The Market Today
Powell Speech in Focus; Durable Goods Point to Continued Strength in Business Investment
by Craig Dismuke, Dudley Carter
Business Investment Continues to Power Ahead: The July Durable Goods Orders report was quite strong, even stronger than expected for capital goods orders. Headline orders fell 1.7% on a big drop in non-defense and defense aircraft orders (-35.4% and -34.6%, respectively). However, excluding those volatile transportation orders, orders for goods designed to last longer than three years rose 0.2% MoM. The more impressive results were seen in core capital goods orders and shipments, proxies for business investment in equipment and software. Shipments rose 0.9%, beating expectations for a 0.3% increase. Additionally, June’s data were revised up to show a 0.9% increase (previously reported at +0.7%). This bodes well for the first revision of the 2Q GDP report which will be released next week. Orders of the same core capital goods items rose 1.4% in July, blowing out expectations for a 0.4% increase. June’s figures were also revised up from +0.2% to +0.6%. The strong read on new orders, through one month at least, points to business investment continuing to boost GDP in 3Q.
Fedspeak Galore from the Tetons: With the Fed’s Jackson Hole Symposium in full swing, comments from Fed officials have been fast and furious over the past 18 hours.
Bullard – Close to Neutral: St. Louis Bank President Bullard reiterated his position this morning, saying the Fed should not knowingly invert the yield curve now, he believes rates are near-neutral already, that inflation is still sluggish, and he would prefer to no longer call policy accommodative at this stage.
Kaplan – Two More Hikes in 2018 and Keep Hiking in 2019: In contrast to Bullard’s apparent deference to the yield curve, Dallas Fed Bank President Kaplan said he hopes the Fed can get back to neutral without inverting the curve. He also seemed to favor three or four more hikes over the next 12 months which would likely be sufficient to invert the yield curve, depending on how forward guidance is tweaked during that time. According to the WSJ, Kaplan said, “I had been saying most of the year that three [rate increases in 2018] was my base case,” said Mr. Kaplan in an interview. “I think I’m comfortable at this point…[with] four increases this year, meaning one in September, one in December.”
George – Two More Hikes in 2018: Kansas City Bank President George affirmed in a CNBC interview which aired yesterday her support for two more hikes this year.
Bostic – Correlation Does Not Imply Causality: Atlanta Bank President Bostic, in a blog post yesterday, once again said he hopes the Fed does not invert the yield curve, but then adopted a slight tweak to his position saying that correlation does not imply causality – an argument held by those who are less concerned with inverting the curve. Bostic has already pledged not to vote for a change in policy that would cause the curve to invert.
Powell – Hawkish Defense in Response to President’s Criticism?: Fed Chair Powell speaks at 9:00 a.m. CT in the focal speech of the symposium. With a range of opinions being expressed by Fed officials, Powell’s comments will provide the decisive takeaway from the symposium. Some commentators are expecting a fairly hawkish speech from the Chair, perhaps justifying recent rate hikes in response to criticism from the President.
Yesterday’s Trading – Yield Curve Continues to Flatten: President Trump, spoke with lawmakers yesterday morning saying that not enough attention was being paid to China’s actions in the trade dispute. After opening the day on a rebound, the news sent stocks lower just before 10:00 a.m. CT. Materials and other trade-sensitive stocks led the losses. Also weighing on stocks were reports that executives at the National Enquirer would be granted immunity in the Gary Cohen case. Any news that appears to harden trade tensions or raise the specter of legal trouble for the President has tended to weigh on stocks. Treasury yields seemed impervious to the news with the 10-year between 2.815% and 2.825% for the majority of the day and closed up 0.7 basis points at 2.827%. The 2-year Treasury yield rose 2.5 basis points to 2.618% as investors continued to digest the growing confidence of the Fed, as reflected in the Minutes from their August 1 meeting. The yield curve continued to flatten throughout the trading day, falling from 22.35 basis points to 20.58, a new cycle low.
FHFA Home Prices Show Still-Solid Gains, but a Slowing Rate: The June FHFA Home Price Index disappointed expectations by rising just 0.2% MoM; however, May’s tally was revised higher from +0.2% MoM to +0.4%. After hitting a year-over-year growth rate of 7.6% back in February, home price gains are now down to their slowest rate of gain in 18 months at 6.5% YoY. While this remains a positive rate of growth, the trend is certainly weaker. Price gains have slowed over the past year on the East Coast, the West Coast, and in the Central Midwestern states.
New Home Sales Join the Housing-Disappointment Party: July’s New Home Sales report added to the string of disappointing housing reports, falling 1.7% and missing expectations by almost 3%. Sales fell to their lowest level since October which helped push supply to 309k (5.9 months), its highest level in a year. While the report was disappointing, it was negatively affected by weakness in the Northeast that was amplified by seasonal adjustments and annualization of the data. On a seasonally adjusted basis, sales in the Northeast fell 52% and 3% in the South. The not-seasonally adjusted, un-annualized data shows sales in the Northeast declined from 4k to 2k and in the South from 33k to 30k. It is not uncommon for the data to be revised 1k higher or lower in each region, which could then be exaggerated higher from the seasonal adjustment and annualization. As such, we are hesitant to make too much of any one housing report. However, the trends remain discouraging for home sales as discussed in yesterday’s Market Today regarding Wednesday’s Existing Home Sales disappointment. We continue to see rising mortgage rates as a material challenge to housing traction.
Chicago Doubles Down on Debt to Salvage Pensions (WSJ): “In a sign that the era of cheap money continues, Chicago is considering a novel approach to its pension deficit: taking on more debt. Finance Chief Carole Brown said she would decide in the next week whether to endorse a $10 billion taxable bond offering that would be used to help close Chicago’s $28 billion pension-funding gap. If the proposal is accepted by Mayor Rahm Emanuel and approved by the City Council, it would become the biggest pension obligation bond ever issued by a U.S. city, writes Heather Gillers. The bet is that Chicago can earn more investing the proceeds than it paid to issue the new debt…”
ECB Still Sees Need for “Significant” Stimulus – Minutes: Just before the markets opened yesterday, the ECB’s June Meeting Minutes were released reflecting satisfaction with the current state of policy, a concern over trade and protectionism, and belief that the region still needs “significant” monetary stimulus. The ECB has already pointed to the overnight rate staying at -0.40% through at least mid-2019. The growing divergence between ECB and Fed monetary policies has been a frequent topic recently.