The Market Today
Trump Cancels N.K. Summit; Now Spanish Political Turmoi
by Craig Dismuke, Dudley Carter
Durable Goods Orders Solid but No Signs of Rampant Acceleration Just Yet: April’s Durable Goods Orders report showed better-than-expected results when excluding transportation items. Headline orders fell 1.7%, driven lower by a 29% decrease in non-defense aircraft orders. However, when excluding this volatile category, orders rose 0.9%, almost doubling expectations. In the ever-important capital goods orders, a proxy for business investment in equipment in each quarter’s GDP reports, orders jumped 1.0% (exp. +0.7%). Shipments of those same items rose a hearty 0.8%, doubling expectations. While business investment in equipment has yet to ramp up significantly following last year’s tax reform package, growth has stabilized and appears poised to accelerate into the second half of the year. For now, it appears that business investment will be accretive to growth in 2Q once again.
Memorial Day Holiday: Today is a recommended early close for the bond market in anticipation of the Memorial Day Holiday. The markets will be closed on Monday. Memorial Day is the day American’s set aside to honor all Americans who have given their lives in war. There have been 1.2 million Americans who have given their lives in combat (U.S. Department of Veterans Affairs). This includes the Civil War (498k), WWII (405k), WWI (117k), Vietnam (58k), Korea (54k), Revolutionary (25k), War on Terror (6k), and many others. Thank you to the families of those men and women.
Yesterday – U.S. Called Off Meeting With North Korea As Geopolitics Made their Way Back to the Forefront: U.S. stocks fell Thursday but finished off early morning lows reached after President Trump said he was forced to cancel the upcoming meeting with North Korea “based on the tremendous anger and open hostility displayed” by the country’s government. North Korea’s Foreign Ministry had referred to U.S. Vice President Pence as a “political dummy” for his reference to the Libyan nuclear approach and said “Whether the US will meet us at a meeting room or encounter us at nuclear-to-nuclear showdown is entirely dependent upon the decision and behavior of the United States.” That added to investors’ worries which were already dampened by the U.S. administration announcing it was investigating whether auto imports posed a national security threat that warranted tariffs. The S&P 500 closed down 0.2% after clawing back from its early 1.0% drop. The Treasury curve also closed lower but had moderated from its biggest moves. The 2-year yield dropped 2.0 bps to 2.51%, its lowest level in almost three weeks, while the 10-year yield fell 1.6 bps to 2.98%.
Overnight – Sovereign Yields Lower as Stocks Struggle, Spanish Politics Weigh, and Oil Prices Slide: Equities were weaker across Asia and modest gains in the two largest European countries were overshadowed by a politically driven sell-off in peripheral European assets. Several opposition parties announced support for a no-confidence vote against Spanish PM Rajoy after racketeering convictions were handed down to several former members of his party. While it’s still early in the no-confidence process, it compounds political worries in the region sparked by the nascent populist coalition in Italy. The Spanish and Italian 10-year notes were up around 9 bps while Germany’s 10-year note fell roughly 5 bps as investors moved into safer core bonds. Italy’s 2-year note, up 27 bps on the day, reached its widest level against a comparable German bund since 2013. The bid for safer sovereigns also helped push the 2-year Treasury yield down 2.0 bps and the 10-year yield 3.5bps lower. The Dollar firmed to its strongest level against the Euro since November. Also of interest, oil prices were more than 2% lower after Saudi’s Energy Minister said a gradual oil supply boost from OPEC was likely in the second half of the year as the effect of current prices on consumer have become a concern. The average cost of a gallon of gas in the U.S. rose to $2.97 yesterday, the highest level since November 2014.
Existing Home Sales Slowed in April: The tug of war between steady demand and sparse inventories continued in the April existing home sales data. Sales dropped 2.5% MoM in April, a steeper decline than the 0.9% decrease expected by economists. But it seems the primary issues remained on the supply side of the equation, as a key indicator of demand remained buoyant. The average home sold in just 26 days, down from the prior five-month average of 37.8 days and 29 days a year ago. Despite a seasonal uptick in inventories relative to March levels, available inventory tightened on a YoY basis for the 35th consecutive month. The confluence of those two factors was a higher median sales price of $257.9MM, 5.3% higher than a year ago and the third highest on record.
Harker Said 2019 Could Mark the End of the This Cycle’s Tightening: Philadelphia Fed President Harker, who had earlier in the week shown support for two more rate increases, said again Thursday that “When I began this year I had three 25 basis-point increases for this year and for next year. Haven’t moved far from that.” Also consistent with his Monday remarks, he noted that “if we see inflation start to accelerate, then I would be open to a fourth increase this year. …I’d have to see evidence of that first. …If we’re creeping up to 2% and we creep up to 2.25% that’s a different story than we’re accelerating past 2%. I think we behave different — at least I would as a policy maker.” Harker, who estimates the neutral rate is around 2.75% to 3.00%, said “If we can hit neutral and stay around there…then I’d be comfortable with that,” adding that it’s possible 2019 could represent the end of the this tightening cycle.