The Market Today
No Economic Data Means Markets Can Keep an Eye on Trade Developments
by Craig Dismuke, Dudley Carter
No Reports, Three Fedspeakers: There are no economic reports scheduled for release on Friday, leaving markets free to focus on U.S. yields and ongoing negotiations on trade with China and our neighbors to the north and south (more below). There are, however, three Fedspeakers on today’s calendar. Already this morning, Cleveland Fed President Mester spoke at an ECB conference on Macroprudential and Monetary Policy in Frankfurt. Mester said, “given some of the limitations on macroprudential tools and the complexity of financial system regulation, ensuring the structural resilience of the financial system throughout the cycle is the first line of defense in promoting financial stability. …From a practical viewpoint, even if, in theory, using countercyclical tools might be preferred, their limits suggest we need to at least contemplate using monetary policy to address financial stability in some cases.” She only briefly touched on the current outlook, noting “In the U.S., the economy is near both of our monetary policy goals of maximum employment and price stability, and the outlook is one of the most favorable we have seen in a long time.”
At 8:15 a.m. CT, Dallas Fed President Kaplan and Fed Governor Brainard will both offer remarks at separate events. Kaplan, who doesn’t vote on policy this year, said earlier this month his base case was for two more hikes this year and believed the overall path should be “flatter than what we are historically accustomed” to. Potentially more interesting will be Brainard’s remarks. Brainard, who speaks publically on a less frequent basis than most of her colleagues, has historically been one of the most dovish voters. However, in March she made headlines by positing that economic “headwinds are shifting to tailwinds.” Last month she noted “The outlook looks consistent to me for continued gradual increases in the federal funds rate, …My anticipation is that the outlook is for continued, solid growth.” Her speech is intended to focus on the Community Reinvestment Act but there is a Q&A session scheduled afterwards.
Yesterday – Trade Worries Kept Stocks at Bay as 10-Year Yield Rose for a Fifth Straight Day: Stocks gave up early gains as the Dow and Nasdaq slipped 0.2% while the S&P 500 fell a more modest 0.1%. Stocks biggest move lower was made after President Trump told a group of reporters, in reference to ongoing trade talks with China, “Will that be successful? I tend to doubt it.” Energy companies were the upside outlier within the S&P, rallying more than 1.3% on the day. Oil prices finished marginally higher. Rate-sensitive sectors continued to bring up the rear as longer Treasury yields inched higher for a fifth straight session. The 10-year yield climbed steadily through the session to end up 1.5 bps at 3.11%. The 5-year yield was essentially flat at 2.94% while the 2-year yield drifted 2.0 bps lower to 2.57%. The net result was the curve steepening for a fifth consecutive session, matching the longest stretch since a six-day run in July 2017. Over the last five days, the spread between 2s and 10s was widened by more than 11 bps.
Overnight – Trade Talks Still a Focus in a Quiet Overnight Session: U.S. equity futures were somewhat firmer after improvement in Asia gave way to slightly weaker trends across Europe. U.S. yields had edged lower with borrowing costs for France and Germany while rising yields in Italy were leading peripheral curves higher. The 2-year yield was down 0.3 bps and the 10-year yield was 1.3 bps lower. The Dollar was firmer at a five-month high, notching gains against its three most heavily weighted components, the Euro, Yen, and Pound. The Yen weakened after Japan’s core CPI inflation of 0.7% for April came up short of estimates at a seven-month low. Trade remained a focus, as China disputed reports it had handed the U.S. a plan to cut $200B from its trade surplus. China did confirm it was ceasing an investigation into alleged U.S. dumping of $1B of sorghum imports. There was also renewed concern around Nafta, after a U.S. official said negotiators are “nowhere close to a deal”, countering more optimistic remarks from Canada’s PM on Thursday that “a good deal is on the table.” House Speaker Paul Ryan had set May 17 as a deadline for any Nafta deal to be reviewed by the current Congress but indicated last night “there’s probably some wiggle room,” on the timing.