The Market Today
Longest Bull Run for U.S. Stocks on Record; New Round of Tariffs Kick in
by Craig Dismuke, Dudley Carter
New Home Sales Offer Chance for a Good Housing Report; Labor Data Remains Strong; Jackson Hole: Initial jobless claims for the week ending August 18 fell again, from 212k to 210k which marks the second-lowest reading since 1973. At 8:00 a.m. CT, the FHFA will release its June Home Price index which is expected to show a 0.3% MoM gain. The Markit manufacturing and services PMIs are scheduled for 8:45 a.m. with expectations that they are both weaker versus July’s results. New Home Sales for the month of July are slated for 9:00 a.m. and are expected to increase 2.2%. This would be welcomed news from a housing sector looking for any sign of stability.
At 7:00 p.m. CT, the Kansas City Fed’s annual Jackson Hole Symposium will kick off with central bankers from around the world. Fed Chair Powell is scheduled to speak on Friday and would do well to address the challenges Fed officials are experiencing in keeping its target overnight rate near the midpoint of its target range. The rate continues to hold closer to the top of its new range, now up to 1.92% versus a mid-point target of 1.875%. Already, at its June meeting, the FOMC raised the rate paid on excess reserves just 20 basis points (to 1.95% rather than a 25 bps hike to 2.00%) in an effort to pull the effective rate back in-line with its midpoint. Some analysts have expressed skepticism in the Fed’s ability to manage the target rate.
Yesterday’s Trading – Longest Bull Run for Equities in the History of U.S. Stock Market: The S&P 500 is now up 320% over the past 3,453 days, marking the longest bull run in U.S. stock market history. The strength of the stock market run was certainly helped, in the first 2,465 days, by the longest run on record for overnight interest rates at effectively zero. While stocks pressed higher in early trading yesterday, they plateaued with the S&P up to 2,873 (closed Tuesday at 2,862) just before the Fed Minutes were released (more below). After the Minutes, stocks reversed with the S&P eventually closing down 1.1 points on the day. The Dollar was relatively unfazed by the Minutes, continuing the recent trend lower. However, the Greenback was down just 0.1% for the day and has reversed overnight. Bond yields were generally unchanged after the Minutes. The 10-year Treasury yield ebbed as much as 1 basis point around the release but eventually closed the day at 2.820%, just over 1.1 basis point lower for the day. The 2-year Treasury yield fell 0.5 basis points on the day meaning the 2/10 curve flattened for the 12th time out of the last 15 trading sessions. Closing at a new cycle low of 22.354 basis point, the 2/10 spread is now down from 32.5 basis points at the beginning of August. Also worth noting from yesterday, U.S. and Mexican officials are reportedly close to resolving some key issues in overhauling the NAFTA arrangements.
Overnight Trading – New Round of Tariffs Kick in: The newest round of trade tariffs between the U.S. and China on $16 billion worth of imports kicked in at 12:01 a.m. ET. According to CNBC, “the U.S. began collecting additional 25 percent duties on 279 Chinese import product categories” including “semiconductors, chemicals, plastics, motorbikes and electric scooters.” China immediately responded with its own tariffs “on $16 billion worth of U.S. exports including fuel, steel, autos, and medical equipment.” U.S. and Chinese officials began meeting yesterday, which will conclude today, in their first formal discussions since May. Overnight, the Dollar has unconvincingly reversed its recent trend lower, up 0.1% from yesterday afternoon’s U.S. close. The yield curve has continued to flatten with the 2-year yield up 0.9 basis points and the 10-year yield down 0.3 basis points, bringing the 2/10 spread down to a new record-low of 21.3 basis points. After yesterday’s FOMC Minutes, the odds of a September 26 rate hike are now at 92%. Globally, stock prices are mixed with no noteworthy movers. Changes in sovereign bond yields are similarly unremarkable. The Markit manufacturing report was slightly weaker-than-expected for the Eurozone but the services index was slightly better. Overall, the composite index for August was fractionally better than July’s report and consistent with good activity.
Fed Tees up September Hike, Concerned about Prolonged Trade Disputes: The outlook for monetary policy for the second half of 2018 is fairly clear in the FOMC’s August 1 Meeting Minutes. Fed officials appeared satisfied with the direction of the economy and the stability of inflation near their 2% target; but, are watching several risks as potential disruptors to their gradual-rate-hike plans. Those risks included the 2020 fiscal cliff (the phasing out of the current boosts from increased government spending and YoY impact from tax cuts), continued trade disputes, housing, and emerging market volatility. As it relates to trade disputes, the Minutes specifically noted risks to trade tensions as including “business sentiment, investment spending, and employment, … [a reduction in] the purchasing power of U.S. households, … reductions in productivity and disruptions of supply chains.” While the flattening yield curve was discussed, only “several” participants noted concerns. Others, however, noted that an inverted yield curve “might not have the significance that the historical record would suggest” because of “global factors … contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets.”
Of primary importance for investors, a September rate hike is now fully teed up. The wording that another hike “would likely soon be appropriate,” which has historically preceded a hike, was replicated in the Minutes. Officials also believed that the Committee’s assessment that monetary policy remains “accommodative” would need to be changed “soon.”
Existing Home Sales Disappoint Again: The sale of existing homes fell 0.7% in July, disappointing expectations for a 0.4% increase. This marks the fourth consecutive monthly decline with existing sales now down 4.6% since March, and further to fall if mortgage applications are any indicator. Moreover, according to Freddie Mac’s Mortgage Market Survey, the average 30-year mortgage rate currently available is up to 4.53%. In comparison, the BEA reports that the average homeowner mortgage rate remains at 3.76%. As such, the average homeowner’s mortgage is now 77 bps cheap to a new mortgage, reducing the economic incentive to move. As this differential has grown, it has continued to add pressure to a housing market already struggling with affordability challenges.