The Market Today

More Fedspeak Reaffirms Desire to Hike and Commence Adjusting Balance Sheet in 2017

by Craig Dismuke, Dudley Carter

Today’s Calendar – Jobless Claims Remain Strong; Kaplan Affirms FOMC Message:  There are a handful of secondary economic reports this morning.  Initial jobless claims for the week ending April 15 rose from 234k to 244k, slightly higher than expected but still in ultra-hot territory.  Continuing claims dropped below 2 million again to the second-lowest level since 1988.  Since 1973, the only periods during which continuing claims have dropped below 2 million have been in 2000, 1988, 1987, and 2017. Layoffs have continued to run very low while job quits have trended higher, an indicator of a tighter and tighter labor market.  This was referenced in the Fed’s Beige Book report yesterday afternoon (more below).  The Philadelphia Fed’s Business Outlook Index fell from a very-strong 32.8 to a reasonably strong 22.0 in April.  At 9:00 a.m. CT, the March Leading Economic Indicators index is expected to show a slight pullback from February’s decent report.


Fed’s Kaplan Reaffirms Baseline Fed Message:  In an early morning interview with Bloomberg, Dallas Fed President Kaplan continued to push the median projection of two more hikes this year as the best baseline. His persistent support for the median projection is built on the expectation that economic activity will be much stronger in the final three quarters of the year than the weak expectations for 1Q. Kaplan expects a gradual phasing in of balance sheet reduction to begin later this year or early next and says the plan should be announced at least a couple of months prior to implementation.


Overnight Activity – Equities Set to Recover as Treasury Yields Move Higher: U.S. equity futures point to a rebound at the open as Treasury yields inched higher and the Dollar continued to search for direction. Gains for U.S. equity futures come against a mostly positive overnight session for global equities. Japan’s Nikkei was unchanged in a mixed Asian session. Japanese exports climbed the most since January 2015 but the trade balance slumped as imports jumped the most since March 2014. France’s CAC is up 0.8% to lead modest gains in Europe and French sovereign debt is outperforming most global sovereigns. The positive trade in French assets comes despite polls showing just 6%-points separating the four candidates in contention ahead of Sunday’s first round of the French presidential election. Treasury yields regained additional ground lost in Tuesday’s rally with the 2-year yield up 0.8 bps and maturities five years and out up between 1 and 1.5 bps. The Dollar is marginally lower but will try to avoid notching its seventh negative daily result in the last nine.


Yesterday’s Trading Activity – Stocks Slip for a Second Day as Treasury Yields, Dollar Rebound: The major U.S. stock indices gave up early gains to close lower for a second day as Treasury yields climbed and the Dollar recovered a portion of Tuesday’s drop. It took a while longer for the S&P to move into negative territory as the Dow suffered early from an outsized impact of a bad day for IBM. After reporting declining YoY revenues for a 20th consecutive quarter on Tuesday, the technology conglomerate accounted for 57 of the Dow’s 119 point drop on Wednesday. Energy companies were the biggest drag on the S&P. Crude prices fell 3.5%, the most in more than a month, after the EIA reported a smaller-than-expected drop in U.S. crude inventories, an unexpected build in gasoline inventories, and the highest U.S. production since August 2015. Treasury yields rebounded from Tuesday’s rally with the 2-year yield closing up 1.6 bps at 1.18%, the 5-year yield adding 3.9 bps to 1.74%, and the 10-year recouping 4.6 bps to 2.21%.


Rosengren Wants Rates Hikes and Lower Reinvestments Concurrently: Boston Fed President Rosengren doesn’t consider his call for three more rate hikes this year as an impediment for beginning balance sheet normalization “relatively soon”. While some Fed Officials have supported pausing rate hikes for a short period once phasing out of reinvestments begins, Rosengren sees a way for hikes to continue at the same time reinvestments are slowed. He said, “By initially retiring only a small percentage of maturing securities, and then very gradually shrinking the volume of the securities being reinvested, the tightening of short-term interest rates should not need to be much different than it would be in the absence of shrinking the balance sheet. …Starting to shrink the balance sheet earlier … implies very little reduction in the degree of monetary stimulus coming from the balance sheet.”


Fed’s Beige Book Cites Economic Progress and Tighter Labor Market:  The Fed’s Beige Book report, released yesterday, continued to reflect an economy growing at a “modest” to “moderate” pace.  The report, compiled in advance of FOMC meetings, also highlighted a continued theme of firmer wages.  While wage growth has remained muted in the official wage and income reports, the Beige Book once again noted “modest” wage gains and stated that they “had broadened.”  The report also cited more companies experiencing increased employee turnover, an indicator that should be consistent with faster wage growth and, thus, firmer inflation.  Looking at the JOLTs data, it is easy to see “job quits” as a percentage of “job hires” has risen to a historically high level.  Yet, wage growth remains tempered at this time.  As it relates to monetary policy, the anecdotal data showing a still-growing economy and firmer labor market likely portend another rate hike as early as June.


Fed’s Fischer Says Economic Improvement to Drive Further Rate Increases: In Wednesday remarks, Fed Vice Chair Fischer commented that a “gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the U.S. economy and to mitigate the risk of undesirable spillovers abroad. …I expect that the Fed’s removal of accommodation will be driven by a continued expansion of the U.S. economy; thus, foreign economies are likely to benefit from the developments that induce the FOMC to tighten.” He added that, “Foreign output expansions appear more entrenched, and downside risks to those economies noticeably smaller than in recent years.” He pointed to the combo of a the two most recent rate hikes and a depreciating Dollar to support his more optimistic global outlook.

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