The Market Today
Powell Vote; Fedspeak; Infrastructure Talks; Banks Take It on Chin in 4Q on Tax Reform
by Craig Dismuke, Dudley Carter
Today’s Calendar – Powell Vote, Fedspeak, Homebuilder Confidence, and Industrial Output: The Senate Banking Committee is scheduled to vote on Jay Powell’s re-submitted nomination to Chair the Fed at 9:00 a.m. CT. Powell’s nomination had to be resubmitted after the Senate adjourned its session without voting. The December Industrial production and Capacity Utilization report is scheduled for release at 8:15 a.m. Manufacturing data continues to show the benefits of a weaker Dollar and strengthening domestic and global economies. The NAHB Homebuilder Confidence index, currently at its highest level since 1999, will be released at 9:00 a.m. The Federal Reserve will release its Beige Book report at 1:00 p.m. in preparation for its January 31 meeting. Finally, Evans (NV), Kaplan (NV), and Mester (V) are all on the tape today discussing monetary policy specifically.
Released this morning, mortgage applications for the week ending January 12 rose 4.1% on a 2.7% increase in purchase apps and a 4.4% increase in refi apps. Looking at the 4w/4w moving averages, purchase apps continue to look positive for future home sales while refi apps remain very low. Mortgage rates rose approximately 10 basis points for the reference week. The 30-year conventional rate rose from 4.23% to 4.33% while the 15-year rate rose from 3.66% to 3.77%. Jumbo 30-year mortgage rates remain more attractive than conventionals at 4.25%.
Infrastructure Spending Package Likely to Be Tough Sell: The Trump administration is reportedly discussing a $200 billion infrastructure spending package which they hope to be leveraged through public-private partnerships (and other forms) to corral a total of $1 trillion in infrastructure spending. According to Pimco, “given events of the past year and the Democrats’ hope for success in the November midterm elections, Democrats … have little incentive to compromise. They will likely insist on a very substantial package as a precondition (and one much larger than the $200 billion the administration is rumored to be envisioning), which is likely a non-starter for most congressional Republicans.”
Overnight Activity – Stock Futures are Up Again, Treasury Yields have Inched Higher: The sentiment surrounding equities was somewhat weaker across Asia and European markets have traded unevenly to keep the Stoxx Europe 600 nearly unchanged for the day. The softer start follows yesterday’s U.S. session where negative momentum took hold roughly an hour in and helped completely erase a big opening jump (more below). Despite a quieter start globally, U.S. futures are up for a second morning;. Corporate earnings continue to be a major driving force of activity across the major economies. In the currencies market, the Dollar bounced off of a more-than-three-year low from Tuesday and is stronger against its most-heavily weighted counterparts. The Euro is weaker overnight but remains just off of a three-year peak relative to the U.S. Dollar. The daily weakness could be technical in nature but may also reflect the impact of comments of concern from another ECB official on the Euro’s recent strength. The official speculated the Euro’s recent gains may be front running economic fundamentals and could impact the central bank’s ability to achieve its inflation target. The ECB is currently considering whether to extend its QE program past September. Sovereign rates have diverged on Wednesday with most European yields slightly lower, save a modest tick up in Spain, but U.S. yields up between 1 and 2 bps inside of 30 years. The 2-year yield is at 2.03%, a new 112-month high, and the 10-year yield is hovering just under 2.56%, its highest level since March.
Yesterday’s Trading Activity – Longer Yields Moved Lower as Stock Rally Faded, 2-Year Yield Rose to New Cycle High: Most mid-morning moves in U.S. assets reversed into the afternoon as an early rally in stocks waned and the Dollar gave up its overnight gains. Several sectors peaked in the first hour of trading and quickly faded to close near their lows of the day. On the day, eight of the 11 S&P sectors helped drag the broader index down just under 0.4%. The energy sector dragged the most while materials recovered slightly to finish just off the bottom. Underlying commodities across the energy complex weakened with gasoline and natural gas both dropping on the day. Tech companies were also weak as seen by the Nasdaq leading losses with a 0.5% decline. The Dow fell 10 points after jumping more than 280 points out of the gates and losing as many as 100 points at its daily bottom. Looking to Treasurys, yields reversed higher in pre-U.S. trading and rose as stocks improved at the open. After peaking, shorter yields leveled off and remained near their daily highs while longer yields dropped back as stocks declined. The 2-year yield finished up 1.7 bps at 2.01%. The 10-year yield closed down 0.9 bps at 2.54% after rising to as high as 2.56% before lunch.
Tax Reform-Related Charges Wiping Out Banks’ 4Q Results, But the Future Is Brighter: Citigroup announced a $22 billion charge related to the tax reform law, completely erasing its profit and resulting in a $18.3 billion loss in 4Q17. Goldman Sachs reported this morning, announcing a $4.4 billion tax reform-related expense erasing most of the firm’s profit for the year. In fact, 4Q17 marked the first quarterly loss for the bank in six years. Bank of America followed suit this morning announcing a $2.9 billion charge along with a profit of $2.4 billion. Investors are likely to disregard 4Q results given the one-time nature of the charges and expected future benefits. According to analysts quoted in the WSJ, they project a 16% increase in BAC’s profits, specifically, going forward as a result of tax reform.