Daily Market Color

All Eyes on Incoming Data After Friday’s Comments from Yellen

After opening slightly positive, US stocks are trading under pressure while Treasurys opened lower and are now rallying marginally as investors react to Friday’s comments from Fed Chair Yellen and a variety of new economic releases.  In an appearance at Harvard during Friday’s holiday-shortened trading day, Yellen said that if the economy continues to improve as she expects, a rate hike would be appropriate “in the coming months”.  Yellen’s comments echo several of her colleagues who have advocated for a rate hike in recent weeks, suggesting a hike in June or July is very much on the table.  The futures market currently implies a better than 50% chance of a hike by July, and a strong week of data and consistent message from Yellen in a speech expected on June 6 should continue to push this percentage higher in the near term.  The Fed meets next on June 14-15. 

Today’s new economic data releases painted a mixed picture of the US economy.  US consumer spending surprised to the upside, recording its biggest increase in more than six years in April.  The 1.0% jump easily beat economists’ expectations for a 0.7% increase, which indicates second quarter GDP is likely to rebound.  Personal incomes and the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation, also both rose at a heathy clip.  Core PCE, which strips out the volatile food and energy components, rose 0.2% after a 0.1% rise in March.  The YoY core PCE rate remained unchanged at 1.6%, still below the Fed’s 2% target.  The positive tone from the early data releases was somewhat offset later by the Conference Board’s latest reading of consumer confidence, which showed a decline to 92.6 in May after a reading of 94.7 in April.  The number of survey participants that said jobs are “hard to get” increased to 24.4% from 22.8% last month. 

Aside from the data, investors today are focused on month-end rebalancing and corporate supply.  There were no previously scheduled Fed speakers today.  The Dow and S&P 500 are both trading down under 0.50%, while the NASDAQ is trading marginally higher.  Treasury yields and swap rates are down 1-6 bps across all major maturities (in a general bull flattener pattern), and WTI crude is up 1%.

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