The Market Today

Today’s Calendar – Brainard on the Tape, Small Business Confidence Drops Again: The June NFIB Small Business Optimism index fell more-than-expected, dropping from 104.5 to 103.6.  The index has failed to see a monthly gain yet this year and has now dropped from a peak of 105.9 in January.  While the headline index remains strong historically, the lack of progress in Washington and weaker-than-expected economic activity to start 2017 are likely weighing on sentiment.  On a MoM basis, those expecting the economy to improve fell 6 points, those expecting higher sales fell 5 points, and those planning to increase employment fell 3%.  Small business owners expecting a better economy remains high versus recent history, but has pulled back 17% since peaking at +50% in January.

 

At 9:00 a.m. CT, the May JOLTs reports is expected to show job openings pull back from a record-high 6.04 million to 5.95 million.  Also at 9:00 a.m., May’s Wholesale Inventories report is expected to show another 0.3% MoM increase.  An inventory rebound is critical to 2Q GDP rebounding above 2.0%.  Perhaps most importantly today, Fed Governor Lael Brainard is scheduled to speak at 11:30 a.m. on monetary policy.  Brainard has been a key indicator for future policy decisions.  Given Yellen’s scheduled testimony tomorrow, the market response to Brainard’s comments may be muted, but they will be important nonetheless.

 

Overnight Activity – Yields Return Higher as Oil Prices Weigh on Equity Sentiment: Not much has changed in the global market story overnight as sovereign yields and global equities continue to search for the next clear catalyst to give investors some direction. Corporate earnings season is sure to be a driver in the coming weeks, but for today oil price volatility continues to impact equity trading. European equities are generally softer Tuesday following a stronger session in Asia. Japan’s Nikkei was among a group of solid performers, up 0.6% after the Yen weakened to a four-month low against the Dollar. The Yen’s weakness is consistent with the recent jump in the 10-year Treasury/Japanese Government Bond rate differential to an almost two-month high on divergent monetary policy expectations. After initially jumping at the open, the Stoxx Europe 600 made an about-face into negative territory as oil prices reversed lower and U.S. crude recaptured a $43 handle. Sovereign yields continued to zig zag, with a modest move higher overnight erasing a portion of Monday’s decline that has partially pared last week’s jump. In the U.S., equity futures are off by 0.1% to 0.2%, Treasury yields are up by less than 1 bp across the curve, and the Dollar remains firm.

 

Yesterday’s Trading Activity – Stocks, Treasurys (Price), Oil, and the Dollar All Rise: Early trends in U.S. assets rightly predicted how Monday’s trading would unfold. Early morning trends correctly indicated tech stocks would lead the way while the S&P and Dow would struggle for direction. The Nasdaq gained 0.4% while the S&P added just 0.1% and the Dow slipped less than six points. The energy sector of the S&P also fared well as crude prices staged a mid-morning rebound to erase an overnight loss and close higher on the day. A report that Libya and Nigeria would be asked to join OPEC’s production cuts, previously excluded for discrete reasons, was price supportive. After some intraday ups and downs, Treasury yields finished about where they began. Between the 2-year (1.38%) and 10-year (2.37%) parts of the curve, yields fell roughly 1.5 bps except for a 2.0 bps decline for the 7-year note.

 

Consumer Credit Expansion Picks Up MoM, Slows Down YoY: Consumer credit expanded in May at a 5.8% MoM seasonally adjusted annualized rate (SAAR), the fastest pace since last November. Total credit expansion quickened as a pickup in revolving credit growth to an 8.7% MoM SAAR (1.4% in April) offset a slower 4.7% MoM SAAR rate of growth in nonrevolving borrowings (5.0% in April). While a near-term positive for personal consumption in the second quarter, a longer lookback is not quite as strong or constructive. When compared to May of last year, total credit outstanding increased at a 5.8% pace. This marked a third consecutive month of a weaker YoY pace and the slowest since September 2012. In the absence of faster wage growth, consumer credit expansion could create a boost consumer spending. In the absence of both, consumer spending could struggle to accelerate.