The Market Today

Positive Housing Data, U.S. Assets Hold Position In Front of Fed Minutes


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Vining Sparks on Fox Business: Vining Sparks Chief Economist, Craig Dismuke, appeared on Fox Business this morning discussing the importance of a trade deal being negotiated between the U.S. and China. Click here to watch the interview.

 

Mortgage Applications Recover on Pick-Up in Purchases, Refinances: Mortgage applications stabilized in the week ended February 25, rising 3.6% in total on increased purchase and refinancing activity and breaking a four-week stretch of declines. A day after home builder confidence rose more than expected, the Mortgage Bankers Association reported a 1.7% weekly increase in home purchase applications. The MBA’s estimate of the 30-year average contract rate on new mortgages was essentially unchanged (+0.01%) at 4.66%, down from 5.17% in November and almost on top of the 4.64% from a year ago. With rates holding lower, refinancing activity picked up 6.4% last week. On a YoY basis, purchase applications were up 2.5% while refinances were 8.3% lower.

 

Lonely Fedspeaker: Dallas Fed President Kaplan will speak at 12:10 p.m. CT, but is unlikely to elicit a notable market reaction unless he veers far from his dovish comments earlier this month.

 

FOMC Minutes to Help Explain Pivot to Patience: Investors are likely to flip their focus to the FOMC’s January Minutes at 1 p.m. CT. January’s decision, although it included neither a rate increase nor a refreshed set of economic or interest rate forecasts, caught markets unprepared for its decidedly dovish tone. In an official pivot to a new policy paradigm of patience in 2019, the Committee replaced “some further gradual increases” with a plan to “be patient” on future rate hikes.   A separate statement stressed that the Fed was willing to adjust (i.e. slow) balance sheet normalization if needed.  In today’s Minutes, there are four primary questions. First, what changed so drastically in the six weeks from December’s meeting to warrant replacing a bias for rate increases with a more symmetric optionality for “future adjustments?” Second, how concerned is the Fed about the “global economic and financials developments” that were a major factor behind the Fed’s shift to patience? Third, because “muted inflation” was the other force supporting a shift to patient policy, has the Committee’s assessment of, or outlook for, inflation changed measurably in recent months? Combined, questions two and three could help calibrate expectations for how long Fed policy could be on hold. And finally, how much progress has the Committee made on deciding when to halt its balance sheet normalization?

 

TRADING ACTIVITY

Yesterday – Both Stocks and Bonds Rose in Price as Trade Talks Resumed, FOMC Minutes Loom: U.S. equities quickly erased an opening decline and turned positive with greater conviction just before noon ET. The S&P 500 gained a modest 0.2% Tuesday with 10 of its 11 sectors closing up on the day. Materials companies, closely aligned with global growth and trade, were the top performers as a second week of trade talks kicked off in Washington. Negotiators are racing to reach a deal before a truce on new tariffs expires after March 1, however, stocks reached new highs Tuesday after President Trump gave another indication that the deadline may be flexible. President Trump said talks are going “very very well” and the March 1 deadline “is not a magical date.” The other notable story in the equity space was a strong earnings report from Walmart that boosted the company’s shares and helped allay fears of an imminent collapse of U.S. consumers sparked by an unusually weak December retail report last Thursday. Despite the support for equities, bond investors remained cautious amid the ongoing trade discussions and ahead of this afternoon’s FOMC Minutes. Yields moved down and closed near their lows of the day after NY Fed President Williams told Reuters that it would take a “different outlook either for growth or inflation” to necessitate the next rate increase. “Monetary policy is where it should be,” Williams, “It’s around my view of what neutral interest rates are.” He indicated, however, that balance sheet normalization could carry over into 2020. The 2-year yield closed down 2.7 bps to 2.49% while the 10-year yield settled 2.9 bps lower at 2.63%.

 

Overnight – U.S. Assets Little Changed as Investors Await FOMC Minutes, Trade News: U.S. equity futures were little changed overnight despite a generally positive day across both Asia and Europe. Sentiment seemed to be propped up by President Trump’s comments yesterday hinting that the March 1 deadline for a trade deal may not be etched in stone. China’s CSI 300 rose 0.4% on Wednesday, but it was a second day of strengthening for the Yuan that was the more interesting move. A Bloomberg report on Tuesday said the U.S. was pressuring China to hold the Yuan steady as part of broader trade negotiations, saying a devaluation of the currency would be considered by the White House as a counter measure to any trade deal and would be met with more tariff pressure. The offshore Yuan was trading up 0.4% at 6.72, back near its strongest level since last summer. Stock indices were mostly firmer across the major European countries, leaving the Stoxx 600 0.2% higher. For a second day, however, Treasurys have reflected more caution. With the Fed’s January Minutes due later this afternoon, Treasury yields were holding close to Tuesday’s close. The 10-year yield was earlier trading at 2.63%, near its lowest level in seven weeks. The 2-, 3-, and 5-year yields all remained inside of the Fed’s target Fed Funds range.

 

NOTEWORTHY NEWS

Home Builder Index Has Improved in Each Month So Far in 2019: While a flurry of hard data have shown economic activity slowed notably at the end of 2018, certain sentiment metrics have stabilized in January and February. The NAHB’s latest Home Builders Market Index became the latest entry on a short-but-growing list of positives in 2019, with its best single-month improvement since 2017. Each of the three underlying metrics improved for a second month, pushing off their lowest levels in at least two years and helping lift the headline index to its strongest level in four months. The recent improvements have also helped cut into the declines from a year ago; the headline index of 62 in February 2019 represented a nine-point decline from February 2018. Regionally the trends diverged, as February’s gains were concentrated in the South and Midwest (both fell the month before) while the Northeast and West reflected moderation (both rose the month before). The decline in mortgage rates has helped ease affordability concerns somewhat and could be a key supporting factor if housing is to be shored up in 2019.

 

Fed’s Mester Sees 2019 As a “Year of Transitions”: Cleveland Fed President Mester, who made two separate appearances last week, was more descriptive Tuesday in her discussion about what she expects for 2019. “If I had to choose a banner headline, I would characterize 2019 as a year of transitions, for the economy, for monetary policy, and for how we communicate about policy,” Mester said. She expects economic activity will continue to expand in 2019 “with growth transitioning to a more sustainable pace.” She did note, however, that increased downside risks “bear watching.” On policy, she noted “we have entered a new phase – our policy decisions are less straightforward and we are transitioning back to normal monetary policymaking.” She echoed last week’s comment that her baseline outlook includes a Fed Funds rate “a bit higher than current levels.” After a lengthy discussion deemphasizing certain aspects of the Fed’s communications framework, she noted communications “are also transitioning with less emphasis on forward guidance…and more focus on the economic and financial information.”

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