The Market Today

Fedspeak Begins; Germans Head to Polls Amidst Strong Eco Data; Markets Brush off NoKo Threats

by Craig Dismuke, Dudley Carter

Today’s Calendar – Let the Fedspeak Begin; German Elections This Weekend:  At 8:45 a.m. CT, the Markit Manufacturing and Service Sector reports are scheduled to be released.  More importantly, we will also begin to hear from Fed speakers today.  San Francisco Fed Bank President Williams speaks early in the morning while Kansas City’s George and Dallas’ Kaplan are scheduled to speak at 8:30 a.m. and 12:30 a.m., respectively.  While today’s speakers are unlikely to move market perceptions, next week’s heavy line-up could.


Germans Expected to Keep Merkel but Give Some Ground to Opposition:  Also to watch this weekend, Germans head to the polls Sunday and Chancellor Merkel’s CDU party is widely expected to retain its position with the most seats in Parliament.  This would take another of the feared 2017 geopolitical risks off the table.  The more interesting development, presuming the polling data are accurate, is which party Merkel’s CDUs will form a coalition government with and the associated implications.  No single party has controlled a majority of Parliament since 1957 and that is not expected to change Sunday. It is possible that the Christian Democrats form a coalition with a party that wants Finance Minister Schaeuble out.  Schaeuble has been the leader of the German austerity movement and such a change could alter the German stance domestically and within the EU going forward. Also worth watching will be the results for the AfD party, and anti-immigration, anti-EU, German nationalist party which has never held a seat in Parliament since its founding in 2013.  In some coalition arrangements, the AfD could end up with important government posts increasing its influence in German politics.


Overnight Trading – Investors Largely Blow off NoKo’s Threats to H-Bomb the Pacific Ocean:  In response to President Trump’s speech at the U.N., North Korean dictator Kim Jong Un called Trump “mentally deranged” and said his speech was “unprecedented, rude nonsense.”  He proceeded to threatened the “highest level of hard-line countermeasure in history.”  Shortly thereafter, North Korean Foreign Minister Ri Yong Ho explained what countermeasures were possible, telling the Korean News Agency that they might “consider a historic aboveground test of a hydrogen bomb over the Pacific Ocean.”  The news caused a small reversal for markets that had been grappling with the FOMC news.  After falling post-FOMC, gold recovered 0.3% while the 10-year Treasury yield fell a few bps to 2.25% overnight.  However, the moves were very moderate.  Japanese stocks are down 0.3% overnight but Eurozone stocks are up 0.4% after the EU Markit PMIs beat estimates. The composite EU Markit PMI rose to 56.7, 0.1 point from its highest level in six years.


Yesterday’s Trading – Markets Continue to Adjust to December Hike Expectations:  The markets continued to digest the fact that the FOMC seems committed to another rate hike in December yesterday with gold continuing its sell-off but other assets classes holding.  Fed Funds Futures contracts, which were pricing in just a 25% chance of a December hike two weeks ago, are now projecting a 67% chance. Stocks failed to continue their hot streak with the Dow falling for the first day in ten trading sessions, down 0.2%.  The S&P dropped for the first time in five sessions, down 0.3%.  The Dollar gave up almost half of its gains from Wednesday afternoon dropping 0.4%.  Treasury yields were largely unchanged with the 2-year closing at 1.44% and the 10-year at 2.28%.  Gold seemed to be the one indicator trading with conviction, down steadily throughout the day.  Gold was down 0.8% again on Thursday bringing its total losses to 1.9% since Wednesday’s FOMC announcement.


Yesterday’s Data – Home Price Gains Weaker than Expected; Household Wealth Continues to Climb:  Meanwhile, two economic reports were released yesterday after the initial data.  Home prices in July rose just 0.16% MoM according to FHFA, less than half the price gains expected. Looking by region, the farther west one goes (excluding the mountain states), the weaker the prices were.  Pacific states saw a 0.5% drop MoM as did the northwest central states.  Southwest central states, a region which includes Texas, saw a 0.1% MoM decline.  Prices in all other regions were slightly higher.  Also released, household net worth rose another $1.7 trillion in 2Q with 77% of the gains coming from financial assets (held primarily by wealthier households). Household debt as a percentage of net worth continued to drop, down to 15.5% from 25.2% at the peak of the financial crisis.  Households continue to have very good capacity to leverage based on historical debt levels.

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