The Market Today

ECB’s Draghi Discusses Easing as FOMC Meeting Begins

by Craig Dismuke, Dudley Carter


FOMC Meeting Begins with Pressure Building to Ease Policy: The FOMC’s two-day meeting begins today with the 10-year yield 33 basis points below Fed Funds, the 2-year yield 55 basis points below, July’s Fed Funds futures contracts implying a 20% chance of a rate cut tomorrow and August’s contracts pricing in a 100% chance of a cut at the July meeting, the ECB talking about more QE and cutting rates further (more below), great uncertainty around trade policy, and inflation still running woefully below-target.  Last week’s retail sales report was surely encouraging that the consumer is stable, but that is a lone bright spot in a sea of weaker data and heightened uncertainty.  As such, we expect the Fed to cut rates over the next few meetings up to 50 basis points, similar to the 1998 experience.  For more on our revised forecast, click here.


Lower Rates Helping New Construction, though Data Remains Choppy:  Housing starts fell 0.9% in May but were revised higher in April (+5.7% to +6.8%) making May’s tally for new homes under construction higher than expected.  Total starts are now up 1.1% YoY, the first positive tally in eight months.  The strength continues to be in multi-family construction, with starts up another 10.9% in May on big increases in the West and the South.  Single family starts fell 6.4% on weakness in every region but the South.  Multi-family starts are now up 15.8% YoY while single family starts are down 11.7%.  Building permits were less volatile with just a 0.3% increase in May and a negative revision to the April data (+0.6% to +0.2%).  On a positive note, single family permits rose 3.7% but remain down 3.8% over the past year.  Mortgage rates fell another 21 basis points in May and are now down 57 basis points from year-ago levels.



Yesterday – Stocks and Yields Inched Up to Start the Week: The pre-market risk-on tone mostly held throughout Monday’s session, leaving stocks marginally stronger on the day and the Treasury curve slightly higher and flatter. The Dow and S&P 500 both rose 0.1% while the Nasdaq jumped a stronger 0.6%. The S&P 500 sectors split ways with real estate companies leading the six that rose and materials and financials matching declines to lead the five sectors that fell. A lack of meaningful headlines left investors pondering what policymakers at the Federal Reserve will signal when they announce their rate decision on Wednesday. Hopes for easing in the months ahead have lifted stocks in recent weeks, although Monday’s move in rates shows there is still some uncertainty around those expectations. Fed funds futures trimmed back their easing expectations and the 2-year yield rose 2.9 bps to lead a flattening rise of the Treasury curve. The 2-year yield finished at 1.87% while the 10-year yield added 1.4 bps to 2.09%.


Overnight – Central Bank Bonanza Begins Early: The Fed kicks off what is expected to be a dovish two-day meeting today and central banks in England and Japan will make policy announcements later in the week. However, it was a speech from the head of the ECB several hours ago that sent Germany’s 10-year yield down more than 7 bps to a new all-time low and the same maturity Treasury to its lowest level since the November 2016 U.S. presidential election. In a speech in Sintra, Portugal overnight, ECB President Draghi said, “The prolongation of risks has weighed on exports and in particular on manufacturing. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” He went on to say, “Further cuts in policy interest rates…remain part of our tools. And the APP (asset purchase program) still has considerable headroom.” The ECB concluded its asset purchase program, or QE program, at the end of 2018. Draghi’s speech pushed markets to price in a 0.10% rate cut by the end of the year and elicited a cross tweet from President Trump. President Trump highlighted that Draghi’s comments, “immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete, …They have been getting away with this for years.” The Euro was 0.3% lower against the Dollar. In addition to the drop in German yields, the 10-year yields in France (hit 0.00% for the first time), Italy, and Spain all posted double-digit declines and European stocks rallied sharply; the Stoxx Europe 600 rose around 1%. Treasury yields were dragged lower with the 2-year yield falling 5.9 bps to 1.81%, which would be its lowest close since 2017, and the 10-year yield down 7.4 bps to 2.02%.



Home Builder Confidence Cools in June: Despite mortgage rates sliding to a 21-month low, the NAHB’s Housing Market Index weakened for the first time this year in June. Instead of the modest one-point gain economists expected, home builder confidence dipped two points from May’s seven-month high but held at its second best level since October. The indices tracking current sales activity and prospective buyer traffic both inched down one point while the metrics for sales expectations in six months cooled two points. The NAHB said “demand for single-family homes remains sound,” but “Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers.”


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