The Market Today
Treasury Takes Aim at Financial Regs; Markets Anticipate FOMC Meeting
by Craig Dismuke, Dudley Carter
Today’s Calendar – Business Optimism in Holding Pattern; Producer Prices Remain Tame: Today’s economic calendar is the last day of relative calm before the avalanche of data on Wednesday, including the FOMC rate decision. On today’s calendar, the May Small Business Optimism index held steady at 104.5 as expected. Small business confidence dropped for three consecutive months prior to the May report, peaking in January at 105.9. Since January, expectations for fiscal policy reforms have diminished somewhat dragging business confidence lower. Confidence remains high, but executives need to see some light in the tunnel soon if it is to remain so. In the May Producer Price report, prices rose 0.3% MoM at the core level (ex. food and energy) bringing the YoY rate up from 1.9 to 2.1%. Also excluding trade, prices showed weaker traction MoM highlighting the impact of the recent weakening of the Dollar. Regardless, there remains very little inflation pressure coming from the production pipeline.
The FOMC begins its two-day meeting today and investors are likely to be focused today on what to expect from tomorrow’s 1 p.m. CT Statement.
Overnight Activity – Tech Stabilizes after Two Days of Turmoil: Overnight trading patterns indicate slightly less risk aversion. Global equities have improved on a rebound in tech shares. Sovereign yields in France and Germany are higher while those in Italy and Spain fell. Stocks in the U.K. lagged the rest of Europe and U.K. government bond yields rose by 5 to 6 bps across the curve. The yield curve shift followed the most recent set of inflation data showing consumer prices rose 2.9% in May, matching the fastest pace since 2012. Core prices matched their fastest pace since 2011 at 2.6%. Sudden inflation pressures have been almost exclusively currency-driven and represent one of the most acute and immediate impacts of the Brexit decision on British citizens. The British Pound rebounded after the report. The Bank of England’s Monetary Policy Committee, which has repeatedly said “there are limits to the extent to which above-target inflation can be tolerated”, is set to announce its latest decision on Thursday. With an uneventful domestic economic calendar, the U.S. news cycle will likely be dominated by coverage of Attorney General Sessions’ testimony before the Senate and pontifications about the outcome of tomorrow’s Fed meeting. Treasury yields are essentially flat. The Nasdaq is leading equity futures higher and the Dollar weakened.
Yesterday’s Trading Activity – Sell-Off in Canadian Bonds Pressures Treasury Yields Higher, Offsets Solid U.S. Auction Results: Treasury yields rose Monday, recovering from a mid-morning rally that pushed yields to their daily lows around the lunch hour. Yields bottomed after metrics from the monthly 3-year note auction signaled strong demand; indirect bids took their largest share since September 2009. The monthly 10-year auction was also well received. Yields quickly reversed higher, however, after a senior official at the Bank of Canada hawkishly questioned whether “the considerable monetary policy stimulus presently in place is still required,” given the recent improvement in the country’s growth prospects. The comments sparked a sell-off in Canadian federal government bonds and sent the Canadian Dollar climbing to its strongest level against the U.S. Dollar since April 18. This pressured the 2-year Treasury yield back up 1.6 bps to 1.35%, just 2 bps shy of its cycle high. The 10-year yield rose 1.0 bps to 2.21% but remains at the low-end of its post-election trading range. The Nasdaq more than halved an early morning sell-off of 1.6% to avoid its worst two-day stretch since the Brexit vote almost a year ago. Losses for the Dow and S&P weren’t as severe as both fell less than 0.2%. Energy companies were a bright spot in the indices as U.S. crude prices climbed back above $46 Dollar for the first time in four days.
Treasury Report Proposes to Ease Financial Regulations: In a report issued on Monday, the U.S. Treasury Department proposed a significant number of regulatory reforms aimed at the U.S. financial services industry. Treasury takes aim at lessening the effect of the Volcker rule, making the annual stress test process less cumbersome and more scaled to an institutions size, and weakening the authority of the Consumer Financial Protection Bureau. Treasury Secretary Mnuchin commented, “We were very focused on, what we can do by executive order and through regulators. …We think about 80 percent of the substance in the report can be accomplished by regulatory changes, and about 20 percent by legislation.” As expected, the report drew praise and criticism split cleanly down the political party lines.