- Weekly U.S. market focus
- Fed expectations turn more dovish for 2018-19
- U.S. stock market trades cautiously with higher volatility
- T-note prices are buoyed by political uncertainty
Weekly U.S. market focus — U.S. market attention this week will focus on (1) Fed policy with Wednesday’s release of the May 2-3 FOMC meeting minutes and a heavy slate of speaking engagements by Fed officials, (2) an active economic calendar with housing data, Markit business confidence data, April durable goods orders, U.S. consumer sentiment, and Friday’s expected upward revision in Q1 GDP to +0.9% from +0.7%, (3) the Treasury’s sale of $101 billion of T-notes, and (4) a light earnings schedule with only 19 of the S&P 500 companies scheduled to report.
The Bank of Canada on Wednesday is expected to leave its monetary policy unchanged with its policy interest rate at 0.50%. North Korea continues to vie for attention after launching another ballistic missile over the weekend.
Commodity prices will garner attention this week with OPEC and non-OPEC members reportedly already on board for a decision at this Thursday’s OPEC and non-OPEC meetings for a 9-month extension of the production cut agreement to Q1-2018. The markets will also be watching the political crisis in Brazil after last week’s plunge in the Brazilian real on reports that President Temer was implicated in a bribery scandal. The plunge in the Brazilian real produced sell-offs in commodities such as soybeans, corn, coffee, and sugar due to heavy selling by Brazilian exporters.
The markets this week will be watching President Trump’s ongoing overseas trip as he visits Israel on Monday and Tuesday, Rome later on Tuesday and on Wednesday, and Brussels on Thursday for a NATO Summit and meetings with EU officials. President Trump will then be in Sicily for the G7 Summit this coming Friday and Saturday. While Mr. Trump is overseas, he will likely remain dogged at home by any fresh news on the Russian scandal. The Trump administration on Tuesday will release its fiscal 2018 budget proposal.
Congress will be in session this week but will then leave Washington late this week for a 1-week recess over the Memorial Day holiday. On the tax front, the House Ways and Means Committee on Tuesday will hold a hearing on Speaker Ryan’s border adjustment tax (BAT). Speaker Ryan and House Ways and Means Committee Chairman Kevin Brady (R-TX) are still going full speed ahead with their BAT proposal despite a lack of support from the White House or the Senate.
Fed expectations turn more dovish for 2018-19 — Market expectations for Fed policy last week were little changed for 2017 but eased for 2018 by 2-5 bp and for 2019 by 6-9 bp. Last week’s White House turmoil put the Republican agenda into further question and thereby reduced expectations for a Fed-tightening response.
The federal funds futures market is still discounting a strong 85% chance for an FOMC rate hike at its next meeting in three weeks on June 13-14. However, the market is now discounting only a 45% chance for a second rate hike by the end of this year. The market is now expecting the Fed to raise interest rates by only another +61 bp from current levels by the end of 2018, down -6 bp from the previous week and down sharply from the peak expectation of +94 bp back in December.
U.S. stock market trades cautiously with higher volatility — The U.S. stock market continues to see underlying support from relatively strong fundamentals such as strong earnings growth, expectations for a recovery in U.S. Q2 GDP growth, and improved global economic conditions. However, valuations are stretched, leaving the market vulnerable to bouts of profit-taking. Even after last week’s downward correction, the forward P/E for the S&P 500 index is at 18.3, well above the 5-year average of 16.3 and the 10-year average of 15.2. The VIX spiked up to a 6-1/2 month intra-day high of 16.30% last Wednesday but then fell back to close the week up only +1.64 points at 12.04%.
U.S. political turmoil reached a near fever pitch last week with the talk about possible obstruction of justice involving President Trump’s firing of former FBI Director Comey. The appointment of former FBI Director Robert Mueller as an independent counsel at least took some of the pressure off Congressional Republicans so they could try to refocus on health care and tax legislation.
The White House political turmoil is a definite negative for the stock market since it impedes Mr. Trump’s ability to help Congressional Republicans push their growth agenda and is likely to partially dampen U.S. consumer and business confidence. However, the stock market at this point seems to have enough support from economic and earnings fundamentals to stave off a big sell-off on the political uncertainty.
T-note prices are buoyed by political uncertainty — June T-note prices rallied sharply last week on the increased political uncertainty, which dampened expectations for Fed rate hikes and reduced inflation expectations. The 10-year breakeven inflation expectations rate last Thursday fell to a new 6-1/2 month low of 1.78% and closed the week down -2 bp at 1.85%. The TYVIX last Wednesday posted a 1-month high of 5.00% but fell back to 4.60% by Friday.
Fed speakers this week are likely to reiterate the Fed’s intent to move ahead with its rate-hike regime regardless of political uncertainty and the transitory economic weakness seen in Q1. The Treasury market will also be carefully scrutinizing Wednesday’s FOMC minutes for any fresh information on the Fed’s balance sheet deliberations. T-note prices may have limited upside unless there is fresh political turmoil and/or weakness in stocks as attention turns back to the hawkish Fed.
