Daily Market Color

Markets optimistic as global equities and dollar climb on Fed bets

It’s a feel good market today.  European stocks rallied overnight, the dollar is firmer against the Euro and Yen, energy and ag prices are firmer, US stocks are higher and the economic data is positive.  The most eye-popping news this morning was the US New Home Sales for April, which rose 16.9% to 619,000 annualized run rate vs. expectations of 523,000.  This gap up was the largest monthly increase in over 24 years, and brought new home sales activity up to the highest absolute level since the financial crisis.  Median new home sales price was up and the inventory of new homes available for sale dropped, also bullish indicators for future housing trends.  The greatly improved home sales data point to greater consumer confidence this spring and employment gains which further strengthen the recent Fed rhetoric, where they have reminded the markets they believe 2 to 3 Fed tightenings are likely through the balance of 2016.  This has now increased the market’s prediction for a June Fed rate hike to nearly a 40% chance, from close to 0% chance earlier this month.  The strength in housing is expected to continue into the second quarter and beyond as exhibited by this U.S. Department of Commerce / Bloomberg chart which shows the number of homes sold but not yet started, signaling strength as we move towards the end of second quarter and possibly beyond.

This risk-on financial sentiment has driven US Treasury prices lower and pushed US rates up some – but maybe not as much as the one might have expected from such surprising strong data.  With today’s move however, we are now up 17 basis points from the 1.70% low yield the 10 year Treasury closed at seven business days ago.  The Treasury department auctioned $26 billion in 2Y paper today.  It was a very strong auction in which dealers only got 17.7% of the auction vs. the auction average of 35%, direct bidders received 32.5% vs the auction average of 16.5%, and bid-to-cover at a very strong 3x vs. an auction average of 2.83x. 

In equities, the gains today have been led by financials (boosted by the hopes for near term rate increases) and technology companies.  After the highest number of new issue high grade debt deals of the year coming to market yesterday (13), the pipeline looks lighter with just 5 new deals expected to get priced today.

All three major US stock indexes are currently up 1 to 1.8%, while Treasury yields and swap rates are 3 to 4 bps higher across the curve.  WTI and Brent crude are both up 1 to 1.5% near 6 month highs and approaching the $50/barrel threshold.

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