Daily Market Color

Oil Halts Slide in Finish to Week, Boosts Stocks While Treasurys Remain Flat

US Treasurys finished the week right around where they opened the week, with the yield on the 10-year note closing just below 2.15%.  A speech by Cleveland Federal Reserve Bank President Loretta Mester echoed much of the same hawkish tone heard from other Fed speakers earlier in the week, expressing the view that the recent weakness in inflation is transitory.  “I don’t think there is an immediate need to do something, I don’t think we are behind the curve, but I do think this gradual reduction of accommodation … makes sense to me,” stated Mester.  Next Friday’s release of the PCE Index, the Fed’s preferred measure of inflation, will serve as an important barometer of whether the FOMC is likely to need to reconsider its rate hike path or not.  US stocks finished mostly higher during the session, helped by energy shares whose prices rose for the first time this week.  WTI crude oil futures managed to rise back above $43/barrel, stemming its losses at 4% for the week. 

Today’s economic data releases were headlined by new home sales, which displayed a strong rebound in the month of May.  As reported by the Commerce Department, there was a 2.9% rise in the number of new homes sold last month, yielding a seasonally adjusted rate of 610,000 units.  The figure represents a solid increase from the previous month’s revised 593,000 pace and exceeded expectations of 590,000.  Compared to a year earlier, new homes sales were up 8.9%.  New homes available on the market increased 1.5% in May to 268,000 units, and the outstanding inventory equated to a 5.3-month supply, which was unchanged from the previous month.  Other data on the day included a flash of Markit’s Composite PMI for June, which displayed weaker than expected momentum this month, as the initial PMI reading came in nearly 1 point below median forecasts.  The services component reported a 53.0 reading (53.7 expected), while manufacturing posted its slowest rate since September at 52.1 (52.7 expected).  

On the regulatory front, yesterday the Alternative Reference Rates Committee (“ARRC”), composed of representatives from 15 large banks assembled by the US government, officially selected a new measure to serve as the future money market benchmark interest rate for US financial instruments.  The Broad Treasury Financing Rate, or overnight repo rate, is planned to eventually replace LIBOR, which had been subject to a series of rigging scandals during the financial crisis.  The expected benefit from the utilization of this new index lies in its reflection of actual traded activity levels vs. the Bank survey levels which make up LIBOR.  Current projections are for the new rate to begin getting published during the first half of 2018, after which trading in futures could begin.  However, given the repo rate’s lack of historical data and the sheer volume of existing financial contracts linked to LIBOR, the ultimate adoption of the new index is still very much in question.

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