The Market Today

Stocks Fluctuate Near Records, Yields Flip Flop as Investors Await Key U.S. Data Later This Week


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Home Prices Expected to Show Continued Gains; Consumer Confidence and Fedspeak: Scheduled for 8:00 a.m. CT, the FHFA and S&P CoreLogic Home Price Indices for April are both expected to show prices climbing at an even faster pace.  Already, there are signs that prices have risen a sufficient amount to slow down activity.  At 9:00 a.m., the Conference Board will release its June report on consumer confidence.  It is expected to improve after a surprised dip in May. Richmond Fed Bank President Barkin, a voter in 2021, will speak again today.

 

24 HOURS OF MARKET ACTIVITY

Stocks Fluctuate Near Records and Yields Flip Flop as Investors Await Key U.S. Data Later This Week: The S&P 500 fluctuated around unchanged for most of Monday’s morning session before running higher after lunch, ending up 0.2% and setting its third consecutive record. Tech shares led sector gains as the Treasury curve flattened lower while more economically sensitive sectors faltered. Global trading had been generally weaker overnight with many analysts pointing to concerns about the Delta COVID-19 variant leading to tighter restrictions in some countries. Crude prices weakened to send U.S. WTI down more than 1.5% and energy names to the bottom of the S&P 500. Financials, industrials, and materials served all declined. While those dynamics led the Dow to a 0.4% drop, tech’s outperformance lifted the Nasdaq by nearly 1% and to its fourth record close in five sessions. The drop in Treasury yields was led by longer maturities, with the 30-year yield falling 5.4 bps to 2.10% while the 2-year yield shed 1.2 bps to 0.25%. The 5-year yield slipped 2.6 bps to 0.90% and the 10-year yield shaved off 4.8 bps to 1.48%. Most of those moves were made in the morning session and lower levels held as equities recovered late.

Despite those records for the S&P 500 and Nasdaq, stocks in Asia were broadly weaker Tuesday, knocking the MSCI Asia Pacific Index down more than 0.5%. European equities, on the other hand, were firmer after a measure of economic confidence in the Eurozone jumped to a 21-year high in June. Confidence in the industrial sector rose modestly, but considerable improvement in the outlook for the services economy was behind most of the gain. Countering that optimism somewhat, however, and reiterating that the current inflation concerns are not unique to the U.S., business expectations for passing production price increases along spiked to a new all-time high. U.S. futures were pointing to a bit of a reversal of Monday’s changes at the open as the Dow was the only major index in positive territory. Bank stocks could be interesting to watch after many of the largest institutions announced increased dividends late Monday following successful stress test results that spurred the Fed to remove temporary restrictions implemented during the pandemic to ensure sufficient capital in the banking system. Treasury yields had partially unwound Monday’s drop at 7:30 a.m. CT, with the 2-year yield up 0.4 bps to 0.26%, the 5-year yield 2.2 bps higher at 0.92%, and the 10-year yield adding 2.2 bps to 1.50%.


NOTEWORTHY NEWS

Fed’s Quarles Cautions Against Waiting for Return to Pre-Pandemic Participation: Fed Governor Quarles discussed his personal outlook for the first time since the Fed’s dot plot showed a pivot towards post-pandemic policy normalization, saying Monday, “We think that the supply-chain imbalances and the released pent-up demand…that are driving the currently high temporary inflation numbers are transitory.” He added, “Over the period of a year and a half or so, all of that will work its way out.” “We have set monetary policy on that expectation, but we are also very mindful that we could be wrong,” adopting a Fed-wide hedge that has become a common refrain. On employment, “I don’t think we can say we need to see labor participation come back up to the levels that we saw before COVID. Because we are still going through the demographic wave of retirements of the baby boomers that have…secularly been pushing down labor-force participation. …I don’t think that we can wait for all these measures to return to their pre-COVID maximums.”

Barkin Sticks with Wait-and-See Approach on Rates but Could See Tapering Commencing “In Short Order”: Fed President Barkin said last week that he expects “most of these [inflation] increases” will “ease as we go into the fourth quarter.” However, that doesn’t mean that he wouldn’t support an adjustment to the Fed’s asset purchases in the months ahead. Barkin, who will vote on policy decisions for the remainder of the year, said that it’s obvious substantial further progress has been made towards the Fed’s inflation goal and that achieving such progress on the employment mandate may occur “in short order.” Barkin indicated current dislocations in the economy make it difficult to draw any clear conclusions, when asked about the potential for a rate hike next year. “I kind of think let’s look at it next year and see what happens. If the numbers hit, great. If they don’t, we’ve got time. They’ll show there is still more room for the economy to grow,” he said.

Dallas Fed Manufacturing Index Slips More than Expected But Details Provide Some Consolation: The Dallas Fed’s Manufacturing Index fell more than expected in June despite some key readings on new orders, production, and employment all improving. Although the 3.8-point drop from 34.9 to 31.1 marked a second month of cooling and showed the loss of some momentum, the level of the index remains at a strong level historically. Related to current inflation concerns, indexes tracking current prices paid and received climbed again, both reaching new record highs. On a more encouraging note, there were some signs of supplier delays easing during the month, expectations for future material costs dipped, and an index gauging company-specific outlooks rose to its second-highest level since 2018.


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