The Market Today

Fed Minutes Showed Confidence in Inflation Trends but Little Concern About a Modest Overshoot


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Rose but Remained Strong, Existing Home Sales Expected to Slow: Initial jobless claims were a touch weaker than expected last week at 234k, up 11k from the week before. Economists had expected claims to dip slightly to 220k. While the initial claims print was the highest since March, it follows several weeks of claims near their lowest level in almost half of a century. The upshot is initial claims continue to be at levels consistent with a healthy labor market. That synopsis was further supported by the continuing claims data which inched up but remained at its second lowest level since 1973.

 

The second round of daily economic reports later this morning will include a couple of data points on the housing sector and another regional Fed survey. The FHFA’s House Price Index is expected to show another 0.6% MoM gain in March keeping price pressures in focus as a persistent headwind to home sales. The average price of a new home sold in April hit a record high according to the latest data from the Census Bureau. That data also showed sales activity missed estimates and included revisions reflecting a weaker trend over the first quarter than was previously estimated (more below). At 9 a.m. CT, data from the NAR is expected to show existing home sales also slowed in April, down 0.9% MoM to a 5.55MM annualized unit pace. The Kansas City Fed’s Manufacturing Activity Index is expected to show a slight pullback from a record high in April.

 

There are several Fedspeakers scattered throughout the day. Already this morning, Bill Dudley of the NY Fed spoke in London but spent his remarks on LIBOR replacement, not monetary policy. Later this morning, Bostic from the Atlanta Fed will make opening remarks at a Fed conference in Dallas. Bostic has been out and about in recent weeks so his comments are unlikely to offer much new insight. Harker from the Philadelphia Fed, who doesn’t vote again until 2020, is scheduled to discuss technology’s impact on the labor market in an afternoon appearance.

 

TRADING ACTIVITY

Yesterday – Markets Read a Fed Confident, Not Concerned, About Inflation and Comfortable with Current Gradual Pace: U.S. assets initially fell Wednesday, in line with the global market’s risk-off response to resurgent concerns around a U.S. trade dispute with China and uncertainty about the recent détente between the U.S. and North Korea. The major U.S. indexes dropped at the open following losses across both Asia and Europe. Treasurys had rallied and the curve was flatter, moves consistent with shifts in other core government bonds across Europe. The Dollar was firmer as the Euro and Pound were hit by political uncertainty in Italy and weaker economic data. And investors rode those trends right up to the release of the Fed’s May Minutes (more below). As markets digested those Minutes to be more dovish than expected, stocks turned around, the Dollar dipped and Treasury yields fell to new lows. The S&P 500 jumped into positive territory to close up 0.3% and at its daily high. The short-end of the Treasury curve caught up with longer maturities’ declines, tracking a flattening of the Fed Funds futures curve. For the day, the 2-year yield fell 5.6 bps to 2.53% while the 10-year yield settled 6.6 bps lower and back below 3.00%. The 5-year yield dropped the most, sliding 7.2 bps to 2.83%. The Dollar weakened modestly but held on to a healthy 0.4% gain for the day to close at its strongest level since December 12.

 

Overnight – Trade Comes Back in Focus on U.S. Investigation into Autos: A U.S. investigation into auto imports for national security purposes became the latest news clipping to give markets some consternation about potential disruptions in global trade flows. Auto company stocks were some of the worst performers across both Asia and Europe. Twists and turns on the trade front this week have been a major focus for the markets. Japan’s Nikkei fell more than 1.0% to a two-week low and weaker autos limited the Stoxx Europe 600’s upside to just 0.2%. In the sovereign market, peripheral yields are leading a leg lower in borrowing costs for the major European countries. Italy’s President on Wednesday evening gave the go-ahead to the coalition’s candidate for Premiere to form a government. Amidst all of the global moves, U.S. assets were only modestly changed after their post-Fed Minutes repricing on Wednesday afternoon. U.S. equity futures were mixed but hovering around breakeven while the Treasury curve had steepened with the 2-year yield down 1.2 bps to 2.52% and the 10-year yield stuck at 2.99%.

 

NOTEWORTHY NEWS

Fed’s More Confident Inflation Will Run Near Target, but Unconcerned About Modest Overshoot: The Fed’s May Minutes reflected a Committee confident in growth and inflation and lay the groundwork for a June rate hike. Most said “it would likely soon be appropriate” to raise the target range again if the data come in as expected. While an increased confidence around inflation trends was still evident, the Minutes did reflect more uncertainty than was shown in the Official Statement. “Most participants viewed the recent firming in inflation as providing some reassurance” inflation was on a path to 2% but “it was premature to conclude that inflation would remain at levels around 2 percent.” In addition, “several participants suggested that the underlying trend in inflation had changed little … some of the recent increase in inflation may have represented transitory price changes … [and] that various measures of underlying inflation … remained relatively stable at levels below 2 percent.” Wage growth was still seen as just moderate in general and several went so far as to say there was “little evidence of general overheating in the labor market.” The flattening yield curve was discussed as was the outlook for forward guidance and a technical change to policy implementation that could affect the level of the IOER rate but, per participants, should not be seen as a change in stance.

 

Momentum of New Home Sales Slows After April’s Data and Revisions: New home sales totaled 662k annualized units in April, short of the 680k pace expected, and the prior three months’ tally was revised down a total of 41k. The 1.5% MoM decline in April was driven entirely by a 7.9% decline in the West, which accounted for just over a quarter of the total month’s sales. Activity in the Midwest and South was essentially flat while sales in the Northeast, the region with the smallest volume, jumped 11.1% after declining 16.3% in March. The median price slipped to $312k, the lowest in 12 months, while the average price jumped to $407k, the highest mark in records back to 1998. While the general uptrend remains intact, the momentum to start 2018 looks slower than expected.

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