Daily Market Color

Treasurys Rally With FOMC Comments on Inflation, Balance Sheet Reduction

US Treasurys held within a tight range during the majority of today’s trading session before rallying after the release of the FOMC statement at the conclusion of its July policy meeting this afternoon.  Highlighted in the text is the Fed’s plan to begin unwinding its $4.5 trillion balance sheet “relatively soon”, leaving the possibility for the exact timing to be announced at the next FOMC meeting in September.  Also acknowledged in the statement was the current period of weak inflation, nothing that “on a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent.”  The committee stated it would continue to monitor “inflation developments closely” and expects to maintain its current path of “gradual” rate increases so long as economic data remains in line with its forecasts.  As expected, the Fed voted unanimously to leave its benchmark borrowing rate unchanged, holding the target range at 1%-1.25%.  Fed fund futures now indicate a less than 40% probability of an additional rate hike by the end of 2017.  Treasury yields/swap rates are currently down 3-8 bps across the curve, reversing the bulk of yesterday’s increase and bringing the yield on the 10-year note back below 2.29%.  All three major US stock indices finished 0.15%-0.45% higher for the session, boosted in part by gains in Boeing (+8.3%) and AT&T (+5.1%), whose share prices jumped following robust Q2 corporate earnings.



Today’s economic data releases were headlined by new home sales, which displayed a modest rise in the month of June as reduced inventories continue to temper the housing market.  As reported by the Commerce Department, there was a 0.8% rise in the number of new homes sold last month, yielding a seasonally adjusted rate of 610,000 units.  The June figure fell slightly below expectations of 615,000, albeit 5,000 higher than the previous month’s revised level.  Compared to a year earlier, new homes sales were up 9.1%.  New homes available on the market increased 1.1% in June to 272,000 units, and the outstanding inventory equated to a 5.4-month supply, which was marginally higher than May’s 5.3-month level.  Other significant data released on the day included the Energy Information Administration’s (EIA) weekly report on US crude oil inventories.  For the week ended July 21st, the supply of crude oil decreased more than anticipated, falling by 7.2 million barrels to 483.4 million.  Current US crude stockpiles are at their lowest levels since January 6th, down 1.4% compared to a year earlier.  With the report helping to alleviate oversupply concerns, crude oil futures extended their rally, increasing roughly 1.5% as WTI rose to $48.65/barrel and Brent crude climbed to $50.90/barrel.



Updating yesterday’s US healthcare news, last night Senate Republicans failed to pass a bill for a full repeal and replacement of the existing Affordable Care Act, losing the vote by a 43-57 count.  The remaining options available for Senate lawmakers as they continue their 20 hours of debate include 1) a repeal of the majority of the ACA with a two-year period to replace it, 2) a “skinny” repeal of a few of the main components of Obamacare or 3) leaving the current bill intact as is.  It is projected to be a complicated path regardless of which route is pursued.

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