The Market Today

Today’s Calendar – Bank Earnings Reports Beat but Disappoint; Homebuilder Confidence:  Import prices fell 0.2% in June as petroleum prices dropped again.  Excluding petroleum, prices of imported goods and services rose 0.1% MoM, slightly faster than expected.  On a YoY basis, import prices are up 1.5%, having now trended down from 4.7% in February.  There remains little price pressure in the import pipeline, even when excluding energy.  At 9:00 a.m. CT, the NAHB Homebuilder Confidence Index is expected to hold steady at 67. 

 

Banks Earnings Beat Estimates but Show Concerning Trends in Trading and Investment Banking:  After JP Morgan’s and Citi’s reported disappointing 2Q trading results last week, Goldman and Bank of America both saw similar trends as reported this morning.  For all four of the large U.S. banks, other areas of revenue growth, such as commercial lending and rising short-term interest rates, helped offset declines in core trading of 17% (GS), 14% (JPM), 9% (BAC), and 7% (C).  Rising short-term interest rates have been a boon for the largest banks.  BAC holds, for example, a large number of adjustable rate loans repricing higher but their average rate paid on interest bearing deposits remains at 0.11% despite a Fed Funds rate of 1.125%.  However, the lack of volatility in the markets has weighed on some of the core businesses.  Likely the biggest concern for economists, investment banking has appeared to slow, down 3% at GS for example, which is always a concern that business leaders are pulling in their horns for varying reasons.

 

Overnight Activity – Senate Health Care Bill Fails, Drags Dollar Lower: The major news overnight was the announcement that there will be no immediate repealing and replacing of the Affordable Care Act. At 7:30 p.m. CT yesterday evening, two additional Senators (Moran – Kansas, Lee – Utah) announced on Twitter that they would not support the Senate’s health care bill. Shortly after, Senate Majority Leader McConnell “regretfully” confirmed the Senate bill’s failure. Instead, the Senate “will vote to take up the House bill with the first amendment in order being…a repeal of Obamacare with a two-year delay to provide for a stable transition period…”, according to his statement. The Dollar immediately sank, tumbling to its weakest level since September. Treasury yields inched lower and equity futures weakened. Since those initial moves, data showed inflation in the U.K. slowed unexpectedly from 2.9% to 2.6% in June – 2.6% to 2.4% at the core level – which could ease any urgency the BoE feels to raise its policy rate. Longer global yields quickly moved to their lows of the day. The 2-year Treasury yield is down 0.8 bps at 1.35% with the 10-year yield down 3.4 bps at 2.28%. Equity futures are weaker following a down day for European bourses and the Dollar remains weaker despite the pullback in the British pound.

 

Yesterday’s Trading Activity – Quiet Start to Quiet Week Leaves Treasury Curve Flatter on Lower Yields: Stocks remained positive for most of Monday morning but reversed into a slow downtrend shortly after lunch. By the close, the three major indices were mixed but less than 0.05% changed. Treasury yields partially pared an overnight drop by mid-morning but turned lower with stocks and remained there for the entirety of the afternoon session. The 2-year yield closed at 1.36% (unchanged) while the 10-year yield settled down 1.8 bps at 2.31%. The Dollar was essentially flat as gains against the Yen and British pound were offset by losses against the Euro. Commodity prices were mixed as struggles in the energy and agricultural space offset gains in metals. The various moves in these markets told the sector story within the S&P. Lower Treasury yields helped the utilities and real estate sectors but hurt financials. Weaker prices for energy commodities hurt companies in that sector while the bounce in metal prices supported shares of materials companies.

 

July Bloomberg Survey of Economists: Economists adjusted their forecasts for inflation and interest rates lower in July’s survey as compared to the June edition. Click here to see what else changed in economists’ outlook.

 

Another Way to Get out of Student Loan Debt – Have an Incompetent Servicer (NYT): The New York Times reports this morning on a growing problem for one holder of student loans, National Collegiate.  The company has bundled private student loans made ten-plus years ago, securitized those loans, and sold them to investors.  However, as borrowers had fallen behind on payments, National Collegiate has quickly taken the cases to court for collection.  Unfortunately for National Collegiate, and potentially the security holders, the chain of custody for some of the loans cannot be established due to missing paperwork leading judges across the country to throw out the lawsuits.  According to the report, ‘A random sample of nearly 400 National Collegiate loans found not a single one had assignment paperwork documenting the chain of ownership, according to a report they had prepared.”