Daily Market Color

Russian Probe Escalates, Sparks Treasury Rally Ahead of Employment Report

US financial markets were trading within a tight range throughout the majority of the session, before a flight to safety which was triggered by a report from the Wall Street Journal regarding special counsel Robert Mueller decision to empanel a grand jury, in his ongoing investigation of Russian meddling in last year’s presidential election.  The enlistment of a grand jury has been viewed as a sign that the Russian probe will not see its conclusion in the foreseeable future, further muddying the outlook for the Trump administration’s ability to implement its policy objectives.  US Treasurys rallied with the news, as yields/swap rates declined 1-6 bps across the curve in a bull flattening pattern.  The 10-year note yield is currently 5 basis points lower at 2.22%.  Major stock indices were mostly lower, with the DJIA (+0.04%) posting a marginal gain while the S&P 500 (-0.22%) and Nasdaq (-0.35%) finished in the red.  The US dollar added to its weekly loss, down 0.1% against major currencies.  Tomorrow, the release of the Labor Department’s employment report for July will take the spotlight, where a 178,000 addition to nonfarm payrolls is expected along with an unemployment rate level of 4.3% expected.



Across the pond, the Bank of England concluded its August policy meeting today with the decision to hold its benchmark interest rate steady at 0.25%.  The central bank also made cuts to its forecasts for economic and wage growth, resulting largely from the uncertainty surrounding the nation’s relationship with the European Union post-Brexit negotiations.  Projections for growth in the British economy are now pegged at 1.7% for this year and 1.6% for 2018, compared to previous estimates of 1.9% and 1.7%, respectively.  With regard to current Brexit negotiations and their effect on businesses, BOE Governor Mark Carney did provide some reassurance in saying that the central bank does not see any reason why “the transition would be anything but smooth.”  Looking ahead, the Monetary Policy Committee signaled its expectation to raise interest rates at a faster pace than what investors are currently pricing, citing increased inflation as an underlying concern.  The British pound declined 0.7% following this morning’s MPC announcement, and is currently trading at $1.31/GBP.



US economic data releases were mixed on the day, beginning with weekly jobless claims which showed continued strength in the labor market.  The number of initial claims for the week ended July 29th totaled a seasonally adjusted 240,000, a 5,000 decline from the previous week’s revised reading.  The four-week moving average subsequently fell 2,500 to 241,750, its lowest level in the past three months.  Also recorded in the Labor Department’s report, the number of Americans receiving benefits for more than one week (continuing claims) edged 3,000 higher to 1.97 million for the week ended July 22nd.  In the service sector, the Institute for Supply Management released its non-manufacturing index for the month of July, displaying its weakest level in the past year at 53.9.  The headline reading was 2.5 points below expectations, albeit remaining above the 50-point threshold associated with expansion.  Particular slowdowns were observed in the new orders and business activity components, while inventories and backlog orders posted notable rises.


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