The Market Today
No Changes by the BoJ or ECB; BoJ Cuts Inflation Forecast, ECB Not Satisfied with Inflation
by Craig Dismuke, Dudley Carter
Today’s Calendar – Initial Jobless Claims Improve But U.S. Calendar Yields to Policy Developments Abroad: Thursday’s U.S. calendar contains only reports of secondary and tertiary importance. As such, markets will be more focused on the continuation of corporate earnings releases and monetary policy decisions from the Bank of Japan and the European Central Bank (more below). In today’s U.S. data, initial jobless claims were better than expected for the week ended July 15. Initial claims were expected to total 245k but instead improved to 233k, down 15k from 248K (+1k revision) the week before. At 233k, initial claims matched their best result since the final week of February. As a result, the 4-week average ticked down from 246k to 243.8k. The continuing claims data was a bit softer, rising 28k to the highest level since April 21. Overall, the labor market data continues to be positive. Elsewhere, the Philadelphia Fed Business Outlook Index cooled more than expected in July. The metric has slipped for two consecutive months and now sits at its weakest level of the year.
At 9:00 a.m. CT, the Conference Board will release its latest Leading Index for May. The index – which considers fluctuations in 10 economic and market metrics (e.g. Treasury curve shape, stock prices, ISM new orders) – is expected to increase for a second month. After jumping to a January peak following the election, the index has eased for most of 2017.
Overnight Activity – Eyes on Central Bankers in Tokyo and Frankfurt: The market’s focus overnight was on the latest policy decisions from the Bank of Japan and the European Central Bank. As expected, both central banks elected to leave current policy unchanged.
BoJ: The major takeaway from the Bank of Japan’s decision was the lower inflation forecast. Because “recent developments in the consumer price index (CPI, all items less fresh food) have been relatively weak” according to the updated outlook, the central bank pushed back its timing for “the year-on-year rate of change in the CPI reaching around 2 percent” to fiscal 2019 (April 2019-March 2020). At that time, the central bank projects inflation will be at 1.8% YoY, down from 1.9% in its April projections.
ECB: Related to the ECB decision, there were no substantive changes to its policy statement; just the date, the location, and a meaningless verb from future to present tense. As to its QE program specifically, the big focus of today’s decision, it is still expected “to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation…”; unchanged guidance compared to the June statement. As always, the focus will be on remarks from ECB President Draghi that are ongoing.
Looking at the markets, sovereign yields are mostly lower with peripheral European bonds down the most in yield. European yields have recovered some of their decline in the early portion of Draghi’s remarks. Treasury yields are down between 0.4 bps and 1.5 bps between the 2-year and 10-year parts of the curve. U.S. equity futures are positive after global equities strengthened overnight. The Dollar is firmer against most major currencies. The Euro has reversed higher, not buying what seems to be a dovish tone from Draghi early, and is currently the day’s top performer
Yesterday’s Trading Activity – Stocks Hit New Records, Led by Strength in Tech and a Jump in Oil: The technology sector continued to shine Wednesday as all three major equity indices climbed to new all-time highs. The Nasdaq’s 0.6% gain was the day’s best but the S&P added 0.5% in a close second place finish. The Dow gained 0.3%. While tech’s strength was clear in the Nasdaq’s outperformance, the underlying firmness was broad-based. All 11 of the S&P sectors closed in positive territory. The energy sector’s 1.4% gain led all sectors after crude prices gained more than 1.5%. Crude prices jumped after the EIA reported a larger-than-expected drawdown in crude inventories of 4.7MM barrels. Gasoline inventories also dropped last week, with the 4.4MM barrel decline the biggest since the week ended March 3. U.S. crude closed at $47.14, the highest level in six weeks. The Dollar gained and Treasury yields traded in a tight intraday range with the 2-year yield higher by 0.8 bps at 1.36% and the 10-year yield 1.1 bps higher at 2.27%.