Weekly U.S. market focus
President Trump will deliver prime-time address on Afghanistan
U.S.-South Korean military exercises will keep tensions high
Jackson Hole conference could offer policy hints
U.S. stocks remain on the defensive
T-note prices post 2-1/4 month high
Weekly U.S. market focus — This week’s U.S. economic calendar is relatively light and the markets will continue to focus mainly on the White House, North Korea, and Fed/ECB policy with the Thursday/Saturday Jackson Hole conference.
Key U.S. economic reports this week include (1) Tuesday’s June FHFA home price index (expected +0.4%), (2) Wednesday’s July new home sales report (expected unchanged after June’s +0.8%), (3) Thursday’s July existing home sales report (expected +0.7% after June’s -1.8%), and (4) Friday’s July durable goods orders report (expected -5.7% and +0.5% ex-transportation after June’s +6.4% and +0.1% ex-transportation).
The Treasury this week will sell 2-year floating-rate notes on Wednesday and 5-year TIPS on Thursday. There are only 16 of the S&P 500 companies that report earnings this week since Q2 earnings season is now virtually over.
President Trump will deliver prime-time address on Afghanistan — President Trump on Monday evening will deliver a prime time address on his administration’s strategy on Afghanistan and south Asia. Reports suggest that Mr. Trump will approve a boost in the U.S. troop size in Afghanistan. The Pentagon has proposed sending about 3,800 more U.S. troops to Afghanistan, adding to the 8,400 troops that are already there.
The markets will be waiting to see if the Trump administration can steady itself after last week’s tumult and after strategist Steve Bannon was fired on Friday. White House economic advisor Gary Cohn and Treasury Secretary Steven Mnuchin so far remain in place, which has cheered the markets. Congress remains on recess until after the Labor Day holiday.
U.S.-South Korean military exercises will keep tensions high — Annual U.S.-South Korean military exercises are scheduled to begin today. The 10-day Ulchi Freedom Guardian exercises will involve tens of thousands of U.S. and South Korean troops, as well as troops from Australia, Canada, Colombia, Denmark, New Zealand, the Netherlands, and the UK.
The exercises always draw a vociferous verbal response from North Korea. There will be increased tensions this year given the recent exchange of U.S. and North Korean threats. North Korea has so far backed off on its threat to launch missiles into the waters near Guam, but could revive those threats this week or come up with a new provocation.
Jackson Hole conference could offer policy hints — The Kansas City Fed’s annual monetary policy conference in Jackson Hole, Wyoming, will be held this Thursday through Saturday (Aug 24-26). This year’s conference is entitled “Fostering a Dynamic Global Economy.” Both Fed Chair Yellen and ECB President Draghi are scheduled to speak at the conference.
The markets are waiting to see if Mr. Draghi conveys any policy hints to the markets ahead of the ECB’s next policy meeting on Sep 7. The ECB at its Sep 7 meeting, or definitely by its following meeting on Oct 26, needs to update the markets about its plans for its QE program for 2018 since the program has so far been announced only through the end of 2017. The market consensus is for the ECB to taper its QE program down to zero over the first six or nine months of 2018.
Regarding U.S. monetary policy, the markets will be waiting to see if Ms. Yellen this week makes any subtle adjustments to the Fed’s latest guidance that it will announce a start date for its balance sheet normalization program “relatively soon.” The market consensus is that the FOMC will announce a start date at its next meeting on Sep 19-20.
While the markets are expecting the balance sheet normalization program to begin this autumn, there are still substantial market doubts about whether the Fed will be able to go through with its intended third rate hike of the year. The market odds for a Fed rate hike are at only 12% at the next meeting on Sep 19-20, 16% by the Oct 31/Nov 1 meeting, and 48% by the Dec 12-13 meeting, according to the federal funds futures market.
U.S. stocks remain on the defensive — The S&P 500 index last Friday fell to a new 6-week low and closed the week down -0.65%, adding to the previous week’s -1.43% sell-off. U.S. stocks last week were undercut mainly by the White House political turmoil and the lack of positive earnings catalysts now that Q2 earnings season is virtually over. Q3 earnings growth is expected to ease to +6.7% from Q2’s strong +12.1% pace.
The stock market this week will focus on (1) any further White House turmoil, (2) the North Korean situation, and (3) the Jackson Hole conference. The VIX index closed last week at 14.26%, elevated by the sell-off in stock prices to a new 6-week low and the White House political turmoil.
T-note prices post 2-1/4 month high — Sep 10-year T-note prices last Friday rallied to a new 2-1/4 month high and the 10-year T-note yield fell to a new 1-3/4 month low on increased safe-haven demand due to the White House political turmoil and the sell-off in stocks. T-notes also continue to take a dovish view of Fed policy given soft inflation statistics and the possibility of market disruptions this autumn with the need for new Congressional spending authority by Oct 1 and a debt ceiling hike by early to mid October. The TYVIX index last week eased by -0.24 points to 4.19%, but remained mildly elevated compared with late-July average of about 3.9%.