The Market Today
Stocks Hit Record Highs While Yields Rise on Monetary Policy Communications
by Craig Dismuke, Dudley Carter
June PPI Rises on Trade Prices: The June producer price data showed another firmer reading on core inflation rising 0.3% MoM, above expectations for a 0.2% increase. The year-over-year rate was expected to fall to 2.1% but held at 2.3% instead. Energy prices fell 3.1% while food prices rose 0.6%. Apart from those volatile categories, the biggest increase was in trade prices which rose 1.3% MoM continuing a run of volatile reports ever since the trade issues began. Core goods inflation was unchanged, services rose 0.4%, but core services rose a small 0.17% MoM. This data is unlikely to add to fears of a markedly firmer PCE report later this month. Moreover, it shows trade having a sizeable impact on prices in the production pipeline.
Bloomberg Survey of Economists: At 8:45 a.m. CT, the Bloomberg Survey of Economists is scheduled for release.
Fedspeak: Chicago Fed Bank President Evans, a voting FOMC member this year, is scheduled to give his opinion on the economy at 9:00 a.m. CT. Evans has historically been on the dovish side but has recently been more moderate making this morning’s comments noteworthy.
Tropical Storm Barry Temporarily Pushing Oil Prices Higher: Tropical Storm Barry is brewing in the Gulf with the potential to develop into a hurricane making landfall as early as tonight. As much as 20% of U.S. oil refining capacity is in the potential path of the storm which has helped push WTI crude prices up 5.2% this week as the storm has taken shape (despite an increase in stockpiles as reported by the IEA).
Overnight Trading – Yields Rise and Stocks Inch Higher: Sovereign yields rose overnight and stocks inched higher on optimism that the world’s two largest central banks will soon be easing monetary policy. China’s June trade report only added to worries of the impact of trade negotiations on real global activity. Imports fell 7.3% while exports dropped 1.3% – a theme of declining trade volumes which we highlighted in yesterday’s economic outlook update. On a bilateral basis, imports from the U.S. fell 31% while exports dropped 7.8%. The data pointed to a $29.9 billion bilateral trade deficit with China, the worst of 2019. In the Eurozone, industrial production beat expectations in May, rising 0.9% versus expectations for a 0.2% increase. Eurozone bond yields rose across-the-board with Spain’s 10-year up 7 bps to 0.53% (hotter inflation report than expected) and Germany’s up 2 bps to -0.21%. The Euro Stoxx 50 rose 0.1%, led higher by French stocks which rose 0.4%. The better industrial production report initially pushed Treasury yields higher also. The 10-year Treasury rose from 2.118% to 2.148% immediately following the release, but has since pulled back to 2.12% in advance of this morning’s producer price inflation report. U.S. stock futures also rose overnight with DJIA futures pointing to another 80 point gain following yesterday’s record-high close.
Yesterday’s Trading – Yields Rise as Inflation Expectations Rise; Stocks Set New Record Highs: Treasury yields rose steadily yesterday after the morning’s CPI report showed the second-hottest monthly gain for core prices of this economic cycle. Core CPI rose 0.29% on broad-based gains, including particularly strong figures from housing and used autos. Meanwhile, Fed Chair Powell was back on The Hill testifying before the Senate Banking Committee, reaffirming Wednesday’s communication which portended an imminent rate cut. Along with the strong CPI report, investors appeared to be taking the cue from Powell that the Fed will defend its inflation target on the low side, implying more inflation in the future. The 10-year yield rose steadily throughout the trading day, up 10 bps to 2.14% by the close of trading. Moreover, yesterday’s 30-year bond auction was on the soft side with a weak bid/cover and a 2.7 bps tail, the largest in over three years. Despite the inflation data, investors continued to price in a 25 bps cut on July 31 according to Fed Funds Futures contracts. They also continue to price in a second cut before year-end. Stocks were less interested in rising yields and more interested in the Fed cut, with the DJIA gaining 228 points (+0.8%) and the S&P closing at 2,999.91 (+0.2%). Both close at record-high levels with the DJIA now up 16.1% YTD and the S&P up 19.7%.
Powell Says Monetary Policy Hasn’t Been as Accommodative as Believed: In his second day of congressional testimony, Fed Chair Powell again bolstered the view that a rate cut is coming. Powell said, “We’re learning that interest rates — that the neutral interest rate — is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought. … So monetary policy hasn’t been as accommodative as we had thought.” Defending the view that the labor market still has space to tighten, Powell noted, “The relationship between unemployment and inflation became weak [about 20 years ago] … It’s become weaker and weaker and weaker.”
Bostic Sees Storm Clouds, but No Storm: Atlanta Fed Bank President Bostic is not yet convinced of the need for a rate cut despite his generally-dovish tilt. He said yesterday that, “I am not seeing the storm clouds generating a storm yet.” He highlighted the strong labor data and noted that, “inflation, the numbers I think are not as bleak as some others might suggest.” Bostic reference the Dallas Fed’s trimmed mean CPI index which strips out the most volatile components each month. Bostic is not a voter this year.
Barkin Doesn’t Believe Inflation Weak Enough to Cut Just Yet: Also not convinced of the need to cut just yet, Richmond Fed Bank President Barkin highlighted low unemployment and strong consumer spending, saying he found it “hard to make a case for stepping on the gas.” He also seemed less concerned about inflation, saying “Inflation may well be closer to target than one might think … I don’t see the current levels of inflation or inflation expectations as a trigger for additional accommodation.” Barkin is not a voter this year.
Williams Says Accommodation Argument Has Strengthened: In contrast to Bostic and Barkin, New York Bank President Williams echoed Chairman Powell’s comments yesterday. Williams, a voting member, said “We’ve got the uncertainties, especially related to trade and global growth. We have issues around inflation expectations being soft, and obviously inflation data continuing to run below 2% … If anything, relative to earlier in the year, the conditions, the arguments, for adding policy accommodation have strengthened over time.” The New York Bank President is a permanent voter on the FOMC.
Kashkari Advocated for Shock to the System at June Meeting: Minneapolis Bank President Kashkari said he believes the Fed “need[s] to do something that kind of shocks the system.” News reports from his townhall talk indicate that he advocated for a 50 bps cut at the June FOMC meeting. Citing a lack of inflation, Kashkari has argued that there is still spare capacity and the Fed should not hike again until inflation proves firmer. Kashkari is an alternate voter this year.