The Market Today
In the Minutes or Not – FOMC Officials Likely Thinking About Four Hikes in 2018
by Craig Dismuke, Dudley Carter
Existing Home Sales and FOMC Minutes: At 8:45 a.m. CT, the Markit Services and Manufacturing PMIs are scheduled for release. The indices are used primarily as indicators for the ISM reports which have a longer history and tighter correlation to actual activity in the U.S. However, this is about the extent of their usefulness to U.S. investors, limiting the possible market reaction. At 9:00 a.m., the January Existing Home Sales report is expected to show a 0.5% MoM increase in sales activity. Big revisions and noisy month-over-month results limit the market impact of this report as well.
In the Minutes or Not – FOMC Officials Likely to Be More Concerned About Inflation: The big news of the day will be the 1:00 p.m. release of the Minutes from the January 31 FOMC meeting. Some analysts speculate that there may be evidence of a growing group of members favoring four rate hikes in 2018. The Minutes would have originally been written prior to the stock market turmoil, the recent run of stronger earnings/inflation data, and Washington’s blowout budget deal. However, the Minutes are then sent out to all meeting participants two times for corrections and clarifications. It is possible that some participants may have tweaked the way their views are worded to reflect a more concerned characterization of their positions. As such, it is possible that this afternoon’s Minutes pour some fuel on the faster-Fed concern. Regardless, it is likely that there is a growing group of concerned Fed officials, whether that is seen in today’s Minutes or not until the March 21 meeting.
Yesterday – Walmart, Higher Rates Weigh Broadly on U.S. Equities: U.S. stocks ended a day of back-and-forth trading on a sour note as the major equity indexes fell for the first time in seven sessions. Tuesday’s weakness was counter to strength seen in Europe but consistent with the pre-market tone in futures trading that presciently portrayed demise of stocks’ recent win streak. Walmart Inc. accounted for 73 of the Dow’s 255-point decline and helped push the consumer staples sector to the bottom of the S&P. The U.S. retail giant dropped 9.9%, its worst day since October 2015, after reporting its first earnings miss in more than two years and a disappointing result for its e-commerce business. But the daily drop was more far-reaching than Walmart’s woes as losses in nine of the 10 remaining sectors offset gains in the tech sector. Higher rates remained a story to start the week, although the equity weakness capped how far yields would climb. The 2-year yield closed up 2.9 bps at 2.22% while the 5-year yield added 1.6 bps to 2.65% and the 10-year yield tacked on a smaller 1.3 bps to end at 2.89%.
Overnight – U.S. Yields Little Changed After Equity Weakness and Economic Data Push Down European Counterparts: U.S. stocks may recover at the open as futures contracts have climbed back into positive territory after earlier weakening in coordination with a downtrend across Europe. Despite a firmer finish for Asian markets, European equities slid at the open helping to drive a bid for sovereign debt that has sent longer yields lower. In order of magnitude, the 10-year yields for the U.K., France, and Germany led the decline. U.K. yields are off their overnight lows that were reached just after mixed employment data showed a tick higher in both the unemployment rate and wages. The steepest downward momentum in French and German yields coincided with the release of February PMIs that pulled back more than expected. As a result, the Eurozone PMI also missed estimates. To be sure, all three reports remain at solid levels. Longer U.S. yields are also lower but shorter yields have added modestly to reach new cycle highs. The 10-year yield is down 0.9 bps (2.88%) while the 2-year yield has added as much (2.26%).
Weaker Demand Could Make for Shakier Auctions Going Forward: According to a Bloomberg report yesterday, “The U.S. Treasury on Tuesday sold $179 billion of securities as it works to rebuild its cash balance, with yields at its auctions of three- and six-month debt rising to levels unseen since 2008.” However, the yield on these issuances being the highest since 2008 was not necessarily the result of weaker demand for Treasuries. Rather, the higher auction yields were primarily the result of rising short-term yields as expectations for Fed rate hikes increase (short-term yields are simply as high as they have been since 2008). The bigger concern, as discussed in yesterday’s MT, will be if there is waning demand for U.S. debt. Demand for issuances is better seen in the bid-cover ratios – a measure of the number of bids received for the new issue as a percentage of the number of bids accepted. The bid-to-cover for yesterday’s $55 billion four-week note auction fell to 2.48, the lowest in 10 years.