The Market Today
Yellen Holds the Mic; More Housing Data
by Craig Dismuke, Dudley Carter
Today’s Calendar – Yellen Holds the Mic, et. al.; More Housing Color: At 8:00 a.m. CT, the S&P CoreLogic Home Price index is expected to show year-over-year home price growth to rise from 5.65% to 5.70%. Rising home prices continue to be a concern for the sector as affordability is becoming an issue in some areas, particularly with home price increases broadly outpacing wage gains. It is somewhat ominous if affordability is cited by real estate professionals as a concern while mortgage rates are still at 3.78% (Bankrate.com’s National Average 30-Year Mortgage Rate). At 9:00 a.m., the August New Home Sales report is expected to show a 2.5% increase in new purchases. However, any increase may be optimistic given the impact of Hurricane Harvey on last week’s August Existing Home Sales data (25% decline in Houston-area homes). New home sales have already fallen to their lowest rate of the year in the July report and were down 10.5% from March’s high of the year. Also at 9:00 a.m., the September Conference Board report on consumer confidence is expected to show a slight pullback in confidence.
Arguably more important than the busy economic calendar will be today’s Fedspeak. Chair Yellen (11:45 a.m. CT), Brainard (9:30 a.m.), Mester (8:30 a.m.), and Bostic (10:30 a.m.) are all on the schedule. Yellen and Brainard are two of the leading voices on the FOMC and have both recently expressed concerns about weak inflation being less transitory than originally expected. However, they have also both toed the company line saying it has not yet affected their forecast for future monetary policy. Neither Mester nor Bostic are voting members this year. Thus far, there have been no big surprises in the post-FOMC Fedspeak.
Yesterday’s Trading – Geopolitics Weighs on Investor Sentiment: The markets were fairly quiet yesterday morning until 9:30 a.m. CT when North Korean Foreign Minister Ri Yong Ho said that President Trump had declared war by saying that the regime “won’t be around much longer.” He went on to say that gave the country the right to shoot down U.S. planes flying near the North Korean border. The WSJ cited the Pentagon saying on Saturday that “eight U.S. aircraft remained in international airspace and flew the farthest north of the demilitarized zone between North Korea and South Korea that American warplanes have flown since Pyongyang started testing ballistic missiles and nuclear weapons in the 1990s.” The White House has said they have not declared war on North Korea. While traders presume nothing will materialize, the lack of détente in the rhetoric has raised concerns once again. Gold spiked to pre-FOMC levels after having dropped roughly 1% following the FOMC’s surprisingly confident near-term outlook. U.S. stocks fell 0.5% within minutes of the comments and the 10-year Treasury yield dropped from 2.25% to 2.21%. The S&P ended the day down 0.2% while the 10-year yield ended at 2.22%. Given the 10-year yield’s pullback and the recent increase in shorter Treasury yields, the 5s10s spread ended the day at 38.1 bps, less than 0.3 bp from tightest spread of this rate cycle (June 26: 37.9 bps).
Uneventful Trading Overnight: The markets traded fairly benignly overnight with little in the way of economic reports and traders still grappling with the fallout from the German election. The Euro Stoxx 50 stock index is unchanged overnight while the biggest movers are hardly movers at all – Germany’s Dax is up 0.1% and Spain’s IBEX 35 is down 0.3%. Sovereign yields remain rougly unchanged from yesterday, perhaps a few basis points higher across the region as some of the North Korean flight-to-quality is subsiding. Gold is the biggest mover overnight. After rallying 1.7% yesterday on the intensified geopolitical threats, it has come back overnight falling 1.1%.
Chicago’s Evans Wants Evidence of Inflation before Another Rate Hike: After New York Bank President Dudley said in early morning comments that below-target inflation was likely to be temporary, Chicago Fed Bank President Evans (voter-2017) said that he was not as convinced that the weak run of inflation data was so transitory. Moreover, he said that inflation expectations were not consistent with the FOMC’s 2% inflation target and reiterated that he wants to see evidence of more inflation before another rate hike. TIPs currently project CPI inflation averaging 1.78% over the next five years and 1.85% over the next 10 years. Consumer inflation expectations also remain low relative to historical norms.