All posts by John Heilner

Market Insights 6/25/2019

U.S. stocks finished in the red and near the lows of the day, as remarks from today’s speech from Federal Reserve Chairman Jerome Powell dampened a widely anticipated rate cut in July.

The economic calendar didn’t help, as Consumer Confidence and new home sales both fell, and another read on regional manufacturing was soft.

Treasury yields were lower and the U.S. dollar ticked higher, while crude oil prices were mixed, and gold added to its rally.

The Markets…

The Dow Jones Industrial Average fell 179 points (0.7%) to 26,548

The S&P 500 Index declined 28 points (1.0%) to 2,917

The Nasdaq Composite tumbled 121 points (1.5%) to 7,885

In moderate volume, 877 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.07 lower to $57.83 per barrel and wholesale gasoline gained $0.02 to $1.84 per gallon

The Bloomberg gold spot price traded $2.41 higher to $1,422.14 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% to 96.17

Consumer Confidence and new home sales fall, Fed Chief speech eyed

The Consumer Confidence Index dropped to 121.5 in June, from May’s revised 131.3 level, below the Bloomberg estimate of 131.0. This was the lowest level since September 2017 as the Present Situation Index and the Expectations Index of business conditions for the next six months both fell month-over-month. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—decreased to 27.6 from the 33.5 level posted in May.

New home sales fell 7.8% m/m in May to an annual rate of 626,000 units versus forecasts calling for 684,000 units and the upwardly-revised 679,000 unit pace in April. The median home price was down 2.7% y/y to $308,000. New home inventory rose to 6.4 months of supply at the current sales pace from 5.9 in April. Sales dropped sharply m/m in the Northeast and West, but rose in the Midwest and South. New home sales are based on contract signings instead of closings.

The main event for the day was likely the afternoon speech from Federal Reserve Chairman Jerome Powell on the economic outlook and monetary policy. Powell’s remarks came following last week’s monetary policy decision that kept rates unchanged but put a rate cut for this year on the table. However the Chairman noted that while uncertainty surrounding trade and global growth have increased, he and his colleagues are “grappling with whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” indicating a July rate cut, widely expected by investors and economists, is not a done deal.

Treasuries were higher, as the yield on the 2-year note was 1 basis point lower at 1.73%, and yields on the 10-year note and the 30-year bond decreased 3 bps to 1.99% and 2.52%, respectively.

Europe and Asia mostly lower on geopolitical tensions and G-20 focus

European equities were mostly lower in apparent caution ahead of this week’s much-anticipated G-20 summit in Japan at which U.S. President Donald Trump and Chinese President Xi are expected to hold talks. Also, the markets continue to grapple with escalated geopolitical tensions as the U.S. imposed new sanctions on Iran. The euro and British pound dipped versus the U.S. dollar and bond yields in the region were mostly lower.

Stocks in Asia finished mostly to the downside as the global markets continue to grapple with heightened geopolitical concerns as the U.S. announced new sanctions on Iran and appeared to tread with some caution ahead of this week’s G-20 summit that is expected to see the U.S. and China resume trade talks.

Japanese equities declined, as the yen gained ground late in the session, while those traded in South Korea also traded to the downside. Stocks in mainland China and Hong Kong dropped, with the banking sector seeing solid pressure on the exacerbated geopolitical tensions.

Market Insights 6/24/2019

U.S. equities finished mixed, as investors appeared cautious ahead of the highly-anticipated meeting between President Donald Trump and Chinese President Xi at this week’s G-20 summit.

Global growth concerns were also in focus in the midst of the recent dovishness from global central banks.

Treasury yields were lower and the U.S. dollar added to a recent drop, while crude oil prices were slightly higher.

The Markets…

The Dow Jones Industrial Average rose 9 points to 26,728

The S&P 500 Index ticked 5 points (0.2%) lower to 2,945

The Nasdaq Composite fell 26 points (0.3%) to 8,006

In moderate volume, 799 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.47 to $57.90 per barrel and wholesale gasoline was unchanged at $1.82 per gallon

The Bloomberg gold spot price traded $19.44 higher to $1,419.007 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.2% to 96.02

Regional manufacturing falls, commencing the economic week

The June Dallas Fed Manufacturing Index unexpectedly fell further into a level depicting contraction (a reading below zero), dropping to -12.1 from -5.3 in May, and versus the Bloomberg expectation of a rise to -2.0. This was the lowest level in three years as the company outlook and orders growth rate components of the survey contracted solidly.

Treasuries rose, as the yields on the 2-year and the 10-year notes, along with the 30-year bond dropped 4 basis points to 1.74%, 2.02% and 2.55%, respectively.

The economic calendar heats up tomorrow, with reports slated for release to include Consumer Confidence, forecasted to decline to a level of 131.0 in June from the 134.1 posted in May, as well as new home sales, with economists looking for a 1.6% m/m gain in May to a level of 684,000 units.

Europe mixed on data and trade uncertainty, Asia higher

European equities finished mixed, as the markets digested a profit warning out of the auto sector and another soft economic report, while awaiting this week’s highly-anticipated meeting between U.S. President Donald Trump and Chinese President Xi. This comes as geopolitical tensions are rising amid reports that the U.S. is threatening new sanctions on Iran and as global central banks have turned more dovish.

In economic news, German business expectations continued to deteriorate in June. The euro and the British pound rose versus the U.S. dollar, while bond yields in the region were lower.

Stocks in Asia finished mostly with modest gains amid the backdrop of a dovish global central bank shift, while the markets are awaiting this week’s G-20 summit in Japan, where U.S. and China are expected to hold talks.

Stocks in Japan ticked higher, with the yen dipping late in session, while mainland Chinese equities nudged to the upside. Markets in Hong Kong and Australia gained ground, while South Korean securities finished flat and shares traded in India dipped.

U.S. Economy in a Snapshot

U.S. Economy in a Snapshot is a monthly presentation designed to give you a quick and accessible look at developments in the economy.

Overview of the June 2019 Snapshot

Real consumer spending fell slightly in April. Real expenditures on durable goods and services both fell, while real nondurable goods expenditures rose. Motor vehicle sales were robust in May.

Real business equipment spending declined modestly in Q1 2019, as investment continued to weaken from its pace in 2018. New orders of non-defense capital goods excluding aircraft have been below shipments since December (except in March), suggesting weak near-term momentum.

Housing activity indicators were mixed. Home sales remained solid in April, likely fueled by a substantial decline in mortgage rates over recent months. However, single-family housing starts and permits remain lackluster. A still-strong labor market and lower mortgage rates potentially could provide support to the housing sector.

Payroll growth was muted in May. The unemployment rate, the labor force participation rate and the employment-to-population ratio were all unchanged. Even with a low unemployment rate, some measures of labor compensation growth have flattened in the past few months.

Core PCE inflation firmed a bit in April but remained below the FOMC’s longer-run objective.

U.S. equity indices declined modestly over the past month, amid notable daily volatility. Implied volatility rose slightly. The nominal 10-year Treasury yield and the market-implied expected policy rate path fell significantly. The broad trade-weighted dollar index was little changed. Oil prices fell considerably over the month.

About the New York Fed’s Snapshot

U.S. Economy in a Snapshot, produced by the Research Function of the New York Fed, is designed to provide a tight yet comprehensive overview of current economic and financial developments. This monthly packet presents charts and commentary on a broad range of topics that include labor and financial markets, the behavior of consumers and firms, and the global economy. What’s more, Snapshot aims to cover special topics such as movements in commodity prices, developments in the Second District, or findings from the New York Fed Survey of Consumer Expectations.

Random Thoughts

The market started the year in recovery mode after falling nearly 20% through late 2018 on global economic growth concerns. Yet the realization that the Fed had finished raising rates, and might even start a new rate-cutting cycle, caused investors to think 2019’s equity market return could resemble that of 1995 or 1998.

The S&P responded by soaring 17.5% through April 30, placing it third in YTD returns since WWII. History warned investors that the market typically digested such strong starts in May, but then engineered a reflex rally in June.

Once again, history proved to be a great guide, even though it’s never gospel. So what could the markets do during the rest of the year? Investor optimism has been buoyed by dovish comments from Fed Chair Powell at his most recent press conference.

Yet the traditionally challenging June-through-October period typically threw cold water in the face of such optimism following the five strongest starts to the year, as the S&P 500 fell an average 5.2% and declined in price 80% of the time, versus a gain of 1.1% and 58% frequency of advance for all years since 1945.

Reasons for near-term uncertainty include elevating geopolitical tensions, ongoing trade disputes, global economic growth worries, a potential EPS recession and seasonal hurdles. The following are forecasts of fundamentals that we think will drive equity prices during the remainder of the year.

U.S. Market Weekly Summary – Week Ending 06/21/2019

S&P 500 Posts 2.2% Weekly Gain, Reaches New Intraday High as Energy, Tech Sectors Lead Broad Climb

The Standard & Poor’s 500 index rose 2.2% this week, representing the market benchmark’s third-consecutive weekly gain and sending it to a fresh intra-day record high Friday after a new record closing high was notched Thursday. The S&P 500 ended the week at 2,950.46, up from last Friday’s closing level of 2,886.98 although down slightly from this Thursday’s record closing high of 2,954.18.

Its high of Friday’s session, 2,964.15, marked a fresh intra-day record for the index, which is now up 7.2% for June and up 18% for the year to date as of Friday’s closing level.

The weekly climb was broad, with all of the S&P 500′s sectors in the black versus last Friday. It was led by the energy sector, which jumped 5.2% as crude-oil futures rallied amid Iran’s downing a US surveillance drone Thursday and as geopolitical tensions remained.

The technology sector had the next-largest percentage increase of the week, up 3.3%, as stronger-than-expected quarterly results from Adobe Systems (ADBE) and Oracle (ORCL) helped boosted sentiment in the sector.

The energy sector’s strong gainers this week included Marathon Petroleum (MPC), whose shares climbed 9.8% as the downstream-energy company named Donald Templin its new financial chief, effective July 1.

The technology sector’s advance was led by Adobe, whose shares soared 9.1% this week amid the software company’s report of better-than-expected results for its fiscal Q2. Wedbush said it sees positive implications for the sector from Adobe’s report.

Market Insights 6/21/2019

U.S. equities lost steam late in the day to finish lower, but were able to notch another week of solid gains, as yesterday’s rally on increased optimism of rate cuts on the horizon following the Federal Reserve policy meeting was tempered by soft reads on manufacturing globally, as well as lingering tensions in the Middle East.

Treasury yields rebounded from a recent slide that took the 10-year note to levels not seen since late-2016, and the U.S. dollar fell, while gold added to yesterday’s rally, and crude oil prices were higher.

The Markets…

The Dow Jones Industrial Average shed 34 points (0.1%) to 26,720

The S&P 500 Index ticked 4 points (0.1%) lower to 2,951

The Nasdaq Composite fell 20 points (0.2%) to 8,032

In heavy volume as a result of quadruple-witching, 1.9 billion shares were traded on the NYSE and 2.8 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.36 to $57.43 per barrel and wholesale gasoline was up $0.06 at $1.82 per gallon

The Bloomberg gold spot price traded $11.92 higher to $1,400.36 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.5% to 96.16

Markets were solidly higher for the week, as the DJIA was up 2.4%, the S&P 500 Index increased 2.2%, and the Nasdaq Composite was 3.0% higher.

Existing home sales rebound

Existing-home sales rebounded in May, increasing 2.5% month-over-month to an annual rate of 5.34 million units, compared to the Bloomberg expectation of a rise to 5.27 million units and April’s upwardly-revised 5.21 million rate. Sales of single-family homes were higher m/m, but down from year-ago levels, while purchases of condominiums and co-ops rose compared to last month and were down y/y. The median existing-home price rose 4.8% from a year ago to $277,700, and marking the 87th straight month of y/y gains. Unsold inventory came in at a 4.3-months pace at the current sales rate, up from 4.2 months a year ago. Sales rose in all regions, with the Northeast seeing the largest increase.

Treasuries were lower, as the yield on the 2-year note rose 2 basis points (bps) to 1.76%, while the yields on the 10-year note and the 30-year bond were up 6 basis points (bps) at 2.06% and 2.59%, respectively. Bonds yields bounced off recent declines, with the 10-year yield touching levels not seen since late-2016, that were exacerbated by Wednesday’s decision by the Federal Open Market Committee (FOMC) not to raise the target for the fed funds rate, while opening the door for the possibility of a near-term rate cut.

Europe and Asia mixed amid weak manufacturing data, geopolitical tension

European equities finished mixed, as increased anxiety over events surrounding the downing of a U.S. drone by Iran yesterday pressured sentiment after it was reported that President Trump authorized strikes against Iran and planes were in the air, but then called off the mission. Some soft economic data exacerbated the negative mood, as the Markit Composite PMI for the Eurozone rose to a seven-month high, courtesy of strength from the services sector, but manufacturing continued to struggle and be a drag on the index, with the component moving further in contraction territory and to a two-month low.

In other economic news, public sector net borrowing in the U.K. fell and was below estimates. The euro was higher versus the U.S. dollar, while the British pound lost ground versus the greenback amid some focus on political events in the nation after a final vote in the battle to become the Conservative Party’s leader and next Prime Minister brought the contest down to the final two candidates, with Brexit hardliner Boris Johnson continuing to garner the largest majority of votes. Bond yields in the region were higher.

Stocks in Asia were mixed following a rally yesterday on the global optimism that ensued following the Federal Reserve’s monetary policy meeting, as tensions in the Middle East continued to linger in the wake of events surrounding the downing of a U.S. drone by Iran. Hopes of a trade deal between the U.S. and China remained, giving mainland Chinese equities a boost, as U.S. Trade Representative Robert Lighthizer is set to meet with Chinese Vice Premier Liu He early next week, ahead of the scheduled meeting between President Trump and Chinese President Xi Jinping at the G-20 summit in Japan.

Japanese equities fell amid strength in the yen, which remains near a 6-month high against the U.S. dollar, and after a read on manufacturing activity fell further into contraction territory and to a three-month low, while department store sales declined and consumer price inflation was marginally softer.

Stocks post another weekly gain courtesy of the Fed

After beginning the week amid palpable caution with the Federal Open Market Committee’s monetary policy meeting looming, U.S. stocks finished the week with solid gains after the FOMC left rates unchanged, but made significant changes to its statement, most notably removing its “patience” language, fueling already-high hopes of rate cuts in the near future. Sentiment was further energized by increased trade deal optimism following a tweet from President Trump that he will meet with Chinese President Xi at next week’s G-20 summit.

Treasury yields continued their descent, further fueled to the downside following the Fed’s monetary policy meeting, with the 10-year yield touching levels not seen since late-2016, but were able to recover somewhat at the end of the week. The U.S. dollar also lost some ground, while crude oil prices jumped amid tensions in the Middle East after Iran shot down a U.S. drone and narrowly avoided strikes authorized by President Trump in the final minutes. All sectors saw gains for the week, led by energy, industrial and information technology stocks.

Next week’s economic calendar will offer a host of key reports, including Consumer Confidence, new home sales, pending home sales, durable goods orders, the final read on Gross Domestic Product, personal income and spending, regional manufacturing reports, and culminating with the final read on the June University of Michigan Consumer Sentiment Index. However, the lion’s share of attention may fall on the highly-anticipated meeting between President Donald Trump and Chinese President Xi Jinping at the G-20 summit in Osaka, Japan late in the week, with hopes of progress on a trade deal between the two nations running high.

Market Insights 6/20/2019

U.S. equities were able to resume a rally that came courtesy of increased optimism for near-term rate cuts after yesterday’s Fed meeting.

Treasury yields came under pressure, with the 10-year note touching levels not seen since 2016. The U.S. dollar was also lower and crude oil prices were sharply higher amid the increased discord in the Middle East, while gold rallied.

The Markets…

The Dow Jones Industrial Average rallied 249 points (0.9%) to 26,753

The S&P 500 Index increased 28 points (1.0%) to 2,954

The Nasdaq Composite advanced 64 points (0.8%) to 8,051

In heavy volume, 974 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil jumped $3.10 to $57.07 per barrel and wholesale gasoline was up $0.05 to $1.79 per gallon

The Bloomberg gold spot price soared $29.89 to $1,390.27 per ounce

The Dollar Index— a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 96.64

Mixed bag of economic data

The Conference Board’s Index of Leading Economic Indicators (LEI) for May was unchanged month-over-month, a tick below the 0.1% Bloomberg projection and compared to April’s revised 0.1% gain. Positive contributions from the financial conditions and consumers’ outlook components were offset by declines in the components for stock prices and the manufacturing sector.

Weekly initial jobless claims fell 6,000 to 216,000, compared to estimates of 220,000, with the prior week’s figure being unrevised at 222,000. The four-week moving average increased by 1,000 to 215,750, while continuing claims dropped by 37,000 to 1,662,000, south of estimates of 1,695,000.

Treasuries were higher, as the yield on the 2-year note was down 4 basis points (bps) at 1.72%, the yield on the 10-year note declined 2 bps to 2.00%, and the 30-year bond rate was 1 bp lower to 2.53%. Bond yields fell sharply following yesterday’s decision by the Federal Open Market Committee (FOMC) not to raise the target for the fed funds rate, while opening the door wider for the possibility of a near-term rate cut. The 10-year yield briefly fell below the 2.0% mark, its lowest level since late-2016.

The week’s economic calendar will close tomorrow with June preliminary reads on manufacturing and services activity from Markit, with both measures expected to remain mostly in line with the levels posted in May, as well as existing home sales, with forecasts calling for a 1.4% m/m increase during May to a level of 5.27 million units following the 0.4% decline in April.

Europe mostly higher as gains moderate on geopolitical tensions, Asia surges

European equities finished mostly higher, after early gains on hints from the Federal Reserve in the U.S. at the increased possibility of rate cuts in the near future moderated amid an increase in geopolitical worries after U.S. officials began responding to Iran’s actions of shooting down a U.S. drone. Increased hopes of a U.S.-China trade deal may also have lent support, as trade representatives from both nations will hold talks with then next couple of days, ahead of the highly-anticipated meeting between President Trump and Chinese President Xi at next week’s G-20 summit.

The euro was higher versus the U.S. dollar, and the British pound gained ground on the greenback as the Bank of England also kept its policy stance steady, as expected. Bond yields in the region were lower. Economic news in the region was light, with retail sales out of the U.K. falling in line with expectations and the trade balance in Switzerland widening far more than forecasts on a jump in exports, while a preliminary read on consumer confidence in the Eurozone fell more than expected.

Stocks in Asia finished solidly higher after the U.S. Federal Reserve hinted yesterday that it stands ready to cut rates in the near future following its decision to keep rates unchanged. Hopes of a trade deal between the U.S. and China continue to escalate, as U.S. Trade Representative Robert Lighthizer is set to meet with Chinese Vice Premier Liu He within the next two days, ahead of the scheduled meeting between President Trump and Chinese President Xi Jinping at the G-20 summit in Osaka, Japan next week.

Stocks in mainland China soared on the trade and stimulus optimism, and those traded in Hong Kong jumped, despite continued unrest in the nation surrounding continued protests over a controversial extradition measure. Japanese equities rose despite strength in the yen, which hit a 6-month high against the U.S. dollar, and after the nation’s All-Industry Index rose at a slightly higher pace than forecasts.

The Bank of Japan (BoJ) left its monetary policy stance unchanged, as was widely expected, with no surprises in BoJ Governor Kuroda’s press conference that followed. Markets in South Korea and India moved higher, while Australian securities increased on the global rate optimism, and after a speech from Reserve Bank of Australia Governor Lowe that solidified another rate cut on the horizon.

Market Insights 6/19/2019

U.S. stocks finished higher after the Federal Reserve held steady on its target for the fed funds rate, while also removing the “patience” language from its statement, solidifying expectations that any future move by the Central Bank would be a rate cut.

Treasury yields moved higher and the U.S. dollar was lower.

Crude oil prices pared gains following a larger-than-expected draw on inventories to finish mixed, and gold ended higher.

The Markets…

The Dow Jones Industrial Average rose 38 points (0.2%) to 26,504

The S&P 500 Index gained 9 points (0.3%) to 2,926

The Nasdaq Composite advanced 33 points (0.4%) to 7,987

In moderate volume, 806 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil inched $0.14 lower to $53.97 per barrel and wholesale gasoline was up $0.02 at $1.74 per gallon

The Bloomberg gold spot price increased $6.76 to $1,346.42 per ounce

The Dollar Index— a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 97.26

Fed holds steady, but removes “patience” language

At 2:00 p.m. ET, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, announcing no change to its target range for the Fed funds rate of 2.25%-2.50%. The Committee said information it received since it last met in May indicate that the labor markets remain strong and that economic activity continues to rise at a moderate rate. However, it noted that uncertainties about its outlook have risen and that “in light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” removing its “patience” language. St. Louis Fed President James Bullard was the lone dissenter, preferring a rate cut. As well, the Committee’s projected rate increases, known as the “dots plot”, showed sharp divisions among Members with regards to the path of rate moves, with nearly half expecting two rate cuts by the end of the year.

Updated economic projections were also released, with the Fed upping its forecast for 2020 GDP to 2.0% from its estimate of 1.9% in March, while decreasing its estimates for its outlooks on inflation and the unemployment rate. In his scheduled press conference after the statement, Chairman Jerome Powell said that as a result of the reemergence of “cross currents” of trade developments and global growth concerns, as well as continued muted inflation, many Members of the Committee believe the case for somewhat more accommodative policy has strengthened. However, he reiterated that the Committee “wants to see more” before adjusting rates, as well as reacting to sustainable trends, not one-time events. With regards to trade, the Chairman said that it was more focused on what the impact of trade disputes have on global growth.

Treasuries reversed course to finish higher following the Fed’s rate decision, as the yield on the 2-year note fell 11 bps to 1.75%, the yield on the 10-year note declined 3 bps to 2.03%, and the 30-year bond rate lost 2 bps to 2.54%.

Europe mixed ahead of Fed decision, Asia surges on renewed trade optimism

European equities were mixed amid caution ahead of the Fed’s monetary policy decision, and amid remarks from President Trump that took aim at European central bank officials, particularly European Central Bank (ECB) President Mario Draghi, after he indicated the possibility of rate cuts in a speech yesterday. As well, today’s Fed meeting will be followed by policy announcements from the Bank of England (BoE) and the Bank of Japan (BoJ) tomorrow, adding to the uncertainty. The euro was higher versus the U.S. dollar and bond yields in the region gained ground.

The British pound also strengthened against the greenback, with a second round of balloting in the nation continuing to trim prospective candidates to replace outgoing Prime Minister Theresa May. In economic news in the region, inflation measures in the U.K. were mostly in line with forecasts and the nation’s Retail Price Index was a tick above estimates, while German wholesale prices were cooler than expectations.

Stocks in Asia finished solidly higher following the widespread gains seen in the U.S. and Europe yesterday, with renewed hopes of a trade deal emerging after President Trump’s tweet that he had a “very good telephone conversation” with Chinese President Xi Jinping, and that they will have “an extended meeting” at the G-20 summit next week.

Stocks in mainland China rose, while those traded in Hong Kong surged amid the optimism and as the nation’s leader Lam backtracked on a controversial extradition bill during a closely-watched press conference, but protests in the region continued as she stopped short of completely ruling out the measure. Japanese equities jumped amid the upbeat sentiment and some weakness in the yen, and despite a sixth-straight slide in the Asian nation’s exports, as some of the softness was attributed to the extended Golden Week holiday. Markets in South Korea and India moved higher, and Australian securities increased amid continued optimism in the wake of yesterday’s minutes from the Reserve Bank of Australia’s monetary policy meeting earlier this month that delivered a rate cut suggesting another reduction could be on the horizon.

Fed holds rates steady, still sees no cuts in 2019

-The Federal Open Market Committee voted 9-1 to keep the benchmark rate in a target range of 2.25% to 2.5%.

-The action sets up a possible confrontation between Fed Chairman Jerome Powell and President Donald Trump, who has been pressuring the Fed to cut rates.

-The Fed dropped the word “patient” to describe its approach to policy.

-The central bank also left the door open somewhat to future cuts.

-Eight members favor one cut this year while the same number voted in favor of the status quo and one still wants a rate hike.

A divided Federal Reserve held the line on interest rates Wednesday and indicated that no cuts are coming in 2019. The decision came amid divisions over what is ahead and still leaves open the possibility that policy loosening could happen before the end of the year depending on how conditions unfold.

The central bank expects one or two rate cuts, but not until 2020. Despite cautious wording in the post-meeting statement Wednesday, markets are still betting the Fed cuts, as soon as July.

In a decision closely watched by financial market participants clamoring for multiple cuts, central bank officials on the Federal Open Market Committee voted 9-1 to keep the benchmark rate in a target range of 2.25% to 2.5%, where it has been since December’s controversial quarter-point increase. St. Louis Fed President James Bullard voted to reduce the rate.

The action sets up a possible confrontation between Fed Chairman Jerome Powell and President Donald Trump, who has been pressuring the Fed to cut rates. Just Tuesday, Trump said “let’s see what he does” at the Fed meeting when asked if he still wants to demote Powell.

At the post-statement news conference, Powell was asked about his future as chairman. “I think the law is clear that I have a four year term and I fully intend to serve it,” he said.

The committee provided an important nod to those worried about slower growth: It dropped the word “patient” to describe its approach to policy. The characterization was a key part of the Fed “pivot” earlier this year that signaled to the market a more dovish approach to rates.

The Fed didn’t surprise investors with the decision to maintain rates, but the split vote tells us that a cut is on the way and it’s increasingly likely that will be in July, as bond markets have been hoping, ” said Neil Birrell, chief investment officer at Premier Asset Management.

The statement also changed wording to concede that inflation is “running below” the Fed’s 2% objective. In their forecast for headline inflation this year, officials slashed the estimate to 1.5% from March’s 1.8%. Core inflation, which excludes volatile food and energy prices, is likely now to be 1.8% from March’s 2%, according to the quarterly summary of economic projections also released Wednesday.

‘In light of these uncertainties’

The committee changed language from its May statement to indicate that economic activity is “rising at a moderate rate,” a downgrade from “solid.”

In their baseline scenario, FOMC members said they still expect “sustained expansion of economic activity” and a move toward 2% inflation, but realize that “uncertainties about this outlook have increased.”

“In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective,” the statement said. The “act as appropriate to sustain the expansion” language mirrors a statement from Powell in early June.

The committee characterized the labor market as “strong” with “solid” jobs growth, despite May’s disappointing nonfarm payrolls growth of 75,000. The statement further said that household spending “appears to have picked up from earlier in the year.”

The changes came amid what appeared to be little consensus among the committee about where rates go next.

Divided Fed

According to the “dot plot” of individual members’ expectations, eight members favor one cut this year while the same number voted in favor of the status quo and one still wants a rate hike. Bullard and Minneapolis Fed President Neel Kashkari have led the public discussion about the potential for rate cuts, while other members have been less firm.

Into 2020, the Fed consensus was a bit stronger, with nine members wanting a cut to a funds rate around 2.1%. The direction changes, though, in 2021, with indications of an increase of about a quarter-point, culminating in an expected long-run value of 2.5%. The funds rate most recently was trading at 2.37%.

Traders in the thin and volatile funds market had been pricing in a 26% chance of a cut at this week’s meeting. Later in the year, though, the probability for a July easing rose to 82.5% and the chances of a second cut in December were most recently at 60.4%. The market expects a third cut to come around March of 2020.

While the statement language offered some significant changes, estimates in the summary of economic projections, other than inflation, moved little from March. GDP growth is still expected to be 2.1% for the year – it was 3.1% in the first quarter, and the Atlanta Fed is forecasting a 2% gain in the second quarter. The unemployment rate is now expected to hold at a 50-year low of 3.6%, against the March forecast of 3.7%.

Market Insights 6/18/2019

U.S. equities finished solidly in the green, as early gains amid increased hopes of a more dovish Fed at the conclusion of its two-day meeting were further fueled from a tweet from President Trump that he will meet with Chinese President Xi at next week’s G-20 summit.

Global policy stimulus also got a shot in the arm after European Central Bank (ECB) President Mario Draghi surprised the markets by hinting that further rate reductions may be necessary if the outlook for economic growth didn’t materialize, and as policy decisions from the Bank of England and the Bank of Japan are to come on Thursday.

Treasury yields were mixed and the U.S. dollar ticked higher, while crude oil prices recovered from a recent tumble, and gold added to a current rally.

The Markets…

The Dow Jones Industrial Average jumped 353 points (1.4%) to 26,466

The S&P 500 Index gained 28 points (1.0%) to 2,918

The Nasdaq Composite advanced 109 points (1.4%) to 7,954

In moderate volume, 772 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.97 to $53.90 per barrel and wholesale gasoline was up $0.03 at $1.72 per gallon

The Bloomberg gold spot price added $6.76 to $1,346.42 per ounce

The Dollar Index— a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 97.63

Housing construction activity modestly tops expectations

Housing starts for May declined 0.9% month-over-month to an annual pace of 1,269,000 units, above the Bloomberg forecast of 1,239,000 units. April starts were revised higher to an annual pace of 1,281,000. Construction on single-unit structures were down m/m and y/y, but activity on multi-unit buildings were up solidly m/m and versus last year. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 0.3% m/m to an annual rate of 1,294,000, versus expectations of a 1,292,000 pace, and compared to April’s downwardly-revised 1,290,000 rate. Single unit authorizations were up m/m but down y/y, while permits for multi-unit structures fell m/m and were up compared to last year.

Treasuries were mixed, as the yield on the 2-year note rose 2 basis points (bps) to 1.87%, while the yields on the 10-year note and 30-year bond fell 2 basis points to 2.06% and 2.55%, respectively.

The mixed economic picture has kept the Federal Reserve in a holding pattern since January; although Fed Chair Jerome Powell sounded a dovish tone in a recent speech, noting that the Fed is monitoring the escalation in trade tensions and will act “as appropriate” to sustain the economic expansion. The market is now pricing in close to a 90% chance of two rate cuts by the end of the year, the Fed has not corroborated the market’s extremely dovish view in its recent commentary. At some point the market or the Fed will be forced to adjust their respective views; with the process of convergence possibly adding to volatility in the stock market.

While tomorrow’s economic calendar is light in size, its weight of importance is likely the greatest, as the early morning report on MBA Mortgage Applications will be followed by the afternoon release of the Federal Open Market Committee’s monetary policy decision after the conclusion of its two-day gathering. Updated economic projections and the Fed’s so-called “dot plot” will also likely be of great interest, as well as Chairman Jerome Powell’s press conference to follow.

Europe and Asia higher ahead of Fed decision and after dovish ECB comments

European equities finished with widespread gains, with the markets awaiting tomorrow’s monetary policy decision from the Fed in the U.S., which will be followed by policy announcements from the Bank of England (BoE) and Bank of Japan. However, the biggest lift to the markets appeared to come from dovish comments from ECB President Mario Draghi. The head of the ECB said in a speech today that additional stimulus will be needed in the absence of any improvement in the outlook for growth and inflation, citing rate cuts as an option.

The euro was lower versus the U.S. dollar and bond yields in the region fell. Moreover, Germany reported that investor confidence in the nation’s economic outlook dropped decisively more than what had been anticipated for June, while Eurozone consumer price inflation remained subdued for May. The British pound was nearly unchanged ahead of the BoE’s decision this week and as the region’s battle for the next prime minister continues. The advance in the markets accelerated on comments from U.S. President Donald Trump that he had a “very good” phone call with Chinese President Xi and they will be having an extended meeting next week at the G-20 in Japan.

Stocks in Asia finished mostly higher, with the global markets awaiting a host of monetary policy decisions, which will begin with tomorrow’s announcement out of the U.S., and continue with Thursday’s decisions from the U.K. and Japan. Also, the G-20 summit in Japan at the end of the month continues to be highly anticipated, with uncertainty lingering regarding if the U.S. and China will resume talks as tensions remain elevated.

Stocks in mainland China ticked higher, with a read on new home prices for May continuing to climb, while those traded in Hong Kong advanced, as optimism of further stimulus measures helped combat ongoing political turmoil after the nation suspended a controversial extradition bill amid protests in the region. Australian securities increased, with the minutes from the Reserve Bank of Australia’s monetary policy meeting earlier this month that delivered a rate cut suggesting another reduction could be on the horizon.

Stocks in Japan fell, with the yen gaining noticeable ground late in the session as the global markets digest the plethora of monetary policy headlines and upcoming decisions.