The Market Today
ECB Holds, Sees Better Growth But Subdued Inflation; Comey Heads to the Hill, U.K. Voters Head to the Polls
by Craig Dismuke, Dudley Carter
Today’s Calendar – Jobless Claims Higher than Expected, Markets Await Comey Testimony: Today’s economic calendar is relatively quiet and markets will instead be focused on former FBI Director Comey’s testimony before the Senate scheduled for 9 a.m. CT. As to the economic data, weekly initial jobless claims were a bit worse than expected and those from two weeks ago were revised higher. Initial claims filed last week totaled 245k compared with estimates of 240k. Claims for the week ended May 26 were revised up from 248k to 255k. The net result was the highest two week average since March. The 4-week average ticked higher by just under 3k to 242k. Continue claims data was roughly in line with expectations. Overall claims data continues to point to strength in the labor market, but initial claims in the last two weeks were a bit softer than expected. At 11 a.m. CT, the Federal Reserve will release 1Q data showing the change in household net worth.
Overnight Activity – Week’s Busiest Day with Comey Back to the Hill, U.K. voters at the Polls, and the ECB’s Latest Policy Decision: The most anticipated day of the week has finally arrived. Yesterday’s release of former FBI Director Comey’s prepared statement to be delivered at the start of today’s Senate testimony relieved some suspense. Nonetheless, there remains headline risk from the live Q&A session. The first indications of the outcome of the U.K. elections will be released at 10 p.m. London time (4 p.m. CT). Polls narrowed recently but still indicated PM May’s Tories would keep a parliamentary majority. The ECB announced it was leaving its key policy rates and the terms of its QE program unchanged. However, there was a notable change to the forward rate guidance in the statement. The ECB removed reference to the possibility that rates could be cut further, electing instead to now say rates are expected to remain at the current levels for an extended period. As always, ECB President Draghi’s press conference will be closely followed for deeper insight into changes in the bank’s outlook. In his early remarks, Draghi upgraded the growth outlook by saying risks are “broadly balanced” but says underlying inflation pressures remain subdued, resulting in the need for continued accommodation. Also of interest will be the ECB’s latest set of economic projections.
As to markets, European equities held daily gains after the release of the ECB statement. German yields remain higher while those in Italy and Spain remain lower. The Euro fluctuated but subsequently moved to its intraday lows. Before the ECB decision was announced, the Eurozone’s 1Q GDP was revised up from 1.7% to 1.9%. Earlier, the major Asian markets responded to economic data from the region. Japan’s Nikkei slid after 1Q GDP was revised down from 2.2% to just 1.0%. Chinese equities led Asian markets following the release of better than expected May trade data. U.S. equity futures are positive and Treasury yields added to yesterday’s rise. The 2-year yield rose another 1.6 bps to 1.32% and the 10-year yield added 2.8 bps to 2.20%.
Yesterday’s Trading Activity – Oil Drops on Unexpected U.S. Supply Gains: Plunging oil prices was a major market story from Wednesday’s session. Not only did gasoline supplies grow by the second largest amount since January, but the significant drawdown of crude stocks projected in Tuesday’s industry data failed to materialize. The API rightly predicted the build in gasoline but incorrectly indicated crude inventories shrank by more than 4MM barrels last week. Instead, data from the EIA showed crude inventories grew by 3.3MM barrels; the first weekly increase in two months and the largest since mid-March. The surprise was enough to send U.S. crude prices tumbling more than 5% (biggest drop since March) to their second lowest level of the year. The other market story was a midday recovery in stock prices and Treasury yields that followed the release of the prepared statement Former FBI Director Comey will make in his Senate testimony. While the statement won’t put the controversy to bed, it apparently wasn’t as damaging as markets had feared. The Dow and S&P both turned positive after the Statement was released and gained 0.2% on the day. The 2-year yield rose 1.2 bps to 1.31% and the 10-year yield added 2.18 bps to 2.17%.
Consumer Credit Expansion Weakens in April: Wednesday’s report on consumer credit activity in April showed net credit growth of $8.2B, equating to just a 2.6% annualized growth rate. The result fell well short of expectations and was the weakest since 2011. The data from the Federal Reserve, which excludes loans secured by real estate, reported slower growth in both revolving and non-revolving credit categories. However, the biggest surprise was the 2.9% annualize rate of expansion in non-revolving credit (also the weakest since 2011). The data is consistent with the slower consumer spending indicators from April and the ebbing of demand in key consumer lending categories in the Fed’s April Senior Loan Officer Opinion Survey. With the consumer expected to drive growth in coming quarters, it appears the rebound in consumption is off to a slower-than-expected start in 2Q.