The Market Today
North Korea Missile Launch Sparks Flight to Quality
by Craig Dismuke, Dudley Carter
Today’s Calendar – Home Prices and Consumer Confidence Expected to Ease: At 8:00 a.m. CT, S&P and Case-Shiller will release home price change information for the month of June. The index tracking average home prices in 20 major metro areas is expected to have risen 0.1% from May’s level. The 0.1% MoM increase would lower the YoY rate from 5.69% to 5.6%, a third monthly decline in the YoY rate and weakest rate of 2017. However, it would also mark the 23rd consecutive month of the index rising at an above-5.0% pace and continue to push affordability as a concern for the housing sector.
At 9 a.m. CT, the Conference Board will announce the results of its August survey of U.S. consumers. The headline consumer confidence index is expected to pull back slightly after a big jump in July. Despite the monthly decline, if the headline index is an as-expected 120.6, it would represent the third highest reading since 2000. Despite the lack of progress on key initiatives in Washington, consumer confidence has remained stable as stock prices have continued to climb and the labor market has continued to tighten.
Despite the fundament importance of consumer confidence to markets and the economy over the longer horizon, Tuesday’s immediate focus is likely to remain on the flight-to-quality bid following another missile launch by North Korea (more below).
Overnight Activity – North Korea Launches a Bid for Save Haven Assets: A flight to quality fueled overnight trading and pushed the prices of traditional safe haven assets higher. The tone turned cautious just after 4 p.m. CT Monday as news broke that North Korea had fired another missile, this time over Japan and into the Pacific Ocean. Japan’s Prime Minister Abe called the launch “an unprecedented, grave and serious threat,” and President Trump said “All options are on the table,” in dealing with North Korea’s latest provocation. The Yen rallied with gold and Treasury yields moved lower. The Japanese currency reached its strongest level against the Dollar in four months. Gold hit its highest mark since the initial knee-jerk rally on the night of the U.S. Presidential election, an almost 10-month high. Treasury yields initially edged down and tumbled when European markets opened. On an intraday basis, the 10-year yield set a new post-election low of 2.084%. It has since recovered a couple of basis points to 2.105%, down 5.2 bps from Monday’s close. The 2-year yield is 2.6 bps lower at 1.31% and the 5-year yield dropped 4.1 bps to 1.689%. The premium for holding 10-year Treasurys over 2-year Treasurys fell to 78 bps, the lowest level in almost 12 months. U.S. equity futures are down but off of their overnight lows and the Dollar weakened to a new 31-month low. The Euro strengthened to $1.20 for the first time since January 2015.
Yesterday’s Trading Activity – Markets Focus on Harvey Impact: Stocks failed to hold an opening bounce Monday and the Dow and S&P ended the day almost unchanged. The Nasdaq outperformed with a gain of 0.28%. Within the S&P, the energy and financials sectors were the worst performers. Energy companies faltered as U.S. crude fell more than 2% on expectations of less demand from Houston-area refiners. In addition to less demand for crude inputs, the indefinite suspension of refiners in response to extreme flooding will also mean less gasoline output. Gas prices rose 3.7% Monday, expanding the spread between crude and gasoline to its widest since August 2015. Financials slipped with insurance companies dropping on expectations for a surge in claims in Houston and banks edging down with Treasury yields. The 2-year yield fell 0.6 bps to 1.33%, the 5-year yield dropped 1.7 bps to 1.74%, and the 10-year yield lost 0.9 bps to 2.16%. After swinging softly between gains and losses in morning trade, the sharpest yield shift occurred after results for the monthly 5-year Treasury auction were announced. The bid-to-cover was unchanged at 2.58 in the August auction but the take down by primary dealers (17.5%) was the lowest on record, signaling strong demand elsewhere. The Dollar finished at session lows after a report that North Korea fired a missile over Japan boosted demand for the Yen.