The Market Today
Powell Goes to the Hill with 2Y10Y at 25 BPS
by Craig Dismuke, Dudley Carter
Manufacturing Output and Homebuilder Confidence: Industrial production is expected to increase 0.5% MoM in June’s report, scheduled for 8:15 a.m. CT. Most notably, manufacturing output is expected to rebound 0.7% after May’s disappointing 0.1% decline. At 9:00 a.m., the July Homebuilder Confidence Index is expected to remain strong at 68. New construction continues to be the primary engine of growth of the housing market.
Fed Chair Powell Goes to the Hill: Also at 9:00 a.m., Fed Chair Powell will begin his second go-around of testimony before the Senate Banking Committee, the remnant of the old Humphrey-Hawkins testimony. Hot topics are likely to be the flat yield curve, if the Fed remains confident in their monetary policy tools given the recent adjustment to the IOER rate, and the impact of tax reform and trade tariffs on the economic outlook. Powell has already admitted less confidence in the future outlook than we’ve come to expect from Fed Chairs, particularly as it relates to the economic impact of the ongoing trade tensions. More interesting to fixed income markets should be his comments on the yield curve. At issue, will the Fed adjust monetary policy in deference to a flat curve if the inflation outlook remains benign. Our basecase outlook remains that the Fed becomes less aggressive with rate hikes once financial conditions tighten, presuming inflation remains modest (this outlook has been challenged recently with Fed officials adding a fourth 2018 hike to their SEP projections).
Yesterday – Notable Moves within Multiple Asset Classes: The major U.S. indexes diverged Monday as uneven sector performances had asymmetrical effects. The Nasdaq slipped 0.3% with one of the sharpest intraday declines coinciding with a pullback in shares of Amazon Inc. The online retail giant’s much-anticipated Prime Day event was tarnished by reports of technical glitches that preceded it’s shares tumbling from up 1.6% to a more modest 0.5% gain. Tech also weighed on the Dow but better-than-expected earnings from Bank of America boosted financials. Bank of America rallied 4.3% after the company’s 2Q EPS beat estimates and details showed solid consumer loan growth, a surprise increase in trading revenue, and a 5% reduction in expenses. JPMorgan Chase and Goldman Sachs combined for 62 points while the Dow rose a smaller 45 points, or 0.2%. Higher rates also helped. After solid June retail sales data, the 2-year yield added 1.7 bps to 2.60%, a new cycle high, while the 10-year yield rose 2.7 bps to 2.86%. The S&P 500 fell 0.1% with energy companies leading losses after U.S. WTI and Brent both sank more than 4%. Saudi Arabia was reportedly providing uncontracted supply to some of its Asian buyers and the White House is said to be debating releasing some supply from the Strategic Petroleum Reserve.
Overnight – Markets Hold Steady as Powell Heads to the Senate: Global equities remained soft in the overnight session after a mixed Monday finish for Wall Street as investors turned to Washington for any clues from Fed Chair Powell on future policy moves. Japan’s Nikkei gained 0.4% while shares in China pulled back for a second day. In Europe, every major national index moved to the downside, helping the Stoxx Europe 600 lose 0.3%. Earlier, U.S. futures were just below breakeven. In addition to analyzing the effects of Fed Policy and trade spats on valuations, investors are now also focused on second quarter corporate earnings. Sovereign yields in Europe were mixed with most curves seeing the flattening combination of steady short yields and lower longer yields; all moves were modest excepting the notable curve shift lower in Italy. The Treasury curve moved similarly, with the 2-year yield steady and the 10-year yield down 0.7 bps to 2.85%. In front of day one of Powell’s testimony, the Dollar and Fed Funds Futures were essentially unchanged. Oil prices had also stabilized after yesterday’s tumble.