The Market Today
Fedspeak and D.C. to Drive Markets as Uncertainty Persists
by Craig Dismuke, Dudley Carter
This Week’s Calendar – FOMC Minutes May Prove Irrelevant after Recent Developments: This week’s economic calendar will bring a handful of important reports including tomorrow’s New Home Sales data for April and Wednesday’s Existing Home Sales data. Both are expected to show monthly declines with some housing experts warning that existing sales may be off more than expected. Also on Wednesday, the FOMC will release the Minutes from their May 3 meeting, at which time a June rate hike was seen as a fait accompli. However, since that time, the economic data has disappointed and the new developments in Washington have thrown the markets for a bit of a loop. As such, the Fed’s collective mindset on May 3 may not matter that much to the markets on Wednesday. Instead, the markets are more likely to take their cue from current Fedspeak including Bullard’s comments Friday that he thought the Fed’s own forward-rate-path projections were too aggressive (he voiced the same opinion prior to the recent drama). Friday will bring the first revision to 1Q GDP which we expect to show that the economy expanded at 1.0% versus the initial estimate of 0.7%. Additionally, Friday will be a recommended early close for the bond market in anticipation of the Memorial Day Holiday.
Fedspeak and D.C. Driving the Markets: As for the most important things to watch right now, they include any current Fedspeak and former FBI Director Comey’s testimony before a Senate panel sometime after Memorial Day. Today we are scheduled to hear from Harker (hawk), Kashkari (moderate dove), Brainard (moderate dove), and Evans (moderate dove). Later in the week, Kashkari, Harker, Kaplan, Brainard, and Bullard are slated to make comments. Lael Brainard is likely to be the most important of those voices so far as the markets are concerned. As it relates to Comey’s testimony, last week’s market response showed a degree of concern from the markets regarding the latest drama in Washington. Encouraging the director to drop an investigation is not constitutionally illegal; firing him for not dropping the investigation may have crossed ethical lines and raises concerns about what an investigation might uncover. Either way, the future of Trump’s economic agenda (tax cuts, healthcare reform, and infrastructure spending) appears mired down in peripheral problems. Bottom Line: Fed comments and the machinations out of Washington are likely to drive the markets over the coming weeks more so than the economic data (barring any surprisingly good/bad data).
Overnight Activity – Oil Prices Rise in front of Thursday OPEC Meeting: Global equities are mixed Monday, sovereign yields are climbing, and oil is up as investors hope OPEC will officially extend current production cuts at a Thursday meeting in Vienna. The British pound and Japanese yen are Monday’s worst performing major global currencies. Yen pressure eased as the Comey-Trump turmoil that drove investors to seek out safer assets last week ebbed over the weekend. The British pound slid after the U.K.’s Brexit Secretary made comments about Britain potentially walking away from exit negotiations if the EU doesn’t ease off a demand that the U.K. pay a steep “exit bill”. Negotiators from the EU have said the U.K. should be liable for commitments it agreed to as part of the seven-year budget through 2020. The so-called “divorce payment” could be one of many points of contention as negotiations unfold. In the global economic data, Japan’s trade surplus was smaller than expected as exports grew less than expected in April while imports topped estimates. The Dollar continues to weaken, dropping overnight to its weakest level since October 10. Treasury yields are higher by 1 to 2 bps across the curve (2s at 1.29%, 10s at 2.25%) and equity futures are marginally positive.