The Market Today
Oil Prices Hit Highest Level Since 2014 After U.S. Withdraws from Iran Deal, 10-Year Treasury Yield Returns to 3.00%
by Craig Dismuke, Dudley Carter
Producer Price Gains Ease in April: As posited by the WSJ’s Jeff Sparshott this morning, “The question isn’t whether inflation is rising, but why isn’t it rising more?” This is the question baffling economists and creating great uncertainty in 2018 for markets dependent on low interest rates. The Phillips Curve appears to be broken, or at least much lower than expected with unemployment now down to 3.9% but every measure of consumer inflation remaining surprisingly tame. As for this morning’s data, Producer Prices for the month of April rose just 0.1%, including a rather large 1.1% drop in food items (the largest drop for food since August 2016). Prices rose 0.2% when excluding food and energy prices. This brought YoY prices for final items down from 3.0% to 2.6%, from 2.7% to 2.3% at the core level. As an important gauge of input costs businesses will face in coming months, the PPI report shows still-firm prices but also a weakening rate of growth.
At 9:00 a.m. CT, Wholesale Inventories for March will be finalized and are expected to have increased 0.5% MoM. The only Fedspeaker on the tape today is Atlanta Fed Bank President Bostic at noon CT.
Yesterday – Markets Moved Mildly Around the Iran Nuclear Deal Announcement: U.S. stocks didn’t move much end-to-end Tuesday as early morning weakness gave way to volatility around the president’s announcement on Iran that gave way to a late-afternoon recovery. The Dow rose less than three points, the Nasdaq improved less than two, and the S&P 500 dropped less than one. Energy stocks finished atop both the Dow and S&P 500 and the path that stocks took looked very similar to swings in oil prices. Oil prices were weaker overnight and slumped more than 4% as sources preceding the actual announcement said President Trump would pull the U.S. out of the agreement with Iran. Following the president making it official, oil prices jump and trimmed its losses to 1.5%, seemingly reflecting a buy-the-rumor-sell-the-news effect. Treasury yields, which had moved higher with the daily global tide, rallied back as stocks and oil briefly sold off but pushed higher again as those two asset classes recovered. The 2-year yield rose 1.2 bps of 2.51% while the 5-year and 10-year yields added approximately 2.6 bps to 2.81% and 2.98%, respectively. The terms of withdrawal, which allow businesses 90 or 180 days based on the nature of the business to cut ties with Iranian operations, may have helped temper the market response. The Dollar continued its climb since mid-April, closing up at a new year-to-date high.
Overnight – The 10-Year Treasury Yield Returns to 3.00% as Oil Prices Rise on Global Supply Concerns: The 10-year Treasury yield recaptured a 3%-handle overnight and buyers re-emerged to push oil prices back to their highest levels since 2014 following the president’s decision yesterday to exit the 2015 Iran nuclear deal. Global equities have moved in different directions. Markets’ initial response reflected a bit of uncertainty around yesterday’s announcement on Iran. Oil ended lower Tuesday but prices rose overnight as investors had more time to reflect on the potential impact to global supply from the re-imposition of sanctions on OPEC’s third largest producer. Both U.S. and Brent crude were up around 3%. After an unchanged day for U.S. equities yesterday, futures were firmer despite the 10-Year yield returning to 3.00%. The two Dow energy components, Chevron and Exxon, were up more than 1% in pre-market trading. The Dow’s lone bank component, JPMorgan Chase, was also in positive territory, likely helped by a higher and steeper Treasury curve. The 2-year yield was up 1.2 bps to 2.52%, a new high for the cycle, while the 10-year yield had added 2.1 bps to 3.00%. The Treasury will announce auction results for $25B of 10-year notes at 12 p.m. CT, the largest block since 2010.
Job Openings Climbed to New Record High and Details Point to Increasingly Tight Labor Market: The latest JOLTS report showed a surge in job openings in March to a new series high of 6.55MM available positions. Comparing it to the unemployment data for March, the number of available workers per open position dropped to 1.01, the lowest in the series’ history. If openings were to hold flat in April, that ratio would fall further to 0.97 considering 239k unemployed individuals left the labor force in the April nonfarm payroll report. Looking at the details, the top five sectors contributing to the bounce were professional and business services (+112k), trade/transports/utilities (+99k), education and health services (+79k), construction (+68k), and leisure and hospitality (+67k). Manufacturing led declines in three separate sectors. There were additional signs of tightness elsewhere in the report. The number of hires dropped despite record openings, supporting the skills mismatch story, pushing the ratio of total openings to total hires to its widest on record. Also, the layoffs rate held at a record low and the quits rate matched its cycle-high. As has been the case, except for wage growth, all signs point to a tight labor market.