The Market Today
Trade Rhetoric Continues; 1Q GDP Revised to 2.0%
by Craig Dismuke, Dudley Carter
1Q GDP Revised Down to +2.0%, Sets Stage for Even Better 2Q Result: The final revision of the 1Q GDP report showed a weaker-than-initially-reported quarter but paves the way for an even larger 2Q report. The economy grew 2.0% during the quarter, down from the previously released 2.2%. Dragging growth lower was weaker personal consumption (+2.2% revised down to +2.0%), weaker inventory growth (+20.2B revised to +13.9B), and a $6 billion larger trade deficit. Already, the 2Q consumption data shows that it is rebounding and will now be rebounding from a lower 1Q level. Inventories are expected to pick up, again from a lower 1Q level. And the 2Q trade data has, thus far, shown a surprisingly smaller trade deficit in 2Q. All of these factors should contribute to an even bigger increase in 2Q GDP which is already poised to grow over 4.0% based on the data received.
GDP Tracking Measures Show 4%-Plus Growth in 2Q: As shown in the Chart of the Day, while the Atlanta Fed’s GDPNow has created some sensational headlines in the past, it tends to normalize over the course of a quarter as more data is received. However, with much of the data now in, the GDP tracking metric still points to the economy expanding at 4.5% in 2Q.
Jobless Claims Remain Low: Also released, initial jobless claims for the week ending June 23 rose from 218k to 227k, higher than expectations but continuing to run at a very low level historically.
Yesterday – Treasurys Rallied, Flattened to New Cycle Low as Stocks Gave Up Early Gains: U.S. equities went on a wild ride Wednesday, initially rising on reports the U.S. wouldn’t be as restrictive as feared on foreign technology investments before tumbling back to close near their lowest ticks of the day as broader trade fears lingered. Stocks jumped at the open following a pre-market news alert from CNBC that “Trump’s tech crackdown on China less restrictive than expected”. Just before 10 a.m. CT, the S&P 500 had added nearly 0.9% and was on track for its best day since June 6. Around 10 a.m. CT, Larry Kudlow, the President’s Chief Economic Adviser, remarked that the aforementioned development on technology wasn’t a signal the White House was retreating on China. Stocks dipped and didn’t recover. Technology companies led the slide, evidenced by the Nasdaq’s day’s-worst 1.5% retreat. The sector was also the weakest within the S&P 500, which ultimately fell 0.9% on the day. Surging crude prices continued to shield energy companies and keep the sector atop the S&P. U.S. oil prices rallied more than 2.5% to a more than three-and-a-half-year high after a huge drawdown of U.S. inventories further fueled worries of shrinking global supplies. The Department of Energy reported U.S. inventories fell 9.9MM barrels last week, the biggest decline since September 2016. As equities weakened, the daily trend lower in Treasury yields intensified. The 2-year yield fell 3.0 bps to 2.50%, the lowest since June 8. The 10-year yield dropped 5.1 bps to 2.826%, the lowest since May 29. The net result was the spread between the two dropping for an 11th time in the last 13 sessions to a new cycle low of 32.0 bps. That helped drive financial stocks lower for a thirteenth consecutive session, extending the longest losing streak on record. Lost in the other news, the Dollar firmed in the flight to quality to its strongest level since July 2017.
Overnight – Global Equities Remain Under Pressure, Treasury Yields Level Off: Not much has changed overnight in the broader global story. Equities across most of Asia were weaker and the major European indexes were swimming in a sea of red. Keeping an eye on what’s happening in China, the three major indexes finished down another 1%, pushing them further into bear market territory in the face of elevated trade uncertainty. The CSI 300 is now down over 22% from its January 24 peak. The Chinese yuan also continued to weaken and remains at a six-month low against the Dollar. Yesterday’s turmoil in U.S. tech companies has translated into equally sharp losses for the sector in Europe. The Stoxx Europe 600 was also down 1% with tech companies creating the biggest drag. Safer European sovereigns remained firm in response, with the German 10-year yield falling 1.5 bps to just 0.30%, critically close to its lowest level in a year. U.S. futures were resilient for most of the overnight session even in the face of the continued global selling. However, around 7 a.m. CT U.S. futures sank to trade down around 0.5%. Treasury yields were flat.
Pending Home Sales Point to Continued Struggles for Existing Homes Transaction: Pending home sales fell for a second month in May and have now missed estimates in five of the last six reports. Total pending sales slipped 0.5% in May because of a large 3.5% pullback of activity in the South, where existing sales account for roughly 40% of total activity. The other three regions that drive the remaining 60% of volume actually saw activity improve. Contract signings rose 2.0% in the Northeast, rebounded 2.9% in the Midwest, and edged 0.6% higher in the West. Stepping away from the monthly changes which tend to be noisy, the prognosis for future existing homes sales remains downbeat. Non-seasonally adjusted pending sales on a year-over-year basis have declined in 10 of the last 17 months. And looking at the seasonally adjusted index, pending sales have been in a clear downtrend since peaking in 2016. The NAR’s chief economist said, “Realtors in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled.”
Rosengren Sees Risk to Overly Hot Labor Market: Boston Fed President Rosengren (2019 voter) said in his prepared remarks that he believes “the policy path that will increase the probability of a longer recession-free period is the path where the economy does not run above capacity and thus, fall far below the sustainable unemployment rate.” Afterwards he said one of the factors that has allowed the Fed to tighten at a gradual pace relative to past cycles has been that “we haven’t seen much of a trade-off between inflation and unemployment, …We haven’t seen wages go up very rapidly yet.” He noted that “If you really think expectations are really well-anchored, maybe we can take a little more risk,” but cautioned that “We do need to think about, is inflation picking up faster than we think.” Thinking about the future, Rosengren said the Fed “focusing more on an inflation range than a specific number,” would be one approach to monetary policy that would potentially allow the Fed to “avoid hitting zero with short-term rates” again.
Bullard Said the Fed Should Stop Tightening, Risks Tipping Economy into a Recession if They Don’t: St. Louis Fed President Bullard (2019 voter) remains concerned that “there is a risk that we’ll go too far, too fast as a [Fed] committee.” The risk of inadvertently overtightening policy, which Bullard described in an interview with the WSJ, won’t be due to malfeasance, but rather a misunderstanding of where the equilibrium setting is for the Fed Funds rate. Bullard said the Fed should sit on their hands from here, cautioning “A misinterpretation of where we are is a distinct possibility, …That’s why I’m trying to push against faster rate hikes.” Bullard’s dot in the dot plot remains at 1.875% at the end of 2018, 2019, and 2020.