The Market Today
by Craig Dismuke, Dudley Carter
Once again, we start a week with our thoughts and prayers going out to a lot of people on the Gulf Coast, hoping the damage is contained as the sun comes up this morning. We will also be pausing at 8:46 a.m. ET this morning for a moment of silence and remembrance, in memory of the events that took place 16 years ago today.
Today’s Calendar – No Economic Data; Ten Days to FOMC Announcement: As for the economic news, there are no reports on today’s calendar. However, the last look at CPI inflation and retail sales before the FOMC’s September 20 policy decision will come on Thursday and Friday of this week. While those reports could create some market volatility, they will have to miss estimates significantly to slow the balance-sheet-adjustment train from leaving the station next week.
Hurricane Impact: As discussed two weeks ago, apart from the human toll which is the paramount concern, large natural disasters like Hurricanes Harvey and Irma have mixed economic impacts. In the short run, they can suspend activity that would have otherwise taken place in the affected areas. In this regard, they hurt growth. Specifically, consider tourism and the cancelled trips that are unlikely to occur at a later date. In contrast, auto purchases that would have taken place during the timeframe of the storms are still likely to occur, just at a later date. On the positive side, there is often a significant amount of rebuilding that will occur in subsequent months as a result of the damage. The most acute example of this was the $15 billion in Hurricane relief passed by Congress last week. This is effectively an infrastructure spending package that would otherwise have not occurred. The government, individuals, are much more likely to borrow money for construction projects when damage has occurred. As such, the net economic effects are likely to be positive over a longer period, negative in the short-term. As for the economic data, there will be certain reports that yield significant volatility, as seen in last week’s initial jobless claims report. For this reason, much of the data over the coming months will need to be taken with a grain of salt.
Overnight Activity – Markets Breathe Sigh of Relief on No News from North Korea: A portion of the risk aversion late last week was attributed to concerns that North Korea might flex its military muscle in one form or another over the weekend to celebrate its national founding day. While there was more talk from North Korea, this time about causing the U.S. “the greatest pain and suffering” in its history, the lack of actual action in the region kick-started global markets Monday. Equities rallied and sovereign yields rose. The bid for other haven assets faded as gold pulled back from a 12-month high and the Yen weakened against all major currencies. The return to risk started early in Asia where Japan’s Nikkei outperformed with a 1.4% daily gain. That strength transitioned westward into Europe where most national exchanges are up more than 1%. Sovereign yields are up in the region with the German 10-year yield 2.5 bps higher and the U.K.’s 10-year gilt yield up 5.2 bps. Treasury yields have rebounded after big declines last week. The 2-year yield is up 3.6 bps to 1.30% after falling 7.6 bps last week. The 10-year yield is up 5.5 bps to 2.11% after tumbling 11.0 bps to a new post-election low close of 2.04% last week. The Dollar has recovered after retreating to its weakest level Friday since January 2, 2015. U.S. equity futures are stronger with the big three indices up 0.5% or more.
ICYMI – September 8, 2017 Weekly Market Recap: Yields fell last week as North Korea’s detonation of a hydrogen bomb and the ECB signaling continued patience proved more than enough to offset the effect of a temporary debt ceiling deal in Washington. The Sunday detonation spooked global markets Monday, but with U.S. markets closed in observance of Labor Day, the Treasury rally was pushed to Tuesday. The 10-year yield dropped 10.6 bps on Tuesday in the biggest single-day drop since March 15. Dovish remarks from the Fed’s Brainard and Kashkari also added to downward pressure on yields in the week’s first day of trading. Yields attempted to rebound Wednesday on a report that the President had struck a deal with top Democrats to fund Harvey relief efforts in a bill that would also temporarily suspend the debt ceiling and extend the government’s spending authority through December 8 (this bill was eventually passed by the Senate on Thursday and the House on Friday). However, Thursday’s ECB decision – one of persistent patience – sent the 10-year Treasury yield to a new post-election low close of 2.039% on Thursday. A Reuters report overnight Thursday that included possible ECB tapering options helped yields edge higher into Friday’s close. Click here for the full recap.