The Market Today
Less Hawkish Fed Chair; Trade Talk; Presidential Criticism of Fed; and 2Q GDP Blowout
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Friday’s 2Q GDP Report Expected to Show Strength: This week’s economic calendar will bring one of the more anticipated GDP reports in a while. The economy is expected to have expanded 4.3% in 2Q on strong consumption, good business investment, modest residential investment, a small uptick in inventory accumulation, and a very strong impact from a reduction in the trade deficit. Sources cite White House officials expecting the growth to be 4.5% while the president is reportedly telling advisors he thinks it will be 4.8%. The previous strongest growth rates of this expansion have been 5.2% (3Q14), 4.6% (2Q14), and 4.6% (4Q11). While a 4%-plus growth rate would be positive news, the focus should be on the real economy, and real final sales. This figure strips out volatile quarter-over-quarter anomalies in trade and inventories and shows how strong demand is across the economy. Real final sales are likely to show just under 3% growth.
On Thursday, the first of the June trade data is scheduled to be reported. June’s advanced goods trade balance report is projected to show a $1.8 billion increase in the trade deficit. Even if it does show an increase in the goods trade deficit, the benefit of the overall deficit shrinking 25% from February to June will be sufficient to deliver a strong 2Q GDP report.
Higher Mortgage Rates and Fewer Sellers Keeping Lid on Existing Home Sales: Existing Home Sales are expected to show a 0.2% MoM increase in June at 9:00 a.m. CT today. Existing home sales have leveled out, going back to late-2016 when mortgage rates rose and tight inventories clamped down on the pace of transactions.
Overnight – Interesting Activity in Japan as Government Bond Yields Jump: Global equities are mostly weaker Monday and there are a mix of moves higher and lower affecting major sovereign yield curves. Chinese shares rose 1.0% to lead a mixed session across Asia before more consistent weakness in Europe took the Stoxx 600 down 0.2%. U.S. equity futures are leaning into negative territory and, while Dow and S&P contracts are hardly changed, Nasdaq futures are off 0.4%. There is no clear trend in European yields and Treasury yields have moved less than 1 bp lower. Despite a lack of excitement in those global trends, there was some interesting activity playing out in Japanese assets. The yen was a top performer, consistent with the softer tone for equities, but a look at Japanese government bond yields shows there could be more in play. Japan’s 10-year yield jumped 5 bps to 0.08%, the biggest daily move since August 2016 to the highest level since February. Reports over the last several days have speculated that Japan’s central bank, which meets again next Tuesday, is discussing ways to alleviate side effects of its yield curve control policy, which pegs the 10-year yield at 0.00%, is having on the banking sector. In response to the sharp move up in yields and the yen, the BoJ offered to buy an unlimited amount of government bonds for just the fifth time since adopting the current policy in 2016.
ICYMI – July 20, 2018 – Weekly Market Recap: There were a handful of economic reports last week and Fed Chair Powell made his second appearance before Congress since assuming the position in February. Retail sales were solid. Home builder confidence was flat and housing starts and building permits disappointed. Industrial production benefitted from a rebound in auto-related manufacturing activity. Initial jobless claims dropped to their lowest level since 1969. And the Fed’s Beige book reported steady growth but increasing concerns about a trade war. Maybe more importantly, was Powell’s upbeat economic assessment and statement “that—for now—the best way forward is to keep gradually raising” rates. The “for now” caveat, when combined with statements that (1) inflation risks are “roughly balanced” but he’s “maybe more worried about low inflation still” and (2) “we’re close to full employment” but “maybe not quite there”, was seen as Powell opening the door to a possible pause of the rate hike path. Volatility ramped up Thursday and Friday after President Trump made multiple remarks questioning the Fed’s current rate path and taking China and the EU to task for manipulating their currencies. Click here to view the full recap.