The Market Today
FOMC Mounting the Balance Beam
by Craig Dismuke, Dudley Carter
CDC Recommends Masks for Vaccinated and Schools: The CDC revised its guidance yesterday, recommending that “fully vaccinated people  wear a mask in public indoor settings in areas of substantial or high transmission.” Areas of substantial or high transmission appear to be defined at the county level, specifically counties with more than 50 new cases per 100k population over the course of a week. There are currently 2,043 counties (63.4%) which fit into these two categories. The CDC also made recommendation for “universal indoor masking for all teachers, staff, students, and visitors to schools, regardless of vaccination status.” The virus continues to spread rapidly in Asia where South Korea and Thailand both reported record daily cases. (Chartbooks: Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts)
FOMC Mounting the Balance Beam: The FOMC’s policy decision is scheduled for 1:00 p.m. CT today. Officials have not yet telegraphed an official change in policy making that a low-probability outcome. However, as seen in the Chart of the Day, a dashboard of economic metrics is flashing yellow, arguably red for some indicators. The S&P is up another 4% since their June meeting, inflation has already proven to be hotter than officials expected, and the housing market has become a concern for broader financial market stability. On balance, their communications are expected to give some indication that they are formulating plans to slow asset purchases, however vague, nuanced, or implied it may be. Fed Chair Powell will host a press conference at 1:30 p.m.
Trade and Inventories: The June advanced goods trade deficit grew more than expected, from -$88.1b to -$91.2b in June, the second-largest monthly deficit on record. Exports gained 0.3% but were outpaced by a 1.5% increase in imports. The disappointing result at least points to growing global trade but the imbalance will prove a larger drag on 2Q GDP than expected. Going forward, the trade deficit is expected to narrow as global economies more fully recover. Also released this morning, retail inventories rose 0.3% MoM in June while wholesale inventories gained 0.8%. In total, inventories rose $7.4b versus expectations for a $4.8b gain. This will help offset the drag from the trade deficit.
Mortgage Applications Rebound, Remain Soft: Mortgage applications for the week ending July 23 rose 5.7% as the 30-year mortgage rate dropped 10 bps to 3.01%. Pushing applications up was a 9.3% gain in refi apps. Disappointingly, purchase apps fell another 1.6% and are now down 26% from January.
Home Price Gains Remain Immune to Gravity: Home prices continued their unsustainable ascent in the May price reports, released yesterday. The FHFA report showed prices rising 1.7% MoM, bringing the year-over-year rate to a new record-high 18.1%. Similarly, the S&P CoreLogic 20-city index rose 1.8% MoM which brought that index up 17.0% YoY, also a record-high. The details of the FHFA report showed the strongest yearly gains in the West (+21.4% YoY), Mountain (+23.2%), and Northeast states (+21.8%). The details of the S&P report showed Phoenix (+25.9% YoY), San Diego (+24.7%), and Seattle (+23.4%) leading the way. Housing affordability continues to be a concern and is part of the equation Fed officials must consider when determining future QE plans.
Consumer Confidence Boosted by Strong Labor Market Perception: The Conference Board’s July report on consumer confidence, also released yesterday, showed a resilient outlook as expectations for the labor market continued to improve. Headline confidence remained solid, ticking up 0.2 point. Driving confidence higher was a 0.7 point improvement in perceptions of the present situation. The key labor market metric of the number of respondents saying jobs are plentiful less those saying they are hard to get inched up to a net +44.4, the most optimistic reading since 2000.
The 10-year Treasury yield fell 5 bps yesterday to close at 1.239%. Lower yields weren’t enough to keep stocks in the black as global markets reflected concern over Chinese policy changes and foreign outflows from Chinese markets. All three main U.S. indices fell. The S&P fell 0.5% while the Nasdaq led the way lower, down 1.2%, the largest drop in two months. Apple, Alphabet, and Microsoft all reported strong earnings after the close, but Apple also warned that sales growth would likely slow and the supply chain is becoming increasingly tight.