The Market Today

Kuroda Calls for Persistent Easing; Investors Focused on Powell’s Tuesday Testimony


by Craig Dismuke, Dudley Carter

THIS WEEK’S CALENDAR

Powell Goes to Washington:  This week’s calendar is packed with economic data but the big news may be new Fed Chair Powell’s first trip to the Hill for his semi-annual testimony.  He’ll testify before the House Financial Services Committee on Tuesday.  We have already learned one thing from the new Chair, his lack of intervention in the midst of the early-February market volatility.  Rather than offering a “Fed-put” (the idea that the Fed will intervene to smooth things over when markets aren’t cooperating), he made no comments and subsequent Fed speakers actually extolled the benefits of some renewed volatility.  Implied in this experience, and other recent communications, is a return to less-than-absolute transparency from monetary policymakers (this is the natural evolution of policy when it is being tightened).  Given his background, we expect Powell would be more likely than Chairs Bernanke or Yellen to surprise markets with policy decisions; including 50 bps hikes, surprise hikes, or surprise cuts.  Already, Fed Funds Futures contracts are now pricing in a 100% chance of a hike in March and a 12% chance of a 50 bps hike.  We do not expect a 50 bps hike, but the markets are reflecting the strength of the recent data and the fact that Powell may be more likely to surprise markets than his predecessors.  We’ll have our first look at his thought process on Tuesday.

 

Busy Week of Data: This week will also include reports on the housing market and construction spending, two reports on consumer confidence, the first revision to 4Q GDP, and January’s data on PCE inflation (Thu) and Personal Income and Spending.  The markets have keyed in on the inflation data, believing the foundation for firmer inflation is in place.  The biggest risk to market volatility (from the economic data, at least) would be a surprise in any inflation metric.

 

New Home Sales Hoping to Rebound Despite Higher Mortgage Rates:  January’s New Home Sales report is scheduled for 9:00 a.m. CT this morning, expected to show a 3.5% MoM increase after December’s 9.3% decline.  We remain focused on the overall pace of home sales given the rate sensitivity they have shown over the past five years (see Chart of the Day).

 

TRADING ACTIVITY

Overnight – Stocks Start the Week Strongly as Longer Yields Continue to Fade: In the face of a heavy weekly dose of economic data and the first testimony from Fed Chair Powell, global equities are off to a solid start Monday but have yet to disrupt last week’s late-week slide for Treasury yields. Japanese stocks were a leader in Asia despite the Yen strengthening against the Dollar. The currency pair’s moves may seem quite peculiar considering they played out even as BoJ Governor Kuroda called for persistently continuing “powerful monetary easing.” In a notably dovish parliamentary testimony, Kuroda said the ceaseless pushing out of when the central bank expects 2% inflation was “regrettable” but indicated there were no new plans for another comprehensive assessment of the current policy framework. The Stoxx Europe 600 is up nearly 0.6% on broad sector strength and U.S. equity futures are modestly higher as well. Treasury yields have added to a two-day decline reaching back to last week with the 2-year yield currently down 1.6 bps (2.22%) and the 10-year yield down 2.5 bps (2.84%). Since bouncing Wednesday after the Fed Minutes, the 2-year yield has fallen 4.4 bps and the 10-year yield has dropped 10.9 bps.

 

NOTEWORTHY NEWS

ICYMI – February 23, 2018 Weekly Market Recap: Yields popped mid-week after the Minutes from the Fed’s January meeting offered a “modestly stronger near-term outlook” than officials had expected at their December meeting and an expectation by “almost all” officials that inflation will reach the “2%-target over the medium term”. In a holiday-shortened week of trading, these Minutes were the highlight but were unable to sustain the immediate rise in longer yields through to Friday’s close. After climbing to multi-year highs immediately following the Minutes, the 2-year yield finished the week up roughly 5 bps while the 10-year yield dropped just under 1 bps. Stocks rallied on Friday to erase a weekly loss but are still down on the month after the early February tumult. Click here to see the full recap.

 

Investors’ Zeal to Buy Stocks With Debt Leaves Markets VulnerableAccording to a WSJ report over the weekend, “Investors borrowing record sums to bet on stocks exacerbated this month’s selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash. If that debt, known as margin loans, continues to rise at the current pace, analysts warn that big selloffs and sudden bouts of volatility in the stock market could become more commonplace. … Retail and institutional investors have borrowed a record $642.8 billion against their portfolios, according to the Financial Industry Regulatory Authority, as they try to pocket bigger gains by ramping up their exposure to stocks. But they were left vulnerable when the Dow rapidly tumbled more than 1,000 points during two separate sessions earlier this month. Money managers say the penalties these investors faced from their brokers for trading on margin helped deepen the rout.”

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