The Market Today

TODAY’S CALENDAR

Weaker-Than-Expected CPI Will Bolster Market Expectations for Fed Ease: Consumer inflation was softer than expected in May and will likely strengthen the pressure the markets are placing on Fed officials to ease policy amid increased economic uncertainty. The price of the full basket of consumer goods rose 0.08% last month while the core items increased by a slightly firmer 0.11%. Energy prices caused the divergence, dropping 0.6% in May and for the first time since January. On a year-ago basis, both headline (more than expected) and core (unexpectedly) inflation cooled, with headline falling from 2.0% to 1.8% and the core measure down from 2.1% to an at-target 2.0%. While recent months have had a mix of strengths and weaknesses, May’s report showed broadly softer pressures. After three months of firm readings, the important rent category rose a below-average 0.25%. Overall auto prices declined 0.4% despite a stable month for new vehicle pricing. Used auto prices fell 1.4% in May marking a fourth consecutive decline. That four-month stretch has knocked 3.7% off the seasonally-adjusted index, the sharpest such decline of the expansion. The medical categories were mixed on softer drug pricing but firmer services, but rose 0.3% in aggregate. Outside of an above average month for furnishing prices, the remaining categories reflected weak to modest inflation pressures. The absence of signs of overheating in the consumer inflation data is likely to embolden market expectations for the Fed to ease policy in the months ahead.

 

Mortgage Applications Surge as Rates Tumble: Data from the Mortgage Bankers Association showed applications surged in the week ended June 7 as mortgage rates tumbled to new 21-month lows amid last week’s Treasury rally. Total mortgage applications spiked 26.8%, the second largest weekly gain of the cycle, to send the index to its highest level since September 2016. In the details, refinancing activity soared 46.5%, also the second best week of the cycle, to push the index to its highest level since rates popped higher after President Trump’s 2016 election victory. The MBA reported its 30-year mortgage rate fell from 4.23% to 4.12%, the lowest since September 2017 and down approximately 0.70% from the same week a year ago. The lower rates also boosted purchases, which posted their second best week of the year. Total purchase applications rose 10% from the week prior, were also up 10% from a year ago, and ended a four-week run of weakness. While inconsistent across other housing reports, the applications data in 2019 have several times reflected a silver lining of uncertainty and lower interest rates.

 

TRADING ACTIVITY

Yesterday – Longer Yields Gave Back Overnight Increases as Stocks Gave Up Early Gains: Positive global momentum from the overnight session rolled over on Tuesday during U.S. trading. U.S. equities gapped higher at the open but quickly gave up those gains, ending the day almost on top of where they started. The Dow made the biggest shift of the three major indices, dropping 14 points, or 0.05%. Six of the S&P 500’s sectors rose Tuesday, led by consumer-related stocks, while the trade-sensitive industrials sector led losses among four others. The financials sector finished the session unchanged. While shorter yields clung to most of their overnight climb, longer yields gave up their gains to close modestly lower. The 2-year yield rose 2.6 bps to 1.93%, a high for June, as Fed Funds futures reflected marginally softer expectations for the Fed to cut rates. Still, the contract gauging expectations for the rest of the year kept nearly 60 bps of easing priced in by the end of 2019. The 5-year yield was unchanged at 1.92% while the 10-year yield dipped 0.5 bps to 2.14%. A slow news day gave investors little impetus to commit to moving asset prices in either direction ahead of today’s consumer price inflation data.

 

Overnight – Equities Weakened and Yields Decline as Investors Await U.S. Consumer Inflation Data: Global stocks retreated Wednesday ahead of this morning’s important U.S. inflation data and after the S&P 500 ticked lower Tuesday to snap a five-day win streak. Hong Kong’s Hang Seng index dropped 1.7% amid ongoing protests there and led losses across the region. While the U.S. and Mexico removed the threat of tariffs for now, tensions between the U.S. and China have continued to simmer this week ahead of the important G-20 meeting later in June. China’s CSI 300 dipped 0.8% after gaining 4.3% to start the week. Stocks have retreated across Europe as well, dragging the Stoxx 600 down 0.5% and putting the index on track for just its second down day this month. Oil prices had also pulled back more than 2% to near a five-month low after a report yesterday indicates U.S. crude inventories may have grown more than expected last week. Ahead of this morning’s CPI inflation report, which could conflict or reinforce the market’s conviction for a summer Fed rate cut if actuals vary from estimates, U.S. equity futures were down 0.2% and Treasury yields pulled back. The 2-year yield was 2.8 bps lower around 7 a.m. CT at 1.90% with the 10-year yield 1.9 bps lower at 2.12%.