The Market Today
Quiet U.S. Economic Calendar; U.S. Stocks, U.S. Yields, Oil Prices All Higher
by Craig Dismuke, Dudley Carter
Quietest Day of the Week for the Data: Today’s lone report will be the Richmond Fed Manufacturing index for the month of May. The index, which is scheduled for a 9 a.m. CT release, is expected to recover from an April tumble that dropped the index to its lowest level since September 2016. If the actual result is as expected, the improvement will extend the recent run of positive regional Fed Bank activity surveys. However, the index would remain at its lowest level in 12 months.
Yesterday – Treasurys Flattened Out in Subdued Trading Despite Equities Bouncing on Softer Trade Tones: U.S. stocks jumped at the open on easing trade tensions between the U.S. and China and partially recovered from a mid-morning slump to finish the stay solidly higher. The Dow outperformed, up 1.2% on the day, while the S&P 500 gained 0.7% and the Nasdaq lagged with an even smaller 0.5% improvement. The Dow’s gain pushed the index into positive territory for the year. Industrials, sometimes seen as a proxy for developments in the trade saga between the U.S. and China, were among the top performing companies. Compared with the strong upside move for equities, the response in the Treasury market was particularly subdued. The 2-year yield held most of its overnight rise to finish up 1.9 bps at 2.57%. But after rising by as much as 2.6 bps to 3.08%, the 10-year yield settled up only 0.4 bps at 3.06% and just off of its daily low. The Dollar tracked longer yields up and back down, weakening for the first time in the last six sessions. Oil prices rose to new three-and-a-half year highs as an election in Venezuela became the latest factor to cause concerns about tightening global supply. Related, the daily national average price for a gallon of gas rose for a 13th day to $2.93, the highest since November 2014.
Overnight – U.S. Stocks Rise as Yields Tick Up: U.S. equity futures were signaling a second day of strength for the major indexes despite a mixed day for global equities, an overnight increase in Treasury yields, and oil prices extending their 11-month climb. Equities were mostly weaker across Asia but activity picked up in Europe with most major indexes there in positive territory. Italian assets, battered in recent weeks on concerns around the formation of a populist political union, seemed to find some support. Italian stocks were trading 0.5% higher, the biggest gain in seven sessions, while the Italian 10-year yield fell 8.6 bps, the largest single-day decrease since October. However, the 10-year yield is still up 50 bps for May. Core European yields rose and helped support Treasury yields, although net changes were modest before the U.S. session. The entire curve was less than 0.5 bps higher. Oil prices continued to climb as concerns about global supply remain elevated on several fronts. U.S. crude was trading about $72.50 per barrel and Brent was closing in on $80.
Monday’s Fedspeak: Atlanta Fed President Bostic, a current voter on the Committee, has been out and about a fair amount lately and his Monday remarks didn’t unearth much new about his outlook. He “won’t be surprised to see a modest overshoot” for inflation, expects two more rate increases this year, and reiterated that the flattening yield curve is “very present” in the Fed’s mind. Philadelphia Fed President Harker, who doesn’t vote on policy again until 2020, said “the economy is just clicking along just fine,” and therefore “it’s appropriate to move rates up judiciously.” But, he added, “I’m not seeing that rapid acceleration in inflation, or even signs of it, yet,” and indicated he has two more rate increases penciled for 2018. However, “It is possible, if we see an acceleration in inflation, that I could be supportive of a third.” On Monday evening, Minneapolis Fed President Kashkari, who will join Harker as a voter in 2020, said the limited wage pressures tell him there could still be some unabsorbed labor slack. “I’ve been saying, hey, let’s not overdo it,” he noted, in order for the economy to gather more momentum.