The Market Today

Gold Hits Six-Year High, Dollar Falls, Yields Grind Lower on Central Bank Pivot and Geopolitical Tensions


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Busy Calendar of Housing, Manufacturing, and Consumer Confidence: Today’s economic calendar is busy and includes an update on home prices, manufacturing in the Richmond Fed District, new home sales, and consumer confidence, as well as remarks from five separate Fed officials. At 8 a.m. CT, the FHFA is expected to report home prices rose 0.2% MoM in April while economists expect the S&P CoreLogic index will have gained a smaller 0.1%. The modest monthly increase, if as expected, will drag the S&P CoreLogic rates of annual growth down from 2.68% to 2.50% (20-City Metro) and from 3.72% to 3.50% (nationwide). At 9 a.m. CT the Richmond Fed’s Manufacturing Survey for June is expected to cool modestly, although disappointing reports from other Fed Banks last week indicate risks are likely to the low side of expectations, new home sales are expected to have recovered 1.6% to their third best level of the cycle, and the Conference Board’s consumer confidence index is forecasted to have edged back in response to increasing uncertainties.


Plenty of Fedspeak on Tuesday: After a significant shift in the Fed’s tone at last week’s meeting, public comments from officials will be important to markets looking to fine tune their expectations for three rate cuts before the year is out. Atlanta Fed President Bostic will speak on housing at 11 a.m. CT and Richmond Fed President Barkin will make remarks at 2:30 p.m. However, appearances by those who vote on policy this year will undoubtedly receive greater attention. New York President John Williams kicks things off with opening remarks at a finance forum at 7:45 a.m. At noon, Fed Chair Powell will discuss his outlook for the economy and monetary policy and could give some indication if he is one of the eight officials who expect a rate cut before 2020. St. Louis’s Bullard is one of those, evidenced by his dissension in favor of a 25-bp cut last week, and will close out Tuesday’s commentary at 5:30 p.m.


TRADING ACTIVITY

Yesterday – Iran Nerves, Upcoming G-20, and Another Weak Manufacturing Report Kept Stocks in Check, Pushed Yields Lower: U.S. equities slowly erased early gains and Treasury yields moved through their overnight lows as another weak manufacturing survey aggravated worries the synchronized shift towards accommodation from global central banks may be late for a slowing global economy. U.S. equity futures had strengthened overnight despite a mixed global session and an increasingly tenuous situation in the Middle East. Oil prices finished mixed after President Trump signed an executive order imposing additional sanctions on Iran, its Supreme Leader and his Office, and others at the top of the Iranian government, for multiple malicious activities, including last week’s downing of a U.S. drone. The S&P 500’s energy sector dropped 1% to lead six other sectors lower and the broader index to a 0.2% daily decline. Treasury yields had declined overnight but moved to new lows after the Dallas Fed’s Manufacturing Index slumped unexpectedly to its lowest level since June 2016 (more below). The 2-year yield fell 3.5 bps to 1.73%, its lowest since November 2017, while the 10-year fell 4.0 bps to 2.01%, a new post-election low closing yield.


Overnight – Markets Continue to Focus on Recent Uncertainties: A quiet overnight news cycle left investors focused on recent events as they await a wave of U.S. data and Fed comments. U.S. WTI crude fell for the first time in four days, even after the U.S. increased sanctions on Iran and key leaders from the country on Monday. However, the commodity is 6.9% higher than it was before Iran downed a U.S. drone last Thursday, sparking worries of a possible military conflict between the two countries. During Asian trading, a spokesman from Iran’s Foreign Ministry said the new sanctions “mean the permanent closure of the diplomatic path” with the U.S. and Iran’s president called the actions “confused and senseless,” adding that the U.S. is lying about wanting to negotiate. After dipping on Iran’s response, U.S. equity futures had recovered but remained modestly weaker and Treasury yields had had moved back close to unchanged. Attention to the divergence between the U.S. dollar and gold continues to grow, with gold now up in six consecutive sessions, rallying more than 6% to a six-year high since the Fed hinted that multiple rate cuts could be in play in 2019. The Dollar, however, has dropped 1.7% amid that speculation and held near its weakest level in more than six weeks. Chinese stocks dropped over 1% to lead broader global weakness, despite reports of a Monday telephone conversation between top U.S. and Chinese officials discussing trade ahead of this weekend’s main event between Presidents Trump and Xi in Japan.


NOTEWORTHY NEWS

Dallas Fed Survey Adds to Angst from Last Week’s Regional Fed Reports that U.S. Manufacturing Continues to Lose Momentum Amid Trade Concerns: A third weak regional Fed survey for June reinforced fears that the slowdown in U.S. manufacturing continues to worsen in response to the uncertainty created by the U.S.-China trade feud. The Dallas Fed Manufacturing Activity index fell unexpectedly last month, and after four consecutive declines has printed its weakest reading in three years. Manufacturing activity reports last week from the New York and Philadelphia Fed teams also reflected larger-than-expected declines. In the details of the Dallas report, while a couple of indicators strengthened from May, including current production and new orders, the overall tone remained downbeat and the outlook for activity in six months slumped to its weakest reading in 41 months (January 2016).


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