The Market Today
Quiet Day with Some Final Fedspeak Before May FOMC
by Craig Dismuke, Dudley Carter
Fedspeak Only Show on the Calendar: There are no economic releases on the calendar today. Chicago Fed Bank President Evans is scheduled to speak on monetary policy at 8:40 a.m. CT this morning. San Francisco’s Williams, incoming head of the New York Bank, is scheduled to speak at 10:15 a.m. CT. This should be some of the final public comments prior to the quiet period in advance of the May 2 FOMC Meeting. Fed Funds Futures are currently pricing in a 30% chance of a surprise rate hike at the May meeting. This, however, would seem inconsistent with the Fed’s commitment to proceed gradually and without shocking the markets. While the Fed has evolved into a more hawkish position, it does not appear that they have become so hawkish as to abandon those commitments at this point.
Yesterday – Stocks Slipped as Yields Rose Again: The S&P 500 dropped 0.6% Thursday as the Treasury curve moved higher and steeper and U.S. crude edged down from a multi-year high. The S&P 500 partially pared a steeper loss on a late-afternoon report that Deputy AG Rosenstein had informed the president he wasn’t a target of Special Counselor Mueller’s investigation. Philip Morris finished at the bottom of the S&P, dropping over 15% on disappointing revenue results and concerns about the performance of its iQos product, one it hoped would take the place of packs of smokes for a number of customers. On the other end, American Express led all gains (+7.6%) after a strong earnings report. With shares of Amex in front, the financials sector finished in the top spot with higher rates providing a further tailwind. The Treasury curve steepened again, with the 10-year yield up 3.7 bps at 2.91%, its highest since late February and fourth highest since January 2014. The 5-year yield added 2.6 bps to 2.76%, the most yield since August 2009. The 2-year yield finished flat. Longer yields have moved up this month as trade tensions and higher commodity prices have helped firm market-based inflation expectations. The 5-year, 5-year forward inflation expectation rate has rebounded to 2.25%, its highest level since early February.
Overnight – U.S. Assets Steady in Sleepy Overnight Session: It’s been steady as she goes overnight for U.S. assets amidst a relatively quiet global session. U.S. Treasury yields added modestly to yesterday’s rise, equity futures were mixed but almost on top of Thursday’s close, and crude prices traded around yesterday’s levels. The 2-year yield was earlier up 0.9 bps at 2.44% with the 10-year yield up 1.5 bps to 2.93%, reflecting a steepening bias for a third consecutive session. Those shifts occurred alongside similar moves in Europe, with the U.K. the one exception. In a Thursday evening interview, Bank of England Governor Carney said that markets should “prepare for a few interest rate rises over the next few years,” but added that he’s “conscious that there are other meetings [after May] over the course of this year,” at which they could hike. Market pricing for a May hike moved from above 80% to closer to a coin flip and shorter yields led the Gilt curve lower. U.S. equity futures were essentially flat except for the tech sector with the Stoxx Europe 0.1% higher and after Asian markets slipped on weaker tech stocks.
WSJ – Crude Awakening (Jeff Sparshott): Oil prices have been marching higher for nearly a year. Brent, the global benchmark, reached $73.78 on Thursday, its highest level since November 2014. It’s up 55% since June 2017. … That certainly means higher gasoline prices. Up until a few years ago, it also meant a brake on U.S. economic growth. Not anymore. U.S. consumers will still get pinched at the pump, but the U.S. is on its way to becoming the world’s biggest oil producer. Energy firms and the companies that supply them with machinery, steel tubing, transportation and other equipment and services largely benefit from higher crude prices.