The Market Today

TODAY’S CALENDAR

Jobless Claims Soften Unexpectedly: Initial jobless claims rose unexpectedly last week, up a modest 3k from a revised higher 219k. Initial claims of 222k were the highest in five weeks and pulled the four-week average up 2.5k to 217.8k. Continuing claims, which lag initial claims by one week, also inched higher. Continuing claims rose 2k to 1.695MM, the highest level since March. While directionally disappointing, overall claims remain at solid levels for the cycle, albeit somewhat softer than in recent weeks. May’s jobs report last week showed the hiring trend has slowed in 2019 amid increased economic uncertainty.

 

Import Prices Decline in Another Sign Inflation Could Remain Tame: Import prices declined 0.3% in May and April’s 0.2% increase was revised down to 0.1%. Removing modest declines in the price of imported petroleum and food, prices declined by a slightly smaller 0.2% from April. The softness in the ex-petroleum-and-food measure was spread across each of the other major categories. Import prices for industrial supplies and materials dropped 1% while capital goods and autos both declined 0.1%. Following yesterday’s weaker-than-expected CPI report, this morning’s data shows the cost of imported non-auto consumer goods was unchanged in May after declining in three of the first four months of 2019. The Dollar has strengthened gradually this year, helping to keep a lid on imported inflation and giving markets another reason to expect the Fed to take a dovish turn in the months ahead.

 

TRADING ACTIVITY

Yesterday – Weak Inflation, Cheaper Oil Drag Yields Lower: U.S. equities joined a global slump on Wednesday and Treasury yields remained lower after another weak inflation report added to the market’s conviction that the Fed will be forced to ease policy in the second half of 2019. The S&P 500 fell 0.2% Wednesday as the energy sector tumbled with oil prices and banks lost value as the Treasury curve declined. The tech sector also weakened, leading the Nasdaq to a day’s worst 0.4% decline. U.S. WTI sank more than 4%, the third largest daily decline of the year, to just over $51 per barrel, its lowest level since mid-January. The EIA confirmed a larger-than-expected build of U.S. inventories at a time when economic uncertainty has weighed on the demand outlook. Banks led the financials sector lower as Treasury yields declined after a weaker-than-expected inflation report was added to the market’s arsenal of reasons the Fed should cut rates. The 2-year yield dropped 5.1 bps to 1.88%, the 5-year yield fell 4.5 bps to 1.87%, and the 10-year yield dropped 2.3 bps to 2.12%. Inflation expectations over the next five years declined more than 4 bps to 1.53%, the third lowest level of the year behind January 2^nd and 3^rd.

 

Overnight – Oil Rebounds as Tankers Explode: A relatively benign overnight session for global equities and sovereign yields pushed the focus to oil prices reversing higher and unwinding yesterday’s supply-driven decline. Before climbing back to unchanged, shares in Hong Kong initially erased another 1.8% from the Hang Seng index as the ongoing political unrest offered few signs of abating. The rest of Asia ended the day mostly unchanged. European markets opened lower but quickly moved into positive territory alongside U.S. futures. The positive equity reversal occurred around the time crude prices spiked on reports of tanker explosions near the Strait of Hormuz. Although no evidence had yet been found, the explosions were blamed on possible Iranian attacks and seen as an escalation of tensions in the region at a time when the U.S. is attempting to alter Iran’s actions with economic sanctions. U.S. WTI and Brent were both up more than 3% but off of their overnight highs. Despite firmer pricing for equities and oil, Treasury yields had added marginally to yesterday’s inflation-linked decline. Yields tracked an early drop for equity futures but showed a weaker upside response when futures recovered. The 2-year yield was 1.2 bps lower at 1.87%, the 5-year yield fell 1.5 bps to 1.86%, and the 10-year yield was down 1.0 bps at 2.11%.