The Market Today
Quiet Week in U.S. Starts; OPEC Possibly Extending Production Cuts
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Quiet Week with Focus on Eurozone Inflation: This week’s calendar is very quiet following a week which saw weaker inflation and retail sales than expected, a continuation of strong confidence reports (business and consumer), and another hot labor report (continuing jobless claims matching lowest level since 1988). The big reports this week will be homebuilder confidence (this morning at 9:00 a.m. CT), April’s housing starts and building permits (Tue), and April’s industrial production report (Tue). Ironically, it may be a report out of the Eurozone that has the biggest impact on U.S. markets this week. Eurozone CPI is expected to hold at 1.2% YoY on Wednesday. After a recent jump in inflation, the ECB is contemplating dialing back their pace of easing. Any more high-side surprises in Eurozone inflation could certainly change the central bank dynamics that have been in play for two years – ECB and BOJ easing, BOE neutral, FOMC gradually tightening.
Overnight Activity – Crude Prices Rallying After Officials Confirm Extension Cuts: Most markets were relatively quiet as major equity indices across Asia and Europe traded on both sides of break-even and sovereign curves steepened on higher yields. Last Friday’s drop in the Dollar, spurred by disappointing retail sales and inflation data, accelerated overnight but the Yen was the biggest underperformer of the major currencies. Crude prices were the major mover overnight with both Brent and U.S. crude trading up more than 3%. Energy officials from Saudi Arabia and Russia confirmed that the current production cuts would be extended. While prices had previously moved higher on rumors of the extension, the fact the cuts will now run through March 2018 (three months longer than expected) may have given prices the extra lift. In Asia, there was focus on another missile test by the North Korean military and weaker-than-expected investment and industrial production data in China. In Europe, German Chancellor Merkel’s party won a weekend election in the country’s most densely populated state; a positive sign for how Merkel may fare in her fight for re-election later in September. In France, Emmanuel Macron will officially begin his tenure as the country’s next president. In the U.S., futures on the Dow and S&P are up between 0.1% and 0.2% with the Treasury curve unchanged out to three years and less than 1 bp higher further out.
In Case You Missed It – Treasury Yields Fall on Friday Data Flop: Treasury yields fell last Friday following weaker-than-expected readings on CPI inflation and retail sales. The bid for Treasurys in the final day of trading was enough to erase a move higher in yield that began after the French elected a pro-EU president and strengthened after the monthly auction of 10-year Treasury notes tailed by nearly 2 bps. Click here for the full Weekly Recap.