The Market Today
Powell Confirmed as Fed Chair, Strong Eurozone Data
by Craig Dismuke, Dudley Carter
Today’s Calendar – Existing Home Sales Expected to Pull Back in December Data: Mortgage applications for the week ending January 19 rose 4.5% as purchase apps rose 6.1% and refi apps rose 0.9%. On a 4w/4w basis, purchase apps are rebounding from their 2H18 drop but refi apps remain very low. At 8:00 a.m. CT, the FHFA will report on November home prices, expected to rise 0.5% MoM again. At 9:00 a.m., the December Existing Home Sales report is expected to show a 1.9% pullback in sales after November’s unusually large, 5.6% increase.
Overnight Activity – Dollar Slippage Continues as Strong PMI Boosts the Euro Ahead of Tomorrow’s ECB Meeting: U.S. Treasury yields are higher with a hint of steepening and U.S. equity futures are firmer following mixed global performances. Losses in Japanese equities offset modest gains elsewhere in the Asian-Pacific. Economic data showed a smaller-than-expected trade surplus for Japan with exports up 9.3% YoY (expected 10.0%) while imports rose 14.9% (expected 12.4%). The Stoxx Europe 600 has recovered to essentially unchanged after sliding to start the session. The turnabout occurred about the time the Euro made its biggest daily move higher that lifted the common currency to its strongest level against the Dollar since December 2014. The spark for European assets coincided with the release of another stronger-than-expected Eurozone PMI. An unexpected gain for the services component offset an unexpected easing of the manufacturing index and helped lift the Eurozone Composite PMI to 58.6, its highest level since 2006. With growth becoming more broad-based in Europe, the data point will likely be a talking point for the hawks at tomorrow’s ECB meeting. European yields are also higher and have helped to push Treasury yields up for the first time in two days. The 2-year yield has added 2.2 bps to 2.07% (a new high for the cycle) while the 10-year yield has climbed 4.8 bps to 2.661% (highest since May 2014). The Dollar’s daily weakness is broader than just against the Euro and has sent the DXY Dollar index below 90 for the first time since 2014.
Yesterday’s Trading Activity – Yields Moved Lower Again after BoJ Announced Dovish Hold: U.S. equities ended Tuesday mixed with the S&P and Nasdaq reaching new record highs while the Dow slipped a minor 4 points, or 0.01%. The Nasdaq led the way with a 0.71% rise and the tech sector was one of six sectors within the S&P to move higher on the day. The S&P added 0.22% as more rate-sensitive sectors finished in the top two spots. Real estate companies were the best performing, tallying a nearly 1.5% gain. Energy companies actually moved lower despite crude prices rallying to a new multi-year high, surpassing the most recent peak from two weeks ago. The lows for longer Treasury yields were set early and levels held steady for the remainder of the session. The 10-year yield finished down 3.7 bps at 2.61%. However, shorter yields were slower to fall but closed near their lows after a steady and continuous drift throughout the day. The 2-year yield closed 2.0 bps lower to 2.04%. Tuesday’s finish lower was the first back-to-back drop since December 8. Keeping an eye on the Dollar, the U.S. currency dropped again, reaching its weakest level since December 2014.
Goodfriend Gets Grilled in Confirmation Hearing: Trump appointee Marvin Goodfriend offered a look into his perspective on monetary policy in a hearing before the Senate Banking Panel to determine if he will fill a vacancy on the Federal Reserve’s Board of Governors. Goodfriend said he supports the Fed’s independence and its dual mandate and believes current policy is “more or less on the right path.” He also expects inflation to reach the Fed’s target “in a year or so.” While he signaled support for the implementation of QE1 and QE2, he said QE3 was unnecessary overkill. Goodfriend received some grief for his previous call that a pickup in inflation could become a concern once the unemployment rate dropped below 7%.
New Fed Chair Made Official: Late Tuesday afternoon, the Senate showed overwhelming support (85-12) for Trump-nominee and current Fed Governor Jerome Powell to become the next Fed Chair. Powell will succeed Yellen when her term expires on February 3, making next week’s meeting the last of Yellen’s tenure. Once Yellen departs and if Goodfriend is confirmed, there will remain three governor vacancies, include vice chair, for President Trump to fill.