The Market Today

Yellen Expects No Financial Crisis in “Our” Lifetime

by Craig Dismuke, Dudley Carter

Today’s Calendar – Positive Inventory Data; Pending Home Sales; Draghi Clarification: The May Pending Home Sales report is expected to show a 1.0% increase in homes under contract for sale.  The pace of improvement in home sales has certainly decreased since 2015, falling from +13.5% YoY then to -5.4% today. However, last week’s New And Existing Home Sales reports provided a small respite from the recently disappointing data.  Unfortunately, this morning’s report on Mortgage Applications for the week ending June 23 was not encouraging, showing a 6.2% drop in apps as purchase apps fell 4.1% and refi apps dropped 8.6%.  This data is volatile and it is hard to make much of one report.  Broadly speaking, purchase apps have been trending higher while refis remain in the cellar.


May’s Wholesale and Retail Inventories reports were both better than expected, rising 0.3% and 0.6%, respectively.  Given weaker-than-expected data on consumption and business investment lately, an inventory rebuild is critical to GDP rebounding in 2Q.  Also positive this morning, the May Advanced Goods Trade Balance showed a smaller-than-expected deficit along with a positive revision to the April data.


Also on the calendar today is a 2:30 p.m. CT speech from San Francisco Fed Bank President Williams.  Williams is not a voting member this year but has been slightly hawkish in his comments recently.


Overnight Activity – Clarification of Draghi’s Intent Sparks Early Morning Volatility: After yesterday’s turmoil in tech stocks, the sector was beat up again overnight. Also weighing on sentiment, oil prices fell for the first time in five sessions after a U.S. industry report indicated inventories of both crude and gasoline inventories likely grew last week. The overnight bias for safer sovereigns had been for higher yields; a likely after-effect of yesterday’s surprisingly hawkish comments from the head of the ECB. However, within the last hour, a unnamed ECB official attempted to clarify that President Draghi was simply trying to “strike a balance” between improved economic growth in the Eurozone but the continued need for accommodation. The clarification boosted European stocks and pushed yields and the Euro to daily lows. The Treasury curve has added to yesterday’s steepening with the two-year yield down 1.6 bps to 1.35% and the 10-year yield 1.4 bps higher at 2.22%. The Dollar had slid further after yesterday’s postponement of a vote on the Senate health care bill and strong gains for the Euro. Excluding an intraday low from the day after the U.S. election, the Dollar touched its weakest level since October 6. However, it quickly pared those gains on the knee-jerk sell off in the Euro. U.S. equity futures are positive.


Yesterday’s Trading Activity – Tech Sinks Stocks, Euro Sinks the Dollar, Sovereign Yields Rise on Hawkish ECB Talk: Overnight losses in European stocks and rising European sovereign yields proved prescient indicators for moves in U.S. assets on Tuesday. The Nasdaq led the way lower again and tech companies were the biggest drag on the Dow and S&P. The S&P dropped 0.8% as the Dow fell 0.5%. Financial companies were the only sector to finish in positive territory in the S&P. Stocks lost some momentum after the Fed’s Fischer commented on valuations but made the biggest lunge lower after Senate leadership announced it was postponing a health care vote until after the July 4th holiday. The daily path for the Dollar and Treasury yields was well established ahead of the U.S. session after hawkish comments from ECB President Draghi boosted the Euro and lifted European sovereign yields. The Dollar sank more than 1% as the Euro moved to its strongest level against the greenback since August 2016. The 2-year yield increased 2.0 bps while the 10-year Treasury yield rose 6.6 bps to 2.20% after the German 10-year note added 12.5 bps. Between 2s and 10s, the curve experienced its greatest single-day of steepening of 2017.


Consumer Confidence Rebounds in June: The Conference Board’s Consumer Confidence Index unexpectedly rebounded in June on divergent shifts in the two key underlying metrics and within two key demographic groups. Consumers 35 years old and older who make at least $35k indicated greater confidence in the June survey. Those who are younger and earn less responded less confidently. As to the two key underlying metrics, the headline index rose to 118.9 in June (third best level since 2001) on the back of a big bounce in consumers’ assessment of the current situation; the expectations index weakened. The current assessment index was the strongest since July 2001, largely because of an improved view of the labor market. The labor market differential – those who believe jobs are plentiful minus those that believe jobs are hard to get – rose to 14.8%, the best since August 2001. As to expectations, fewer consumers expect to buy a car or home within the next six months and fewer expect stock prices or interest rates to be higher by this time next year.


Harker Holds to Call for Balance Sheet Roll-Off and Another Rate Hike Before 2018: In comments in London, Philadelphia Fed President Harker said he continues to expect the Fed to slow its reinvestments and raise rates one more time before 2017 comes to a close. He may revisit that outlook if inflation continues to disappoint but, for now, simply pushed the timing of when he expects inflation to reach the Fed’s target into 2018 as he believes the recent soft patch will prove to be transitory. Somewhat interestingly, he believes the relationship between unemployment and inflation still exists despite an acknowledgment that wages have disappointed even with unemployment at or below the natural rate.


Vice Chair Fischer Eyeing Asset Prices: In a speech around lunch on Tuesday, Fed Vice Chair Fischer said “There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks.” He cautioned that rising risk appetites should be closely watched and said high asset prices could lead to future stability risks. Elevated P/E ratios and a “notably leveraged” corporate sector were two risks he highlighted, although he did note the corporate debt picture had improved recently.


Yellen Doesn’t Move the Needle on Policy Outlook: In a speech in London, Fed Chair Yellen spent a measurable amount of her time discussing improvements in the safety and soundness of the U.S. financial system. She noted bank capital positions were much stronger, pointing to evidence in the continued improvement in stress test results. She went as far as saying another 2008-esque financial crisis was unlikely “in our lifetime.” On the current outlook, she said there are reasons to believe rates will remain low for a period and noted that markets have listened to the Fed’s call for only gradual rate hikes.  If she believes the market has their messaging correct, perhaps the Fed’s dots haven’t listened so well. Despite recent weakness in the correlation, she said there are still many at the Fed that still believe in the Phillips Curve. She, like other officials, also touched on frothy asset prices but said the Fed doesn’t target asset price level.

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