The Market Today
Today’s Calendar Has Some Important Data: ISM, Construction Spending, Fed Minutes
by Craig Dismuke, Dudley Carter
Today’s Calendar – Mortgage Applications Up, ISM and Construction Spending at 9 a.m. CT, FOMC Minutes after Lunch: Overall mortgage applications ticked up 0.7% in the final week of 2017 as refinancing activity increased 1.4% and offset a small 0.1% drift lower by the purchase index. The small weekly gain was driven completely by demand for fixed rate mortgages which rose 1.4% compared with a 10.1% decline in adjustable rate debt. The weekly pullback marked the biggest weekly decline for adjustable rate mortgages since early July 2017. Looking back at all of 2017, purchase applications were stronger but refinancing slowed significantly with the biggest decline occurring alongside the post-election spike in interest rates.
At 9 a.m. CT, the ISM will release its December manufacturing index and the Census Bureau will disclose construction spending results for November. The ISM manufacturing index is expected to be unchanged for December after inching lower in the last two reports. The expected 58.2 would be a still-respectable reading that would keep the index at one of its best levels of the cycle. Construction spending, which rose a surprisingly-strong 1.4% in October (expected +0.5%), is expected to improve another 0.5%. Auto sales data for the month of December will drift in throughout the day and are expected to show a slight uptick in the pace of car buying.
Later this afternoon, the Fed will release the Minutes from its December meeting where all but two officials voted to increase the overnight range to 1.25%-1.50%. In the refreshed projections from that meeting, the Fed forecasted stronger economic activity and a lower unemployment rate but left the median rate forecast for 2018 and 2019 unchanged. The lack of responsiveness in the rate forecast to the improved economic outlook was presumably the result of the median inflation forecast not budging. The discourse around those dynamics will be what markets are focused on when the Minutes are released at 1 p.m. CT.
Overnight Activity – Stocks Improve but Yields Recoil after Yesterday’s Rally: Yesterday’s solid session in the U.S. (more below) seems to have given global equities a positive push overnight and sovereign yields have returned lower after yesterday’s surge. Equities were firm across the Asian markets that weren’t closed for holidays and the Stoxx Europe 600 was higher by just over 0.2%. As was the case yesterday in the U.S., technology and energy companies are driving the strength in Europe. U.S. equity futures are up but not to the degree of yesterday’s pre-market positioning higher; the Dow is leading with a daily gain of 0.21%. European sovereign yields are leading Wednesday’s retreat with the peripheral countries the outperformers. Off of earlier-session lows, the 10-year yields in Italy and Spain were down 3.5 bps and 2.9 bps while similar maturity debt from France and Germany were approximately 2.5 bps lower. Shorter yields have moved less which has helped to partially unwind yesterday’s steepening. Treasury yields have also moved lower with the 2-year yield unchanged and the 10-year yield 1.3 bps lower at 2.45%. The Euro and British Pound eased which finally gave the Dollar a lift for just the third time in 13 sessions.
Yesterday’s Trading Activity – Strong Start to the New Year as Treasury Yields Climb with Stocks: The Nasdaq started 2018 by extending the impressive run it registered for 2017. After rallying more than 28% last year, the tech-heavy index started the new year by climbing 1.50% and closing above 7,000 for the first time in its history. The S&P closed up a smaller 0.83%, but also at a new record high, and the Dow trailed with an even more modest 0.42% improvement. But the strength was broader than just technology with three S&P sectors rising by more on Tuesday. Energy companies gained 1.8% while consumer discretionary and materials moved up 1.5%. The gains in the energy sector unfolded even with crude prices weaker on the day. Both U.S. and Brent crude eased off of their highest levels in two-and-a-half years; U.S. crude held above $60 per barrel for a second day. Several S&P sectors fell, however, with the biggest losers being those companies which get buffeted when interest rates rise. Treasury rates rose to recover a portion of last week’s drop. Treasurys were under pressure even before stocks began their daily ascent with European yields snapping higher in response to strong PMIs and hawkish remarks from an ECB official. The 2-year U.S. Treasury yield closed up 3.6 bps at 1.92% with the 5-year yield 4.2 bps higher at 2.25%. Further out, the 10-year yield added 5.6 bps to end at 2.46%. Notably, the inflation expectations component of the nominal yield accounted for roughly half of the daily change and crossed above 2.00% for the first time since March.