The Market Today
New Home Sales Expected to Bounce; Senate Releases Health Care Plan; One-Year Anniversary of the Brexit Referendum
by Craig Dismuke, Dudley Carter
Today’s Calendar – New Home Sales Expected to Bounce Back after Big Drop in April: The most important Friday report will be released at 9 a.m. CT. The Census Bureau’s new home sales report for May is expected to show sales rebounded 3.7% after a steep drop in April – from a cycle-high pace in March. If actual results match estimates, it would be the fourth best pace of the cycle. Prior to the new home sales data, at 8:45 a.m. CT Markit will release its June PMIs for the U.S. The manufacturing PMI is expected to improve 0.3 points to 53.0. The services PMI is expected to ease just 0.1 to 53.5.
The final economic-related events of the day will include comments from two Fed officials. At 11:40 CT, Cleveland Fed President Mester will make remarks at an event hosted by the Cleveland Fed. Following Mester’s comments, Fed Governor Powell will speak at 1:15 CT in Chicago.
Overnight Activity – Oil Set for Fifth Straight Weekly Loss: European equities moved lower at the open to erode a mostly positive start in Asia as crude prices continued to hover near their lowest levels in ten months. Sovereign yields are mixed again. Yields in the U.K. rose and the pound strengthened on the one-year anniversary of the initial Brexit referendum. As to the economic data, global PMIs released on Friday were softer than expected in both Asia and Europe. Japan’s manufacturing PMI fell to 52.0, indicating activity expanding for a 10th consecutive month but at the slowest pace since November. In Europe, the Eurozone composite PMI dropped more than expected to a five-month low. A softer services index, driven by weakness in both Germany and France, offset improvement in manufacturing. Crude prices remained stable overnight but are set for their fifth consecutive weekly loss. The Treasury curve is nearly unchanged. The Dollar continues to move lower and pare early weekly gains. U.S. equity futures are mixed but less than 0.1% changed in either direction.
Yesterday’s Trading Activity – Senate ACA Reform Bill Boosts Shares of Health Care Companies: The major U.S. equity averages ended Wednesday little unchanged after losses in consumer staples and financials neutralized gains in health care and materials. The Treasury curve flattened on lower yields and the Dollar was flat. Equities had traded higher for most of the session before a late afternoon drop erased those early gains. Health care companies gained after the Senate released their draft health care reform bill (more below). Shares of financial companies fell ahead of the after-market announcement of the Fed’s latest stress test results. Results from round one of the stress tests showed all 34 banks met the minimum requirements under stressed financial scenarios. The second round results will be released next Wednesday. After a bit of intraday volatility, Treasury yields ended about where they started. The 2-year yield fell 0.8 bps to 1.34% as the 10-year yield edged down 1.6 bps to 2.15%.
Senate Republicans Release their Plan for Health Care Reform: Early headlines on the Senate’s health care reform proposal focused on a handful of themes from the 142-page document. The highlights most talked about were (1) the repeal of the individual and employer mandates, (2) the repeal of key taxes implemented by the ACA, (3) suspension of the ACA’s Cadillac tax through 2025, (4) protection of pre-existing conditions (no waiver option for states), (5) option for states to waive essential health benefit coverage, (6) continuation of low-income tax credits but tighter eligibility requirements, (7) cost sharing reduction subsidies kept through 2019, (8) Medicaid expansion rolled back more slowly than in the House bill but more deeply when fully phased in, and (9) Federal funding to help stabilize individual marketplaces over the next four years. Shortly after the bill was released, the CBO said they should have the Senate bill scored early next week which would allow Sen. McConnell to hold a vote before the weekend. With Republicans forced to use the reconciliation process – requires just 50 yay’s and a tie-break from VP Pence – McConnell can only afford to lose 2 Republican votes (assuming no Democrats support the bill). So far, four of the most conservative Republican Senators have publicly stated they currently won’t support the bill as-is.
Bullard Buys Balance Sheet Roll-Off, Balks at Rate Path Projections: In a Thursday interview with the Wall Street Journal, St. Louis Fed President Bullard, who doesn’t vote in 2017 or 2018, said he supports beginning the process of trimming the Fed’s balance sheet but sees no reason for the Fed’s projected rate path to be so steep. On the balance sheet, Bullard would like the Fed to begin the cash flow roll-off “sooner rather than later,” adding “We’ve outlined an approach that is going to be very much a go-slow approach, and so I think we could start the ball rolling. It’s going to roll very slowly anyway.” Addressing the recent inflation weakness, he said, “I’m open to the idea that maybe there was just some noise in there—that’s possible, …But it looks more broad-based to me, and now with other corroborating factors like the 10-year [Treasury yield] coming down to low levels, oil prices falling, it just doesn’t look like there’s a lot of price pressure.” This is why he says the 3-hikes-a-year pace the Fed continues to project is “unnecessarily aggressive.”