally, the results were mixed as activity in the Northeast and Midwest improved but was offset by fewer closings in the South and West. While Freddie Mac’s 30-year mortgage rate fell from an average of 4.07% in May to 3.80% in June, the median price of a home sold rose from $278K to $286k, a 4.3% gain from a year ago. The NAR’s Chief Economist noted, “Sales refuse to break out higher, …It doesn’t make any sense” considering the apparent solid financial position of U.S. consumer. However, in a silver lining of sorts, supply perked up and first-time buyers accounted for 35% of sales, the largest share in at least six months.

 

Unexpectedly-Weak Richmond Fed Survey Serves as Reminder of Manufacturing Concerns: In contrast to some firming up in a couple of regional Fed surveys for July, the Richmond Fed’s manufacturing activity index tumbled 14 points unexpectedly, the largest monthly decline since 2017, to its second-weakest level of the expansion. In the overwhelmingly-downbeat details, a survey of current activity and employment conditions was broadly and notably weaker while expectations for activity picked up some. Expectations for employment conditions softened. Despite some stronger results in separate business surveys for July, the weakness across the Richmond Fed District served as a reminder of businesses’ concerns amid the continued uncertainty around trade.