The Market Today
With Oil Already above $70/Barrel, President to Announce Decision on Iran Deal Today
by Craig Dismuke, Dudley Carter
What to Watch – President’s Announcement on Iran Nuclear Accord: While the Small Business Optimism Index and JOLTs Reports are important pieces of economic data, today’s announcement from the president regarding the U.S. commitment to the Iran nuclear accord has more potential to drive the markets. He is scheduled to make his announcement at 1:00 p.m. CT. With oil up over $70 per barrel for the first time since 2014, abandoning the Iran deal would likely push oil even higher (it would presumably take Iran’s large supply of oil off the table for some buyers).
Small Businesses “Surge of Optimism” Continues: Small business optimism rose fractionally from 104.7 to 104.8. The lead from the underlying data was an increase in the net percentage of small business owners citing improved earnings. In fact, the net percentage was the highest in the history of the data at -1% net. For context, the average net response on earnings improvement going back to 1973 has been -18%. Respondents’ expectations for capital spending rose 3% to net +29%, and respondents’ expectations for higher sales rose 1% to +21%. Those expecting to raise wages in the future rose 2% to +21%. Some of the other underlying data did weaken, but remained strong overall. The net percentage of respondents expecting a better economy fell 2% to +30%; and, those expecting to hire fell 4% to +16%. According to NFIB Chief Economist Bill Dunkelberg, “There is no question that small business is booming … Consumer spending, the new tax law, and lower regulatory barriers are all supporting the surge in optimism across all small business industry sectors.”
JOLTs Report: The March Job Openings and Labor Turnover report is expected to show job openings bounce back up to 6.1 million at 9:00 a.m. CT. Job openings remain historically high while the number of un- and under-employed continues to shrink.
Yesterday – Stocks Finished Up But Off the Highs as Treasury Yields Loitered to End Little Changed: U.S. stocks rose Monday but some late afternoon volatility saw the major indexes pare early morning gains. The S&P 500 was up more than 0.7% before President Trump tweeted that he would announce his decision on the Iran nuclear deal on Tuesday. Markets had expected the announcement on May 12. The S&P 500, spooked by the nearness of potential changes to the tenuous relationship between the U.S. and Iran, nearly halved its gain and finished up just under 0.4%. Technology companies remained a bright spot. The same geopolitical concerns had also pushed oil prices to their highest levels in more than three years because of the potential for supply-negative sanctions on OPEC’s third largest oil producer. Oil prices fell after the President’s tweet. Treasury yields were much quieter, calming from some early morning swings to end almost where they started. The Dollar finished at its highest level of the year.
Overnight – Iran Announcement, Italian Politics in Focus on Tuesday: Concerns around President Trump’s afternoon decision on Iran has pushed equities in different directions and oil prices lower. Earlier strength in Asian equities has faded in European trading, leaving the Stoxx Europe 600 down 0.3% and U.S. futures weaker by similar amounts. Oil prices were off more than 1% and U.S. WTI had pulled back below $70 per barrel in anticipation of an announcement from the White House about the U.S.’s continued participation in the 2015 nuclear deal. Treasury yields again moved mostly sideways overnight but ticked up around 1 bp just prior to the U.S. session. European sovereigns were up more and being led by an outsized jump in Italian yields. Italy’s 10-year note yield jumped around 10 bps overnight after its President’s proposal for a temporary “neutral government” failed to satisfy key parties in the currently hung parliament. The ultimate outcome is a continuation of the political uncertainty and the potential for snap elections this summer.
Smaller Credit Card Balances Dragged Down Consumer Credit in March: Total non-mortgage consumer credit expanded a weaker-than-expected $11.6B in March as revolving credit contracted the most since 2012. According to the Fed’s latest consumer credit release, total outstanding non-mortgage credit rose an annualized 3.6% in March to $3.874B. The net increase occurred despite revolving credit, which consists primarily of credit cards, falling $2.6B, a 3.0% annualized contraction. The $2.6B decline was the largest since December 2012. Comparing quarterly figures, revolving credit contracted at an annual rate of 0.9% in 1Q after a boomy 10.3% increase in 4Q, consistent with the slowdown in consumer spending in the first 1Q GDP estimate. Non-revolving instruments, a category comprised primarily of student loans and auto notes, rose $14.2B, an annualized 6% rate.
Fedspeak, the Voters: There was a run of Fedspeak Monday, including comments from two of the four rotating FOMC members who vote on policy in 2018. Raphael Bostic, Atlanta Fed President, said he’s comfortable with “some overshoot” of the 2% inflation target, echoed his previous call for two more rate hikes this year, and said he expects “we are going to see wages start to go up” because of a shrinking pool of available labor. Thomas Barkin, head of the Richmond Fed, said high levels of consumer and business confidence support continued growth which could get an extra boost from fiscal stimulus. He added, “Monetary policy is still pretty accommodative…when unemployment is low and inflation is effectively at our target, we probably ought to go to neutral in that environment.”
Fedspeak, the Nonvoters: In addition to the comments from the current year voters, Dallas Fed President Kaplan and Chicago Fed President Evans both made public appearances of their own. Kaplan, who expects two more rate hikes this year, said he reads the current shape of the yield curve as the market’s skepticism of the medium-term outlook and commented that “we should be seeing higher wages” with “a lot of stimulus in the economy” and a “tight, very tight labor force.” Evans said structural changes could create headwinds for inflation going forward and noted it’s possible the neutral rate could move up if productivity picks up. Evans, a dove, latched onto the message of slack from last Friday’s payroll report that included a 3.9% unemployment rate but just 2.6% YoY earnings growth. Evans posited that the natural rate could be even lower than the 4.5% current Fed estimate.