A little softer in the US stock market early this morning; the 10 yr note 3.09% -2 bp, MBS prices +3 bps from yesterday’s close. The dollar is weaker in early activity.
Sec of Commerce Wilbur Ross commenting that a trade deal with China is impossible by January. Trump and Xi will meet face-to-face at the end of the month at the G-20 meeting. The best Ross expects is a framework for more talks. When asked about a report that China this week had presented a list of possible concessions ahead of the talks, Ross said in an interview Thursday that everything leading up to the meeting is just “preparatory.” “We certainly won’t have a full formal deal by January. Impossible.”
At 9:15 am ET October industrial production and capacity utilization; production expected +0.2% increased 0.1%; Sept production initially reported +0.3% was revised to +0.2%. Manufacturing was up 0.% as was expected. Factory use spiked higher, October expected at 78.2% increased to 78.4% after Swept was revised higher, from 78.1% to a strong 78.5%.
At 9:30 the DJIA opened -77, NASDAQ -66, S&P -10. 10 yr note 3.09% -2 bp. Conventional 30 yr MBS price +11 bps from yesterday’s close and +7 bps from 9:30 yesterday.
Not much to focus on today but markets always find something to talk about. Late Wednesday Jerome Powell opened the door a crack with remarks the Fed may be tilting toward fewer rate increases next year than what markets had been expecting. Most analysts were thinking three to four increases in 2019, after Powell’s comments listed three possible challenges to growth in 2019: slowing demand abroad, fading fiscal stimulus at home and the lagged economic impact of the Fed’s past rate increases. The Fed is a sure thing to increase the Federal Funds rate on Dec 19th at the conclusion of the FOMC meeting. Also at the meeting, it's time for the Fed to release its forecasts for growth, employment, and inflation as it does every quarter. The last quarterly data didn’t indicate any significant increase in inflation and cut the GDP growth slightly from the June data. The data recently has conflicted with Fed speeches and Powell’s remarks. You have heard that the Fed wants the Federal Funds rate at a neutral level; what you and anyone else hasn’t heard is, what is neutral.
Looking ahead: next week is a holiday week, a week that more than others thins out markets. Thanksgiving, even more than Christmas, drains participants as many take Wednesday and Friday off. Of course, markets will be closed on Thursday, and the Bond market will close at 2:00 pm on Friday. The world does continue although we don’t see anything out there now that will motivate huge movements while the US is shopping.
Jim Cramer, CNBC, yesterday said company leaders across industries are telling Jim Cramer — off the record — that they're worried about a slowdown in the U.S. economy. "So many CEOs have told me about how quickly things have cooled," the "Mad Money" host said. "So many of them are baffled that we could find ourselves in this late-cycle dilemma that wasn't supposed to occur so soon."
No more data today, Chicago Fed Pres Evans at 11:30. The dollar is continuing to weaken this morning; still bullish but retracement happening now.
PRICES @ 10:00 AM
10 yr. note: +6/32 (18 bp) 3.09% -2 bp
5 yr. note: +6/32 (18 bp) 2.90% -4 bp
2 Yr. note: +2/32 (6 bp) 2.83% -2 bp
30 yr. bond: +5/32 (15 bp) 3.35% -1 bp
Libor Rates: 1 mo. 2.302%; 3 mo. 2.264%; 6 mo. 2.860%; 1 yr. 3.118% (11/15/18)
30 yr. FNMA 4.5: @9:30 102.48 +11 bp (+7 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.78 +18 bp (+14 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.72 -2 bp (-3 bp from 9:30 yesterday)
Dollar/Yuan: $6.9373 -$0.0018
Dollar/Yen: 112.76 -0.87 yen
Dollar/Euro: $1.1397 +$0.0065
Dollar Index: 96.44 -0.66
Gold: $1224.40 +$9.40
Crude Oil: $57.55 +$1.09
DJIA: 25,313.25 +23.98
NASDAQ: 7237.66 -21.37
S&P 500: 2728.78 -1.42
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
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While interest rates softened a tad by 8 am ET, stock indexes were generally quiet in pre-open trading. By 8:30 am, data revealed weekly jobless claims were up by +2K to 216K.
October retail sales, expected to add +0.5%, were up 0.8%. September revised from +0.1% to -0.1%; excluding auto sales (expected +0.5%) increased 0.7%, less autos and gas added +0.3%. The Control group was up +0.3%. Looks good, but September Control group sales, (which are important inputs into personal consumption expenditures) revised from +0.5% to +0.3%. Control group sales exclude autos which were very strong in October, rising 1.1% following several months of weakness. Sales for the control group also exclude building materials which surged nearly as much as autos, up 1.0% in what is good news for residential investment. Gasoline is also not included in the control group, and here sales jumped 3.5% in the month, though this reading for November is very likely to reverse given the ongoing decline in the price of oil. Overall the headlines looked good, but the devil is in the details.
The November Philadelphia Fed business index was expected at 20.5 from 22.2, but the index slipped to 12.9. Growth in new orders slowed sharply, down more than 10 points to 9.1 with unfilled orders, at minus 4.8 — an outright contraction for a second straight month. The 6-month outlook is down 6.6 points to a still favorable 27.3. And there is an indication of easing capacity stress in the report as the workweek dropped very sharply from October's 20.8 to only 6.3. Price data are mixed with input costs rising slightly more than 1 point to a very elevated 39.3, though pass through to customers is moderating, down slightly more than 2 points to 21.9.
October import prices expected 0.0% but increased 0.5%. September import prices revised from +0.5% to +0.2%. Export prices were thought to be +0.1%, as reported +0.4%, September export prices were 0.0%. Yr/yr import prices added +3.5% unchanged from September; yr/yr export prices were up +3.1% from 2.7% in September.
Jerome Powell spoke in Dallas last evening. One takeaway; he said the FOMC's 17 members "have to be thinking about how much further to raise rates and the pace at which we will raise rates. The way we will be approaching that is to be looking really carefully at how the markets and the economy and business contacts are reacting to our policy." That sounded like an outward admission that the Fed is going to react as markets react, while until now the Fed has appeared to give little notice to what markets are doing. While it isn’t likely, it was good to hear Powell say it. He stressed that gradual rate hikes are central to the Fed's commitment to extending the ongoing expansion as long as possible.
Powell also said keeping rates "too low for too long" can raise the risk of unwanted inflation as well excesses in the financial markets. The mirror risk, he said, is raising rates too soon which he warned could "terminate" the expansion. "We are taking both of those risks very seriously which is why we've been raising rates very gradually." One concern he cited is the slowdown in global growth, admitting that 2018 has seen a "gradual chipping away" of the strength seen in 2017. Powell said the Fed is watching with special care the health of the emerging markets which include China and India and which he said make up half of the global economy. In one more official kicking the can down the road on rising levels of government debt, he repeated that the U.S. is on an unsustainable path which he attributed to high health care costs and an aging population. Though this is a long term issue that will eventually have to be addressed, he said it isn't part of the Fed's immediate concerns and isn't entering into the current debate over ongoing monetary policy.
At 9:30 am the DJIA opened down -167, the NASDAQ lost -31, and the S&P dropped -20. The 10-yr note yield was at 3.09%, down -3 bps.
Yesterday Theresa May’s Brexit plan that was approved by her cabinet went postal. One of the reasons is that US treasuries are continuing to advance. Brexit Secretary Dominic Raab announced his resignation, the highest official among other resignations. May addressed lawmakers in the House of Commons, but faced a barrage of critical questions and was repeatedly told she does not have the support she needs to pass the deal. What looked good 24 hours ago looks worrisome now. There is speculation she may not survive as prime minister.
At 10:00 am September business inventories increased 0.3% as was expected. Inventories at manufacturers rose a sharp 0.5% with inventories at wholesalers up 0.4%, both offsetting a marginal 0.1% build at retailers.
The 10-yr at 3.09% is looking good technically as we indicated when the yield closed below 3.14%; the next technical resistance is 3.06%, the low on 10/25 before the rate increased to 3.23%.
10 yr. note: +8/32 (25 bp) 3.09% -3 bp
5 yr. note: +6/32 (12 bp) 2.92% -4 bp
2 Yr. note: +2/32 (6 bp) 2.84% -3 bp
30 yr. bond: +12/32 (37 bp) 3.34% -2 bp
Libor Rates: 1 mo. 2.310%; 3 mo. 2.629%; 6 mo. 2.863%; 1 yr. 3.129%
30 yr. FNMA 4.5: @9:30 102.41 +13 bp (+23 bps from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.64 +15 bp (+24 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.75 +6 bp (+13 bp from 9:30 yesterday)
Dollar/Yuan: $6.9393 -$0.0012
Dollar/Yen: 113.23 -0.38 yen
Dollar/Euro: $1.1307 -$0.0004
Dollar Index: 97.15 +0.17
Gold: $1213.00 +2.90
Crude Oil: $56.63 +$0.38
DJIA: 24,962.20 -118.30
NASDAQ: 7116.56 -19.83
S&P 500: 2684.74 -16.84
The bond and mortgage markets opened weaker this morning. We were looking for the 10-yr to confirm additional improvements if it could hold yesterday’s 3.14% (-3 bps) and a key technical resistance. There's a lot of day ahead but at 8:00 am ET the 10-yr at 3.16%, up 2 bps, and MBS prices are generally unchanged from yesterday’s closes. Oil prices so far are trading better after 12 sessions of huge declines on more oil on the market.
At 7:00 am we saw more weakness in MBA weekly mortgage applications; down 3.2%, purchases down 2.3% while refinances slipped 4.3%. Purchase apps are at their lowest level since Feb 2017; refinances are the lowest since Dec 2000. Unadjusted purchases continued to decline, with yr/yr down 3.0%, the lowest since this time last year. The refinance share of mortgage activity rose 0.3 percentage points from the prior week to 39.4%.
At 8:30 am the October consumer price index hit forecasts of +0.3%; core CPI added +0.2%, also as expected. Both the overall and core CPI data are higher than in September (overall +0.1%, core +0.1%). Yr/yr CPI added +21.5% from 2.3% in September; core yr/yr +2.1% but better than 2.2% in September. The October CPI led a 3.0% rise in gasoline prices, but when we get November’s data, there should be a big decline given the massive decline in oil that is leading gas prices down substantially. Housing is the dominant component in the consumer price report, and here price pressures are also moderate, especially for rents which rose only 0.2% and also for homeowners, where the reading for owners' equivalent rent rose 0.3%. Medical services are also an important component, and here the story is the same —up only 0.2% with both physician services and hospital services unchanged in the month. Housing does show a little yearly pressure at a 3.2% gain overall which, however, is the lowest reading since February this year. Today's report and the outlook for the next report for November may increase criticism of the Federal Reserve which is raising interest rates to protect against inflation; although CPI doesn’t take into account wage growth that the Fed believes will increase (as noted yesterday we don’t expect wage increases to be as strong as the Fed and markets think).
At 9:30 am, the DJIA opened up +192, the NASDAQ added +70, and S&P added +20. The 10-yr note was at 3.16%, +2 bps.
Oil erased losses amid renewed speculation that OPEC and its allies are considering curbing supply next year. OPEC and its partners are discussing a reduction of as much as 1.4 million barrels a day, deeper than the cut proposed earlier this week. Oil has fallen sharply from the four-year high reached in early October when the US allowed waivers for seven countries to continue buying oil from Iran. While oil has always been a volatile commodity, oil experts have a history of over-reaction to supply/demand ratios. It was in September when crude was touching close to $80.00, and more oil experts and traders were calling for $100.00/barrel.
Alan Greenspan was interviewed about inflation on Bloomberg television’s “The David Rubenstein Show: Peer-to-Peer Conversations” and said, “I’m beginning to see the first signs of it. We’re seeing it basically in the tightening of the labor markets first, which, as you know, have gotten very tight now. We’re beginning finally to see average wages rise, and clearly there’s no productivity behind it.” Greenspan said a lack of productivity growth meant “you’re getting into a system now which has no outcome that’s in equilibrium other than inflation and no productivity growth.” He also warned that rising U.S. debt levels could undermine the economic expansion; “You can’t have a tax cut without finding the revenues elsewhere, or you run into problems.” He believes cuts are necessary on Social Security, Medicaid, and Medicare, but it’s unlikely Congress and the administration can get that accomplished.
Brexit is moving closer to a decision. China/US trade talks are continuing; moving closer to the G-20 meeting at the end of this month where Trump and Xi are expected to meet face to face.
There is basically nothing left on the calendar; Jerome Powell is scheduled to speak at 5:00 pm this afternoon after markets close.
10 yr. note: -4/32 (12 bp) 3.16% +2 bp
5 yr. note: -2/32 (6 bp) 3.00% +1 bp
2 Yr. note: unch 2.90% unch
30 yr. bond: -18/32 (56 bp) 3.339% +3 bp
Libor Rates: 1 mo. 2.306%; 3 mo. 2.616%; 6 mo. 2.855%; 1 yr. 3.132%
30 yr. FNMA 4.5: @9:30 102.11 -2 bp (+5 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.35 -2 bp (+2 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.49 -6 bp (-18 bp from 9:30 yesterday)
Dollar/Yuan: $6.9511 -$0.0050
Dollar/Yen: 113.91 +0.10 yen
Dollar/Euro: $1.1334 +$0.0044
Dollar Index: 97.11 +0.15
Gold: $1210.30 -$0.10
Crude Oil: $56.78 +$1.09
DJIA: 25,440.55 +154.06
NASDAQ: 7572.02 +51.15
S&P 500: 2741.15 +18.97
The bond and mortgage markets were closed yesterday; stocks and currency markets traded. You know by now about the beatdown in US stocks yesterday; the improvement of the dollar and crude oil continues to fall.
This morning early stock indexes attempted to improve. At 7:00 am ET the DJIA gained +135, by 9:00 am was back down to +34.
At 6:00 am the October NFIB small business optimism index, expected at 18.0, was 107.4 —lower but still the optimism in the small business sector remains solid, off 1.4 on the index from it 45-year high back in August. Weakening most compared to the previous month, that the view that now is a good time to expand, which fell 3 points to a still solid net 30% and earnings trends, down 2 points to a net minus 3%. Plans to increase employment were down 1 point to a net 22%. Expectations of higher retail sales were down 1 point to a net 28%, and the net of business owners judging current inventories to be too low fell 1 point to a net minus 2%.
The bond and mortgage markets opened stronger this morning after the stock market decline yesterday, but not as firm as we expected. Overnight markets are being influenced by continuing talks between Secretary of Treasury Mnuchin and China’s Vice Premier Liu He. They spoke by phone Friday. Liu is set to visit the U.S. soon for discussions, according to the South China Morning Post.
Besides Apple saying that iPhone sales are slowing, setting off a huge decline in tech stocks (NASDAQ yesterday -206 points), Apple will do okay even with fewer phone sales. Its suppliers, however, won’t fare well.
News over the weekend that North Korea has a number of silos fit for nukes that up until recently were not detected added a little support to the bond market this morning.
History says gridlock in Washington is a good thing for the economy, keeping Washington from adding layers of issues and infighting that renders the government somewhat sterile. Overall the US is seen as strong, and the outlook is expected to continue. In the other parts of the globe, it isn’t so rosy; China is on the edge of significant problems according to the PBOC; emerging market debt is increasing as is the US, but smaller economies won’t be able to push higher debt under the rug much longer. While the Fed is still talking of more interest rate hikes, markets are somewhat at odds with recent Fed speeches such as yesterday’s when SF president Daly continued to talk of at least two more increases in 2019 after the increase next month.
There was a story over the weekend that the Brexit deal might be in trouble, one of the issues that is likely helped send stocks down. This morning Theresa May said that Brexit negotiations are in the endgame with no agreement at any cost. “The negotiations for our departure are now in the endgame,” she said. “And we are working extremely hard, through the night, to make progress on the remaining issues in the withdrawal agreement, which are significant. Overwhelmingly, the British people want us to get on with delivering Brexit, and I am determined to deliver for them. I want them to know that I will not compromise on what people voted for in the referendum. This will not be an agreement at any cost.” Spain’s prime minister is calling for Brits to vote again on the exit.
At 9:30 am the DJIA opened down -32, the NASDAQ added +48, and the S&P was up +10. The 10 yr was at 3.16%, down -3 bps from last Friday’s close.
At 2:00 pm the Treasury will report the October budget, expected to be at a deficit at -$111.8B.
The 10-yr successfully held 3.23% last week when it was tested last Thursday; this morning it was at 3.16%, down -3 bps from Friday and -7 bps lower than last Thursday. MBS prices are tracking but it’s not the usual relationship between the 10 and MBS levels. It’s all about safety and less about the rate. That said, a close for the 10 below 3.12% will send the 10 down to 3.00%.
This Week’s Calendar:
6:00 am October NFIB small business optimism index (108 from 107.9 in September; 107.4 reported)
2:00 pm October Treasury budget (-$111.8B)
7:00 am weekly MBA mortgage applications
8:30 am October CPI (+0.3%; yr/yr +2.5% from +2.3% in September; excluding food and energy +0.2%, yr/yr 2.2% unchanged from September)
8:30 am weekly jobless claims (215K +1K)
10:00 am September business inventories (+0.3%)
9:15 am Oct industrial production and factory use (production +0.2%, factory use 78.2%)
10 yr. note: +7/32 (22 bp) 3.16% -3 bp from Friday
5 yr. note: +4/32 (12 bp) 3.01% -3 bp
2 Yr. note: +1/32 (3 bp) 2.91% -2 bp
30 yr. bond: +5/32 (15 bp) 3.37% -1.5 bp
Libor Rates: 1 mo. 2.306%; 3 mo. 2.614%; 6 mo. 2.855%; 1 yr. 3.134% (11/12/18)
30 yr. FNMA 4.5: @9:30 102.05 +5 bp (+16 bp from 9:30 Friday)
15 yr. FNMA 4.0: @9:30 101.51 +3 bp (+11 bp from 9:30 Friday)
30 yr. GNMA 4.5: @9:30 102.46 +7 bp (+13 bp from 9:30 Friday)
Dollar/Yuan: $6.9567 -$0.0070
Dollar/Yen: 113.97 +0.13 yen
Dollar/Euro: $1.1265 +$0.0046
Dollar Index: 97.30 -0.34
Gold: $1202.70 -$0.80
Crude Oil: $58.74 -$1.19
DJIA: 25,318.28 -68.90
NASDAQ: 7206.38 +5.51
S&P 500: 2728.68 +4.16
Stock indexes in pre-open trade this morning were lower after a generally unchanged session yesterday. The FOMC meeting didn’t provide anything new and no noticeable market reactions were seen. Someone counted the words comparing the September to this FOMC statement and concluded there were 30 words that were eliminated or changed.
The October producer price index jumped to a 7-yr year high this morning; up +0.6% m/m on forecasts of 0.2%; yr/yr up +2.9% from 2.6% in September. The core (excluding food and energy) was up +0.5% on forecasts of +0.2%; yr/yr at 2.6% from 2.5% in September. The increase is coming from trade services which track costs at wholesalers and retailers and which jumped 1.6% in October. When excluding trade services as well as food and energy, the pressure eases to an as-expected 0.2 percent gain. Finished goods rose 0.7 percent in the month with the yearly rate at 3.4 percent in what points to continuing pressure for consumer goods where finished prices rose 1.0 percent in the month for a yearly 3.9 percent. Finished services rose 0.6% for a moderate-to-strong 2.5% yearly rate in the month. Food rose 1.0%, energy is up +2.7%, up 12.5% yr/yr (that will drop significantly when we get the November data as oil prices have crumbled into bear market territory). Construction costs jumped 1.9% in October with the yearly rate at 4.7%. Crude oil over the last month has fallen from $75.00 to $59+ this morning. Next week CPI, the more important inflation look, should show less inflation concerns than what may be thought today.
Crude oil is now in the midst of its longest decline on record; down 20% from its October high that now puts it in a bear market. OPEC is now talking about cutting production while there are new thoughts that OPEC has lost its significance and should be disbanded. An OPEC meeting took place over the weekend. Russia, the US, and the Saudis have increased output only to think now about reversing and likely will vote for cutting back. OPEC in October reached the highest level since 2016, while Russia last month pumped 11.4 million barrels a day, a post-Soviet record. Producers meeting this weekend will have to contend with not only the threat of a glut but also the risk to demand from faltering emerging-market economies and a trade war between the U.S. and China.
At 9:30 am the DJIA opened down -94, the NASDAQ dropped -61, and S&P lost -15. The 10 yr note stood at 3.22% down -2 bp.
At 10:00 am the University of Michigan mid-month consumer sentiment index was expected at 98.0 from 98.6 in October; the index at 98.3.
At 10:00 am September wholesale inventories anticipated to be up +0.3% increased 0.4%; final sales were at +0.2%.
The 10-yr is holding its support today at 3.21%, down from yesterday’s 3.24%; we note yesterday that the 10-yr has to hold today to keep that technical double top formation intact. MBS prices at 10:00 am are 8 bps better now than at 9:30 am.
PRICES @ 10:10 AM
10 yr. note: +7/32 (22 bp) 3.21% -3 bp
5 yr. note: +4/32 (12 bp) 3.07% -3 bp
2 Yr. note: +1/32 (3 bp) 2.96% -2 bp
30 yr. bond: +15/32 (47 bp) 3.41% -2 bp
Libor Rates: 1 mo. 2.318%; 3 mo. 2.614%; 6 mo. 2.857%; 1 yr. 3.140%
30 yr. FNMA 4.5: @9:30 101.89 +3 bp (unch from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.40 -2 bp (-6 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.33 unch (-10 bp from 9:30 yesterday)
Dollar/Yuan: $6.9556 +$0.213
Dollar/Yen: 113.86 -0.20 yen
Dollar/Euro: $1.1343 -$0.0021
Dollar Index: 96.75 +0.11
Gold: $1211.50 -$13.70
Crude Oil: $59.45 -$1.22
DJIA: 26,045.38 -145.84
NASDAQ: 7442.05 -88.84
S&P 500: 2783.93 -22.90
After the strong improvement in stock indexes yesterday, this morning stocks are quiet ahead of the FOMC policy statement at 2:00 pm ET. The bond market is experiencing some slight improvement in early trading.
Weekly jobless claims, is the only data today — not a factor in trading, at 214K, down -1K. Claims have been locked into a tight range now for six weeks at low levels, and traders don’t pay as much attention to claims with the unemployment so low.
Gridlock appears to suit the stock market just fine given the reaction yesterday. President Trump’s press conference yesterday afternoon set some sparks flying. Overall he said he is prepared to work with Democrats as they take control of the House. He sought to frame the politics of divided government to his advantage, setting up Democrats as an obstructionist party motivated by a zeal to bring down his presidency. “Now, we have a much easier path because the Democrats will come to us with a plan for infrastructure, a plan for healthcare, and we’ll negotiate.” Trump warned that cooperation would be impossible if House Democrats seek to paralyze the White House with a blitz of congressional probes and subpoenas. He went on to say if investigations and probes lead to subpoenas he would reciprocate with Democrats themselves.
Yesterday began the president’s 2020 campaign. With the midterms behind him, he dove into a reelection campaign facing a Democratic House, political gridlock — and special counsel Robert Mueller's Russia probe. Sessions “resigned” yesterday. His temporary replacement, Matthew Whitaker, formerly Sessions’ chief of staff, will assume oversight of Mueller and his continuing Russian election probe from Deputy Attorney General Rod Rosenstein. Whitaker has been an outspoken critic of the Russian investigation and Mueller; he wrote an opinion piece for CNN entitled “Mueller’s investigation of Trump is going too far” and said the president’s personal finances should be considered off-limits. This situation will likely lead to House investigations about Sessions’ firing. Government ethics regulation, federal employees are required to recuse themselves from matters where their impartiality could reasonably be questioned; the reason Sessions recused himself since he was a Trump supporter in the early days.
The FOMC policy statement at 2:00 pm will strongly confirm a rate increase at the December meeting. The focus will be on any clues pointing to more increases in 2019. While it’s not news that the Jerome Powell and most of the Fed are aiming for another two or three increases next year, it will depend on whether the Fed believes the economy can stand more increases.
At 9:30 am the DJIA opened down -43, the NASDAQ dropped -31, and the lost S&P -8. The 10-yr stood at 3.21%, down -2 bp.
We anticipate no real news until 2:00 pm, when the FOMC policy statement is released. The 10-yr is at another key level at 3.21%. Late yesterday the note moved to 3.23%, the high for the year since September. The statement will affirm a rate increase in December; the focus will be on how the FOMC frames next year’s potential increases.
10 yr. note: +7/32 (22 bp) 3.21% -2 bp
5 yr. note: +2/32 (6 bp) 3.06% -2 bp
2 Yr. note: unch 2.96% unch
30 yr. bond: +10/32 (31 bp) 3.415% -1.5 bp
Libor Rates: 1 mo. 2.315%; 3 mo. 2.601%; 6 mo. 2.843%; 1 yr. 3.125%
30 yr. FNMA 4.5: @9:30 102.13 +3 bp (-7 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.55 +9 bp (-1 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.43 +18 bp (+17 bp from 9:30 yesterday)
Dollar/Yuan: $6.9328 +$0.0128
Dollar/Yen: 113.66 +0.14 yen
Dollar/Euro: $1.1437 +$0.0011
Dollar Index: 96.13 -0.03 yen
Gold: $1226.00 -$2.70
Crude Oil: $61.06 -$0.61
DJIA: 26,183.90 +3.60
NASDAQ: 7556.11 -14.64
S&P 500: 2811.85 -2.04
The elections turned out just as expected. The House went to Democrats, and the Senate stayed Republican. The stock market has liked the results so far. The indexes at 9:30 am ET opened higher; the DJIA opened up +226, the NASDAQ added +61, and S&P increased +25. The 10-yr note is also improving a little. At 9:30 am it stood at 3.19%, losing -3 bps.
Weekly MBA mortgage applications declined once again; down 4.0% overall, down 5.0% for purchases and losing -3.0% for re-finances. The unadjusted purchase index at 0.2% is below its reading in the comparable week last year and at the lowest level since November 2016. The refinance share of mortgage of activity decreasing to 39.1%.
The FOMC meeting is just getting underway; as you know there won’t be anything today; the policy statement takes place tomorrow at the end of the meeting at 2:00 PM. No change in rates at this meeting; the statement should make it clear that the December meeting will see another 0.25% increase in the Federal Fund rate.
At 1:00 pm the Treasury will auction $19B of new 30s; yesterday’s 10-yr auction did meet with strong demand from foreign investors (indirects).
Later this afternoon at 3:00 pm September consumer credit is expected to add +$16.5B, down from $20.1B in August. The only thing in the report is the revolving credit category (credit card use).
Now that Democrats have won control of the U.S. House, they will be able to force administration officials to testify and provide documents. That will subject Trump’s decision-making -- as well as his finances and potential conflicts of interest -- to deeper public and private examination by key committees, as the national focus shifts to the 2020 presidential election. Trump’s Twitter response “If the Democrats think they are going to waste Taxpayer Money investigating us at the House level, then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level. Two can play that game!”
The 10-yr note yesterday momentarily hit its September high at 3.23% before backing down to 3.22% — a double top on the yield charts and something we will focus on. A failure to break above 3.23% in the next few days will likely force some of the market short positions to exit the bearish trade. It is a momentary trading event, and it won’t change the bearish outlook for interest rates.
10 yr. note: +7/32 (22 bp) 3.19% -3 bp
5 yr. note: +3/32 (9 bp) 3.03% -2 bp
2 Yr. note: unch 2.94% unch
30 yr. bond: +28/32 (87 bp) 3.39% -5 bp
Libor Rates: 1 mo. 2.316%; 3 mo. 2.591%; 6 mo. 2.841%; 1 yr. 3.116%
30 yr. FNMA 4.5: @9:30 102.19 +16 bp (+6 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.47 +5 bp (-1 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.26 -4 bp (+6 bp from 9:30 yesterday)
Dollar/Yuan: $6.9200 +$0.0005
Dollar/Yen: 113.24 -0.19 yen
Dollar/Euro: $1.1480 +$0.0053
Dollar Index: 95.93 -0.34
Gold: $1229.20 +$2.90
Crude Oil: $62.50 +$0.30
DJIA: 25,804.17 +169.16
NASDAQ: 7472.63 +96.66
S&P 500: 2780.38 +24.93
The bond and mortgage markets are generally unchanged this morning and are likely to remain that way throughout the day. With the election on us now investors and traders won’t make any major moves until results are finalized. Polls got closer the last two days between Democrats and Republicans over who will win the House but most believe Democrats will take over while the Senate will stay with Republicans. Mid-term elections are about the presidency. Usually, the party in the White House loses votes at mid-term, so this one is really about President Trump.
Dems need 23 seats to change, some polls indicate anywhere from 20 to 40 seats will change. According to one poll, Dems are expected to win key governor races in Ohio, Florida, Wisconsin, and Michigan. The Boston Globe reported hackers targeted voter registration databases, election officials and networks across the country. Facebook blocked 85 Instagram and 30 Facebook accounts after a tip from the authorities. Almost all the Facebook pages were in French or Russian.
At 9:30 am the DJIA opened up +14, the NASDAQ added +1, and the S&P remained unchanged. The 10-yr also remained unchanged at 3.20%.
At 10:00 am the September JOLTS job openings were expected at 7.110m from 7.136m originally released; as reported openings totaled 7.009m and August was revised to 7.293m.
At 1:00 pm the Treasury will auction a new $27B 10-yr note; important for the long end of the curve and mortgage rates. Tomorrow $19B of 30s will hit the auction block.
In addition to the election outcome being revealed tomorrow, the FOMC meeting will begin. It will be a key meeting as always, but this one should settle once and for all what the Fed will do at the Dec meeting; presently the consensus is a rate hike. What markets will look for is any waffling in the policy statement released on Thursday afternoon at the conclusion of the meeting. There will be no Powell press conference, and likely this meeting will be the last meeting that won’t have a press conference after the meeting. In the past, every other meeting was considered a meeting that the Fed might act; beginning next year, Jerome Powell will do a press conference after each meeting.
10 yr. note: unch 3.20% unch
5 yr. note: -1/32 (3 bp) 3.03% unch
2 Yr. note: unch 2.91% unch
30 yr. bond: +3/32 (9 bp) 3.42% -1 bp
Libor Rates: 1 mo. 2.316%; 3 mo. 2.589%; 6 mo. 2.835%; 1 yr. 3.116% (11/5/18)
30 yr. FNMA 4.5: @9:30 102.13 +2 bp (+1 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.48 -2 bp (+3 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 102.20 -5 bp (-9 bp from 9:30 yesterday)
Dollar/Yuan: $6.9170 -$0.0088
Dollar/Yen: 113.28 +0.08 yen
Dollar/Euro: $1.1418 +$0.0010
Dollar Index: 96.25 -0.10
Gold: $1232.70 +$0.40
Crude Oil: $63.23 +0.15
DJIA: 25,528.94 +67.24
NASDAQ: 7386.75 +57.90
S&P 500: 2749.04 +10.73