The Market Today

TODAY’S CALENDAR

Small Business Confidence Hits New Record: Small business confidence surged unexpectedly in May to its highest level since 1983 and its second highest level in the survey’s 45 year history. The NFIB’s Small Business Optimism Index rose from 104.8 to 107.8, easily clearing economists’ expectation of 105. Eight of the 10 component indexes improved from April with the biggest contributions coming from expectations for higher sales and a stronger economy. The NFIB singled out several specific bright spots in its press release. The number of businesses raising workers’ pay, the share experiencing stronger earnings, and the number planning to expand their operations all hit survey highs. The number who have seen sales go up improved for a sixth month to the highest since 1995 and those raising prices on their products jumped to the highest level since 2008. As to what is causing business owners the most frustration, finding quality labor remained atop the list with 23% citing it as their single biggest problem, the most since 2000. Bottom line: With consumer activity strengthening in recent month, the booming business confidence and strong underlying details adds another layer to the optimism for growth to pick up in the months ahead.

 

CPI Inflation Matches Estimates as Fed Begins Two-Day Meeting: In one of the more anticipated economic reports of the week, CPI inflation rose 0.21% MoM at the headline level while the core index increased 0.17%; both rounded to 0.2%. The steady monthly increase pushed the YoY rates up to 2.8% at the headline and 2.2% at the core level. The headline inflation rate was the strongest since 2012 while the core gain put the metric back on its above-target trendline from 2016.

 

Within the details of the report, food prices were flat while the cost of energy goods rose less than 1% on higher gasoline prices. At the core level, goods prices slid for a third month, although the pace of decline was slower, on a mix of up-and-down swings. Household furnishings fell the most since 2010. New car prices rebounded but used cars were cheaper for a fourth month. Prescription drugs showed an outsized gain of 1.4%, the second strongest in more than two decades. Recreational goods fell the most since 2016 while textbooks and school supplies rose the most since 2000. Core services prices, which excluded the effect of energy swings, rose a steady 0.25%. Shelter prices rose 0.34%, consistent with the prior two months. However, the two key components of rents and owner equivalent rents both slowed while lodging away from home jumped an unusually large 2.9%. The important medical care services category fell, registering its weakest result in a year. Recreation and education and communication had unusually strong months. Bottom line: There were some unusually large swings in multiple categories last month while some of the more heavily-weighted components were steady but not alarming. The report is unlikely to sway the Fed in either direction but should give them some comfort that inflation remains steady as they look to continue gradually tightening policy.

 

TRADING ACTIVITY

Yesterday – No G-7 Consensus is No Problem for Stocks: U.S. stocks inched higher amid a global rally Monday as the Dow ended just above flat and the S&P 500 and Nasdaq managed 0.11% and 0.19% gains, respectively. The positive momentum had earlier boosted Asian equities and helped European bourses to close near their daily highs. Eight of the S&P 500’s 11 sectors closed in positive territory with telecommunications, consumer staples, and energy companies finishing in the top three spots. AT&T led gains for telecoms as investors awaited a court ruling, expected today, on whether it can move forward in acquiring Time Warner. J.M. Smucker, maker of your favorite fruit jam, led all consumer staples companies while a recovery in U.S. crude prices supported shares of energy companies. The Treasury curve ended higher and flatter after a day full of auctions. The 2.66% yield awarded for an auction of $32 billion of 3-year notes matched last month’s, the 51.4% indirect takedown was larger than in May, but the bid-to-cover of 2.83 slipped below the prior six-month average. The 2.96% awarded at the 10-year auction matched the when-issued yield, direct bids took a larger share, and bid-to-cover was average. For the day, the 2-year and 3-year notes added around 2 bps while the 10-year yield closed up 0.6 bps.

 

Overnight – U.S., North Korea Sign Agreement as Investors Escape Potential Trip Hazard: The meeting between President Trump and North Korea’s Kim Jong Un came and went overnight, creating lots of fanfare but little lasting impact on global markets. The pair of leaders from opposing countries ended the day by signing an agreement that pledges to continue diplomatic relations with the ultimate desired outcome of “denuclearization of the Korean Peninsula”. Afterwards, both described the meeting to members of the media as a positive first step towards a new diplomatic relationship. With the summit out of the way and an escalation of earlier tensions avoided for now, investors turned an eye to the U.S. and this morning’s CPI report. After the summit but ahead of the inflation data, global equities were mixed and U.S. futures were marginally weaker. Sovereign yields, including U.S. Treasurys, had generally ticked to the upside. The 2-year and 10-year U.S. yields were up just over 2 bps.