The Market Today
Dow Hits Record High; June Income and Spending Disappoint; Busy Calendar
by Craig Dismuke, Dudley Carter
Today’s Calendar – Everything and the Kitchen Sink: Today’s economic calendar is packed with data. By the end of the day, investors will have plenty of data to digest covering the health of the consumer, manufacturing activity, residential and commercial construction, and auto sales. In the early data, personal spending rose a weak, but expected, 0.1% in June (matching the weakest monthly rate of growth since March 2016) as income growth stagnated month-over-month. Personal income was unchanged in June, thanks to a 3.0% drop in dividend income, while May’s 0.4% gain was revised down to 0.3% growth. Including the inflation adjustment, real personal spending was unchanged MoM while real disposable personal income actually contracted 0.1%. Given the weakness in income growth, the saving rate fell from 3.9% to 3.8%. Accompanying this morning’s income and spending report is the June PCE inflation data which showed slightly firmer price gains. While headline prices were flat on a MoM basis, core prices rose a fractional 0.1%, bringing the YoY rate up to 1.5% (slightly firmer than expected). The income and spending data were somewhat disappointing although that was offset by the slightly firmer inflation reading.
The July ISM Manufacturing Index is scheduled for release at 9:00 a.m. CT and is expected to drop from 57.8 to 56.4. June’s Construction Spending report is also scheduled for 9:00 a.m. and is projected to show a rebound in June activity after a flat May report. And July’s vehicle sales data will be reported throughout the day.
Overnight Activity – Equities Gain as Oil Drops and the Dollar Recovers: Global equities rallied overnight and sovereign yields traded in different directions. Oil prices erased earlier gains within the last several hours and the Dollar recovered slightly from yesterday’s 15-month low. Shares in China led Asia’s gains after July’s private manufacturing PMI topped estimates to show activity accelerated at its fastest pace in four months. An index tracking shares in the Asian Pacific extended their 2017 climb, rising to an almost 10-year high. European stocks are up 0.2% following mostly positive earnings data from European corporations and solid economic data. The initial release of 2Q GDP for the Eurozone showed activity expanded as expected, up 0.6% for the quarter and 2.1% from a year ago. Despite the solid data from Europe, the common currency ceded ground overnight after notching a new two-and-a-half year high on Monday. The Dollar recovered on gains against most major currencies. Treasury yields rose modestly (2s +0.6 bps, 5s +1.1 bps, 10s +1.4 bps) following the morning’s inflation data. Equity futures indicated U.S. stocks may extend Tuesday’s positive global trend.
Yesterday’s Trading Activity – Stocks Finished July on Mixed Note as Dollar Drops for a Fifth Month: U.S. stocks ended July unevenly as the S&P and Nasdaq faltered despite the Dow rising 0.3% to a new record high. For the month of July, the S&P gained 1.9% and the Dow added 2.5% as both indices moved higher for a fourth consecutive month. The Nasdaq rallied 3.4% in July to recover from June’s 0.9% loss. Equities’ gained despite a mixed day for U.S. economic data and another shakeup at the top of the White House staff directory. After just 10 days from his appointment, White House Communications Director Scaramucci was shown to the exits. Treasury yields looked hardly different by Monday’s close with the 2-year yield up just 0.2 bps (0.002%) to 1.35%. The 5-year yield rose by the same amount while the 10-year yield increased 0.5 bps. For the month, the 2-year yield fell 3.3 bps, the 5-year yield dropped 5.3 bps, and the 10-year yield edged 0.9 bps lower. The Dollar sank to its lowest level since May 2016 and closed out July down 2.9% for the month. The greenback’s monthly loss made it five straight months of net depreciation, the longest losing streak since 2011. Crude gained Monday on price-positive developments from OPEC to cap a 9.0% monthly gain for July.
Greenspan Gives Unnerving Warning for Bond Investors: In an unnerving interview from former FOMC Chairman Greenspan, as reported by Bloomberg, he warned that “By any measure, real long-term interest rates are much too low and therefore unsustainable. … When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace. … We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”
Pending Home Sales Beat Expectations in June, Remain Choppy: June’s Pending Home Sales report beat expectations of a 1.0% gain, growing 1.5%. Pending sales, measuring the number of homes which have gone under contract to sell during a given month, were notably strong in the West (+2.9% MoM) and the South (+2.1%). However, on a year-over-year basis, pending sales in the Northeast and South have been the strongest rising 2.9% and 2.6% respectively. Based on the pending sales report, it appears that existing home sales are likely to be flat in July with strength in the South and West offset by weakness in the Midwest.