The Market Today

Senate Passes Storm Relief, Temporary Debt Ceiling Increase; All Eyes on Irma


by Craig Dismuke, Dudley Carter

Today’s Calendar – Hurricane Watch:  Today’s economic calendar is fairly quiet with the July Wholesale Inventories revision at 9:00 a.m. CT expected to hold at 0.4% growth MoM and the July Consumer Credit report at 2:00 p.m. expected to show $15.0 billion in monthly credit growth.

 

In the absence of market-moving economic reports, traders are likely to be focused on Hurricane Irma which was downgraded to a category 4 hurricane overnight but continues to pack a very damaging punch.  Maximum sustained winds have dropped from 185 mph on Wednesday to 150 mph as the storm now skirts north of Cuba.  All of southern Florida is under a hurricane warning now with landfall increasingly expected near Miami.  We should know which direction the storm turns by midday Saturday.  Our primary concern is for the human toll the hurricane is bound to have.  From an economic standpoint, in contrast to Harvey, the greatest impact is likely to be on the agricultural industry.  Moreover, with much of South Florida’s economy services- and tourism-related, the potential impact to GDP could be more costly than Harvey.  Services activity is more likely to be totally lost when disrupted (e.g. vacations that were going to occur may not be replaced, etc…).

 

Overnight Activity – European Yields Reverse on Reuters Report, Dollar Continues to Slide: Global equities are mixed Friday and yields in Europe have reversed higher. Despite yields rising across the Atlantic, Treasury yields initially added to their weekly (yearly, really) decline and the 10-year yield inched even closer to the round 2.00% yield. The 10-year Treasury traded as low as 2.014% overnight. In the early minutes of U.S. trading, however, Treasury yields have reversed higher. The 2-year yield is +0.8 bps and the 10-year yield is 1.5 bps higher. The Dollar extended its weekly loss to 1.8%. Against the Yen, the Dollar reached its weakest level since November. The stronger Yen weighed on Japanese stocks which fell 0.6%. The initial estimate that Japan’s economy expanded at a 4.0% annualized rate in 2Q was revised down to 2.5%. Against the Chinese Yuan, the Dollar traded at its weakest level since April 2016. China trade data showed weaker-than-expected exports in August but estimate-topping imports. Strength in Chinese demand boosted the Aussie Dollar to its strongest level against the U.S. Dollar since May 2015. The Euro also gained against the Dollar. European yields reversed a portion of yesterday’s drop as a Reuters report describing possible QE options hit the wires. Unnamed officials told Reuters the ECB discussed extending the QE program by six to nine months after December at a reduced pace 40B or 20B Euros per month.

 

Yesterday’s Trading Activity – Yields Fall on ECB Decision, Senate Passes Relief/Spending/Debt Ceiling Bill: Stocks closed little changed Thursday after spending most of the session underwater. The Dow fell 0.1%, the Nasdaq gained as much, and the S&P barely budged. Gains in S&P health care and real estate stocks were offset by weakness in telecom and financials. Financials fell with Treasury yields which dropped sharply after the ECB’s decision. The central bank left policy unchanged and President Draghi said a substantial degree of accommodation is still needed because underlying inflation measures remain subdued. Despite his commitment for a decision on QE at the October meeting, sovereign yields tumbled. Italy’s 10-year yield sank 11.1 bps on the day while Germany’s 10-year yield fell 4.1 bps. The 10-year Treasury shed 6.6 bps to 2.04%, its lowest close since 1.86% on the day of the Presidential election. The Euro, however, seemed to latch on to the ECB’s improved growth outlook and Draghi’s characterization of the currency’s recent strength as an “uncertainty”, not a concern. The Euro, which has been on a tear in 2017, rose nearly 1% to take its year-to-date gain to over 14%. Euro strength helped knock the Dollar down to a new low since January 2015. While markets focused on the ECB’s decision, the U.S. Senate passed a bill that will provide $15.3B in funds for Harvey relief and suspend the debt ceiling and extend spending authority through December 8.  The House must vote on the new bill but it does not appear that conservative Republicans will have enough votes to derail the bill from getting to the President’s desk.

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