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Mid Day Report: Stock Market Slightly Down Ahead of FOMC Meeting

Energy Action: WTI crude rallied to fresh highs of $64.12 from $63.75 following the EIA inventory data which showed a 100k bbl rise in crude stocks. The street had been expecting a 500k bbl build, though the API reported a 4.3 mln bbl build after the close on Tuesday. Meanwhile, gasoline supplies, seen up 500k bbls actually rose 100k bbls, while distillate stocks were down 3.3 mln bbls, versus expectations for a 2.0 mln bbl fall. Overall, it was a bullish report. Meanwhile, Wall Street remains mostly mildly weaker, with the Dow down -0.4% and the NASDAQ -0.1% in the red. The S&P 500 is 0.2% firmer.

The advance indicators report revealed a bigger than expected March widening in the goods trade deficit to a new all-time high of $90.6 bln from a prior all-time high of $87.1 bln in February. March exports beat our assumption by a hefty $5.1 bln, but imports outperformed by an even larger $8.6 bln, leaving a -$3.4 bln net undershoot for the March trade balance but a robust growth path for the trade components. We also saw a huge $7.2 bln March overshoot for wholesale inventories, alongside a smaller -$1.9 bln undershoot for retail inventories. The advance data imply a March goods and services trade deficit widening to a new all-time high of $74.0 bln from a prior all-time high of $71.1 bln in February. We expect a 0.4% March rise for business inventories after a 0.6% (was 0.5%) February gain. We raised our GDP growth estimates to 5.8% (was 5.6%) in Q1, 8.5% in Q2, and 6.2% (was 5.9%) in Q3. We expect the current account deficit to widen to a 14-year high of $196.4 bln in Q1, while the annual current account deficit widens to a 13-year high of $806 bln in 2021.

Equity futures are mostly lower, but only mildly as the market awaits the FOMC decision. The S&P 500 is marginally firmer with a 0.03% gain but the NASDAQ and Dow have both declined -0.2%. Wall Street closed little changed yesterday, with the Dow and S&P 500 flat while the NASDAQ dipped -0.3%. In addition to the FOMC, the market is digesting news that President Biden will propose a $1.8 tln spending plan that features child care, education and the extension of some tax breaks, reports the WSJ. In order to fund the plan, the top tax rate would rise to 39.6% from 37%, while the top rate on capital gains and dividends would jump to 39.6% from 20%. Note that the $1.8 bln spending plan would be in addition to the $2.3 bln in infrastructure funding he has already proposed. In other matters, the surge in infections in India remains a source of concern. Another round of high-profile earnings are due after the close, this time from Facebook, Apple, Qualcomm and Ford. Google parent Alphabet, reporting after the close yesterday, revealed record sales driven by strong spending on digital ads. While there are a variety of factors for the market to mull, trading could be sideways into the FOMC.

Treasury Action: bonds are mixed ahead of the FOMC outcome, but yields have dipped from earlier highs. The front end is outperforming with the 2-year marginally richer at 0.174% after testing 0.181% Tuesday. That was the highest rate since November 13. There has been some speculation that a positive outlook from Chair Powell could signal that the tapering conversation could begin near term. However, we don’t believe that will be Powell’s stance and he will continue to assure that officials still are not really thinking about trimming QE at this point. But, assuming the economy remains on track, that discussion could be announced at Jackson Hole in August. Meanwhile, the long end is underwater with the 10- and 30-year yields at 1.63% and 2.298%, respectively, amid inflation and supply considerations.

FOMC resumed its meeting and will announce its decision at 14 ET, to be followed by Chair Powell’s press conference at 14:30 ET (this meeting does not include forecasts). The Fed is universally expected to maintain a steady policy stance and will repeat the ZIRP posture will be maintained for “some time” into the future and will stress officials will continue QE at the $120 bln monthly pace until “substantial further progress” on its goals has been made. The statement should reiterate that the “path of the economy will depend significantly on the course of the virus, including progress on vaccinations.” Chair Powell also will emphasize the stance is outcome-based and that it will not act preemptively based on forecasts. And he will again claim the pick up in inflation likely is transitory, and that the Fed has the tools to contain price pressures if needed. Don’t expect the Fed to provide any clarity on what is “some time” or “substantial further progress.” The dots from March suggested no hikes for the next two years.

Advance goods trade deficit widened to -$90.6 bln in March, a new record, after moving out to -$87.1 bln (was -$86.7 bln) in February. Both imports and exports rebounded smartly from February declines. Imports increased a hefty 6.8% to $232.6 bln after dropping -1.0% to $217.7 bln (was $216.9 bln) in February. Exports climbed 8.7% to $142.0 bln following the -3.6% slide to $130.7 bln (was $130.1 bln). Meanwhile, advance wholesale inventories rose 1.4% to $693.4 bln after increasing 0.9% in February to $684.1 bln (was $681.1 bln). Retail inventories declined -1.4% to $613.2 bln after inching up 0.1% in February to $622.0 bln (was $625.9 bln).

MBA posted a -2.5% drop in mortgage applications for the April 23 week, resuming its declines following the prior week’s 8.6% pop. That was only the 5th increase of the year, and broke a string of 6 straight weekly declines. Most of the weakness was in the purchase component which fell -4.8%, largely erasing the 5.7% rebound previously. The refi component slid -1.1% after jumping 10.4% previously. The y/y pace of applications contracted at a -3.5% y/y rate from -3.7% y/y previously, while purchases slowed to a 34.1% y/y clip from 56.9% y/y previously. Refis were -18.4% y/y from -23.5% y/y. The stability in Treasuries saw the 30-year mortgage rate dip back to 3.17% from 3.20%, though it is up from the all-time nadir of 2.85% from mid-December. The 5-year ARM eased to 2.59% from 2.67%.

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