The Market Today
Markets In Risk-Off Mode on Trade, Geopolitical Concerns; Investors Await FOMC Minutes
by Craig Dismuke, Dudley Carter
Mortgage Applications Pull Back as Analysts Watch Homebuyer Response to Rising Rates: Mortgage applications for the week ending May 16 fell 2.6% on a 2.0% decline in purchase apps and a 3.7% decline in refi apps. With 30-year mortgage rates now over 4.60% (up 83 bps since September and at their highest level since 2011), the reaction from homebuyers continues to be a focal point for analysts. Thus far, the pace of sales has slowed but not yet shown a marked downturn. At 9:00 a.m. CT, the April New Home Sales report is expected to show a 2.1% decline in sales. Currently, new sales remain up 9% YoY.
Explanations of “Accommodative” the Key to FOMC Minutes: The biggest report of the day, and week for that matter, is likely to be the Fed’s May Meeting Minutes released at 1:00 p.m. The focus for investors and economists will be on discussions related to the “accommodation” of monetary policy. Fed officials continue to debate dropping the language stating that policy is currently “accommodative.” Also at issue is if the real neutral rate is actually rising at this point. On one level, this is a debate about what “accommodative” actually means. While the Yellen-led Fed seemed to fall in line with her adherence to the Laubach-Williams model estimate that the real neutral rate remains close to zero, there appear to be emerging opinions within the Powell-led Committee. Answers to questions regarding how accommodative policy is and what “accommodative” actually means will be key to today’s Minutes. Also worth watching will be commentary on removing the statement that Fed Funds are expected to remain below the longer-run prevailing level.
Yesterday – Sticky Treasury Yields Disregarded Monday’s Equity Gains, Ignored Tuesday’s Slide: The S&P 500 outlasted the Dow in positive territory on Tuesday but afternoon selling pulled both lower for the day. Industrials were weaker essentially from the start, causing a notable downshift in both indexes’ intraday charts. While the Dow fell slowly and steadily for the entire session, the S&P didn’t lose its grip on early gains until just before the final hour of trading. The turn lower followed President Trump saying he’s “not satisfied” with the current state of trade talks with China and separately predicting “there’s a very substantial chance [the June 12 summit with North Korea] won’t work out and that’s OK. That doesn’t mean it won’t work out over a period of time.” The late-day slide for stocks also coincided with a move lower in oil prices. An OPEC source told Reuters that production curbs could be raised in June to take some pressure off of prices from supply concerns involving Iran and Venezuela. U.S. WTI closed 0.4% lower and the energy sector finished at the bottom of the S&P. Treasury yields spent most of the session higher but drifted back down as stocks faded into the close. Compared with Monday, the biggest move on the Treasury curved was 0.3 bps (3-year and 30-year).
Overnight – Stocks Sell-Off, Most Sovereign Debts Rally in Gloomy Overnight Session: Global equities slumped overnight after U.S. indexes tailed off late Tuesday on a couple of less-than-optimistic comments from President Trump on trade with China and a meeting with North Korea. Japan’s Nikkei fell 1.2% and China’s CSI 300 lost 1.3% amidst selling in Asia. Also adding to concerns was Japan’s manufacturing falling to a nine-month low in May. The Stoxx Europe 600 was down around 1.0% on widespread national weakness but it was Italian assets that were back in the spotlight on continued concerns around the country’s politics. The FTSE MIB sank more than 1.7% as Italian government bonds erased yesterday’s rally and yields moved back up to multi-year highs. But the global government bond sell-off began and ended in the boot-shaped country. The shakier risk landscape sparked a rally in safer European government bonds with Germany’s 10-year down 5.6 bps and France’s 10-year note yielding 2.8 bps less. Further fanning the flames was more weakness in European PMIs. The preliminary May reports for France and Germany missed estimates, leading to an unexpected drop in the Eurozone composite PMI to an 18-month low. Just to the west, U.K. inflation missed again, calling into question a possible rate hike by the BoE this year. U.K. Gilts were leading Wednesday’s global decline in sovereign yields. In the U.S., equity futures were weaker and Treasury’s rallied in a flattening fashion. Despite expectations for the Fed Minutes to reflect a greater confidence in the inflation discussion, Wednesday’s risk-off trends had knocked 2.4 bps off the 2-year yield (2.56%) and pushed the 10-year yield down 4.4 bps to 3.02%.