The Market Today

Fed’s July Minutes Expected to Reinforce Dovish Stance


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE

VS Coronavirus Chartbook (PDF) (Link) *Updated by 10 a.m. CT

Monitoring the Virus Headlines: There were still no signs of a break in the stimulus gridlock in Washington on Tuesday as a spokesperson for Speaker Pelosi said the White House must meet Democrats halfway if a deal is to get done. There was some good news, however, as U.S. cases continued to show the infection slowing after an acceleration from mid-June through most of July. Still, Notre Dame joined UNC at Chapel Hill as major colleges moving classes online in response to a spike of infections on campus. Elsewhere the mood around the virus situation wasn’t as upbeat. After South Korea announced new restrictions to try and quell a new outbreak after the country saw its largest case increase since March. In Europe, leaders from Germany, Ireland, and the Netherlands all made statements about concerning virus trends that may well result in social restrictions being reinstated after a period of relaxation.


TODAY’S CALENDAR

Mortgage Applications: The latest data from the Mortgage Bankers Association (MBA) showed mortgage applications slipped last week as purchase applications leveled off and refinance activity continued to be volatile, pulling back 5.4% after spiking 9.3% higher the week before. The slower pace for refinancing activity occurred as the MBA’s 30-year mortgage rate jumped from a record low 3.06% to 3.13%, its biggest weekly increase since March. The benchmark 10-year yield rose 14.5 bps last week amid auctions of a record amount of longer Treasury debt. Purchase applications, however, remained positive inching up 0.8% after a 2.0% gain the week before. Data this week has continued to show housing’s strong recovery has so far been uninterrupted.

Fed’s July Minutes: Considering last month’s Fed meeting was relatively unfulfilling as it relates to the longer-term policy outlook, markets will be keen to glean any additional insight on the timing for the completion of the framework review and any hints as to how it could impact monetary policy going forward. Powell was mum on the topic in his press conference after the July meeting, only saying that discussions were continuing. Public comments from others at the Fed on the topic have been mixed. The conclusion of the framework review and any potential change to the Fed’s policy approach in achieving its dual mandate are expected in the coming months, potentially as soon as the September meeting. Any change is expected to also be accompanied by more explicit forward guidance about the Fed’s plans for interest rates.


YESTERDAY’S TRADING

The S&P 500 Finally Passed February’s All-Time High: After several failed attempts in recent sessions, the S&P 500 finally joined the Nasdaq in record territory after overtaking its previous all-time high from February. The index rose 0.2% on Tuesday to 3,389.77, the highest level in the index’s history, after data on starts and permits showed the housing sector’s V-shaped recovery continued into July and earnings reports from Walmart and Home Depot showed consumers continued to spend despite a surge in unemployment. Unprecedented stimulus from Washington, both monetary and fiscal, has helped stocks roar back from March lows despite economic destruction unlike anything seen since the Great Depression. Adding to the optimism, the virus trends in the U.S. have improved in recent weeks, offering hopes that the worst of the acceleration from mid-June has passed which could allow for a more sustained recovery.

Treasury Yields Continued to Reflect a Long Recovery Ahead: The trek for a new record hasn’t been without trials, however, as economic data showed the recovery slowing in July and negotiations for more stimulus at a stalemate, leaving President Trump to sign executive orders aimed at easing the impact of expanded unemployment benefits expiring at the end of July. The lingering caution has helped nudge Treasury yields back lower this week following a spike the week before amid record supply issuance of longer-dated debt. The 2-year yield slipped 0.8 bps to 0.143% while the 10-year yield settled back 2.3 bps to 0.665%.


OVERNIGHT TRADING

U.S. Futures Hold Gains in Uneven Global Session: Yesterday’s equity records on Wall Street have given global stocks a boost on Wednesday while Treasury yields have continued to inch lower, bleeding away some of last week’s rapid rise amid increased supply pressures. Stocks slid in China following Tuesday’s liquidity-fueled gains and recovered in South Korea from yesterday’s virus scare, leaving a broad measure of Asian stocks little changed. Europe’s Stoxx 600, however, rose 0.3% and U.S. futures mostly held their ground despite a softer tone for some tech stocks. For a second day, a major U.S. retailer and home improvement store posted earnings that beat expectations. Sales at Target rocketed 24% higher last quarter, the strongest result in the company’s nearly 60-year history, helping to drive earnings per share to a record. Lowe’s also reported stronger-than-expected revenue and earnings.

Treasury Yields Continued to Tick Lower: Treasury yields continued to shave away small portions of last week’s ascent. Fiscal stimulus talks remain stalled but a White House official told Reuters they believe there is growing bipartisan support “to do a smaller deal on the things we can agree upon.” While the fiscal path remains uncertain, this afternoon’s Fed Minutes are expected to reinforce the central bank’s dovish stance. Also helping to keep downward pressure on yields, cases have ticked up across Europe and tensions between the U.S. and China continue to grow. President Trump indicated Tuesday evening that he called off last weekend’s meeting to review the trade deal out of frustration with China’s virus response. At 7:30 a.m. CT, S&P 500 futures were essentially flat while the 5-year Treasury yield had dipped 1.4 bps to 0.26% as the 10-year yield declined 2.1 bps to 0.65%.


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