The Market Today

Strong Earnings, Solid Eurozone Data Pressure Yields Higher

by Craig Dismuke, Dudley Carter

Today’s Calendar – Home Prices, Consumer Confidence, House to Vote on Arbitration Rule: After yesterday’s disappointing existing home sales report, today’s calendar will bring two home price reports.  While the majority of the housing data has been disappointing and choppy, the home price indices have been unwaveringly consistent.  The S&P CoreLogic 20-City index is expected to show annualized price gains rose from 5.67% to 5.80% while the FHFA Home Price index is expected to show purchase prices rising at a 6.9% rate.  Low inventories and higher construction costs continue to drive sales prices.  At 9:00 a.m. CT, the Conference Board will release its May Consumer Confidence report and is expected to show a slight pullback.  The index is currently at its highest level since 2001, saving the March and April 2017 reports.  Also at 9:00 a.m., the Richmond Fed will release its regional manufacturing index in the midst of a host of weakening manufacturing reports.  The House is expected to pass legislation today reversing a CFPB rule which bans mandatory arbitration clauses in lender contracts with borrowers.  The Senate is expected to vote on whether or not to proceed with healthcare legislation.


Overnight Activity – European Confidence Boosts Yields, Saudi Boosts Oil, Earnings Boost Dow Futures: Global sovereign yields are under pressure Tuesday following record level confidence in Europe, another daily gain for oil prices, and earnings-driven strength in U.S. futures. A minute-by-minute yield chart of the 10-year German Bund showed the biggest move higher in yield at 3 a.m. CT, the same time German business confidence was reported at its highest level in 16 years. The third consecutive record reading in Germany followed stronger than expected confidence in France. Confidence remains high in Europe and on the side of stronger economic growth (and the hawks at the ECB). The second notable move up in yields occurred an hour later as crude prices made their sharpest daily jump. U.S. WTI is up nearly 3% in the last two days after Saudi Arabia said on Monday that they would cut exports in August. Just after 7 a.m. CT, Dow futures surged following strong corporate earnings from several key components (DuPont, United Technologies, Caterpillar, McDonalds). Looking at the Treasury curve, the 2-year yield is up 2.5 bps to 1.38% and the 10-year yield is 3.9 bps higher at 2.29%. Despite rising Treasury yields and stronger equities, the Dollar sank to a new post-Brexit low on big moves against European currencies.


Yesterday’s Trading Activity – Dollar Rises with Treasury  Yields as Gains in Tech Buoy Stocks: The Treasury curve rose Monday and yields ended near their highs of the day. The 2-year yield closed up 1.7 bps at 1.36% as the 5-year (1.82%), 7-year (2.07%), and 10-year (2.26%) notes rose just under 2 bps. There was no clear catalyst for the rise, but instead yields steadily drifted higher throughout the session. As yields rose, so did the Dollar. The move in the currency was only minor and driven mainly by an easing Euro. The Euro had reached a 30-month high close last Friday. The higher yields also coincided with the financials sector’s first place finish within the S&P. Technology was the only other sector to notch a gain and the broader index closed down 0.1%. The Dow also slipped, falling 0.3%, but tech’s strength pushed the Nasdaq 0.4% higher and to a new record close.


June’s Existing Home Sales Start Week off on Weak Note: Existing Home Sales for the month of June disappointed expectations, falling 1.8% MoM versus expectations of a 0.9% decline.  Single family sales dropped 2.0% while multi-family sales were flat.  The weakest region was the South, dropping 4.7%  while sales in the Midwest rose 3.1%.  On a year-over-year basis, existing home sales are now up just 0.7%.  The inventory of homes for sale fell 10k although the months’ supply rose from 4.2 to 4.3 months.  The median sales prices of homes sold rose from $252,500 to $263,800 (not seasonally adjusted) bringing the YoY rate of price gains to 6.5%.  The housing data continues to perplex economists with very choppy data and frequently disappointing reports – despite lowered expectations.


Obamacare Architect Now Says Mortgage Interest Deductions Don’t Work: The WSJ ran an article yesterday afternoon, Mortgage Interest Tax Break Has ‘No Effect’ on Homeownership, Study Finds, citing research from MIT’s Jonathan Gruber and other researchers.  According to the research report which evaluated Danish housing trends in the 1980s, “Over multiple time periods, and considering multiple empirical strategies, we find no effect of the tax policy change on whether households own or rent.”  Gruber said in an interview yesterday, “I really view this as putting a nail in the coffin of the idea that this tax break affects homeownership.”  Unfortunately, Gruber has a checkered past when it comes to policy discussions.  As the “architect” of Obamacare, Gruber has a history of manipulating/hiding facts when he believes the outcome is worthwhile.  In a post-ACA-passage interview, Gruber infamously said, “Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really, really critical for the thing to pass…Look, I wish Mark was right that we could make it all transparent, but I’d rather have this law than not.”  A central tenet of tax policy has long been that tax breaks encourage economic activity which policymakers deem as being positive, from capital investment to philanthropic giving to homeownership.

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