The Market Today

Weak Eurozone Data Pushes Treasury Yields to 2017-Lows Overnight

by Craig Dismuke, Dudley Carter

Today’s Calendar – JOLTs Report:  The only report on the economic calendar today is the April JOLTs report.  The report is expected to show a slight increase in job openings which continue to run at very high levels.  Given the lag in the JOLTs data, it tends to not have a big impact on the markets.


Overnight Activity – Treasury Yields and the Dollar Touch New Post-Election Lows as Risk-Off Permeates Overnight Session: Sovereign yields reversed yesterday’s rise as Monday’s slight risk-off trade in the U.S. strengthened in the global overnight session. Treasury yields fell as the Yen rose and European equities tracked most exchanges in Asia lower. As was the case yesterday, markets continued to search for a catalyst to push markets definitively in one direction or another. With not much on the calendar before Thursday (U.K. parliamentary election, Comey’s Senate Testimony, ECB decision), the market’s most recent memory remains last Friday’s disappointing U.S. payroll report. In Europe, the Eurozone’s retail PMI cooled in May (softer Germany and Italy, stronger France) after reaching an almost two-year high the month prior. This preceded data showing actual retail sales were weaker than expected in April and March was revised softer. Tuesday’s risk aversion pushed the 5- and 10-year Treasury yields to their lowest levels of the year, and the lowest since November. The 5-year yield is down nearly 4 bps to 1.70% while the 10-year yield shed a full 4 bps to 2.14%. Between the 2- and 10-year notes, the curve flattened to an eight-month low (October 3). Equity futures were down 0.3% and the Dollar fell to a new low for the year.


Yesterday’s Trading – Stocks Come Off of Friday’s Record Close as Treasury Yields Rise from Key Technical Levels: An uneventful day for stocks left the major equity indices marginally below Friday’s closing levels as gains in energy shares and consumer staples only partially offset losses in utilities, materials, and industrials. Energy companies’ tallied a Monday-best 0.2% gain despite crude prices falling back towards their lowest levels in nearly a month. Rate-sensitive utility companies took a hit as Treasury yields moved higher by 1.4 bps on the 2-year note (1.30%) and 2.3 bps on the 10-year note (2.18%). The day’s economic data was a touch on the soft side but failed to push Treasury yields further through key technical levels tested last Friday. The Dollar inched up off of Friday’s closing levels which was the weakest level since early October. Oil prices fell and have now moved lower in six sessions out of the last eight as OPEC’s announcement that it would extend production cuts has failed to boost prices.


Factory Orders Show Only Slight Positive Revisions to Business Activity: The April Factory Orders report was as expected, with headline orders down 0.2% from March. However, the March data was revised higher (+0.2% to +1.0%), putting overall orders on a firmer trajectory than before. The report included final updates to initial estimates for orders of capital and durable goods, with the two datasets faring differently in revisions. Durable goods orders were slightly weaker than initially estimated, down 0.8% in April; down 0.5% when excluding transportation items. Business activity looks better after the initial estimate of unchanged orders was revised to +0.1% and shipments were revised from -0.1% to +0.1%. All told, weak durable goods orders offset a slight gain in nondurable activity and the trajectory of business spending in April appears to have slowed from its solid 1Q pace.


ISM Services Survey Softens More than Expected: The ISM Non-manufacturing index slipped further than expected in May. After rebounding to 57.5 in April, the May index dropped to 56.9 compared with a smaller expected decline to 57.1. The details of the report offered a mixed outlook for a couple of the key underlying indices. New orders dropped 5.5 points to 57.7, a post-election low, after reaching a near 12-year high in April. Production weakened, export orders pulled back from a ten-year high, and the prices paid index dropped into contraction for the first time since February of last year. On a positive note, the employment index climbed to its best level since July 2015 and the inventories index matched a 12-month high. The report echoes the messaging in the broader economic dataset: a slight weakening in actual activity, firming labor data, and no signs of significant inflation pressures.

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