The Market Today

Today’s Calendar – Jackson Hole Speeches and Good Indicator of Business Investment:  The headline durable goods orders report looks quite disappointing with orders dropping 6.8%.  However, this was the result of a 55% drop in aircraft orders (71% drop in non-defense overwhelmed a 48% increase in defense aircraft orders). Additionally, auto orders were down 1.2% as auto manufacturers continue to try to control inventory against a backdrop of weaker sales.  Excluding the volatile transportation categories, orders actually rose 0.5% MoM, beating expectations.  In the critical capital goods orders excluding defense and aircraft, a proxy for business investment in equipment, orders rose 0.4% while shipments of those same items rose a hearty 1.0%.  There was also a positive revision to the June shipments data, indicating the possibility of a positive revision of 2Q GDP business investment figures (although the first estimate was already strong; first revision released next Wednesday).

The market focus today will be on the speeches from ECB President Mario Draghi and FOMC Chair Yellen (more below).

 

Overnight Activity – Equities and Yields Rise Ahead of Central Bank Speeches, Oil and Gasoline Rise Ahead of Harvey: Global equities have gained and sovereign yields have risen as markets await the highly anticipated remarks from Fed Chair Yellen and ECB President Draghi. The FTSE All-World Equity Index is up 0.2% and U.S. futures are signaling a solid opening for the big three. European sovereign yields are higher by at least 1 bps at the 2-year part of the curve and between 2 and 3 bps at the 10-year part of the curve. The 2-year Treasury yield is up 0.8 bps to 1.34% with the 10-year 0.3 bps higher at 2.20%. The Dollar weakened against every major currency except the yen and crude prices recovered a portion of Thursday’s decline. Gasoline prices rallied 3.6% overnight as Hurricane Harvey moves closer to the Texas coast. The potential disruptions the storm is expected to cause in the oil refining industry have pressured crack spreads in near-term future contract months (see chart in link below). The front-month gasoline futures contract is up more than 6.5% in the last two days. Economic data showed core prices rose 0.5% YoY in Japan, a seventh monthly gain and the strongest pace since March 2015. In Germany, 2Q GDP was unchanged at 2.1% YoY in final revisions and a survey of business confidence from August was better than expected and the second strongest on record.

 

Yesterday’s Trading Activity – Food Retailers Slump on Amazon Price-Cuts, Hurricane Fears Hit Gas Crack Spreads: U.S. stocks fell for a second day Thursday, further trimming weekly gains accumulated in Tuesday’s rally. Health care companies were the only bright spot within the S&P as the remaining 10 sectors faltered. Nine of those 10 sectors saw modest declines of less than 0.4%. However, the consumer staples sector fell 1.34% after companies playing in the food retail space tumbled 2.71% collectively. Food retailers took it on the chin after it was reported Amazon will close its deal to acquire Whole Foods on Monday and immediately cut prices on a selection of key grocery items. Treasury yields remained higher despite the weakness in equities ahead of big Friday speeches from the heads of the U.S. and European central banks. The 2-year yield rose 2.5 bps to 1.33% as the 5-year yield added 3.1 bps to 1.78% and the 10-year yield closed up 2.8 bps to 2.19%. Crude prices fell while gasoline rallied on concerns that hurricane Harvey could shutter refiners for a period. The divergence sent the gasoline crack spread to its widest since February.

 

Existing Home Sales Data Continues to Exhibit Affordability Headwinds: The National Association of Realtors’ (NAR) reported below-estimate sales of existing homes for July. Sales declined 1.3% MoM to a 5.44MM unit annualized pace, the slowest since August 2016. The result well short of economists’ forecast of a 0.5% gain and capped off a disappointing week for the housing series. Data Wednesday showed new home sales fell 9.4% MoM in July. The details of the NAR’s existing home data showed a continuation of the theme that prospective buyers are facing affordability and selection issues. Demand remained steady. The average contract was signed within 30 days of the initial listing for a fourth month. But inventories tightened again. On a YoY basis, inventories were down 9.0% and contracted for a 26th consecutive month. Persistent demand and falling inventories helped the median price rise 6.2% from a year ago. The average YoY pace for price gains in 2017 held at 6.5%, the strongest annual pace since 2013.

 

Jackson Hole Opening Acts Offer Little Excitement: In an opening act for Friday’s main event featuring Fed Chair Yellen and ECB President Draghi, Fed Bank Presidents Kaplan and Mester made comments from Jackson Hole on Thursday. Kaplan reiterated his call for patience (on inflation) before hiking again, restated his support for 2017 balance sheet normalization, and echoed his previous pondering that the neutral rate may have a 2% handle. He did weigh in on the topic of NAFTA saying it should be reviewed, not scrapped, and indicating concerns around trade disruptions with our border neighbors. Mester seemed less concerned about the recent weakness in inflation. She said that the Fed “should continue with the gradual rate path,” because “Inflation is running close enough to 2 percent in my view that it allows a gradual approach.”