The Market Today

Fed Meeting Begins; Heavy Data Day; Tariff Exemptions Extended

by Craig Dismuke, Dudley Carter


Happy Birthday Recovery/Expansion: The current economic recovery/expansion hits 107 months of age today as we turn from April to May.  Beginning July 2009, this period of growth now marks the second-longest in modern history, only surpassed by the April 1991 to February 2001 period of growth (118 months).  Expansions do not die of old age; they die of imbalances.  We continue to watch for the formation of imbalances, and even more diligently at this stage of an expansion.


Fed Meeting Begins with Focus on Inflation Wording, Policy Announcement Tomorrow:  The Fed is beginning its two-day meeting today with a policy announcement scheduled for tomorrow.  They are expected to firm up their assessment on inflation.  The March Statement stated that headline and core inflation “have continued to run below 2 percent”.  However, headline PCE hit 2% for only the second time since 2012 in yesterday’s March report and core PCE rose to 1.9% for the first time since mid-2016.  Additionally, they appear unlikely to list any areas of concern such as tightening financial conditions or trade concerns given their broadly dismissive attitude seen in the March meeting Minutes.  As such, the results are likely to be a snoozer… unless the wording is strong enough to indicate a possible shift to four total hikes in 2018 rather than the currently expected three hikes.


Manufacturing, Construction, and Auto Sales Data on Tap Today: Also on the calendar today, the ISM Manufacturing index is expected to pull back from 59.3 to 58.5 at 9:00 a.m. CT, remaining at a very strong level.  March’s construction spending data is expected to show a rebound after a weak February report.  Automakers will report on vehicle sales throughout the day with expectations for a slight pullback versus March’s blowout month.



Yesterday – Stocks Faded an Opening Rally and Treasury Yields Fluctuated Back to Almost Unchanged: An opening jump for U.S. equities disappeared mid-morning and, after drifting lower during afternoon trading, the major indexes sold off into the close. All 11 sectors of the S&P 500 were weaker and dragged the overall index down 0.82%, its first daily decline since last Tuesday. Telecommunications was the worst performing sector after shares of Verizon fell more than 4% following the weekend announcement that two of its competitors, T-Mobile and Sprint, had reached a merger agreement. Energy companies nearly gained after oil prices rose on reports that Iran was operating a secret nuclear program, which could push President Trump further away from supporting the current nuclear deal. Despite the weaker finish for equities, Treasury yields bounced from their lows to close almost unchanged. Longer yields initially fell on weaker-than-expected spending and income data and as-expected PCE inflation. However, most portions of the curve moderated back towards Friday’s closing levels. The 2-year yield (2.49%), 5-year yield (2.80%), and 10-year yield (2.95%) were less than 0.5 bps different.


Overnight – Quiet Night With Europe Closed, Tariffs Exemptions Extended: A couple of key Asian markets re-opened on Tuesday just as most major European indexes shut down for Labour Day, leaving overall trading volumes lighter than the norm. Equities improved across Asia and the U.K.’s FTSE 100 notched a lonely 0.5% gain midway through trading as the Pound weakened on a disappointing PMI report. The manufacturing PMI dropped to a 17-month low in April just a week before the Bank of England announces its latest decision on monetary policy. U.S. futures are weaker. As expected when Europe doesn’t trade, Treasury yields barely budged overnight. It was an interesting overnight session for the Dollar as the U.S. currency pushed higher despite the moribund global volumes. Technical pressures may have caused the uptick, as the greenback broke through its 200-day moving average for the first time in almost a year. In non-market news, the U.S. extended the exemption of metals tariffs for the EU, Mexico, and Canada until June 1 while making permanent relief for Australia, Argentina, and Brazil.



Pending Home Sales Add to Positive March Housing Data: Pending home sales improved again in March, although the pace was weaker than expected and February’s solid 3.1% gain was trimmed to a still-respectable 2.8%. On a regional basis the results were mixed. More contracts were signed in the South (2.5%) and Midwest (2.4%) and helped absorb a drop-off in the Northeast (-5.6%, likely affected by wintry weather) and West (-1.1%). The NAR, who publishes the pending sales data, said in a statement that “Healthy economic conditions are creating considerable demand for purchasing a home, but not all buyers are able to sign contracts because of the lack of choices in inventory, …What continues to hold back sales is the fact that prospective buyers are increasingly having difficulty finding an affordable home to buy. …That is why it is an absolute necessity for there to be a large increase in new and existing homes available for sale in coming months to moderate home price growth.”


Inflation Not Necessarily Taking Off (WSJ, Greg Ip): “Inflation Hits The Target … It finally happened: inflation hit the Fed’s 2% target in March for the first time since 2012, except for a brief spike early last year. Excluding food and energy, core inflation, using the Fed’s preferred index, climbed to 1.9%. Core inflation last reached that level in  summer of 2016 only to sink back. That seems less likely now…  …But May Be Peaking:  The 12-month inflation rate is rising because low readings a year ago are dropping out of the calculation. Recent data is subdued: core prices rose just 0.15% in March from February. Hospital services have contributed a lot to recent cost pressures but may be waning. True, the bond market’s implied inflation forecast has shot up since last year; but that’s almost entirely because of oil rather than economic fundamentals. Bond yields topped 3% last week but have slipped back since which doesn’t exactly scream that the 1970s are back. Yes, inflation could become a problem as fiscal stimulus overheats an already-tight labor market. Just not this year.”

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