The Market Today
FOMC Minutes May Provide Post-Fourth Fireworks
by Craig Dismuke, Dudley Carter
Today’s Calendar – FOMC Minutes the Focus for Investors: In today’s data, factory orders are expected to decline another 0.5% MoM (9:00 a.m. CT) while the final durable goods orders report will be released for May. The initial May report was weaker than expected and points to a weaker pace of business investment in 2Q than realized in 1Q. The more important news today will be the release of the FOMC’s June meeting Minutes at 1:00 p.m. CT. Recall that this was the meeting during which the FOMC hiked rates, laid out the plans for the balance sheet adjustment process, said the balance sheet plans are likely to begin sooner than investors were expecting, and continued to forecast another 2017 hike followed by three more hikes in 2018. This was a more hawkish result than expected despite the weakening inflation data, disappointing economic reports to begin the year, and lack of progress on economic agenda items in Washington. The conversations about these topics could be very interesting and have the potential to create some market volatility.
Overnight Activity – No Fireworks in the Overnight Session: The overnight session has been an uneventful with European equities more cautious than the earlier activity in Asia and sovereign yields mixed but little changed. Crude prices erased overnight gains, dropping more than 1% after Russian officials indicated a lack of support for additional production cuts. After Monday’s session, crude had gained in eight straight sessions. As to the economic data, weakening in China’s services PMI pushed the composite index to its lowest level in a year. In Eurozone, however, the services and composite PMIs were both revised stronger for June. After rising Monday on the back of a strong ISM manufacturing report (2nd best employment index since 2011, 3rd best new orders index since 2014), Treasury yields are essentially unchanged. The 2-year yield held at 1.41%, the highest yield since November 2008. The 10-year yield is 0.5 bps lower at 2.35%, the highest since the middle of May. Equity futures are higher after a mixed half day on Monday. The Dow touched a new record on an intraday basis Monday before falling back to close up 130 points, or 0.6%. The S&P gained 0.2% Monday but another bout of weakness for tech dragged the Nasdaq down 0.5%. The Dollar has continued its weekly recovery after slipping to an eight-month low last week.
Manufacturing Sentiment Booms, Auto Sales Disappoint in Monday’s Economic Data: The ISM Manufacturing index, released Monday morning, was much stronger than expected, rising 2.9 points from 54.9 to 57.8, the strongest level since 2014. The employment index rose from 53.5 to 57.2, the second highest level since 2011. Certainly, this report points to a pick up in economic activity although we are reluctant to rely too heavily on the sentiment measures given the recent lack of correlation with actual activity measures. Autos sales disappointed again in Monday afternoon’s reports on June activity. Overall sales dropped 50k to 16.41 million units, the fifth decline in the last six reports. The auto sector continues to be a concern with auto loan delinquencies ticking higher (particularly for lower credit borrowers) and loan terms lengthening to keep sales afloat. It all sounds too similar to the housing sector back in 2006-2007.