The Market Today
Political Turmoil Weighing on Market Expectations
by Craig Dismuke, Dudley Carter
Today’s Calendar – Markets Focused on Washington on Quiet Day for Economic News: This morning’s economic calendar is fairly light with the MBA Mortgage Applications report for the week ending May 12 and the Fed’s 1Q Household Debt and Credit Report (10:00 a.m. CT). In the MBA report, mortgage applications fell 4.1% as purchase apps fell 2.7% and refi apps dropped 5.7%. Despite the drop in purchase apps, on a 4-week moving average basis purchase apps continue to trend very positively higher. Refi apps, however, remain very low relative to recent history. The improving trend for purchase apps continues to be one of the positive indicators for new housing activity. Former Fed Chairman Bernanke will be speaking mid-morning at the SALT Conference in Las Vegas.
Overnight Activity – Market Mood Spoiled by Ongoing Political Drama: Treasury yields gapped lower early Tuesday evening as Asian markets opened with the 10-year yield trading below 2.30% for the first time in two weeks. At the same time, Dow futures tumbled more than 100 points and the Dollar extended its recent decline to move back to pre-election levels. The yen rallied with gold. The moves were part of global flight to quality that gained steam as media coverage and Twitter timelines became overwhelmed by discussion of and debates on to the legitimacy of a Tuesday article in the NY Times. The article cited conversations with an associate of former FBI Director Comey and alleged that President Trump asked Comey to end an investigation into former national security adviser Michael Flynn. From a market perspective, the article is just one more potential detour on the trek to health care, tax reform, and potential infrastructure spending. Unrelated, but worth noting, was data that confirmed the initial estimates for Eurozone CPI of 1.9% headline and 1.2% core; the core pace was the fastest since early 2013. The overnight risk-off moves are strengthening as U.S. traders make their way to work with equity futures, Treasury yields, and the Dollar near their lows of the day. Treasury yields are lower by more than 3 bps across the curve. The 5-year yield is down 4.8 bps to 1.80% and the 10-year yield is 4.9 bps lower at 2.27%, its lowest level in three weeks.
Investors Losing Hope for Significant Fiscal Boost This Year: According to Politico’s Ben White, “Wall Street and corporate America view President Donald Trump’s bold agenda for a sweeping tax overhaul as largely dead for the year. … Executives, lobbyists and Wall Street analysts increasingly believe the administration – distracted by repeated crises while facing a short and crowded legislative calendar – will be unable to deliver on Trump’s promise to slash corporate and individual tax rates this year and ignite significantly faster economic growth. … The main hope now in corporate America and on Wall Street is that the White House and Congress manage to bypass a scary fight over raising the nation’s debt limit this summer, keep the government open and avoid any major foreign policy crisis.”
Yesterday’s Trading – Dollar Erases Post-Election Gains as Treasury Yields Fell with U.S. Stocks: Treasurys rallied Tuesday, reversing an overnight rise that peaked as U.S. markets opened. The daily low yield coincided with the bottom for the major U.S. equity exchanges. Stocks quickly erased an opening jump, falling as much as 0.3% before trimming the those losses to essentially nil. Utility companies were the worst performing sector while technology companies continued to flex their muscles. The S&P’s tech sector gained 0.5%, is up 6% since Q1 earnings season began, and extended its year-to-date gains to nearly 18%. The Nasdaq gained 0.3% to set its 33 record high of 2017. Crude prices turned negative around lunch and extended their losses after hours as API reported crude inventories likely grew by more than 800k barrels. Analysts were expecting a 2.4 million barrel draw. The Dollar’s downshift never let up and the currency ended down 0.7% on the day; the greenback is down 1.4% since last Thursday and has now completely erased its post-presidential election gains. The 2-year Treasury yield was unchanged at 1.30% while the 5-year yield fell 1.3 bps to 1.85% and the 10-year yield dropped 1.8 bps to 2.33%.
Manufacturing Output Jumps the Most in More than Three Years: Actual industrial production more than doubled estimates in April as manufacturing output improved by the most since February 2014. Overall industrial production and the manufacturing component both rose 1.0% last month; both were expected to improve by 0.4%. April’s gains in manufacturing extended a healthy run for the sector that has now experienced higher output in seven of the last eight months. While most categories within the manufacturing data improved, output from the auto sector jumped an even 5.0% (the most since November 2014) and contributed 0.3% to the headline 1.0% gain. Despite the strength in the April auto-related data, the anecdotal evidence indicates surging auto production may be short-lived. Mining output also rebounded in April and utilities output was positive again in April as electricity usage edged higher.