Daily Market Color

US Stocks Higher, Treasurys Steady After FOMC Minutes Release

Highlighting US market activity today was the release of the FOMC minutes from the June meeting where the Fed made the decision to hike the benchmark borrowing rate for the second time this year to its current 1%-1.25% target range.  Detailed in the minutes was a difference in opinion amongst Fed members as to when to begin the unwinding of its $4.5 trillion balance sheet securities position.  “Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors,” the minutes stated. “However, several participants expressed concern that progress toward the committee’s 2% longer-run inflation objective might have slowed and that the recent softness in inflation might persist.”  A reduction in the balance sheet was signaled to start as early as September, given an improvement in consumer price data in the short term.  The statement also provided an updated plan for the asset portfolio unwind, consisting of a $6 billion runoff in Treasurys per month, an amount which would increase by $6 billion every three months until being capped at $30 billion.  The Fed’s portfolio of mortgage-backed securities would decrease by $4 billion per month, increasing by $4 billion every three months with a cap of $20 billion.  When looking ahead to future rate hikes, the Fed confirmed its expectation for gradual increases and labeled its monetary approach as “accommodative”.  Fed funds futures currently indicate a 28% chance of rate bump at the September FOMC meeting and 57% probability at the December meeting.  Treasurys held within a tight range following the release, with the 10-year note yield trading close to 2.33%. 

Crude oil prices declined as much as 4.25% during the session, weighed down by production concerns in Russia, Libya and Nigeria.  In Russia, government officials stated their unwillingness to increase supply cuts past current levels, citing fears that such an action would send the wrong message to markets.  Additionally, OPEC-led efforts to curb production have been partially offset by increased volumes reported in Libya and Nigeria, two countries who were not parties to the broad, oil-production pact.  WTI crude futures ended their eight-day streak of gains, falling roughly $2 to $45.05/barrel.  All three major US stock indices traded mostly higher on the day, despite being held lower by shares in the energy sector. The tech-heavy Nasdaq led the equity indices at +0.7% for the day.  A light day of economic releases featured factory goods orders falling by 0.8% in May (-0.5% expected), the second consecutive month of declines after a -0.3% revised reading in April.  Compared to a year earlier, factory orders were up 4.8%.

The markets will also be closely following political progress on the most recent international threat coming out of North Korea, with their apparent deployment of a test ICBM.

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