The Market Today
Equities Firm Up on Corporate Earnings, ECB Headline Briefly Disrupts Treasury Yield Climb
by Craig Dismuke, Dudley Carter
Another Chance for Softer Data to Rebound: Manufacturing and Homebuilder Sentiment: Today’s calendar brings the March Industrial Production report at 8:15 a.m. CT which is expected to show manufacturing output ticked 0.1% higher, partially reversing back-to-back monthly declines. Manufacturing output and sentiment has been discouraging lately, globally and in the U.S. There is a bit of optimism for the sector after recent Chinese data bounced higher. At 9:00 a.m. CT, the NAHB homebuilder confidence index is also expected to tick higher, from 62 to 63. Confidence peaked in December 2017 at 74 and fell throughout 2018. However, lower mortgage rates have helped homebuilder sentiment partially rebound recently.
Yesterday – Stocks Stalled and Treasury Yields Trimmed Friday’s Rise: U.S. stocks faltered at the open but, despite spending almost the entire day floundering in negative territory, ended hardly changed for the session. The Dow, S&P 500, and Nasdaq all ended the day down 0.1% with the biggest drag coming from the financials sector. The sector jumped 1.9% last Friday after a strong earnings report and positive outlook from JPMorgan lifted spirits and combined with positive economic news from China to push stocks and Treasury yields higher. And while both Citi and Goldman topped earnings estimates Monday, other key metrics left analysts unimpressed. Citigroup recovered from its steep early drop but Goldman slumped 3.8% on its weaker trading results. The financials sector as a whole dropped 0.6% to lead six of the S&P 500’s 11 sectors lower for the day. Treasury yields showed net daily gains a couple of times during the overnight session but pulled back and held lower throughout U.S. trading. The 2-year yield ended unchanged at 2.39% while the 10-year yield dipped 1.1 bps to 2.55%.
Overnight – Stocks Recover On Earnings, Treasury Yields Climb Disrupted by ECB Headline: U.S. futures have climbed steadily throughout overnight trading, signaling the major indices will likely recover Monday’s losses at the opening bell. After disappointing earnings from Citi and Goldman weighed on sentiment to start the week, upbeat early-morning earnings announcements from other major U.S. companies have helped ease those concerns somewhat. Bank of America posted stronger net interest income compared with a year ago thanks to the Fed’s 2018 rate increases and growth in consumer loans, and its CEO said “Economic growth and consumer activity in the U.S. continue to be solid.” Similar to its competitors, however, the company saw a decline in trading activity. Other releases, including from UnitedHealth (2nd biggest Dow component), First Horizon, and Johnson & Johnson (12th biggest Dow component), also topped estimates. Dow futures were up 0.7% just after 7 a.m. CT while the S&P 500 had risen by 0.4%. Elsewhere, equities in Europe were stronger and Asian markets had earlier closed with solid gains. Bond yields were moving up despite a brief disruption just after 4 a.m. CT. A Bloomberg headline from Reuters that “ECB significant minority doubt 2H growth recovery” briefly pulled the German 10-year yield from up 1.6 bps to down 1.8 bps. Treasury yields also fell on the report but recovered alongside German yields. Counter to the Reuters headline, however, a key confidence survey for the Eurozone strengthened for a fifth consecutive month, turned positive for the first time in 11 months, and landed at a 13-month high. Ahead of U.S. trading, the 2-year yield was up 1.5 bps to 2.41% and the 10-year yield had added 2.9 bps to 2.58%, both the highest since the Fed’s March decision.
Evans Sees Rates Flat into Late 2020: Chicago Fed President Evans (2019 voter), historically a dove, said Monday morning that the U.S. economy is “doing fine” and the underlying fundamentals are “quite good,” but inflation has been weaker than he expected. Evans said, “I can see the funds rate being flat and unchanged into the fall of 2020. For me, that’s to help support the inflation outlook and make sure it’s sustainable.” In an afternoon speech, Evans noted “For most of the recovery, inflation has run stubbornly below our target, and inflation expectations today appear much lower than during earlier periods when inflation was running more symmetrically around 2 percent.” “To fix this problem, I think the Fed must be willing to embrace inflation modestly above 2 percent 50 percent of the time,” Evans said, adding “I would communicate comfort with core inflation rates of 2.5 percent, as long as there is no obvious upward momentum and the path back toward 2 percent can be well managed, …Importantly, we should follow these words with actions and implement policies consistent with these communications.”
Rosengren Echoes Evans Themes: Later Monday evening, Boston Fed President Rosengren (2019 voter) gave a similar take to Chicago’s Evans on the state of the U.S. economy. He said, “despite some deceleration from last year, the pace of growth in economic activity will be enough to bring further reductions in the unemployment rate in the near term, so a recession is not my modal forecast.” He noted, “One reason for the policy committee’s decision to be patient in determining future rate adjustments, despite tight labor markets, is waiting to see more convincing evidence that inflation will achieve and sustain the 2 percent inflation target.” As to how to go about that, he added, “My own preference is for the Federal Reserve to adopt an inflation range that explicitly recognizes the challenge of the effective lower bound. …We might be forced to accept below-2-percent inflation during recessions, but we would commit to achieving above-2-percent inflation in good times, so as to provide more policy space to counteract the next recession.”