Markets Digest Mixed Data Ahead of Fed

US stocks are rallying for the first time in five days while Treasury yields are continuing to test local lows as investors await the Federal Reserve’s policy decision.  The weak May payrolls report and uncertainty surrounding next week’s UK referendum essentially eliminated any chance of a June rate hike, but the statement and accompanying press conference are likely to reiterate that all meetings are “live”, including July.  The Fed’s communication will likely stress data dependence, while acknowledging that both upside and downside risks to the outlook are currently balanced.  Market-participants will pay close attention to the Fed’s updated dot plot forecast.  The dots were lowered in March to reflect two increases in 2016, down from four in December.  With half of 2016 now over, it will be interesting to see if some Fed officials reduce their forecast down to just one hike this year. 

In terms of today’s new data releases, a report showed US industrial production fell more than expected in May after expanding at a robust 0.6% pace in April.  The -0.4% decline was largely due to weakness in manufacturing production.  One positive in the report was mining production, which showed an increase for the first time in eight months.  The trend of recent soft business investment continued, with business equipment spending falling 0.7%.  A separate report showed producer prices increased 0.4% last month off the back of a 2.8% jump in energy prices.  Excluding the volatile food and energy components, core PPI increased 1.2% YoY, beating the 1.0% gain economists were expecting.  A third report showed manufacturing in New York increased to 6.01 in June as new orders and shipments moved into positive territory.  The report is a glimmer of hope for the manufacturing sector after the setback in industrial production.

All three major US stock indexes are currently up close to 0.25%, while Treasury yields and swap rates are flat to down two bps across the curve.  Oil prices fell for a fifth day, with WTI and Brent crude down close to 1% and 1.50%, respectively.