The Market Today

TODAY’S CALENDAR

Mortgage Applications Improve Despite Softer Purchases Activity: Mortgage applications rose 2.4% last week, although the weekly gain was completely driven by an 8.3% improvement in refinancing applications. Purchase applications fell 2.0% in the week ended May 17, pulling the purchase index down to its second lowest level in two months. In contrast, stronger refinancing activity pushed that index to a five-week high. The recent trade tensions that have pulled Treasury yields back to or near their lowest levels in more than a year have had similar knock-on effects for mortgage rates. The MBA’s 30-year rate estimate dropped for a fourth week to 4.33%, the lowest level since January 2018. The softer purchase activity increases the risk that, despite a better trend for pending home sales, the uncertainty for existing home sales (more below) may continue in the near-term.

Wednesday’s Fedspeak: St. Louis Fed President Bullard spoke overnight, saying he believes the increased tariffs would have to be in place for at least six months before it potentially affected U.S. monetary policy. He reiterated that the Fed Funds rate could be a “bit restrictive” but that overall the process of normalizing policy “has been quite successful.” Similar to his statement earlier this week, a rate cut is an option if inflation continues to disappoint in the months ahead. He said trade tensions are a challenge for the Fed but weak inflation remains the strongest argument for a potential rate reduction. At 9 a.m. CT, New York Fed President Williams will hold an economic press briefing, followed ten minutes later by Atlanta President Bostic kicking off a conference at the Dallas Fed.

FOMC Minutes: Today’s FOMC’s Minutes, set for release at 1 p.m. CT, should be the most meaningful economic event of the day. At the two-day meeting that concluded on the first day of May, officials voted to keep the target range unchanged and retained the “patient” language in the Statement, which acknowledged better economic activity since earlier in the year but highlighted that inflation had declined. Despite no official change to the policy range, they lowered the IOER rate to 2.35% in an attempt to move the effective borrowing rate back towards the middle of the range. In his press conference, Fed Chair Powell said “We suspect that some transitory factors may be at work” on inflation. How confident are officials that the better economic activity will be sustained, and has the balance of the list of risk factors shifted? How concerned are officials that weaker inflation will persist? How big is the “we” group that suspects the weakness is transitory? Was there progression of the discussion about changing the inflation framework to make-up for prior weakness? Any progress on a more detailed plan for the balance sheet going forward? Those will be questions investors will look to answer later this afternoon.

TRADING ACTIVITY

Yesterday – Equities Recovered Tuesday as Exceptions Took Away Some of the Bite of Huawei Actions: U.S. equities recovered nicely Monday in response to the U.S. providing certain exceptions, for a 90-day period, to domestic companies transacting with China’s Huawei. The action, which was announced after markets closed Monday, was a welcomed reduction of the trade tensions that have ratcheted higher over the last couple of weeks. Materials companies rose 1.5% to lead all gains within the S&P 500, while the technology sector gained 1.2% after slumping 1.8% as Monday’s worst performer. Eight of the nine remaining sectors also strengthened amid the broad recovery. As equities strengthened, Treasury yields held their overnight increase that had flattened the curve between the 2- and 10-year notes. The 2-year yield grinded higher throughout U.S. trading, ending up 3.3 bps at 2.25% and near its high of the day. The 10-year yield added a smaller 1.1 bps to 2.43%, flattening the curve to a five-week low of 16.7 bps. In addition to the upward pressure from stronger equities, a move up in European yields just before 10 a.m. CT had a noticeable impact on Treasurys. U.K. gilt yields led increases across Europe after PM May, in a speech attempting to rally support for her Brexit plan, offered members of parliament the option to put the details of a final Brexit plan to a public referendum. Her 10-point pitch was quickly met with resistance from both sides of the aisle.

Overnight – Markets Knocked Back by Continued Trade Concern: Trade tensions lingered Wednesday despite some reprieve on Huawei restrictions, keeping a lid on investors’ appetite for global equities and nudging sovereign yields lower. News outlets reported just before midnight CT that the U.S. was considering blacklisting up to five Chinese surveillance firms. Other headlines captured a comment from China’s President Xi at the Long March memorial garden that was surmised to be a subtle signal to the U.S. that it won’t back down in the trade negotiations. “We came to the starting point of the Long March to experience the Red Army’s departure at that time, …It’s a new Long March now, and we must start all over again.” Chinese stocks were Asia’s worst performers, down 0.5% during a mixed session for the region. European equities briefly turned positive but the Stoxx 600 had stumbled back to new lows at down 0.2% just before 7 a.m. CT. The U.K.’s export-focused FTSE 100 was the only European index in positive territory, propped up by the British pound sliding to its lowest level against the U.S. dollar since early January. Against the Euro, the pound weakened for a record thirteenth day. PM May’s attempt at a fourth vote appears to have fallen flat and has led to multiple calls for her to resign. The U.K.’s 10-year yield was down 5.7 bps, an outsized drop relative to more modest declines for other sovereigns. Just after 7:30 a.m. CT, U.S. equity futures were being led lower by the Nasdaq while the 2-year Treasury yield had moved down 2.9 bps to 2.23% and the 10-year yield had dipped 2.5 bps to 2.40%.

NOTEWORTHY NEWS

Existing Home Sales Slipped Unexpectedly: Existing home sales slipped unexpectedly in April and have pulled back in the two months since February’s 11.2% surge. Total sales dropped 0.4% last month, worse than the 2.7% economists had expected, to 5.19MM annualized units. Total sales have recovered from January’s more-than-three-year low but April’s pace held well below stronger average levels from 2016 and 2017. Activity was mixed across the four regions, rising 1.8% in the West (21% of total volume) but declining 0.4% in the South (44%) and 4.5% in the Northeast (12%). Sales were unchanged in Midwest, which accounts for the remaining 23% of existing sales volume. Months of supply on hand rose to 4.2 in April, a six-month high for the inventory gauge, and the YoY change in the median price slowed from 4.0% to 3.6%. In addition to less supply pressure and slower price appreciation, lower rates have provided support for mortgage applications and pending home sales, but the benefit for existing home sales has yet to clearly affect what has been a noisy trendline for final existing sales.

Two Voters Discuss Why They Support Patient Policy: Chicago Fed President Evans said it’s “hard to escape the conclusion that trend growth in the U.S. is likely less than 2%.” As a result, while interest rates remain the Fed’s “distinct preference” for providing accommodation in the event of a slowdown, the proximity to the zero bound means another episode of quantitative easing is more likely. Addressing the ongoing policy framework review, if the Fed signals support for inflation above 2% for a period, those words need to be backed up with action. “If we say we are going to pursue this, we better doggone do it,” Evans said. Rosengren from Boston said he sees “no clarion call to alter current policy in the near term, …I view current policy as slightly accommodative and likely to be consistent with inflation returning to the Fed’s 2% inflation target over time.” While he takes comfort in the stability of “trimmed-mean” inflation measures in the face of weakness in core PCE, he cautioned that the Fed would be “wise to admit to some uncertainty about this part of the forecast.” His baseline forecast is for a trade deal to be reached between the U.S. and China, but described the current conflict as a “prominent downside risk” and an “important reason for policymaker patience until this source of uncertainty is more resolved.”