The Market Today
Yields Continue Higher with Oil; FOMC Begins Meeting
by Craig Dismuke, Dudley Carter
FOMC Begins Meeting: The FOMC begins their two-day meeting today. At tomorrow’s conclusion, economists and investors expect that they will hike for the 8th time of the cycle. Presuming no surprising wording in the Statement (which should be very confident with possibly brief references to the risks caused by trade and slowing global activity), the focus will be on the dot plot.
Home Prices and Consumer Confidence: At 8:00 a.m. CT, the FHFA and S&P CoreLogic will both release their July Home Price indices. They are expected to show a continued decline in the pace of annual price gains. At 9:00 a.m., the Conference Board is scheduled to release its report on consumer confidence. Confidence has been sky-high.
Yesterday – Treasury Yields Added to Last Week’s Rise Even as Stocks Faltered: Energy companies closed with strong gains to start the week but, despite an additional jolt from a steep recovery in tech, the S&P 500 faltered 0.4%. Crude prices extended overnight gains during U.S. trading with both WTI and Brent breaking to their highest levels since 2014. Speculation that OPEC et al. would raise current production ceilings at a weekend gathering proved incorrect and the post-meeting comments indicated little urgency to stem the recent move higher in price. Elsewhere, stocks were weaker in their first day since the new U.S.-China tariffs took effect and swung around early headlines that Deputy Attorney General Rosenstein could resign or be fired. The negativity in other equity sectors was most notable in real estate companies which dropped 1.9%, but four others finished the session with greater-than-1% losses. Treasury yields were affected by those events, but made one of their bigger moves on comments from ECB President Draghi. European yields spiked higher around 8 a.m. CT after Draghi told Members of the European Parliament he sees signs of “a relatively vigorous pickup in underlying inflation.” Ten-year yields in Germany and France, which were roughly 1 bps higher ahead of his remarks, finished up roughly 5 bps. Treasury yields were impacted too, but closed with more modest gains. The 2-year yield added 1.7 bps to 2.82% (a new high for the cycle), the 5-year yield rose 1.9 bps to 2.97% (a new high for the cycle), and the 10-year yield closed 2.6 bps higher at 3.08% (3rd highest since mid-2011).
Overnight – Global Yields Rose Overnight, Pushing 10-Year Yield Back Towards May High: The major Asian stock indices, which were closed Monday for a holiday, traded mixed in their first response to China calling off trade talks with the U.S. Japan’s Nikkei gained more than 1% but China’s CSI 300, which saw its biggest weekly gain last week since March 2016, slipped 0.9%. Momentum has picked up in Europe, however, and U.S. futures are pointing to a partial recovery of yesterday’s losses. Energy companies continued to outperform in Europe, rising 1.9% and helping lift the Stoxx Europe 600 0.5%. Crude prices pushed above yesterday’s closing levels which were the strongest since 2014. After recovering from a sharp spike lower early in the session, the German 10-year yield was up 2.1 bps to 0.53%, its highest level since May. The brief yield drop occurred after the ECB’s Chief Economist Praet poured cool water on President Draghi’s Monday remarks about inflation. Praet noted, “…I don’t think there was anything new in his communication, …Basically what we say is price pressures remain subdued and it will take a long time before we get close to 2 percent.” Earlier, the Japanese 10-year yield crept up to its highest level (0.123%) since January 2016. The U.S. 10-year yield reached as high as 3.111% overnight, 1.5 bps away from its May high of 3.126%, the highest since July 2011. The 10-year yield had settled back to 3.10%, up 1.1 bps on the day, with the 2-year (+0.4 bp) and 5-year (+1.2 bp) yield both inching up to new highs for the cycle.