The Market Today
Multiple Themes Driving Global Markets on Thursday
by Craig Dismuke, Dudley Carter
Secondary Reports Continue to Show Strength, Fed Stress Tests Due: Initial jobless claims for the week ending June 16 remained at 218k, although the previous week’s claims were revised up 3k to 221k. The 4-week moving average is now back down to 221k and continues to point to a hot labor market. The Philadelphia Fed’s Business Outlook Index, a leading indicator for the ISM Manufacturing Index, fell from 34.4 to 19.9. While the drop was larger-than-expected, the regional reports are often volatile and the index remains in positive territory. At 8:00 a.m. CT, the FHFA Home Price Index is expected to show home prices rose another 0.5% MoM in April. May’s Leading Index (formerly the Leading Economic Indicator index) is expected to rise another 0.4% MoM. In the Fed news, Minneapolis Bank President Kashkari is slated to speak this morning and the Fed is expected to release the results of their 2018 Bank Stress Tests today.
Yesterday – Yield Curve Steepened by the Most in Two Weeks: U.S. stocks were mixed Wednesday with the Nasdaq moving up 0.7% (new record) and the S&P 500 gaining 0.2% while the Dow declined 0.2%. The Dow’s drop was its seventh in a row. U.S. stocks responded to a better day globally for equities as the overnight news cycle produced no new negative headlines around trade. Less turbulent waters for risk assets at least partially explained the higher and steeper finish for the U.S. Treasury curve, but there also appeared to be other forces at play. In addition to another round of positive remarks from Fed Chair Powell (more below), Vining Sparks’s Director of Trading Mark Evans pointed out Walmart’s bringing a large corporate issuance to market and technical price resistance as adding to the upward pressure. Nearly half of the retail giant’s $16 billion offering won’t mature for at least 10 years which was consistent with longer Treasury notes underperforming. In addition, the increase in the 10-year Treasury yield accelerated after it pushed back above 2.90%. The 2-year yield closed 2.1 bps higher while the 10-year yield added 4.2 bps. In other markets, U.S. WTI gained after the EIA showed the largest drawdown of inventories since January.
Overnight – Several Themes at Play in Mixed Session: Several specific shifts across multiple asset classes capture the key events on investors’ minds Thursday: trade tensions, Italian politics, BoE decision, and OPEC meeting. After a brief pause Wednesday, China’s major equity indexes fell more than 1% amid the ongoing trade feud with the U.S. Trade tensions have also been blamed for European markets erasing early gains and falling into negative territory. Germany’s DAX was the second worst regional performer and auto companies were the biggest drag. Daimler AG cut its profit forecast for 2018 in part because of ongoing trade disputes. Italy’s FTSE MIB, however, was Europe’s biggest loser, down more than 1.2%. Politics again pressured Italian assets, this time on the appointment of two outspoken Euroskeptics to lead of the finance and budget committees. The timing of that news headline also coincided with a sell-off in Italian bonds. The Italian 10-year yield was up 12.0 bps. U.K. Gilt yields were also higher following the BoE’s 6-3 vote in support of the current policy. The central bank said its expectation for activity to rebound in 2Q “appears broadly on track,” but the bump in yields and spike in the Pound was likely more driven by the extra dissenter. The BoE’s chief economist voted for a rate increase, the first time the post has dissented from the majority since 2011. Finally, oil prices were off more than 1% with U.S. WTI near its lowest level since April. OPEC and other key producers will decide on Friday whether to alter its 2016 production agreement to increase supply. A glance at U.S. assets shows mixed equity futures, the 2-year Treasury yield 1.7 bps lower, and the 10-year yield down 2.9 bps.
Existing Home Sales Were Disappointing in May: Existing home sales, expected to rise 1.1% in May, fell 0.4% to an annualized rate of 5.43MM units. That represented the slowest annualized pace since January and extended an essentially sideways trend that started in early 2016. Looking at the details, activity in three of the four regions slowed: South -0.4%, West -0.9%, Midwest -2.3%, Northeast (smallest volume) +4.6%. The signals from other metrics in the report showed the story was consistent with prior months. Demand for existing homes remained steady based on the average home moving from listing to closing in just 26 days. On the supply side, total inventories grew by 50k to a total of 1.85MM helping to push months’ supply up to 4.1; both were the highest since September. However, that didn’t keep the median price from reaching a new all-time high of $264.8k and the NAR’s chief economist from saying “The housing affordability issue is becoming a crisis.” The group’s president echoed his concern, saying “seller clients are dealing with a seesaw of emotions when deciding to put their home on the market, …While they’re thrilled that they will immediately find multiple buyers interested in their listing, many fear they’ll have extreme difficulty finding another home to buy.”
Central Bankers in Sintra
Powell Stays Upbeat: Powell remained upbeat in Portugal, saying “With unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.” The remainder of his prepared remarks debated the potential costs (“larger, nonlinear effects” on inflation, financial imbalances) and benefits (improved participation, stronger wages, incentive for productivity-enhancing investment) of a tight labor market. On inflation, Powell said inflation is back near the 2%-target but has yet to hold there on a “sustained basis.” Because of changes to the economy, he also appeared to dismiss an example from the 1960s where a past-full employment labor market led to a rapid increase of inflation. Afterwards, as part of a panel discussion, Powell said the Fed may provide less “formal forward guidance” in the future, calling it an “unconventional tool” created for use in the crisis era. On risks to the outlook, he said trade is becoming a bigger concern among the Fed’s business contacts and noted the Fed is watching for any spillover effects from ongoing disruptions in some emerging markets.
Powerful Policymaker Panel: Alongside Powell in the Sintra panel, ECB President Draghi said “you clearly see an upward trend in underlying inflation” in Europe and confidently added the central bank sees “nothing that resembles a recession.” While he sounded confident about the outlook, he also said the ECB has plenty of ammunition to reply to a downturn if needed. Kuroda from the BoJ said that “Japan’s economy has improved significantly” but the effects of years of deflation remain evident. He said the “deflationary mindset” has proven “quite tenacious” and could take time to break. All were asked about the trade developments and none had anything positive to say about the ongoing escalation of rhetoric around trade tariffs.