The Market Today
Investor Focus Shifts to Upcoming Debt Ceiling and Government Funding
by Craig Dismuke, Dudley Carter
Today’s Calendar – Home Prices: Today’s economic calendar continues the slow start to the week, bringing the June FHFA Home Price index at 8:00 a.m. CT as well as the quarterly price report. Both are expected to confirm the recent price trends of 5%-type annualized growth. At 9:00 a.m., the Richmond Fed Manufacturing Index is expected to show a slight pullback in regional manufacturing activity.
Investors Beginning to Focus on Debt Ceiling and Spending Authorization: In the absence of much economic data, it is worth noting the shift in investors’ concerns recently to the upcoming debt ceiling and government funding legislation. Important dates – Congress is scheduled to return to session September 5, appropriations legislation must be passed by September 30 to continue funding the government, and Treasury is likely to exhaust its “extraordinary measures” thus requiring an increase to the debt ceiling by mid-October. A lot of compromise will need to be achieved in a rather short time. The White House has asked for a “clean” debt ceiling increase. A faction of the Republican party prefers to use the debt ceiling to further cut federal spending. And Democrats will have certain agenda items they want to see included to gain their support. Based on previous outcomes, it is reasonable to assume a continuing resolution may be passed by September 30 to continue funding the government at least through the debt ceiling debate, thereby avoiding a shutdown. Investors’ fears are intuitive; Washington has not excelled in compromise in a long time, particularly in the past seven months (see healthcare debate). Going into the discussion, it is important to recognize that 1) Treasury is extremely unlikely to default on its debt (perhaps a delayed payment is possible, but certainly not an outright default), and 2) government shutdowns have historically not had lasting economic effects.
Overnight Activity – Sovereign Yields Rise As Equities Firm: Tuesday’s market tone is a touch firmer than yesterday’s start to the week. Except for losses in Japan and Italy, the global equity screens are painted green. European stocks are up 0.5% after holding gains collected in a big opening jump. Materials companies are leading strength in the Stoxx Europe 600 with those dealing in copper outperforming. Glancing at the commodities screen, base metals are outperforming their precious partners with copper up 1.5% and gold down 0.5%. Higher yields are prevalent on the world bond page with the biggest shifts seen in Italy (10-year +8.1 bps) and Spain (10-year +4.4 bps). Germany’s 10-year yield is 1.0 bps higher but off its session top. Just one day after Germany’s Bundesbank said growth could be stronger this year than previously expected, a survey of financial experts’ expectations for growth dropped more than expected to its lowest level since October. German yields fell back after the report. In the U.S., Treasury yields are higher by 2.0 on 2-year debt and 3.0 bps on 10-year notes. The Dollar has gained nearly 0.5% and completely erased yesterday’s sharp decline. Equity futures point to solid gains at the open.
Yesterday’s Trading Activity – Stocks Inched Higher as Markets Overshadowed by Solar Eclipse: A last minute rally helped the Dow and S&P eclipse last Friday’s closing levels by 0.1% and overshadow a 0.05% loss for the Nasdaq. The shifts within the various S&P sectors reflected the movements in other asset classes. Sectors generally thought to be negatively correlated with rates, such as real estate and telecom, led the gains while the financials sector, considered to be positively correlated with rates, faltered. Treasury yields ended the day almost where they started the U.S. session, with the 2-year yield down 0.4 bps at 1.30% and the 10-year yield 1.2 bps lower at 2.18%. Yields made the day’s net move as European markets opened ahead of U.S. trading. The S&P’s energy sector dropped to last place as crude fell more than 2% and gave back the lion’s share of Friday’s rally. The Dollar was the worst performing currency Monday, falling in every major pairing. Senator McConnell and Treasury Secretary Mnuchin pledged to raise the debt ceiling and spoke broadly about tax reform in a joint appearance, but it was Monday’s solar eclipse that dominated the news cycle (and likely weighed on worker productivity).