The Market Today
Vining Sparks 3Q Economic Outlook Webinar; Yellen Shows More Concern over Weak Inflation
by Craig Dismuke, Dudley Carter
Vining Sparks will host our 3Q economic outlook webinar this morning at 10 a.m. CT. The webinar, entitled The Moderation of Great Expectations, will cover five primary topics: 1) an update on economic developments in the U.S. this year, 2) an overview of diminished expectations from fiscal policymakers, 3) the transformation of a blindly dovish to a blindly hawkish FOMC, 4) the impact of evolving monetary policies outside the U.S., and 5) the implications for interest rates for the remainder of the year. To register, please click here.
Today’s Calendar – Yellen and Brainard Speak; Producer Prices Show No New Inflation Pressure: Initial jobless claims for the week ending July 8 fell from 250k to 247k. Despite a recent uptick in initial and continuing claims, the claims data continue to look very solid for the labor market. June’s producer price report showed less core inflation in the production pipeline than expected. Headline prices rose 0.1% MoM bringing the YoY rate down from 2.4% to 2.0%. Core prices, excluding food and energy, also rose 0.1% MoM bringing the YoY rate down from 2.1% to 1.9%. This was fractionally weaker than expected and continues to affirm that there is little inflation pressure coming from the production side. At 7:45 a.m. CT, the Bloomberg Survey of Economists will be released. Most importantly today, Fed Chair Yellen will continue her congressional testimony today appearing before the Senate. Additionally, Fed Governor Brainard will be speaking at noon CT.
Overnight Activity – Stocks Gain, Yields Turn Higher on Report of Possible ECB Tapering Announcement: Global stocks are stronger overnight following big gains yesterday in the U.S. (more below). Economic data from the world’s second largest economy was risk supportive. Exports from and imports into China in June were improved from May and stronger than expected. Sovereign yields had moved lower but have reversed within the last couple of hours. The reversal occurred at the same time the WSJ released a report that ECB President Draghi will speak at the Fed’s Jackson Hole Conference next month. The same report also noted that, according to an unnamed ECB official, the ECB’s September meeting may include forward guidance that tapering of its QE program could begin in 2018. Though the Dollar is weaker against most major currencies, another day of weakness in the Euro has kept the greenback afloat. Crude prices have moved lower despite a significant weekly drawdown in U.S. crude and gasoline inventories. The turnabout was spurred by an International Energy Agency report signaling less confidence that the “process of rebalancing” the global oil supply has begun. Tech is leading U.S. equity futures higher and Treasury yields are up just over 1 bp across the curve.
Yesterday’s Trading Activity – Dovish Take on Yellen’s Remarks Spurs Rally in Equities and Treasurys: Fed Chair Yellen’s prepared remarks, released before markets opened and ahead of her actual Senate testimony, roused U.S. assets early. Those remarks included a comment that she believes inflation’s response to the economy is the “key uncertainty” right now and echoed a Tuesday comment from Governor Brainard that the Fed may not have much further to go to get the overnight rate to its neutral level. Treasury yields fell as those comments crossed the wires, depicting the markets dovish interpretation of these views. On the day, the 2-year yield dropped 3.2 bps to 1.34% while the 5- and 10-year notes fell roughly 4 bps to 1.87% and 2.32%, respectively. The Dollar initially tumbled but recovered to almost unchanged after a swift strengthening against the Euro and sharp weakening against the Canadian Dollar. Equity investors cheered Yellen’s tone and pushed all three major indices to strong daily gains and the Dow to a new record high. The Dow gained 0.7% as the S&P added 0.7% and the Nasdaq rallied 1.1%.
Yellen’s Testimony: Economy Doing Well, Wages to Grow, Balance Sheet Normalization in 2017, Watching Inflation Closely: In her prepared remarks, Fed Chair Yellen signaled support for starting to slow portfolio reinvestments sometime in 2017. In the Q&A portion of her Senate testimony, she went further, saying she supports starting that normalization process “relatively soon”. She expects that the Fed’s “methodical” description of the normalization plan to the public will allow it go smoothly. She’s unsure about the ultimate size of the portfolio but expects it to be comprised primarily of Treasurys. Yellen expects the economy will continue to grow and believes further tightening in the labor market will eventually boost wages. This should help inflation head towards the Fed’s 2% target on a sustainable basis. On inflation, she mentioned the couple of categories that have led the Fed to believe the recent weakness is transitory. But, she did dovishly admit that the recent weakness in inflation is only “partly” due to those factors. After Yellen’s testimony, the story on the Fed is that there’s agreement on beginning balance sheet normalization this year but slightly greater concern over the recent weakening in inflation which could impact the rate path.
Fed Beige Book Shows Consistent Wage Pressure, Slightly Softer Economic Growth: The July edition of the Fed’s Beige Book said economic growth ranged from “slight to moderate” across the Fed Districts, a marginally weaker characterization than the “modest or moderate” growth in the May report. The report said, “Consumer spending appears to be rising across a majority of Districts, …However, many Districts noted some softening in consumer spending, particularly in auto sales.” It also said “labor markets tightened further”, creating a shortage of workers in some cases, and wage growth remained “modest to moderate.” However, price pressures remain only modest. The details have changed some since May but the plot of stable economic growth, a tightening labor market with some noticeable wage gains, but only modest inflation pressures remains the same.
Draghi to Give Speech from Jackson Hole: As former Fed Chairman Bernanke did several times, it is speculated that ECB President Draghi will use a speech from the Kansas City Fed’s Jackson Hole Symposium to deliver a message on future monetary policy. According to a report from the WSJ, Draghi may use the speech to signal “growing confidence in the Eurozone economy and its reduced dependence on monetary policy. Developments at the ECB are critical for U.S. interest rates as we will discuss in our 3Q economic outlook webinar today.