The Market Today
FOMC the Focus in Busy Week for Economic Calendar
by Craig Dismuke, Dudley Carter
This Week’s Calendar – FOMC Expected to Hike for Third Time in Seven Months: This week’s calendar will bring a barrage of economic reports. There are three reports on housing including the June homebuilder confidence report on Thursday and the housing starts and build permits data on Friday. The housing data has been weak lately and a positive run would be a relief. Small business confidence will be released tomorrow which has weakened recently as Washington has proven to be Washington. Consumer confidence will be released on Friday. Three manufacturing reports are scheduled including the Empire Fed and Philly Fed reports and the May Industrial Production report.
The most important data of the week will come Wednesday, the May retail sales data and CPI inflation report. Personal Consumption has been weaker-than-expected through the first four months of the year and the FOMC’s forecast is dependent on a rebound. However, the rebound has not yet been evident in the data. Inflation has run below the Fed’s target, to a surprising degree, making the May CPI data even more important. More to the point, these reports will be the final data the FOMC sees prior to its Wednesday afternoon rate decision.
Wednesday’s FOMC Meeting May Mark an Inflection Point: As of this morning, the markets are pricing in over a 90% chance of a rate hike for two reasons, the Fed’s communications and an unemployment rate down to 4.3%. The Fed has communicated, as it did prior to the March and December hikes, that the time may “soon be appropriate” to hike. However, the economic data has had a run of weak reports. Inflation, most importantly, has disappointed on the low side in recent reports. Some officials have dismissed these reports as being one-off anomalies, while other officials are more concerned. However, recent reports on retail sales, auto sales, home sales, capital goods orders, inventories, business confidence, and trade have all disappointed expectations. Moreover, a growing fear that Washington will be unable to deliver on the President’s economic agenda are weighing on the investor outlook. Given these factors, the Fed is likely to include some dovish commentary on the future path of policy, perhaps lowering their projected dot plot or perhaps through Yellen’s post-meeting press conference. However that message is communicated, this FOMC result is likely to be viewed as a dovish hike when all is said and done – if the Fed remains committed to data-dependence. It is highly unlikely, given the current environment, that they will manage another three rate hikes over the proceeding seven months.
Overnight Activity – A Lull in Economic News Leaves Markets Focused on Politics: Global markets got off to a weak start Monday with European sovereign curves flattening on lower yields as global equities weakened and the Yen gained. The tech sector is the sore spot in Monday’s equity trade following big losses for the industry in last Friday’s U.S. session. The Stoxx Europe 600’s tech sector dropped more than 3% as the broader index slid 0.8%. An early look at U.S. futures indicates tech companies may struggle anew with Nasdaq contracts down 0.9%. After falling nearly 4% last week, crude prices recovered 1.5%. Market news headlines remain focused on EU politics and monetary policy decisions from the Fed, the BoE, and the BoJ later this week. The British pound continues to underperform other major currencies as political uncertainty remains elevated after last Thursday’s elections resulted in a hung parliament. Late Friday reports of a coalition agreement between PM May’s Conservatives and the Democratic Unionist Party may have been premature with more recent accounts describing negotiations as ongoing. PM May also reshuffled certain cabinet positions over the weekend. French President Macron fared more favorably than May in Sunday parliament elections in France where indications are he should win an overwhelming majority in the second round next Sunday. Local elections in Italy dealt a pro-EU blow to the anti-EU Five Star Movement party. Treasury yields rose modestly despite the bid for safety in Europe and the Dollar dipped.
ICYMI – June 9 Weekly Recap: Treasury yields recovered in the last half of the week after longer yields set new post-election lows on Tuesday. The weekly U.S. economic data was, on balance, weaker than expected. However, the weekly newsreel was weighted heavily towards Thursday: the ECB’s latest policy decision, Former FBI Director Comey’s Senate Testimony, and Parliament elections in the U.K. Click here for the full recap.