The Market Today
FOMC on the Clock with Some Disappointing Data in Hand
by Craig Dismuke, Dudley Carter
Tomorrow morning, Thursday June 15, we will host a special economic update webinar focusing on where the Fed goes from here. After potentially hiking three times in seven months, the outlook points to a slower pace of rate hikes going forward. As such, today’s meeting may mark an inflection point for policy action. We will discuss the reasons why this may be an inflection point and the implications for interest rates. You can click here to register for the short conference call.
Today’s Calendar – FOMC Expected to Hike, Inflation and Retail Sales Data Disappoint: Both of this morning’s important reports disappointed with CPI inflation and Retail Sales data weaker-than-expected. May’s CPI inflation report showed a 0.1% MoM drop in headline prices and just a 0.1% MoM increase in core prices (excluding food and energy). This brought headline inflation down from 2.2 to 1.9% YoY and core down from 1.9 to 1.7% YoY. The growth of housing inflation pulled back slightly and the important Owners’ Equivalent Rent inflation fell again on a YoY basis, now down to 3.25%. Medical care inflation also slowed its YoY growth rate, down to 2.66% from 2.95% (the growth rate had been as high as 4.9% just eight months ago. These two categories had been providing a solid base for inflation but have shown a weaker trend of-late. In the retail sales report, headline sales fell 0.3% MoM led by a 2.4% drop in gasoline sales and a 0.2% drop in autos. However, even excluding these categories, core retail sales were flat for the month, again disappointing expectations for 0.3% growth. The weakness was fairly widespread with sporting goods sales down 0.6% MoM, food services sales down 0.1%, general merchandise sales down 0.3%, electronics/appliance sales down 2.8%, and miscellaneous store sales down 1.3%. The strongest category was non-store retailers (online) which rose 0.8%, although this appears to be more related to a continuing change in consumer behavior. Looking at the bigger picture, this morning’s disappointing retail sales data combined with last month’s fair report points to personal consumption rising at just 2.0% in 2Q, a weaker rebound than expected.
Fed Funds Futures are projecting a 95% chance of another 25 bps FOMC hike this afternoon. The market expectations have risen as the Fed has communicated in a similar fashion to the lead-up to the December and March meetings, saying that a hike might be “appropriate soon.” Bolstering the belief, the unemployment rate has now dropped to 4.29%. As we will discuss in tomorrow’s webinar, the flip side of the calculus includes a run of weaker data recently (including this morning’s retail sales and CPI reports), a downturn in earnings growth, and a reversal in the inflation trend. As a result of those developments, we expect the FOMC will wrap today’s hike in something dovish. This may come in the form of lower projections in the infamous dot plot, although it more likely to be in the form of nuanced tweaks to the text of the Statement along with the tone of the comments from Chair Yellen in her press conference. Additionally, we expect the FOMC to shift its focus to balance sheet “normalization” once the target range is over 1.00%, which it would be presuming the Committee does hike today. The remains an outside chance the Fed proves its data dependence by not hiking today. The events begin at 1:00 p.m. CT with the release of the Official Statement and the Summary of Economic Projections. Chair Yellen’s presser will begin at 1:30 p.m.
Overnight Activity – Few Signs of Market Stress in Front of a Busy U.S. Economic Calendar: Global investors found themselves pinned between a Tuesday rebound in U.S. equities and a heavy Wednesday U.S. economic calendar, including a likely rate hike from U.S. monetary policymakers. In the interim, the uncertainty seemed to weigh slightly on Asian markets where Japan’s Nikkei and China’s CSI 300 both declined in value. The Stoxx Europe 600 is more sanguine with all sectors currently positive and technology companies, leveraging stability in yesterday’s U.S. session, leading the way. Crude prices tumbled more than 1% after data yesterday showed higher U.S. inventories and increased OPEC production. U.S. crude traded back below $46 per barrel and at one of its lowest levels since last November. Economic data from China was as expected except for slightly disappointing fixed investment figures. U.K. unemployment figures improved in April but earnings fell short of estimates. Ahead of this morning’s U.S. retail sales and inflation data, the Treasury curve was flattening on lower yields. The 2-year yield was 0.4 bps lower at 1.36% with the 10-year yield 1.2 bps lower at 2.20%. The Dollar was almost unchanged but outperforming the Euro, Yen, and British Pound. U.S. equity futures were between 0.1% and 0.3% higher, pointing to a positive start for the major indices.
Yesterday’s Trading Activity – Stocks Climb to New Records, Yield Curve Flattens, Dollar Weakens Ahead of the Fed: Tech companies recovered Tuesday to help the Dow and S&P reach new all-time record highs. However, due to the severity of the downturn for the Nasdaq over the previous two sessions, the index’s 0.7% gain left the tech-heavy index 100 points shy of its previous record close. The materials sector led the gains in the Dow and S&P while the rebound in tech pushed that sector into second place in each index. Treasury yields continued their weekly quiet streak as investors looked towards the Fed’s Wednesday decision. The 2-year yield rose 0.8 bps to 1.36% while the 10-year yield fell 0.5 bps to 2.21%. The net result was the spread between 2s and 10s falling to 84.3 bps, the lowest since October 3. The Dollar weakened but remains in its relatively well-defined, month-long trading range that developed after a steep drop in mid-May (weak retail sales and CPI data; Comey memos). Crude prices finished essentially unchanged after a volatile session. Prices fell from session highs late after data indicated another likely build in U.S. crude and gasoline inventories.