The Market Today

Influx of Data Should Keep the Fed in Monitoring Mode, Markets Hope Mnuchin Is Right on Trade


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications Get a Lift from Lower Rates: Mortgage applications rose 1.3% last week as refi activity recovered on another decline in mortgage rates. The MBA’s measure of 30-year mortgage rates fell 0.08% after the Fed hinted rate cuts could be near, pushing the average rate down to 4.06%, its lowest level since September 2017. Purchase applications, however, slipped 2.3% and have declined in six of the last seven weeks; purchase activity surged 25% surge to start June.


2Q Business Investment in Equipment Steadies: May’s preliminary estimates for business investment in equipment was better than expected, with core capital goods orders and shipments both easily outpacing expectations for 0.1% gains. Core capital goods orders, an indicator of future investment, rose 0.4% in May while shipments, an estimate of past investment, gained 0.7%. Additionally, shipments in April were revised from unchanged to up 0.4% from March. The report shows equipment investment in 2Q tracking along a stronger trajectory. At the headline level, total durable goods orders fell 1.3% but rose 0.3% when declining aircraft orders are adjusted out.


2Q Inventory Growth Looks Solid: Retail and wholesale inventories both rose more than expected, and from stronger-than-estimated levels in April. Inventories rose sharply in 1Q to contribute 0.6% of the 3.1% total growth, and was seen as a headwind to 2Q’s overall growth tally. This morning’s better-than-expected data will be a net positive to current quarter growth estimates.


Goods Trade Deficit Widens as Exports and Imports Both Improve: May’s advance look at the goods trade balance showed a wider-than-expected deficit last month, although some of the negative growth impact to 2Q was absorbed by a downward revision to April’s figure. The goods deficit widened from -$70.9B in April, previously estimated at -$72.1B, to -$74.5B in May, a five-month high. Goods exports rose 3% last month but were countered by a 3.7% gain in imports. Stronger imports of autos and industrial supplies outpaced improvements in exports of the same categories. The trade data will have an offsetting impact to the positive growth implications of the equipment and inventory reports.


TRADING ACTIVITY

Yesterday – Yields Declined with Stocks as Weak Data, Cautious Fedspeak Fed Uncertainty: Stocks weakened gradually throughout the day Tuesday, as an influx of weaker economic data preceded more cautious commentary from Fed officials, both of which exacerbated uncertainty created by U.S. tensions with Iran and an important trade meeting on Saturday. Stocks opened lower amid the continued uncertainty, and fell further after a measure of home prices slowed for a thirteenth month (more below), another regional Fed manufacturing survey missed estimates, consumer confidence crumbled (more below), and new home sales slid unexpectedly to the weakest pace of the year (more below). A brief moment of stability for the major indices broke down and stocks set new lows after Fed President Bullard, who dissented in favor of a rate cut in June, dismissed the need of a 50-bp cut when the Committee gathers in July (more below). Treasury yields, which were near their lows of the day, jumped on his remarks, but fell back after he later clarified that he still expects 0.50% of easing by year-end. Fed Chair Powell spoke at the same time as Bullard but stayed closed to his remarks following last week’s press conference (more below). By the close of trading, the S&P 500 had declined 1.0%. The 2-year yield was unchanged at 1.73%, its lowest level since November 2017. The 10-year yield fell 2.9 bps to 1.99%, a new low since President Trump’s election.


Overnight – Mnuchin’s Reminder a Deal Was 90% Complete Stirred Hopes ahead of G-20 Meeting: Global equities opened weaker again Wednesday, leaving most indices across Asia lower on the day and sending the Stoxx Europe 600 down 0.4% in its opening run. However, sentiment shifted positively just after 4 a.m. CT when U.S. Treasury Secretary Mnuchin told CNBC in an interview from Bahrain, that “We were about 90% of the way there [with a deal] and I think there’s a path to complete this.” Despite the past tense verb, and the fact similar messaging was relayed prior to talks breaking down, markets reversed during the interview on hopes for progress at this Saturday’s presidential meeting on trade. European stocks jumped into positive territory and U.S. futures, which were hovering around unchanged, strengthened. Contracts on the Dow and S&P 500 were up 0.4% just before 7 a.m. Treasury yields added to their overnight increases, pushing the 2-year yield up 6.9 bps and the 10-year yield up 4.3 bps. European yields responded as well, but lagged Treasurys after a measure of consumer confidence in Germany slipped more than expected to a 27-month low.


NOTEWORTHY NEWS

New Home Buyers Ignore Continued Cooling of Home Price Gains: The FHFA’s house price index rose 0.4% in April, firmer than the 0.2% gain expected, lifting the annual rate for the first time in ten months. However, the 5.2% YoY rate remained well below the 6.8% rate from April 2018. Released at the same time, the S&P CoreLogic index was unchanged in April after the March gain was revised stronger and the YoY rate cooled for a thirteenth month to 3.54%, its weakest pace since 2012. Separately, new home sales were weaker than expected in May, despite price gains continuing to moderate and the large monthly drop in mortgage rates. New home sales totaled an annualized 626k in May, a 7.8% drop from April and the weakest pace of the year, and the prior two months were revised down cumulatively by 12k units. Sales actually rose 4.9% in the South (62% of the total) and 6.3% in the Midwest (13%), but were neutralized by a 17.6% drop in activity in the Northeast (4%) and a 35.9% plunge in the West (20%). The sharp slump in the West was the largest since 2010.


Consumer Confidence Crumbles in June: Consumer confidence was a major disappointment in June according to the Conference Board’s latest survey, showing growing uncertainties may be starting to affect the largest component of U.S. economic activity. Consumer confidence crumbled 9.8 points in June based on responses collected in the first half of the month to 121.5, the weakest since September 2017. Economists had expected the index to tick down only slightly to 131.0, making June’s miss the largest of the cycle relative to expectations. The current assessment fell 8.1 points to a twelve-month low while future expectations sank a more severe 10.9 points to the second weakest level since the 2016 presidential election. The details showed less optimism about business conditions, employment opportunities, and income expectations, and are a directional disappointment for Fed monitoring “the implications of incoming information for the economic outlook” in order to determine the “appropriate” policy action in the weeks ahead.


Bullard Balks at a 0.50% Cut in July: St. Louis Fed president Bullard, who currently votes on policy and dissented at last week’s meeting, noted now was a “good time” for an “insurance” cut with growth expected to slow and inflation running below target. However, he disrupted markets when he said that while holding rates steady at the June meeting increased the probability of a rate cut in July, a half-percent cut next month would be “overdone.” “I don’t think we have to take huge action,” he said, adding “This is more in the realm of insurance, in the realm of ordinary adjustments to monetary policy that you should be making to be sensitive to market developments.” Seen as the top dove on the Committee, Bullard balking at a 50-basis-point cut in July disrupted a midday equity recovery. He did, however, clarify that he still expects the Fed Funds rate to be a half-percent lower by the end of the year, implying a couple of 25-bp cuts during the second half of the year.


Powell Sticks with Press-Conference Comments: Fed Chair Powell echoed his post-meeting press conference tone in his Tuesday speech, saying “risks to [the Fed’s] favorable baseline outlook appear to have grown.” “The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy,” Powell noted, “The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” he said, adding “Many…judge that the case for somewhat more accommodative policy has strengthened.” Restating the forward guidance from the June Statement, Powell concluded, “We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.” In the Q&A that followed, he stressed that trade concerns among businesses have grown and that the inflation undershoot may be more persistent than they had hoped. And while the Fed is “mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment,” he acknowledged that “if you see weakness, it’s better to come in earlier rather than later.”


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