The Market Today
Fed Minutes Show Divide on Details; Sovereign Sell-Off Continues
by Craig Dismuke, Dudley Carter
Today’s Calendar – ADP Points to Slowing Job Growth: The slowing in the labor market data continued in this morning’s economic reports, although it continues to run at a sufficiently positive pace. The ADP employment report projects that just 158k private nonfarm payrolls were added in June, below expectations of a 188k increase. May’s figures were revised lower to show total growth of 230k, down from the initial read of 253k. Looking at the trend line over the past three years, including this morning’s report, it continues to look like payroll growth will settle in the 160k-170k range in 2017. Total payroll growth averaged 250k in 2014, 226k in 2015, 187k in 2016, and 162k thus far in 2017. This is, however, a sufficient pace of payroll growth for Fed officials who have collectively acknowledged a lower hurdle rate for “improvement” given the smaller number of net persons entering the labor market. We will wait for the important ISM Non-Manufacturing Survey, to be released at 9:00 a.m. CT today, before finalizing our projection for Friday’s BLS payroll report.
Also released this morning, initial jobless claims for the week ending July 1 rose from 244k to 248k. The last three reports were the first three consecutive tallies above 240k since March. The May Trade Balance showed a $1.1 billion decline in the trade deficit, a slightly smaller decrease in the deficit than expected. Trade is poised to be a positive contributor to 2Q GDP along with inventory growth and a modest increase in personal consumption.
At 9:00 a.m. CT, Fed Governor Powell is scheduled to speak and Vice Chair Fischer is slated to make comments at 6:30 p.m.
Overnight Activity – Sovereign Sell-Off Sends German 10-Year Yield to Almost 18-Month High: A sell-off in European sovereigns is steepening government curves there and pressuring U.S. Treasury yields higher. Global equities are notably weaker despite oil recovering a portion of yesterday’s plunge. The Dollar weakened as the Euro rose in lockstep with European yields. The sovereign sell-off was sparked by a weak auction of French government bonds but was spread by the winds of a breach of key technicals. Importantly, it also occurred against a backdrop of surprisingly hawkish talk from global central bankers last week, including the ECB’s Draghi. The French 10-year yield is up 8.6 bps at 0.90% (highest since April 21), the German 10-year added 8.5 bps to 0.55% (highest since January 14, 2016), and the U.K. 10-year yield rose 5.4 bps to 1.31% (highest since February 6). The 2-year Treasury yield is up 1.2 bps to 1.42% with the 10-year yield 4.8 bps higher at 2.37%. Equity weakness is broad-based from a sector perspective and widespread geographically. U.S. equity futures are sharply lower. Oil recovered roughly 1.5% after an industry report from the API projected U.S. inventories of both crude and gasoline fell more than 5MM barrels last week.
Yesterday’s Trading – Energy Losses Offset a Recovery in Tech as Fed Minutes Prove Uneventful: Tech stocks recovered Wednesday helping the Nasdaq finish well ahead of the Dow and S&P. The Nasdaq’s 0.7% outpaced a 0.2% gain for the S&P while the Dow changed by only 1 point. A drag from energy companies kept the Dow and S&P from matching the Nasdaq’s strength. The losses in energy materialized as crude prices tumbled the most in three weeks. U.S. crude fell 3.3% and Brent prices dropped 2.9%. The losses for the commodity came it two swift moves. The first came after Russia indicated no desire to produce any less than the current agreement with OPEC requires. The second move lower occurred following a Reuters report that showed OPEC exports rose in June. The timing of the drop in oil coincided with a slide in Treasury yields that flattened the curve in early morning trading. The 2-year yield fell less than 0.5 bp while the 10-year yield settled down 2.5 bps at 2.33%. The Dollar was unchanged on the day. The Minutes from the June meeting caused a brief bout of repositioning but ultimately proved to be a nonevent for markets.
Fed Minutes Show Split on Inflation Outlook and Starting Point for Balance Sheet Roll-Off: Fed-watchers were interested to see if Minutes from the Fed’s June meeting would shed light on why the Fed remained so sanguine in the face of a soft patch for the economic data. Despite recent inflation reports showing a trend away from its 2% target, the Fed still expects another rate hike and beginning to slow portfolio reinvestments in 2017. The Minutes acknowledged the “surprisingly low recent readings” but showed participants still expect inflation to reach the Fed’s target over the medium term. Most chalked the recent weakness up to “idiosyncratic factors”, namely cell phone plans and prescription drugs, while “several” seemed more concerned that the weakening “might persist”. The Minutes indicated there were a “range of views” on when to begin phasing out portfolio reinvestments; “several” wanted to start “within a couple of months” while “some others” preferred to wait until later this year. “Several” also expect balance sheet normalization could result in slower rate hikes while “some other[s]” said there should be no impact on future rate hikes. Bottom line: The biggest news from the Minutes was the lack of news from the Minutes. Recent Fedspeak had already indicated a split between those that think inflation weakness is transitory and those that think something bigger is brewing. On the balance sheet, there appears to be a consensus for beginning to phase out portfolio reinvestments this year but there is disagreement on which particular month to put the plan in place.