Daily Market Color

US Financial Markets Rally After Release of FOMC Meeting Minutes

Treasurys traded sideways this morning before rallying after the release of the minutes from the March FOMC meeting at 2pm EST.  Detailed in the minutes, most Fed officials maintained their stance that it would be appropriate to tighten the monetary policy again in the near future, while also confirming the committee’s intention to begin a gradual unwind of the balance sheet by year end.  “Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation,” read the text from the minutes.  Driving the post-release rally were comments surrounding the Fed’s views on the inflation outlook, particularly with regard to the potential downside risks given the below-target consumer price data released earlier this month.  Specifically, FOMC voters added a caveat which stated “members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.”  Currently, the probability for a June rate hike continues to hold around an 80% likelihood as per fed fund futures, and the total projected 1/4 point rate tightenings for 2017 remains at three.  Treasury yields/swap rates are down 2-5 bps across the curve, bringing the yield on the 10-year note back below 2.25%.  US stocks also rose on the day as major indices reached new record highs, erasing the largest equity market selloff of the year last week.                

Key economic data released on the day included April’s existing home sales, which displayed a slower-than-expected start to the second quarter.  Sales of previously owned homes declined 2.3% last month to a seasonally adjusted pace of 5.57 million, as per the National Association of Realtors.  A continued reduction in the supply of homes on the market is considered the main factor in accounting for the drop-off from March’s 10-year high level.  The inventory of available homes has fallen for 23 consecutive months on a year-over-year basis, with April 2017 recording a 4.2-month supply compared to 4.6-month supply one year earlier.  The average time a home was on the market also declined last month, coming in at 29 days in April compared to a 34 day average in March.      

Abroad, Asian stocks experienced volatility this morning following the downgrade of China’s debt rating by Moody’s Investors Service for the first time since 1989.  The reduction in credit rating from Aa3 to A1 was attributed to the expectation of a weakening of the financial strength of the nation as public and private debt levels continue to rise and growth tapers off.  “The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account,” explained a statement released by Moody’s.  As of year-end 2016, outstanding Chinese debt totaled 260% of GDP, up from 160% in 2008, however external debt only accounted for roughly 12% of GDP, indicating a minimal global bond market impact from the downgrade.  The majority of Asian indices closed 0.1%-0.6% higher to finish the day, erasing losses from early in the session.      

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