The Market Today
ECB Holds Course; Draghi Cites Currency Concerns
by Craig Dismuke, Dudley Carter
Today’s Calendar – Jobless Claims Remain Low; New Home Sales; ECB Response: Initial jobless claims for the week ending January 20 rose to 233k from a revised 216k in the previous week. The revised 216k remains the lowest reading since 1973. At 9:00 a.m. CT, the December New Home Sales report is expected to show sales pull back 7.9% following an unusually volatile 17.5% increase in November. The December Leading Economic Indicators index is also scheduled for 9:00 a.m., although it has lost some of its predictive capability given the distorted financial market valuations.
Overnight Activity – Dollar Attempts to Stabilize, ECB Leaves Policy Unchanged: The Dollar continued to be one of the most closely watched assets overnight as investors awaited the latest policy decision and press conference from the ECB. Early in the session the Dollar index added to its recent losses, extending a more than 12-month decline that has the currency trading at a more than three-year low. However, the Euro gave up some gains before the ECB decision which helped the Dollar index move back to unchanged. Against other currencies the Dollar remained weaker, reaching its lowest level against the Yen since September. The stronger Yen finally weighed on Japan’s Nikkei which fell 1.13%, its biggest daily drop since September 6. Ahead of the ECB announcement, other data showed German consumer and business confidence at their highest levels in records reaching back to 2005 and 1991, respectively. As to the ECB, the updated statement included only necessary wording changes and left the overall messaging unchanged; they expect to make net asset purchases through “the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation.” As expected, a punt in the Statement turned the attention to Draghi’s press-conference comments. In his early remarks, Draghi went right to the Euro saying that volatility in the currency creates uncertainty that warrants monitoring. He also described growth in the Eurozone as “robust” and said activity in the second half of last year was better than expected. But keeping the main thing the main thing, Draghi said an ample degree of stimulus is still needed to boost inflation and said domestic price pressures are still muted. Markets weren’t buying the dovishness, with the Euro and longer European yields spiking to their highs of the day. Treasury yields are also higher but to a lesser degree; the 2-year yield is up 1.2 bps to 2.09% with the 10-year yield notching a smaller 0.4 bps gain to 2.65%.
Yesterday’s Trading Activity – Dollar’s Slide Picked Up Pace in Worst Daily Performance Since June 2017: After a day of ups and downs, U.S. stocks closed mixed Wednesday as a rout in tech shares led the Nasdaq to a 0.61% drop. The tech sector was also the biggest drag on the S&P but gains in financials and other sectors left the broader index hardly changed (-0.06%). The Dow managed to edge 0.16% higher which was enough to give the index its second record close of the week. Treasury yields held an overnight rise but, on net, did very little during the actual U.S. session. The 2-year yield finished 2.6 bps higher at 2.076%, a new high for the cycle. The 5-year yield added 2.2 bps to 2.574% after a $34B auction produced average results: best bid-to-cover since September, highest awarded yield since April 2010, but average allocation splits between primaries, directs, and indirects. The 10-year yield rose 3.3 bps to 2.647%. The Dollar’s ceaseless decline, however, continued to be one of the most talked about market stories. The greenback closed at its lowest level since December 2014 and is off to its worst year-to-date start since 1987. There were beneficiaries of the Dollar’s daily weakness as gold closed at its highest level since August 2016 and U.S. crude prices rallied more than 2% to its best level since December 2014.
Existing Home Sales Slowed More than Expected as Inventory Fell to New Series Low: The pullback in existing home sales in December was larger than expected and November’s gain was trimmed a touch but remained the fastest pace for sales since February 2007. The 3.6% MoM decline to close out 2017 was driven by weaker activity across all four regions. Sales in the Northeast, the least heavily-weighted region, saw the biggest percentage drop of 7.5%. Activity in the Midwest slowed by 6.3% and sales in the South, the most heavily-weighted region, were 1.7% weaker. Sales in the West saw a similar 1.6% drop. Although the median price dipped in December, prices remained 5.8% higher than a year ago. While steady demand continues to support prices, supply forces are also contributing to the continued appreciation. Inventory of existing homes fell to 1.48MM units which is enough to cover just 3.2 months of sales; both metrics represented the lowest reading in the data series’ history back to 1999. Click here to view these metrics in a historical context.
Politico Reports Progress on Budget Negotiations, Affirming Possibility of Lifting Budget Caps: “Senate Democrats are willing to drop their demand that relief for Dreamers be tied to any long-term budget agreement – a potential breakthrough on spending talks, but one that could face opposition from their House counterparts. …The shift comes in response to the deal struck between Senate leaders Monday to reopen the government and begin debate on an immigration bill next month. Meanwhile, budget negotiators are expressing optimism that a two-year agreement to lift stiff caps on defense and domestic spending is increasingly within reach.”