Equities were initially nominally lower ahead of today’s outcome of the FOMC meeting. No change in monetary policy is expected, however the comments surrounding tariffs and the Middle East conflict will be closely scrutinized.
Selling accelerated following the President’s comments that Iran must “unconditionally surrender.” Oil rallied about 4% as did the dollar and Treasuries on a flight to quality.
At the time of this writing, the markets are expecting almost two interest rate cuts by year’s end, the first one fully priced in by October.
Yesterday’s data—specifically retail sales—did little to alter perceptions. Headline sales were worse than expected. That being said, control group sales, which excludes auto sales, building materials and gas sales—were stronger than expected and the prior month was revised higher. The control group feeds into GDP calculation.
Before the data was released, the Atlanta Fed’s GDPNow forecast suggested a 3.8% increase for second quarter GDP, which would mark a rebound from a contraction at the start of the year on a monumental pre tariffs import surge.
Most believe economic activity was front loaded because of buying before the tariffs took effect thus believing this 3.8% rate is not sustainable. The data is also relatively immature, representing only 65% of the quarter. However, with this written, the economy is exhibiting considerable momentum and durability.
Will the Committee comment about Washington’s fiscal recklessness?
Total Federal Government Revenues are at an all-time high at $5.11 trillion. Revenues are up 5% year over year. However, the abysmal reality is that total outlays are up over 7% with continued deficits running close to $2 trillion.
Full employment in a growing economy with record tax receipts simply isn’t keeping up with spending. I believe this highlights that many things are going economically right but the problem that is getting worse. Revenues are not the issue. Spending is, and the country needs spending solutions. Period.
Latest Treasury data indicates the county has spent $776 billion in interest costs over the past eight months. This is up 7% from the same period last year. Annual interest expense is projected to be $1.16 trillion. What is more disconcerting, according to Bloomberg the US has over $7 trillion in debt maturing by year’s end.
Yields on several Treasury benchmarks are either flat or down year to date. The only benchmark that is yielding more today than on January 1 is the 30-year Treasury. The two-year and 10-year Treasury are down about 35 and 16 bps, respectively since January 1.
The market is relatively complacent about this gargantuan sum of monies that needs to be refunded. Interest coverage is rising in a generally declining rate environment, the result of uncontrollable spending and the refinancing of lower yielding bonds originated 5 or more years ago.
As stated, spending solutions must be found, a view that the Federal Reserve may [should] articulate today.
Radically changing topics, Iran appears to be on the run. Will Iran act out of desperation? Both crude and tanker rates are up only nominally. Are the markets relatively complacent that the hostilities will be relatively contained and short lived?
In so many dimensions the world has changed radically.
What will happen today?
Last night the foreign markets were down. London was down 0.06%, Paris down 0.26% and Frankfurt down 0.37%. China was up 0.04%, Japan up 0.90% and Hang Seng down 1.12%.
Futures are little changed ahead of the FOMC meeting and rising geopolitical tensions. Oil is up about 1%. The 10-year is up 4/32 to yield 4.38%.
