The Market Today

TODAY’S CALENDAR

Mortgage Applications Cooled as Rates Recovered: Mortgage applications pulled back in the week ended June 8 after rising for the first time in seven weeks in the prior release. Total applications pulled back 1.5%, matching the decline in both purchase and refi requests. Interest in fixed rate products fell 1.1% while activity in adjustable-rate offerings dropped a larger 6.4%. Conventional mortgage applications slowed 3.4% from a prior-week rebound while interest in government-backed loans rose 5.7%. The MBA data showed the average 30-year mortgage rate rose 8 bps on the week to 4.83%, just 3 bps from its highest level since 2011 reached in the week of May 18.

 

Energy Impacted Producer Prices as Core Reflects More Gradual Firming: Producer prices were firmer than expected at the headline level but fell short of estimates when stripping out some of the more volatile categories. All-in prices rose 0.5% MoM, compared with estimates for a 0.3% gain, which pushed the YoY rate up from 2.6% to firmer-than-expected 3.1%. The YoY rate matched its fastest pace since 2011. As was the case in yesterday’s CPI report, energy prices, which rose 4.6%, were responsible for most of the increase. Food prices recovered after falling 1.1% in April but were up only a modest 0.1%. Stripping out those effects, as well as a 0.9% gain in trade prices, core producer price rose a more tame 0.1%. While 0.1% below expectations, the monthly increase lifted the YoY rate back to 2.6%. Bottom line: Notable increases in the cost of energy have had an outsized impact in this week’s inflation reports. This was the case in Tuesday’s CPI report and again in this morning’s producer price data. But adjusting out the effects of energy swings, trends in the core measures also reflect a continued gradual firming in underlying inflation pressures.

 

25-Basis Point Hike Baked In Leaving Investors Focused on the Forward Guidance: As discussed in Monday’s Market Today, investors fully expect the FOMC to raise its target range to 1.75% to 2.00%. A technical adjustment in the implementation note could show just a 0.20% increase in the IOER rate in an attempt to bring the effective overnight rate back closer to the middle of the range. This too would be in line with expectations. More importantly will be changes to the Statement and Summary of Economic Projections as well as any color given by Chair Powell in his press conference:

 

• The economic data has firmed a bit since the Committee met in May and may drive a modest upgrade to the Statement’s current assessment.
• More interesting and impactful will be any changes to the forward-looking language. Are the risks still roughly balanced or has there been enough improvement to remove the caveat? Will they continue to say “policy remains accommodative”? Will they still forecast that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
• The SEP experienced notable changes in March for growth (stronger), unemployment (lower), inflation (modest overshoot), and the interest rate path (still 3 hikes in 2018, but +1.5 additional hikes by 2020). Considering May’s unemployment rate equaled the Fed’s projection for the end of the year, they may opt to lower their expectation again.
• Changes to the outlook could determine if one of the eight officials from March who expected three or fewer hikes this year raises their 2018 dot to 2.375%. This would move the median expectation up to four hikes for the year.
• Powell will undoubtedly be asked about any and all of these in his post-meeting conference.

 

TRADING ACTIVITY

Yesterday – Markets Shrugged Off Singapore Summit, Saw Few Surprises in May’s CPI: It was a relatively uneventful day in U.S. markets as equities were mostly steady and Treasury yields moved only modestly above Monday’s finish. The summit between the leaders of the U.S. and North Korea ended with a high-level agreement that implies there is more to do but without a disturbance of calmer geopolitical waters. May’s CPI inflation report was as expected and showed a steady but unalarming increase in the cost of a broad basket of consumer goods. The lack of excitement left the Dow ended essentially flat for a second day and the S&P 500 up just under 0.2%. Strength in tech boosted the Nasdaq 0.6%. Tech companies within the S&P strengthened as well but utilities stocks rose the most. Financial companies finished near the bottom, likely impacted by the term structure between the 2-year and 10-year Treasury yields reaching a new cycle-low of 42 bps. The 2-year yield rose 1.8 bps to 2.54% while the 10-year yield added a smaller 0.9 bps to 2.96%.

 

Overnight – Markets Trade Unevenly as They Await Refreshed Guidance from the Fed: Global equities have moved in different directions overnight while sovereign yields have ticked lower as investors await the Fed’s afternoon announcement. Stocks weakened in Asia but are stronger across most of Europe while U.S. futures were earlier up between 0.2% and 0.3%. Chinese equities led the weakness in Asia as shares of ZTE Corp. sank after resuming trading for the first time since April. The company has been caught up in the trade spat between the U.S. and China and become a topic of contention for U.S. law makers. Shares of the company limited down at -10% on the mainland but plunged more than 40% in Hong Kong. Italian yields stand out amid Wednesday’s small moves down for most global yields. Auctions of multiple maturities drew solid demand as political pressures have continued to abate. Moves in the U.S. Treasury curve more closely mirrored German Bunds, with a modest flattening around the 5-year note. Just a few hours before the Fed is expected to announce another 25 bps of tightening, the spread between the 2-year (+1.0 bps) and 10-year (-0.4 bps) had slipped to a new cycle-low of 40.4 bps.