The Market Today
Strong Corporate Earnings; Tax Day 2.0
by Craig Dismuke, Dudley Carter
Mortgage Applications Point to Homebuyers Persisting through Higher Rates: Mortgage applications for the week ending April 13 rose 4.9% as purchase apps rose 6.1% and refi apps rose 3.5%. Purchase applications, on a 4w/4w basis, have rebounded in recent reports to near the early-2018 highs of the cycle. This is a positive indicator for the housing market as purchase activity appears to be weathering the recent increase in mortgage rates. Of course, the new and existing home sales data will have to confirm the uptick in activity in upcoming reports. Refi apps remain very low.
Beige Book Report Front-Runs Interesting May FOMC Meeting: At 1:00 p.m. CT, the Fed will release its Beige Book report in anticipation of its May 2 FOMC meeting. Fed Funds Futures markets show a 28% chance of another rate hike in May, a surprisingly high likelihood for a non-press conference meeting. Thus far in this cycle, the meetings with press conferences have been seen as being in-play for hikes while investors have expected policy to be unchanged at the interim meetings. The Fed, however, has fairly convincingly tamped down expectations that they may begin considering a faster pace of hikes. As such, a 28% probability appears to be overly high at this point.
Tax Day v2.0: As if Tax Day weren’t a dreadful enough day, it has now been extended to a two-day event after a system malfunction delayed some on-line filings and payments yesterday. The IRS extended the filing deadline to today.
Yesterday – Treasury Curve Hit New Cycle-Low Despite Stocks Rallying as Positive Earnings Pour In: U.S. equities extended their positive streak for a second day this week as the Nasdaq gained 1.74%, the Dow moved up 0.87%, and the S&P 500 split the two by adding 1.07%. Technology companies rallied more than 2% and Netflix led the consumer discretionary sector to a close second place finish. After posting solid earnings and strong subscriber growth after Monday’s market close, the media-streaming service provider jumped more than 9% Tuesday to lead all 505 S&P companies and take its year-to-date gain north of 75%. Other companies, including Johnson and Johnson, Goldman Sachs, UnitedHealth, and IBM, also topped analysts’ estimates and added to the widespread reach of Monday’s move. The financials sector was the only one to finish below Monday’s close, as the Treasury curve flattened to a new cycle low of 43.0 bps. The 2-year yield moved up 1.7 bps while the 10-year yield added just 0.2 bps.
Overnight – Wall Street Working on Another Opening Jump After Morgan Stanley Tops Estimates: The risk-on tone this week in the U.S. became contagious overnight across Asia and most of Europe. A strong start to corporate earnings season has overwhelmed concerns about trade and geopolitics this week and helped lift the S&P 500 1.9% since last Friday. That sentiment looks set to continue Wednesday, after Morgan Stanley became the latest U.S. company to exceed analysts’ expectations. The company posted an all-time figure for both revenue and after-tax profit. Futures on all three major U.S. indexes are up around 0.4%. Still, longer Treasury yields remain stubbornly stable. The 10-year yield was up 1 bp to 2.84% and stuck near the middle of its trading range since early February. Longer yields in Europe were also capped Wednesday by slower-than-expected inflation reports. The U.K.’s latest release (2.5% YoY, core 2.3% YoY) showed a further receding of currency effects and the Eurozone’s CPI flash estimate of 1.4% YoY was revised down to 1.3%. The 2-year Treasury yield increased 0.8 bps to trade above 2.40% for the first time since August 2008 and the 5-year yield added 1.4 bps to reach 2.70%, a new high since April 2010.
Utility Swings Lift Industrial Production in March: Industrial production was stronger than expected in March, rising 0.5% MoM versus the median estimate for a 0.3% gain. Utilities output increased at a faster 3.1% monthly pace, thanks mostly to an outsized gain in natural gas usage (+15.6% MoM versus -12.9% MoM in February), and helped offset slower manufacturing (+0.1% MoM) and mining (+1.0% MoM) activity. The swings in utilities usage lend themselves to an explanation of unusual weather patterns. While manufacturing activity did ease in March, the sector has been strong recently. That strength can also be seen in utilization, which has risen from 75% in late 2016 to 78% last month, its highest level in three years.
Flood of Fedspeak: John Williams, current San Francisco Fed President who will soon take over the New York operations, said in a Tuesday speech that he has a positive outlook for the U.S. economy and believes inflation is closing in on 2%. He supports the Fed continuing with the gradual rate hikes to keep the economy from overheating. Williams expects unemployment will reach 3.5% next year and sees signs that wages are picking up, a trend he believes will continue. He expects inflation will get a nudge from fiscal policy and slightly exceed 2% for a few years. He also believes fiscal stimulus could help create a high-pressure economy for the next few years. Addressing potential curve inversion, Williams called it a powerful recession signal but described the current flattening as normal. And while he doesn’t expect the curve will invert, Williams thinks longer yields will move up, he noted that he would take such a situation seriously.
Chicago Fed President Evans doesn’t “foresee an outsized risk of a break out in inflation,” which should continue to give the Fed leeway for a patient and gradual path of rate increases. Evans added, “I’m definitely optimistic we’re on our way to 2%. …I don’t really see a lot of pressure beyond that. …The puzzling aspect of this is that (the) labor market seems very strong and yet employers aren’t competing against each other to get the workers they need.”
Fed Governor Quarles focused on bank regulation in his testimony before the House Financial Services Committee and while Philadelphia Fed President Harker said that the unemployment rate was at or below its natural rate, he didn’t address monetary policy in a speech centered on student loan levels.