The Market Today
Fed Funds Already at Neutral Rate?; Import Prices Show Weaker Price Pressure
by Craig Dismuke, Dudley Carter
Import Prices Point to Weaker Inflation: Import prices rose less than expected in April, up 0.3% at the headline level and just 0.2% when excluding food and fuels. Additionally, the March data were revised lower with headline lowered from +0.0% to -0.2% and core lowered from +0.1% to +0.0%. Petrol-based products rose 1.6% MoM in April on higher oil prices. Food and beverage prices fell 0.4%. At the core level, there is less and less evidence of an imminent acceleration of input costs for U.S. companies despite the weakness for the U.S. Dollar dating back to mid-2016.
St. Louis Fed Bank President Bullard – Already at Neutral Rate?: The Fed’s Bullard, who has been the low dot in the Dot Plot for some time, continues to believe the Fed should be done with the gradual rate hikes for now. In pre-market comments earlier this morning, Bullard said the six previous rate tightenings have likely already returned Fed Funds to a neutral setting. As such, the Fed should table any further policy changes or risk inverting the curve. Separately, ECB President Draghi is scheduled to speak this morning at 8:15 a.m. CT.
Consumer Confidence Likely to Remain Sky-High: At 9:00 a.m. CT, the University of Michigan’s May preliminary read on consumer confidence is expected to show a small drop in confidence. Gasoline prices are continuing to rise and beginning to take a toll on consumers’ disposable income but the unemployment rate fell to a new cycle-low in April and stocks remain rangebound near flat-for-the-year.
Yesterday – CPI Inflation Miss Flattened the Curve, Was a Fillip for Stocks: Thursday saw another strong performance by U.S. equities as oil prices inched higher and the Dollar slipped with longer Treasury yields following the slower-than-expected CPI data. All 11 sectors of the S&P 500 gained to push the index up 0.94%, a slightly better result than the Dow and Nasdaq. U.S. WTI rose for the sixth time in the last seven sessions and reached a new high since November 2014. A weaker Dollar was price supportive even with Saudi Arabia pledging Wednesday to “mitigate the effects of any supply shortages.” The Dollar weakened for a second day as the long end of the Treasury curved moved down after a miss in the morning’s CPI data. The 10-year yield dropped 2.7 bps to 2.96% but the 30-year yield fell more, losing 5.4 bps to 3.11%. Compared to the 2-year yield at 2.53%, unchanged in Thursday trading, the spread between both longer maturities reached new lows for the cycle. The slower CPI report shouldn’t affect the expected Fed hike in June but, because it takes some momentum out of the argument of imminently faster inflation, will help the Fed remain on its gradual path. That combination lines up with the positive response from stocks, the flattening of the Treasury curve, and a slightly weaker greenback.
Overnight – Equities Look to Wrap Up Solid Week as Yield Spreads Reach New Cycle Lows: U.S. futures were signaling a continuation of yesterday’s positive momentum at Friday’s open as the major indexes look to close out one of their strongest weeks of the year. A rally in crude prices on Wednesday boosted the major indexes and yesterday’s inflation miss gave investors some comfort the Fed won’t go too fast. For the week through Thursday, the S&P 500 was 2.2% higher, the Nasdaq was up 2.7%, and the Dow had risen 2.0%. For the Dow and S&P, that represents the best week since March. It’s been a positive week outside of the U.S. as well, with Asian stocks set for a roughly 2% gain and European stocks on pace for a seventh consecutive five-day finish, matching the longest stretch since 2014. Outside of a rally in peripheral European bonds, sovereign yields were relatively quiet. The 2-year Treasury yield was 0.1 bps higher at 2.53% after slower-than-forecasted import price gains while the 10-year yield had dipped 0.9 bps. While modest, those were enough to nudge the related spread to a new cycle low. In other markets, oil prices were essentially flat at their highest levels since 2014 despite the Dollar ticking lower for a third day.
WSJ Survey Points to 2020 End of Expansion: The WSJ’s monthly survey of economists was released yesterday showing that 59% of respondents expect the second-longest U.S. expansion on record will end in 2020. An additional 22% of respondents believe it will end in 2021. Economists expect the end of the expansion will come as the Fed tightens policy in an attempt to slow down a relatively hot economy.