The Market Today
Oil Prices Tank to New Seven Month Low, Pound Sinks as Carney Talks Down Rate Hikes
by Craig Dismuke, Dudley Carter
Today’s Calendar – Should be a Quiet One: Tuesday’s focus will again be on comments from the several Fedspeakers scheduled throughout the day. Overnight, Fed Vice Chair Fischer focused his remarks made from Amsterdam on the potential impact of a long run of low rates on global housing prices. Fischer noted, “House prices are now high and rising in several countries, perhaps as a result of extended periods of low interest rates.” It’s likely that most would have perhaps chosen a stronger word than “perhaps”. Fischer warned against forgetting the damage from the last housing crash, saying “The world as we know it cannot afford another pair of crises of the magnitude of the Great Recession and the Global Financial Crisis.” Boston Fed President Rosengren spoke this morning about the financial stability risks that low policy rates pose. Rosengren said the closer the rate is to the zero-bound, the tougher it is to address future recessions and the more likely global central bankers are to revert back to nontraditional policies such as quantitative easing. Elsewhere, Treasury Secretary Mnuchin remarked in a Bloomberg interview that no decision has been made on who will head the Fed when Chair Yellen’s current term is up at the end of February 2018.
The current account deficit widened by $2.8B in 1Q as the drag from trade increased was only partially offset by gains in the income accounts. Dallas Fed President Kaplan will speak in San Francisco at 2 p.m. CT.
Overnight Activity – Oil Prices Tank to New Seven Month Low, Pound Sinks as Carney Talks Down Rate Hikes: Major world equity exchanges traded with mixed results Tuesday leaving most sovereign yields quietly lower. Futures on the Dow and S&P are mixed but essentially unchanged. With the Stoxx Europe currently down 0.3%, European yields showed a slight flattening bias with steady shorter yields and slightly lower yields further out. Yields in the U.K. moved the most to the downside after counterbalancing comments from Bank of England Governor Carney. After three of the eight MPC members voted last week to increase the overnight rate, Carney said Tuesday that “Now is not yet the time to begin that adjustment. …I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.” The Dollar edged closer to its one-month high as the British pound sank on the comments. Crude prices had stabilized overnight before a steep drop within the last several hours sent the commodity tumbling 2.5% to a new seven-month low (see Chart of the Day).
Yesterday’s Trading Activity – Stocks Set Records Despite Fedspeak Forcing Yields Up: The Dow and S&P both reached new records Monday as tech shares rallied to finish in front. The Dow gained 145 points, or 0.7%, as the S&P added 20 points, or 0.8%. The Nasdaq outperformed with a gain of 1.4% but finished 83 points shy of its previous high close. Although tech companies were the top performers, the S&P’s strength was broad based. Only three sectors moved lower; the rate-sensitive telecom and utilities sectors lost value but energy companies closed in last place. Energy’s losses were driven by a more than 1% drop in crude prices which reached their lowest levels since November 14. Equities gained in the face of hawkish commentary from NY Fed President Dudley (more below) that spurred yields to their highs of the day. The 2-year yield rose 4.1 bps to 1.36%, just a couple of basis points shy of its highest level since 2008. The 5-year yield rose 4.5 bps to 1.79% while the 10-year yield increased 3.7 bps to 2.19%. The Dollar also improved following Dudley’s remarks, returning to near its highest level in more than a month.
Dudley Says Expansion has a Long Way to Go, Expresses Faith in the Phillips Curve: NY Fed President Dudley spoke with an optimistic tone when discussing his outlook for the U.S. economy. Dudley remarked, “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go.” But for that play out, he noted the Fed must not wait too long to tighten in order to avoid having to “slam on the brakes”, potentially pushing the economy into recession. Stating the obvious, he admitted inflation was a little lower than the Fed would like. He partially blames weak productivity for unimpressive wage growth but noted that wages should pick up as the job market continues to tighten. On the four hikes so far during this expansion, Dudley believes the Fed has “gotten the balance roughly right,” dismissing the potentially ominous indications of a flattening yield curve. Instead, he believes the flattening has helped keep financial conditions from tightening too quickly; adding to the gradual nature of the Fed’s removal of accommodation.
Evans is Uneasy on Persistence of Weak Inflation: Chicago Fed President Evans isn’t as convinced as NY Fed President Dudley that a tight labor market will soon boost wages and help lift inflation back to the Fed’s two-percent target. In comments early Monday evening, Evans cautioned that core inflation “has generally under-run 2 percent — and often by substantial amounts, …This is eight full years below target. This is a serious policy outcome miss.” While Evans clearly believes the inflation mandate remains unmet, he is more comfortable that the labor market has returned to full employment and the U.S. economy is “doing quite well”. It’s these latter two factors that support his belief that “the current environment supports very gradual rate hikes and slow preset reductions in our balance sheet.” Still, his harping on the Fed’s “need to demonstrate a strong commitment to hitting our symmetric inflation objective sooner rather than later,” the “need to pursue an outcome-based policy to actually help us achieve our inflation goal,” tilts Evans remarks to the dovish side of the policy preferences.