Treasury Rally Eases While Labor, Manufacturing Data Remain Robust

Today US financial markets reversed yesterday’s risk-off trading resulting from the most recent controversy surrounding President Donald Trump.  Helping to stabilize investor sentiment was the hiring of former FBI Director Robert Mueller III who will serve as special counsel in the investigation of Russia’s interference in the 2016 election, along with any potential collusion with the Trump campaign in the process.  Economic data released on the day also provided a positive backdrop for the market, as initial jobless claims remained near record lows at a seasonally adjusted 232,000 last week, below expectations of 240,000 new claims.  The four-week moving average of new filings for unemployment correspondingly shifted lower to 240,750.  Additionally, the number of continuing claims for the week ended May 6 set a new 29-year low at 1.898 million.  In a separate report, the Philadelphia Fed Business Outlook survey displayed a robust level in measuring the current manufacturing conditions.  May’s general business conditions figure totaled 38.8, a 16.8-point rise from the previous month as strength in shipments provided a large boost to the index.  In the financial sector, US Treasury Secretary Steven Mnuchin helped ease the concerns of large banks today as he further clarified the Trump administration’s stance as it applies to their policy views on the Glass-Steagall Act.  Previous comments made in reference to the act had sparked fears that banks would be forced to break apart their investment and commercial banking arms, however Mnuchin squashed such a possibility in his comments to lawmakers earlier in stating that “We do not support a separation of banks from investment banks. We think that would be a very significant problem for financial markets and the economy.”  

Political turmoil abroad spiked on Wednesday evening after a report from a central newspaper in Brazil revealed the existence of a secret recording of current President Michel Temer involving the bribing of a former congressional leader.  The tape allegedly surfaced as part of a plea deal in an ongoing investigation into Brazilian meatpacking firm JBS SA and provides evidence of Temer giving the instruction to regularly pay former House Speaker Eduardo Cunha to maintain silence from his prison cell.  While the reports lack verification and have been denied by the Temer administration, numerous local officials, lawmakers and citizens are demanding the resignation of the President, who prior to this news was well-regarded, given his push for economic improvements in Brazil and ending the current recession there.  The report scared global financial markets, as it triggered a circuit breaker after Brazil’s main stock exchange, the Ibovespa, plunged 10% with shares of major oil producers in the area declining nearly 20%.  Futures on the country’s currency dropped 6% before futures trading was halted. Additionally, the yield on Brazilian five-year credit default swaps surged more than 60 basis points on the day.

US Treasury prices traded lower on the day, reversing a rally at the beginning of the session as yields/swap rates increased 1-2 bps across the curve.  The yield on the 10-year note looks poised to finish the day just under 2.23%.   All three major stock indices recovered a portion of yesterday’s losses, with the DJIA up 0.3%, S&P 500 0.4% higher and Nasdaq gaining 0.75%.  The US dollar halted its sixth day losing streak, gaining 0.4% on the day against major currencies, highlighted by a 0.6% rise against the euro.  In commodities, gold shed 0.9% as investor caution eased, while crude oil prices added to yesterday’s gain with a 0.5% increase in today’s session.