The Market Today

Stocks Continue to Rise While Longer Yields Remain Rangebound Amidst Optimism, Tax Plan Markup

by Craig Dismuke, Dudley Carter

Today’s Calendar –  Job Openings, First Comments from New Fed Vice Chair Quarles, Tax Bill Markup:  At 9:00 a.m. CT, the JOLTs Job Openings report is scheduled for release and is expected to show job openings remain at a very high level, 6.08 million openings.  At 2:00 p.m., the September Consumer Credit report is scheduled for release.  At 11:35 a.m., new Fed Vice Chair of Supervision Quarles is slated to speak in some of his first public comments.  We will be interested to hear his views on monetary policy issues such as the continued tightness of the labor market and the continued weakness in the inflation data. The House Ways and Means Committee will continue its Bill markup today.


Overnight Activity – Peripheral European Bonds Rally in Otherwise Quiet Overnight Session:  Oil prices leveled off but the energy-driven momentum that pushed U.S. equities to new records Monday continued overnight. After rising around 3% Monday, U.S. crude slipped 0.10% and Brent crude dropped 0.45%. Nonetheless, current price levels remain near their highest levels in more than two years and are supporting the energy equity space. The energy sector led Japan’s Nikkei up 1.73% and to its highest level since 1991 while other national Asian exchanges were similarly as strong. The broad-based sector strength in Asia faded during European trading but the energy sector remained the top performer. Energy companies within the Stoxx Europe 600 gained 1.05% while the broader index dropped 0.18%. U.S. equity futures were mixed overnight against the divergent global performances. U.S. Treasury yields were little changed and German yields avoided tracking European peripheral bond yields lower. The 2-year Treasury yield was unchanged at 1.62%, the highest level since October 2008. The 5-year yield held at 1.99% and the 10-year noted yielded just 0.4 bps more at 2.32%. The Dollar recovered from Monday’s dip and is at its strongest level since mid-July.


Yesterday’s Trading Activity – Yields Fall as the Curve Flattens; Oil Rallies on Saudi Turmoil, Lifts Equities to Another Record:  Most markets were quiet Monday with Treasury yields ending slightly lower (but little changed from their levels at the beginning of the U.S. session) and stocks closing modestly higher. The 2-year yield rose 0.6 bps to 1.62% while the 10-year yield ended 1.6 bps lower at 2.32%. The spread between the two maturities dipped below 70 basis points for the first time since early November 2007. The shift of the Treasury curve was consistent with the daily adjustments in fed funds futures. The implied rate in the December 2017 futures contract ticked up while the rate in the December 2019 contract slipped 2.5 bps. Monday’s flattening bias in rate markets followed comments from a couple of key Fed officials that sounded supportive of another near-term tightening but continued to reflect an uncertainty about inflation trends (more below). The Dow gained just nine points, or 0.04%, as the S&P added three points, or 0.13%, and the Nasdaq jumped 22 points, or 0.33%; all set  new record high closes. Energy companies outperformed others as crude prices rallied roughly 3%. The weekend drama in Saudi Arabia set the stage for the commodity’s gains and is likely to be an important driver of near-time activity. A weaker Dollar also helped support oil’s improvement as the world’s reserve currency gave back most of last Friday’s gains.


Dudley Confirms Mid-2018 Retirement:  NY Fed President Dudley officially confirmed he would be retiring in mid-2018 and that the search for his replacement was already underway. He said he is a big fan of both Randal Quarles and Jay Powell (as Fed Chair) and added that the current committee shares a common paradigm on monetary policy. Dudley spent most of his time discussing the financial regulatory environment but did touch on his economic outlook during Q&A. He said the economy is close to full employment and that, while inflation weakness has been puzzling this year, he expects it to drift up over time. Going forward, he said the Fed may need allow inflation to exceed its 2% target for a period in order to better anchor inflation expectations.


Williams Wants More Hikes and a Discussion about Price-Level Targeting:  Shortly after Dudley’s remarks, San Francisco Fed President Williams, who votes on policy in 2018, reiterated his support for a December hike and three additional moves in 2018. He characterized the U.S. economy as about “as strong as I’ve seen in my professional career” but admitted inflation was “well below desirable levels.” He believes that some structural forces will continue to weigh on inflation and as a result, “We need to have a pretty strong economy, a tight labor market in order to create a little bit more inflation in more typically cyclical parts of the inflation rate.” Williams added that this need is behind his expectation that the unemployment rate will “come down and drop below 4% early next year and stay there for some time.”  In addition, Williams published an essay Monday discussing potential benefits of price-level targeting over a 2% symmetric inflation goal for monetary policymakers moving forward.

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