The Market Today

Investors React to Evolving Fed Policy Expectations


by Craig Dismuke, Dudley Carter

Economic Outlook Webinar – Why We Believe the Fed Will Cut Rates: Vining Sparks will host our 3Q Economic Outlook Webinar on Thursday at 10:00 a.m. CT.  There has been a sea change in the interest rate environment because trade negotiations have been more protracted than expected and inflation has, again, undershot expectations.  We will discuss why we expect the Fed to cut rates this year, perhaps as early as July 31, but also detail why we believe the cut will be an “insurance” cut – not one associated with fear of recession.  To register for the webinar, please click here.


TODAY’S CALENDAR
Uncertainty Weighs on Small Business Confidence:
Small business confidence fell as-expected from 105.0 to 103.3 in June, remaining near the midpoint for confidence in 2019 but on the low end of the 2018 trend.  Trade uncertainty, and now the outworking of weaker economic activity, continue to take a toll on business sentiment.  Most prominently, the general business conditions index was unchanged at +16 but has fallen from +48 at the end of 2017 before the trade tensions arose. Additionally, the sales outlook index dropped 6 points to +17, down from +34 prior to the trade uncertainty.  Perhaps a sign that wage pressure is hurting margins, the number of respondents indicating higher prices jumped from -3 to +7 while those planning to raise wages fell 3 points.  According to the NFIB CEO Juanita Duggan, “Last month, small business owners curbed spending, sales expectations and profits both fell, and the outlook for expansion dampened. When you add difficulty finding qualified workers and harmful state level laws and regulations, you’re left with a volatile mix where uncertainty has increased to levels not seen in more than two years.”


Job Openings and Fedspeak: At 9:00 a.m. CT, the May Job Openings and Labor Turnover report is expected to show the number of job openings tick higher and remain above the number of unemployed persons for a fifteenth consecutive month. Fed Chair Powell will open a conference this morning on stress tests.  However, expectations are that he will try to prepare markets for the upcoming July 31 policy decision in his congressional testimony beginning tomorrow.  Also speaking today are St. Louis Bank President Bullard (voting dissenter), Vice Chair Quarles, and Atlanta Bank President Bostic (non-voter who is likely one of the dots projecting a cut in 2019).  The real Fed news will likely wait for a day.


TRADING ACTIVITY

Yesterday – Treasury Yields Ticked Higher and Stocks Slipped for a Second Day Since Strong Hiring Hurt Expectations of Big July Rate Cut: U.S. stocks retreated for a second day after the market’s expectations the Fed might cut rates as many as 50 basis points later this month took a hit after hiring rebounded more than expected in June. While Fed Funds futures were little changed on Monday, the short end of the Treasury curve led a bear-flattening trade that pushed the spread between the 2- and 10-year notes to its lowest level since the end of May. The 2-year yield rose 3.1 bps to 1.89%, a four-week high, while the 10-year yield added 1.4 bps to 2.05%, its second highest level since the Fed pivoted to a pledge to “act as appropriate to sustain the expansion.” Stocks weren’t too keen on the reduced expectations for Fed easing, as the S&P 500 slipped 0.5% on losses across its largest sectors.


Overnight – Waiting Game Continues as Investors Eye Powell’s Wednesday Remarks: Futures are pointing to a third down day for the major U.S. equity indices, as markets remain stuck between last Friday’s estimate-topping payroll report and two days of testimony from Fed Chair Powell that may hint at whether the unexpectedly strong hiring rebound reduced policymakers’ appetite for easing policy later this month. Yields and stocks diverged in early June after Chair Powell first uttered that the Fed would “act as appropriate to sustain the expansion,” language that later made its way into June’s official policy Statement. The S&P 500 has set four new all-time highs since and Treasury yields moved to multi-year lows. Since last Friday’s report, the S&P 500 has edged back and rates have nudged higher as the most extreme easing hopes took a hit. The Treasury curve had pulled back from overnight highs and was less than 1 bp changed around 7:30 a.m. CT. Asian stocks finished Tuesday mostly lower and Germany’s DAX was leading losses across Europe. Core European yields were also higher by amounts similar to Treasurys.


NOTEWORTHY NEWS

Consumer Credit Expanded in May: Consumer credit across non-mortgage categories grew by $17.1B to $4.088T in May, or at an annualized 5% rate. Revolving credit, consisting primarily of credit cards, picked up to an 8.2% annualized growth rate while the nonrevolving facilities, heavily driven by student loan borrowings, slowed to a 3.9% pace. The May data shows that prior to the lengthy breakdown in China trade talks and brief threats of tariffs on imports from Mexico, consumers were willing to use leverage to fund purchases; the stronger-than-forecast retail sales report for May echoed that message. However, consumer confidence suffered a steep blow in June according to the Conference Board’s release, raising some concerns that consumer spending could slow in response to increased uncertainty.


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