The Market Today
FOMC in Focus, Expected to Stay on Track but Acknowledge Less Certainty
by Craig Dismuke, Dudley Carter
Today’s Calendar – FOMC Announcement; New Home Sales; Senate Votes Again: The June New Home Sales report is scheduled to be released at 9:00 a.m. CT with sales expected to increase 0.8% MoM. New home sales continue to trend higher, currently up 9% YoY, albeit at an uneven pace. Mortgage applications for the week ending July 21 rose 0.4% as purchase apps fell 2.2% and refi apps rose 3.4%. According to the MBA report, 30-year mortgage rates fell from 4.22% to 4.17% for the week. The average loan size for purchase apps rose from $301,200 to $308,900. The Senate is expected to vote on a measure that would repeal and replace the ACA with a two-year phase-out giving Congress time to devise an alternative plan (more below).
The FOMC will conclude its July meeting this afternoon with an Official Statement scheduled for 1:00 p.m. CT. With no post-meeting press conference and no economic projections accompanying the Official Statement, changes are likely to be limited. Our expectations … 1) The recent run of weaker inflation and economic data is likely to force the FOMC into minor tweaks to its language. Those changes could be seen in their assessment of economic activity generally, the balance of risks, or their expectations for inflation over the near term. 2) However, the committee seems eager to get on with letting its balance sheet begin to shrink and they is likely to avoid any major changes which could lead investors to conclude that balance sheet adjustment will be delayed. The markets, however, reflect no uncertainty that 3) the Fed will leave its target rate range unchanged at 1.00-1.25%.
Overnight Activity – Equities, Oil Remain Firm; Yields Fall in Front of the Fed: Demand for sovereign debt increased overnight even as global equities and oil remained firm. The Stoxx Europe is up 0.6% midday following a mostly positive day in Asia. Corporate earnings continue to drive equities although oil’s weekly gains have also been bullish for riskier assets. In the U.S., the Dow’s +0.4% is leading futures higher. After a steep rise on Tuesday, Treasury yields pulled back ahead of this afternoon’s Fed decision. For the 10-year yield, -1.6 bps to 2.31%, the biggest move (-1.5 bps) occurred during Asian trading. The 2-year yield is down 1.2 bps to 1.38%. Washington remained in focus after markets closed Tuesday with the Senate’s first vote on healthcare falling short. The Senate voted down the option one (the BCRA) 43-57 and is expected to vote on a “repeal and delay” option later today. In addition, President Trump tried to revive tax reform hopes in an interview with the WSJ last night. He called for a 15% corporate rate and a break for middle-income Americans even if it is at the expense of wealthier taxpayers.
Yesterday’s Trading Activity – Stocks Reach New Records as Yields Rise the Most Since January: Tech was a laggard Tuesday and the Nasdaq trailed the Dow and S&P. The Dow led with a gain of 0.5% but was the only index not to reach a new record close. After setting a new intraday record high, the blue-chip index fell back as updated outlooks from 3M and United Technologies overshadowed better-than-expected quarterly earnings. The S&P’s 0.3% gain and the Nasdaq’s negligible 0.02% improvement were enough to register new record high closes. Crude prices rallied almost 5% in their biggest daily gain since November and are up 6% so far this week. Treasury yields began climbing after pre-market earnings from several major U.S. companies topped estimates with the upward momentum strengthening gradually throughout the day. In the Treasury market, the 2-year yield rose 3.3 bps (1.39%) as the 5-year yield increased 6.9 bps (1.89%) and the 10-year yield added 8.0 bps (2.34%). Tuesday’s moves marked the biggest daily increases in the 5-year and 10-year yields since late January. Between the 2-year and 10-year notes, the curve experienced its second sharpest single-day steepening (4.7 bps) of the year. While it only had a modest market impact, worth noting was the Senate successfully voting to begin debate on repeal and/or replace.
Consumer Confidence Bounces with Current Labor Market Assessment: Consumer confidence unexpectedly improved in the Conference Board’s July survey as the expectations index rebounded after a disappointing June result. At 121.1, the headline index returned to its second strongest level since 2000. Better overall expectations were almost exclusively the result of expectations for business conditions as the outlook for employment and income were the same or softer. The current assessment of business conditions improved and the current assessment for employment fared better than the future outlook. The labor market differential – % who think jobs are plentiful less % who think jobs are hard to get – hit its highest since August 2001.