The Market Today

FOMC Minutes Reflect Different World Just Three Weeks Ago


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications Remain Elevated, Despite Small Weekly Drop, as Rates Continue Lower: Mortgage applications for the week ending August 16 fell 0.9% after jumping 21.7% in the previous week.  Interestingly, the recent strength in mortgage applications has come partly from increases in adjustable rate loans.  According to the MBA data, adjustable rate loans jumped 6.4% during the reference week and 55.8% in the previous week. Mortgage rates continue to inch lower with the 30-year rate now down to 3.90%, the lowest since 2016.  The bottom was seen back in 2012 when the 30-year rate fell briefly to 3.50%.

 

Existing Home Sales and Kashkari: At 9:00 a.m. CT, the July existing home sales report is expected to show sales up 2.5% in July.  Also on the calendar today, Minneapolis Fed Bank President Kashkari will speak at 5:30 p.m. in Minneapolis.


FOMC Minutes Reflect Different World Three Weeks Ago: The FOMC will release their July meeting Minutes at 1:00 p.m. CT.  However, much has happened since the FOMC meeting which will make the Minutes somewhat irrelevant.  For more on what all has transpired over the past three weeks, see below.


TRADING ACTIVITY

Yesterday – Treasury Yields Fell Back an Equities Weakened: The strong early-morning bid for U.S. Treasurys persisted through Tuesday’s U.S. session, leaving the yield curve closer to its multi-year lows reached after last week’s inversion scare. Global equities had turned lower ahead of U.S. trading and European yields had moved down, a day after optimism about global stimulus had lifted sentiment and pushed the S&P 500 back to within 3.4% of its all-time high. Tuesday’s reversal shaved 0.8% off the index and was driven by losses across all 11 sectors. Consumer discretionary stocks nearly eked out a gain, helped by strength in home improvement retailers. Home Depot was the top performer among the 500 companies comprising the index, rallying 4.4% after stronger-than-expected current-quarter earnings. The company’s forward guidance, however, came up short of expectations. The company’s CEO said, “…lumber prices have declined significantly compared to last year, which impacts our sales growth. As a result, today we are updating our sales guidance to account primarily for continued lumber price deflation, as well as potential impacts to the U.S. consumer arising from recently announced tariffs.” Financials were the worst performers, flailing 1.4% and not helped by a notable daily decline in Treasury yields. Following falling yields across Europe, the 2-year Treasury yield dipped 3.3 bps to 1.51% as the 10-year yield closed 5.1 bps lower at 1.56%. Related to unconfirmed and disputed reports earlier in the week about the White House considering a cut to the payroll tax to boost the economy, President Trump said “We’re looking at various tax reductions,” but “I’m not talking about doing anything at this moment.”


Overnight – Fed Minutes May Offer Some Clarity, But Likely to be Upstaged By Powell Friday from Jackson Hole: A bit of cautious optimism crept back into markets as investors look ahead to this afternoon’s Fed Minutes, hoping the discussion will provide some clarity on how the Fed expected to respond to an uncertain trade situation that is weighing on global growth. Fed Chair Powell’s July press conference resulted in more questions than answers, and has led to widening divergence in the Fed’s dot-plotted path and the market’s future expectations. Ahead of the Minutes, Minneapolis Fed President Kashkari made his case in a morning Financial Times opinion piece for further Fed action. He noted, “Absent some surprise reversal in [slowing global growth, stalled U.S. business investment, and an inverted yield curve], I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver.” As to the markets, European equities and U.S. futures started strongly after a softer start in Asia and had climbed steadily higher by 6:45 a.m. CT. Tuesday’s downward pressure on global bond yields eased, lifting longer yields on both Treasurys and German Bunds by just over 2 bps. While it didn’t appear to move the markets, an auction of 30-year German bunds with a zero coupon was making its rounds through the market news headlines; Bloomberg’s read “World’s First 30-Year Bond With Zero Coupon Flops in Germany.” The offer to return investors’ principal in 30 years with no periodic interest payments was mostly shunned. Investors took just 824 million euros of the 2 billion the government hoped to sell, with the issuance awarded at a premium to yield a record low yield of -0.11%.


NOTEWORTHY NEWS

Daly Doesn’t See a Recession But Concerned Soured “Mood” Could Become “Self-Fulfilling Prophecy”: San Francisco Fed President Daly said Tuesday, “I don’t think we’re headed towards a recession right now.” Capturing what seems to be the consensus take among most economists, Daly noted “When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion. The labor market is strong, consumer confidence is high, and consumer spending is healthy.” However, “considerable headwinds, like weaker global growth and trade uncertainties, have emerged – and they’re contributing to this fear we see in the markets that a downturn is right around the corner.” On the July decision to cut rates, she noted it “was an appropriate recalibration of policy in response to the headwinds we’re facing – along with inflation rates that continue to come in under our 2% target.” Moving forward, Daly said “One thing I’m looking closely at is whether the mood gets so out of sync with the data that the fear of recession becomes a self-fulfilling prophecy.”


FOMC Minutes Reflect Different World Three Weeks Ago (Cont.): Much has transpired since the Fed’s decision to cut interest rates on July 31, followed by Fed Chair Powell’s vaguely-worded description of what might trigger future policy decisions.  Interpreting his post-decision press conference comments, it appears the Fed is watching trade developments, global growth, and the impact of these factors on U.S. economic activity.  With that as a framework, the Fed appears justified to ease policy once again.  In fact, the deterioration in trade and global financial conditions arguably warrant a more aggressive policy response.  Trade discussions between U.S. and Chinese officials took a turn for the worse immediately after the Fed’s decision.  Global data have been disappointing, central banks have generally been moving toward easier policy postures, and interest rates have responded by plummeting.  U.S. economic data have shown some signs of weakness, but the consumer sector has remained encouragingly resilient.  Perhaps most importantly, informed by the Fed’s guidance, investors have increasingly come to expect more aggressive easing to counter the growing global uncertainty. While the Fed would do well to surprise the markets by cutting early or more than expected, a large amount of data which could provide more clarity is scheduled to be released between now and the September 18 FOMC meeting.


Since the Fed’s July Decision

U.S. – CHINA TRADE DISCUSSIONS DETERIORATE

  • White House unexpectedly announced new 10% tariff on all remaining Chinese imports effective September 1
  • Chinese officials pledged counter-measures, saying they would not be intimidated nor blackmailed
  • Chinese state-owned companies were instructed to end imports of U.S. agricultural products
  • Chinese Yuan devalued 2.6% weaker versus the Dollar, now down 12% since bilateral trade dispute began last March
  • U.S. officials pause plans to allow U.S. companies to transact with Huawei
  • President Trump sounded indifferent on outcome of trade talks in September, “if we don’t, that’s fine…we’re not ready to make a deal”
  • U.S. officials announced a delay on implementations of a portion (cell phones, laptops, toys) of the newest tariffs from September to December
  • China’s State Council Tariff Committee said it had no choice but to retaliate against new tariff threat


GLOBAL UNCERTAINTY RISES FURTHER

Eurozone

  • German economy contracted 0.1% (2Q)
  • German officials reported interest in considering deficit spending to fund climate change stimulus package
  • Italian Deputy Prime Minister calls for swift elections in response to unworkable government coalition
  • ECB official, Rehn, called for “significant and impactful” stimulus in September

Asia

  • Central banks in New Zealand, India, and Thailand surprised markets with rate cuts and/or dovish outlooks
  • Hong Kong’s pro-democracy (anti-China) protests have escalated; fears of a Chinese military response have grown
  • Chinese industrial production weakest in 17 years
  • Chinese retail sales slow more than expected

LatAm

  • Argentina’s Peso collapsed 32% after elections adding doubt to the future political landscape; Peso has since recovered 35% of its initial losses


U.S. ECONOMIC DATA MIXED

Labor Market

  • July labor report good enough (+164k nonfarm payrolls), but show slowing pace of gains (3-month average second lowest since 2012)
  • July unemployment rate held at 3.7%
  • July nonfarm payroll growth was good (164k), but 3-month average fell to second lowest since 2012 (139.7k)
  • July average hourly earnings rose to 3.2% YoY, but average weekly hours worked fell
  • June JOLTs report showed decline in job openings

Consumer

  • August consumer confidence (U.M.) saw its second-largest monthly decline since 2013 on a weaker future outlook and a less-favorable view of government economic policy
  • July ISM non-manufacturing index unexpectedly fell to 3-year low on weaker new orders
  • July retail sales blew out expectations rising 0.7% at core level, with 3M/3M annualized rate significantly higher than expansion trend
  • 2Q Walmart earnings report beats expectations reducing fear of trade impact
  • White House begins dialogue about potential payroll tax cut to boost economy

Business Investment

  • July small business confidence more resilient than expected

Manufacturing

  • July ISM manufacturing index unexpectedly fell to near a 3-year low
  • Regional Fed manufacturing indices beat expectations with better new orders indices
  • July manufacturing output fell 0.4% MoM (I.P. report) marking fifth decline in seven months

Inflation

  • July core CPI (2.2%) firmer than expected, boosted by nascent evidence of tariffs pushing core goods prices higher
  • 10-year TIPS breakeven inflation rate down 22 bps from 1.78% to 1.56%
  • 5-year TIPS breakeven inflation rate down 22 bps from 1.58% to 1.36%


MARKET CONDITIONS REFLECT GROWING EXPECTATION FOR MONETARY EASING

  • 2y10y spread inverted for first time since 2007
  • 10-year Treasury falls from 2.07% to 1.47% (-60 bps), lowest yield since 2016
  • German 10-year down 31 bps to -0.71% (record low)
  • Japanese 10-year down 8 bps to -0.23% (record low)
  • U.S. stocks (S&P) down from 3,013 to 2,911 (-3.4%)
  • Chinese stocks (Shanghai 300) down from 3,870 to 3,787 (-2.0%)
  • Eurozone stocks (Euro Stoxx 50) down from 3,466 to 3,350 (-3.3%)
  • Global sovereign debt with negative yields up 16.7% (from $13.78T to $16.09T)
  • U.S. Dollar up 1.5% (125.315 to 130.309)


ECONOMIC DATA SCHEDULED BEFORE FOMC’S SEPTEMBER 18 DECISION

  • July Durable Goods Orders (8/26) with Final Revision (09/05)
  • Aug. Consumer Confidence (C.B.) (08/27)
  • 2Q GDP Revision (08/29)
  • July Personal Income and Spending (08/30)
  • July PCE Inflation (08/30)
  • Aug. ISM Manufacturing Index (09/03)
  • July Trade Volume (09/04)
  • Aug. Markit Services PMIs (09/05)
  • July ISM Non-Manufacturing Index (09/05)
  • Aug. Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings (09/06)
  • Aug. Consumer Price Index (09/12)
  • Aug. Advanced Retail Sales (09/13)
  • Aug. Industrial Production and Manufacturing Output (09/17)


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