Yesterday, the DJIA declined intraday 104 points, but turned in the afternoon and ended up 5 points; the other two key indexes hardly moved yesterday. This morning in pre-open trading in the futures, US stock indexes traded higher; at 9:00 AM EDT the DJIA up 95. Interest rates are doing what they do when stocks increase, trading higher in yield and lower in price. MBS prices at 9:00 am -22 bps from yesterday’s close.
Yesterday, the Senate approved the budget resolution for the 2018 fiscal year. The approval paves the way for their tax-cut proposal that would add up to $1.5 trillion to the federal deficit over the next decade to pay for the cuts. Rand Paul, senator from Kentucky, was the only Republican who voted against it, but today added he was “all in” on the tax cuts. The administration has said it would deliver up to $6 trillion in tax cuts to businesses and individuals. Democrats remained united in their opposition to the budget bill and are unlikely to support the Republicans’ tax plan, arguing it would benefit the wealthy, raise taxes on some middle-class Americans and widen the federal deficit. The vote was 51 to 49 with no Democrats voting for it.
The 10 yr. yield increasing this morning to 2.38% early this morning, and likely will once again test the main near-term support at 2.40%, the level tested and rejected three times since last May. A push above 2.40% likely clears the way (technically) to climb to the high of the year at 2.62% (Dec 15th, 2016) the first time and again in March this year.
It is somewhat of a route in the MBS markets this morning in the increased belief there will be tax cuts after the Senate cleared the way to increase the deficit over the next 10 yrs. At 9:30 the DJIA opened +75 but futures earlier had the index +95, NASDAQ +28, S&P +7. The broad market better, but still not exploding as the 30 DJIA stocks have done the last few sessions. At 9:30, the 10 yr. note at 2.38% +6 bps from yesterday. FNMA 3.5 30 yr. coupon -30 bps from yesterday’s close and -35 bps from 9:30 yesterday.
At 10:00, September existing home sales were thought to be at 5.30 mil, down 0.9% from August. Sales at 5.39 mil were up 0.7%; yr./yr. sales down 1.5% after being +0.2% in August. No initial reaction to the better m/m improvement over estimates.
The initial euphoria about the Senate approving an increase in the deficit is somewhat weakening; the vote was expected, and tax cuts are mostly already discounted within market stock prices. If there is any question now, it’s whether cuts will actually increase consumer spending, move inflation higher and whether wage gains will materialize at levels many currently believe. A few months ago, we believed the DJIA would climb to 22K but then turn sour. Can’t fight the reality now; investors are defying most signs of being overbought, making huge investments that there won’t be any major corrections, and even if it happens, it will be seen as a big buying opportunity. Risk of losses in stocks is not even considered.
PRICES @ 10:10 AM
10 yr note: -18/32 (56 bp) 2.385% +6.5 bp
5 yr note: -10/32 (31 bp) 2.02% +5 bp
2 Yr note: -2/32 (6 bp) 1.58% +3 bp
30 yr bond: -39/32 (122 bp) 2.90% +7 bp
Libor Rates: 1 mo 1.238%; 3 mo 1.362%; 6 mo 1.550%; 1 yr 1.827%
30 yr FNMA 3.5 Nov: @9:30 102.61 -30 bp (-35 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.32 -16 bp (-16 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 103.59 -23 bp (34 bp from 9:30 yesterday)
Dollar/Yen: 113.40 +0.86 yen
Dollar/Euro: $1.1791 -$0.0061
Dollar Index: 93.62 +0.46
Gold: $1283.50 -$6.50
Crude Oil: $51.16 -$0.13
DJIA: 23,234.44 +71.40
NASDAQ: 6637.57 +32.51
S&P 500: 2571.18 +9.08
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.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.
The DJIA blew over 23K yesterday, but the broader stock market was nonplussed and hardly moved. 30 stocks rose, the rest based on the indexes were mostly flat. This morning in futures trading the DJIA, after increasing 160 points, was trading down 89 points and the NASDAQ and S&P also under pressure. Yesterday, the 10 yr. note reacting to the DJIA increased 4 bps to 2.34%, this morning in early trade back to 2.32%. MBS prices yesterday down 23 bps, this morning up 11 bps. Not news, but the bond and mortgage markets are dancing with stocks; stocks higher, interest rate prices lower, and vice versa.
Weekly claims this morning were expected to have declined 3K to 240K; claims fell 22K to 222K--the lowest claims filings in 44 years. The 4-week average of claims at 248.25K down from 257.75K the prior week. The hurricanes continue to influence data. The decrease in claims was the largest since April and was probably exaggerated by the Columbus Day holiday on Monday, but regardless it is a solid number that will increase the idea that employment is strong. We'll see next week if claims were an aberration or confirmation of increased employment that will add to the Fed’s thinking about a rate increase in Federal Funds in December.
Also at 8:30, another better report than expected: the October Philadelphia Fed business index was thought to be at 20.2 from 23.8 in September, the index jumped to 27.9. More evidence of improving economy. The employment, at 30.6, is a record in 48 years of this report's data. The unusual strength of demand, together perhaps with lingering hurricane effects on the supply chain, are making for the longest delivery delays on record, at 21.6. New orders 19.6 vs September's 29.5, unfilled orders at 10.9 vs 17.0, shipments 24.4 vs 37.8, the 6-month outlook 46.4 vs 55.2. Building up inventories while price data show a 7-month high for inputs costs, at 38.1, but a dip back in selling prices to a still very solid 14.2.
At 10:00 am, September leading economic indicators, not a major report, expected +0.1% it fell 0.2%.
A stock market top is imminent. Stocks were mixed yesterday. The Dow Industrials exploded higher, mostly on IBM's move. The S&P 500 was up slightly, the NASDAQ 100 fell slightly. The Industrials have risen far more sharply than the broader index S&P 500 over the past several weeks. However, only a few large stocks are pushing this index higher. Breadth has not contributed. It is shrinking the higher the Index moves, typical fifth and final wave action for a rising trend that is ending. The Wall Street Journal noted today that more money has pulled out of the U.S. stock market this year from investors than has gone in. The price push has largely come from corporate buybacks, foreign investors, and sovereign wealth funds--deep pockets. This type of buying is not the stuff of sustainable Bull markets.
The US bond and mortgage markets overall are flat, not moving in any trend and following the stock market. Stocks higher, interest rates up, lower and interest rates down. We still believe the stock market is extremely overdue for a pullback as most analysts currently believe also. Those that are shorting the market are being hit hard with trade losses. We believe interest rates at the long end of the curve are holding mainly on hedging against a stock market decline. Won’t decline much though, until the stock indexes turn sour--and so far, it isn’t happening. It isn’t a healthy equity market now for the near term. Markets need backing and filling to confirm the overall direction. This market has had none, just keeps increasing with no volatility and exceptionally complacent. Not a positive as you might expect.
PRICES @ 10:00 AM
10 yr note: +13/32 (41 bp) 2.30% -4 bp
5 yr note: +7/32 (22 bp) 1.95% -4 bp
2 Yr note: +2/32 (6 bp) 1.55% -2 bp
30 yr bond: +29/32 (91 bp) 2.81% -4 bp
Libor Rates: 1 mo 1.238%; 3 mo 1.362%; 6 mo 1.550%; 1 yr 1.834%
30 yr FNMA 3.5 Nov: @9:30 102.92 +11 bp (+4 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.48 +8 bp (-4 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.06 +11 bp (-8 bp from 9:30 yesterday)
Dollar/Yen: 112.38 -0.55 yen
Dollar/Euro: $1.1844 -$0.0043
Dollar Index: 93.12 -0.29
Gold: $1289.60 +$6.60
Crude Oil: $51.28 -$0.76
DJIA: 23,066.14 -91.46
NASDAQ: 6562.65 -61.57
S&P 500: 2548.69 -12.57
Last night after the close IBM reported another strong earnings report. This morning, adding at least 50 points to the 30 DJIA stocks. Prior to the open at 9:30 AM EDT, the DJIA traded +107 points from yesterday’s close and well above the 23K level that was tested yesterday. The other two key indexes, however, were not quite as strong. The bond market taking a hit early, at 2.34% +4 bps and above its near-term support at 2.32%; MBS prices at 8:30 -15 bps from yesterday’s close.
Tax cuts are making headway now, maybe a bipartisan deal coming. Standard deductions doubling to $12K ($24K for couples); the NAR arguing against the possibility of eliminating the mortgage tax deduction but increasing the standard deduction should offset the mortgage deduction for most of middle America. NAR saying eliminating the deduction will hurt future home buying. Most itemized deductions, other than mortgage interest and charitable contributions, would be eliminated. NAR commenting, “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase” and ensure “that only the top 5% of Americans have the opportunity to benefit from the mortgage interest deduction.” NAR not likely to succeed on its concerns; according to the WSJ two-thirds of all income-tax filers already take the standard deduction. Increasing it to $12,000 ($24K for married couples filing jointly) would mainly affect homeowners earning between $50,000 and $100,000 who on average itemize $7,000 in mortgage interest and $6,342 in local and state taxes.
Tax cuts, according to market action (higher indexes), are widely expected now but to do it, Congress has to pass a budget resolution being debated in the Senate that will increase the deficit by $1.5 trillion over the next 10 years. It will be a close vote, but the conventional wisdom is that any politician that votes against tax cuts will face angry constituents regardless of the increase in debt. No voter cares about the federal deficits, but the time will come when US debt will have a significant impact on rates and the economy. That is a long way off, and so far over the years we have kicked that can down the road anytime it is debated.
At 8:30, September housing starts and permits were weaker than forecasts. Starts were thought to be at 1170K, as reported 1127K, down 4.8% from August; permits expected at 1238K but reported at 1215K -4.5%. August starts were revised slightly higher from 1180K to 1183K, while permits in August revised lower, from 1300K to 1272K. Permits for single-family homes rose 2.4% to an 819,000 rate and a year-on-year gain of 9.3%. Permits for multi-family units fell 16.1% to a 396,000 rate. Yr./yr. -24%. Single-family starts down 4.6% to 829,000. Single-family completions offer some good news, up 4.6% to a 781,000 rate and adding immediate supply to the market. Looks like the housing market will end the year about unchanged from 2016.
Weekly MBA mortgage applications: +3.6%, purchases +4.0% while, refinance apps +3.0%. The previous week, apps were down 2.1%, re-finances -4.0%.
This afternoon, the Fed will release the Beige Book, the Fed staff details from the 12 Fed districts. Also this afternoon, September Treasury budget and year-end deficit data.
Two Fed officials: William Dudley, NY Fed saying that investors have not been paying enough attention to the servicing of government debt. Recall that investors have been encouraged to ignore total debt load during the recovery from the financial crisis. Dallas Fed President Robert Kaplan said he is worried about a short-term tax cut that would raise the debt load. Kaplan said the economy is at or close to full employment and that 2017 growth is not expected to exceed 2.5%. Based on the present negotiations on tax cuts, the federal debt will increase; the proponents of the cuts believe that the debt will not increase due to the increase in GDP growth because of cutting taxes.
10 yr note: -13/32 (41 bp) 2.35% +5 bp
5 yr note: -6/32 (18 bp) 2.00% +4 bp
2 Yr note: -2/32 (6 bp) 1.57% +2 bp
30 yr bond: -36/32 (112 bp) 2.86% +6 bp
Libor Rates: 1 mo 1.237%; 3 mo 1.357%; 6 mo 1.545%; 1 yr 1.821%
30 yr FNMA 3.5 Nov: @9:30 102.89 -16 bp (-8 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.52 -11 bp (-4 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.16 +3 bp (-8 bp from 9:30 yesterday)
Dollar/Yen: 112.96 +0.76 yen
Dollar/Euro: $1.1764 -$0.0002
Dollar Index: 93.57 +0.05
Gold: $1283.00 -$3.20
Crude Oil: $52.22 +$0.34
DJIA: 23,114.72 +117.28
NASDAQ: 6622.90 -0.76
S&P 500: 2561.89 +2.53
Softer open today in the bond and mortgage markets. At 8:30 AM EDT, September import and export prices; import prices expected up 0.5% but up 0.7%, export prices expected +0.4% doubled to 0.8%. Yr./yr. import prices +2.7% from 2.1% in August; yr./yr. exports +2.9% up from 2.4% in August. Oil prices sharply higher at the headline level in September, up 0.7. Petroleum import prices jumped 4.5% in the month on top of August's 5.0% increase. Excluding petroleum, import prices rose 0.3%, and a gain tied to a 1.8% jump for imported foods, feeds & beverages. Excluding both petroleum and foods, import prices managed only a modest 0.2% gain. Pressure on the export side is centered in industrial supplies, which rose 3.0% in September following August's 1.8% gain in a component where petroleum inputs play a significant part. This gain offsets a sizable 0.7% decline in agricultural exports. Finished goods holding steady; yr./yr. finished goods +1.2%. Yr./yr. change for consumer imports, which is a critical category for the economy, are up 0.2% on the year. Not much in the way of inflationary pressures when the skewed data is minimized. The bond and mortgage markets didn’t react much on the strong headlines after looking deeper into the data.
More earnings out in the financials this morning; both Morgan Stanley and Goldman Sachs beat forecasts. Banks doing quite well over the last six months. Johnson & Johnson beat estimates; so too did United Health, Comerica, Netflix, Harley Davidson.
September Industrial production at 9:15 +0.3%, better than 0.2% expected; August, originally -0.9%, was revised to -0.7%; manufacturing +0.1% but was expected +0.4%. Capacity utilization in September was thought to be at 76.2%, it fell to 76.0% but August capacity utilization, originally reported at 76.1%, was revised lower to 75.8%. Interesting, but the data generally doesn’t elicit much interest from traders, as it is reflected within other more direct data through the rest of the month’s reports.
At 10:00 am, the October NAHB housing market index, thought to be unchanged at 64, increased to 68, the best since last May; September index declined 3 points from August from 67 to 64, now improving. We will have more details at 4:30.
Later today at 2:00 pm, Treasury will report September budget data. and since it is the end of the fiscal year, the total deficit for 2017--and it will be a deficit. With the tax cuts and reforms still a white-hot topic, and if passed will likely increase deficit spending, we will watch this closely. No concrete plans yet for passage of a tax cut and any potential reforms, but yesterday Pres. Trump and Senate majority leader Mitch McConnell made nice when they met. Both have been jawing back and forth over the lack of Senate Republicans’ cohesiveness on health care and about anything else of importance.
More saber rattling from North Korea: the deputy U.N. ambassador warned Monday that the situation on the Korean Peninsula "has reached the touch-and-go point and a nuclear war may break out any moment." First of all, keep in mind he is the deputy--in North Korea a minor politician. He commented that NK is the only country in the world that has been subjected to "such an extreme and direct nuclear threat" from the United States since the 1970s ? and said the country has the right to possess nuclear weapons in self-defense. The war of words not likely to stop; and a nuclear war isn’t likely, but neither the US, the UN and now Russia will end the sanctions that are increasingly harming the rogue regime.
Technicals still bearish: the 10 yr. now trading at its support at 2.32%. I know we have said this many times recently, but unless stocks come under heavy selling or there is some other kind of black swan unexpected market shock, the rate markets will not have the momentum to decline much or increase much either. The Fed still thought to increase rates once again in December; some Fed officials out recently talking about three additional cuts in 2018 but we don’t give that outlook that much credibility at the moment. The lack of inflation remains a conundrum for the Fed and other key central banks. Economists are beginning to understand that the old measurements and results no longer apply in this global economy.
10 yr note: -3/32 (9 bp) 2.31% +1 bp
5 yr note: -5/32 (15 bp) 1.98% +3 bp
2 Yr note: -1/32 (3 bp) 1.55% +1 bp
30 yr bond: unch 2.82% unch
Libor Rates: 1 mo 1.236%; 3 mo 1.353%; 6 mo 1.533%; 1 yr 1.809%
30 yr FNMA 3.5 Nov: @9:30 102.97 -6 bp (-9 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.56 -6 bp (-13 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.22 +2 bp (-15 bp from 9:30 yesterday)
Dollar/Yen: 112.43 +0.24 yen
Dollar/Euro: $1.1741 -$0.0056
Dollar Index: 93.67 +0.40
Gold: $1286.70 -$16.30 (stronger dollar)
Crude Oil: $51.92 +$0.05
DJIA: 22,979.71 +22.75
NASDAQ: 6625.91 +1.90
S&P 500: 2557.97 +0.33
A weaker open in the rate markets this morning; the stock indexes continue to advance. Once again back in earnings season: one-third of the DJIA stocks will report this week. The overall outlook looks good for earnings and will continue to drive stocks further into the stratosphere.
Last Friday, a strong rally in the bond and mortgage markets. September PPI and CPI out last week, adding more debate about why inflation is not increasing. The Fed released the minutes from the September meeting, noting that there was an increasing debate within the FOMC about why inflation isn’t following historic models that imply by now inflation in wages should be increasing with unemployment at 4.0% levels (4.2% in September). The Fed is still widely expected to increase the Federal Funds rate again in December, although we doubt it is built into present interest rate levels; too much time between now and December for traders to begin making serious bets.
Boston Fed Eric Rosengren speaking; believes the Fed will have to increase the federal funds rate three to four times over the next year, beginning at the December meeting. But as always with Fed officials that have outright forecasts, Rosengren fell back saying it depends on increasing inflation. The Fed and its regional presidents continue to say the same thing, always ending it with the IF about inflation. We agree; inflation in wages then in prices is not marching to the prior drummers. The comments mark Rosengren, who does not vote on policy this year, as slightly more hawkish than most of his colleagues.
This afternoon at 2:00 pm EDT, Treasury will report the September balance, expected +$3B in September after $107.7B in August. It is the end of fiscal 2017, so we will have the annual deficit for the year.
The unfolding tax cut plans, still in flux, but what is being discussed: the potential to virtually eliminate a break lawmakers once considered untouchable--the mortgage interest deduction. So far it hasn’t been ruled out, but it may not matter if the standard deduction doubles as is being talked about. Only the highest earners would continue to itemize their deductions, and only a few of them would take the mortgage break. For most taxpayers, the standard deduction is likely to be the better option. Under current law, a typical homeowner would need to purchase a home worth at least $305,000 to make taking the break worthwhile, according to Zillow, while under the proposed law that would shoot up to $801,000. The median home value in the U.S. is just over $200,000. Tax reforms (cuts) still far from being close to any significant agreements.
Technically, the 10 yr. note has near term support at 2.32%, after declining Friday on weaker CPI data back to 2.30% this morning on the usual stock market gains. Crude oil higher on concerns supply lines may be interrupted from Kirkuk as Iraqi fighting intensified; also, the constant talk from oil producing companies on continuing to keep cuts announced last November will continue.
This Week’s Calendar:
10 yr note: -6/32 (18 bp) 2.30% +2 bp
5 yr note: -4/32 (12 bp) 1.93% +2 bp
2 Yr note: -1/32 (3 bp) 1.52% +1 bp
30 yr bond: -14/32 (44 bp) 2.83% +2 bp
Libor Rates: 1 mo 1.236%; 3 mop 1.353%; 6 mo 1.534%; 1 yr 1.812%
30 yr FNMA 3.5 Nov: @9:30 103.06 -11 bp (-4 bp from 9:30 Friday)
15 yr FNMA 3.0: @9:30 102. 70 -19 bp (-6 bp from 9:30 Friday)
30 yr GNMA 3.5: @9:30 104.38 +16 bp (-8 bp from 9:30 Friday)
Dollar/Yen: 111.82 unch
Dollar/Euro: $1.1800 -$0.0020
Dollar Index: 93.19 +0.04
Gold: $1306.30 +$1.30
Crude Oil: $51.99 +$0.54
DJIA: 22,917.17 +45.45
NASDAQ: 6626.97 +21.16
S&P 500: 2557.57 +4.40
September retail sales were strong, but not as firm as estimates, up 1.6% against +1.9% expected. Excluding auto sales, sales were thought to be up 0.8% but did increase 1.0%. The control group that excludes autos, restaurants, building materials and gas are another core measure and are also very positive, up 0.4%; the control group data is used to calculate GDP growth. Sales up the most in over two years and is a plus for the equity markets, but the strong improvement is built on the back of the hurricanes Harvey and Irma: sales of goods to replace losses caused by hurricanes. September auto sales released last week showed cars and light trucks sold in September at the fastest annualized rate since 2005. If that were the only data at 8:30 AM EDT this morning, mortgage rates would be moving higher..
September CPI up 0.5%, was expected +0.6%, the core (ex food and energy) up 0.1% on expectations of +0.2%. Yr./yr. core was expected +1.8% but up 1.7%. The CPI data adds more to the idea inflation is still not increasing as the Fed wants; as a reaction, interest rates declined, and MBS prices increased. Most inflation reports have continued to affirm a lack of inflation pressures and removes the fear of parking money in US treasuries. This, in turn, pushes mortgage prices higher.
BofA reported stronger Q3 earnings than thought: +15%. Wells Fargo disappointed with weaker earnings due to legal and other costs within the bank over mortgage practices and sales scandals. Wells Fargo is the largest U.S. residential mortgage lender, making more than $98B of loans in the first half of the year, according to the trade publication Inside Mortgage Finance.
Two reports at 10:00 am: the U. of Michigan consumer sentiment index expected at 95.5 from 95.1 in September, the index exploded to 101.1, the highest since 2001. August business inventories were expected to be +0.6%, as reported +0.7%.
Scanning news this morning, there were the usual comments about retail sales and now the explosion in the U. of Michigan consumer sentiment index. On the outlook for stock markets: one recognized professional saying the stock market could capitulate as it did in Oct 1987 when the DJIA and other indexes dropped over 40% in three sessions. The other, a retired multi-millionaire recluse Dr. Steve Sjuggerud, a much-followed financial analyst, saying that within the next two to three years the DJIA will increase to 40K to 50K (now 22K). The point: there is a chasm as wide as the Grand Canyon over what will happen.
The IMF meeting underway but no news yet.
PRICES @ 10:15 AM
10 yr note: +7/32 (22 bp) 2.29% -3 bp (2.28% was the low this morning)
5 yr note: +4/32 (12 bp) 1-91% -3 bp
2 Yr note: +1/32 (3 bp) 1.50% -1 bp
30 yr bond: +4/32 (12 bp) 2.84% unch
Libor Rates: 1 mo 1.238%; 3 mo 1.359%; 6 mo 1.531%; 1 yr 1.808%
30 yr FNMA 3.5 Nov: @9:30 103.13 +16 bp (+18 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.88 +11 bp (+18 bps from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.45 +14 bp (+20 bp from 9:30 yesterday)
Dollar/Yen: 111.89 -0.39 yen
Dollar/Euro: $1.1857 +$0.0026
Dollar Index: 92.81 -0.29
Gold: $1303.10 +$6.60
Crude Oil: $51.36 +$0.76
DJIA: 22,886.68 +$45.67
NASDAQ: 6607.50 +15.99
S&P 500: 2555.31 +4.38
Weekly jobless claims were better than forecast: -15K to 243K; the 4-week average continues to decline, 257.50K from 267K the prior week. Claims, after increasing because of hurricanes, are now coming back to levels before Harvey and Irma. There are still some issues with claims from Puerto Rico that likely will increase once the data is available. The island almost wiped out; claims from there are being estimated. Overall claims are reflecting the strong job market.
September PPI expected +0.4% was +0.4%, the core (ex food and energy) expected +0.2% increased 0.4%. Yr./yr. overall PPI increased from +2.4% in August to +2.6%. Yr./yr. core increased to +2.2% from +2.0% in August. Core PPI plus trade services +0.2% and yr./yr. 2.1% from +1.9% in August. PPI increase the biggest month-to-month increase since February 2012, when the yr./yr. Month-To-Month increased to 2.8%. Markets (stocks and bonds) appeared to ignore the increase, with the Fed now questioning its own inflation forecasts.
There was very little reaction to the higher PPI and better claims. The 10 yr. at 8:30 -1 bp to 2.33%; stock indexes slightly weaker. Tomorrow’s CPI data a better look at inflation.
The IMF begins its meeting today. Today starts the earning season; banks reporting today. JP Morgan Chase reported better than expected earnings; Citi reported better than they forecast three weeks ago. Banks are seeing declines in trading profits, but cost cuts and asset sales holding earnings well.
This afternoon, Treasury will auction $12B of 30s re-opening the issue in August. Yesterday, the 10 yr. auction was OK with reasonable bidding.
Yesterday, the minutes from the September FOMC meeting revealed that within the Fed there is an increasing concern that ‘maybe’ the inflation outlook that Yellen has continually said is coming may not be coming. A new wrinkle, given the Fed and most all other central bankers, have been preaching increasing inflation for well over a year now.
IMF not getting on board with the US tax cuts being outlined. It has been claimed the cuts will increase growth to over 3.0%. IMF more concerned that the proposed cuts, if actually passed, will increase US debt as deficit spending is a reality regardless of those that believe the cuts to be revenue neutral and doubt that it will increase US growth as anticipated.
10 yr note: +4/32 (12 bp) 2.33% -1 bp
5 yr note: +2/32 (6 bp) 1.94% -1 bp
2 Yr note: +1/32 (3 bp) 1.52% unch
30 yr bond: +4/32 (12 bp) 2.88% unch
Libor Rates: 1 mo 1.238%; 3 mo 1.358%; 6 mo 1.529%; 1 yr 1.809%
30 yr FNMA 3.5 Nov: @9:30 102.94 +11 bp (+11 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.70 +3 bp (-5 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.17 +8 bp (+ 8 bp from 9:30 yesterday)
Dollar/Yen: 112.39 -0.10 yen
Dollar/Euro: $1.1832 -$0.0027
Dollar Index: 93.13 +0.17
Gold: $1294.60 +$5.70
Crude Oil: $50.33 -$0.97
DJIA: 22,839.48 -33.41
NASDAQ: 6595.10 -8.44
S&P 500: 2550.42 -4.82
Money continues to move to treasuries while the stock market continues to confound most thinkers. North Korea kind of back in the picture, and tax cuts moving forward, although in fits, with Republicans still fighting each other with barbs and nasty comments (Trump vs Sen. Corker). Washington a mess of partisanship. North Korea news that it hacked sensitive data about the US and South Korea plans against North Korea is rattling the cyber community. In the meantime the US yesterday flew two strategic bombers over the Korean peninsula in a show of force as President Donald Trump met top defense officials to discuss how to respond to any threat from North Korea.
Over the weekend, the Nobel Prize in economics was awarded to Richard H. Thaler, the University of Chicago professor: His thesis: people don’t use their heads but act on emotions. It is deeper and more detailed than that, but essentially humans tend to repeat their mistakes over and over. He is now another voice confused about equity markets; why nothing bothers investors and why volatility and complacency continues to push equity markets higher. “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler said, speaking by phone on Bloomberg TV. “I admit to not understanding it...Nothing seems to spook the market,” and if the gains are based on tax-reform expectations, “surely investors should have lost confidence that that was going to happen...where anyone would get confidence” that tax reform is going to happen, “The Republican leadership does not seem to be interested in anything remotely bipartisan, and they need unanimity within their caucus, which they don’t have,” Thaler said. “And the president’s strategy of systematically insulting the votes he needs doesn’t seem to be optimizing anything I can think of, but maybe he’s a deeper thinker than me.”
The point I am making here is, some money is moving to safety to balance considerable investments in stocks.
Weekly MBA mortgage apps; the composite index -0.4%, purchase apps +1.0% while refinance apps down 2.0% from the prior week.
At 10:00 am, the August JOLTS job openings, expected at 6.160 million from 6.17 million in July; Job openings declined to 5.082 million, and July was revised lower to 6.14 million. PS: if the opening were better than forecasts media would have already made it important.
At 11:30 am EDT Treasury will auction $24B of 3 yr. notes.
At 1:00 Treasury will auction $20B of 10 yr. notes reopening the issue from August. The demand and how the auction is received will be closely watched by traders and some investors.
Too many central bank speeches? Adds confusion, not clarity. Two economists from the Swiss National Bank, Thomas Lustenberger and Enzo Rossi, refute the idea that increased communications by central bankers have added clarity rather than adding confusion. We echo that, and it isn’t rocket science, US Fed officials out like flies on fruit continue to twist thinking in markets.
We haven’t gotten the interest rate rally we mentioned on Monday, but the bond and mortgage markets have stopped increasing (yields), and prices have been stable. I know it is a broken record, but until the stock market succumbs to this continual buying on bets, tax reforms will drive growth and finally capitulates into a correction, or NK fears increase, the rate markets at best will stay about where they now trade. As we noted Monday, the momentum oscillators driving rates higher recently hit oversold levels and now moderating but still bearish. Frustrating, but that is the story now.
10 yr note: +7/32 (22 bp) 2.33% -2 bp
5 yr note: +4/32 (12 bp) 1.94% -2 bp
2 Yr note: +1/32 (3 bp) 1.50% -1 bp
30 yr bond: +17/32 (53 bp) 2.86% -2 bp
Libor Rates: 1 mo 1.237%; 3 mo 1.356%; 6 mo 1.524%; 1 yr 1.806%
30 yr FNMA 3.5 Nov: @9:30 102.84 +10 bp (+10 bps from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.72 +8 bp (+6 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.11 +8 bp (+2 bp from 9:30 yesterday)
Dollar/Yen: 112.20 -0.25 yen
Dollar/Euro: $1.1852 +$0.0046
Dollar Index: 92.99 -0.27
Gold: $1292.70 -$1.10
Crude Oil: $50.97 +$0.05
DJIA: 22,833.30 +2.62
NASDAQ: 6579.84 -7.41
S&P 500: 2549.51 -1.13
Bond and mortgage markets closed yesterday for Columbus Day while the other markets traded. The stock indexes were lower but not much, generally a quiet session. This morning, the 10 yr. began unchanged from Friday’s close at 2.36%, early trade in MBSs -2 bps from Friday’s close.
The only data today, and it isn’t generally a market mover: the September NFIB optimism index, expected at 105.4 from 105.3 in August, declined to 103.0, led by a sharp drop in sales expectations, not only in states affected by hurricanes in Texas and Florida, but across the country. The surprising drop put the index at the lowest level of the year after hovering just below the 12-year high set in January and came in not only below the consensus forecast of 105.4 but below the range of analysts' forecasts. Sales expectations, which fell 12 points to 15, and now is a good time to expand, falling 10 points to 17. But planned increases in capital outlays by small business owners also fell significantly, with the component shedding 5 points to 27. Not that good of a report, but still the outlook from most small businesses are positive, with most saying they will increase inventories. This report does get looks, but investors don’t actually react to it.
Another report this morning, the Redbook same store sales, a weekly measure of comparable store sales at chain stores, discounters, and department stores. Yr./yr. sales the prior week were +4.1%, this report 3.2%.
Tax reform being debated again; over the weekend Republican Senator Bob Corker and Pres. Trump spat at each other on Tweets. Over the weekend, Trump took to Twitter to label Corker a “negative voice” standing in the way of his agenda. He also claimed Corker had begged for an endorsement and decided to retire when Trump refused. Corker responded that the White House had become “an adult day care center. Someone obviously missed their shift this morning.” The keystone of the Trump agenda is tax reforms; now Republicans can’t get along, and that adds height to the hurdle of tax cuts. Republicans do not have much margin to disagree or Tweet each other to death.
No stopping the equity markets: the indexes keep increasing, the volatility decreasing; complacency from investors, and there is no end in sight. Recently though, instead of interest rates rising as stocks increase and the Fed poised to increase rates again, the 10 yr. note held a very significant support level last week at 2.40%, and mortgage prices holding well. Big money (hedge funds, money managers, and Wall Street firms) are not huge sellers in the bond market. Why? The economic data has been positive, tax cuts are still expected by most, and central banks talking about removing stimuli. North Korea fears have ebbed. Later this week, markets will get September PPI and CPI along with September retail sales: key data.
Yesterday in our brief afternoon report we noted; “Heads up; the bond market is about to see some improvement. Do not front-run it; the wider view remains bearish: wait and continue to follow the bearish trend. Stocks will lead the way; as long as the indexes continue to increase, interest rates will continue to move higher.” As long as equity markets continue to climb, rates at best will stabilize here for a while. The bond market is oversold based on all of our momentum oscillators. Whether we see a strong rally in bonds depends almost entirely on equity market trading and inflation beliefs; both September PPI and CPI on Thursday and Friday are also keys. Interest rates this morning are improving so far; currently, we believe it’s a reaction to technical factors.
PRICES @ 10:05 AM
10 yr note: +8/32 (215 bp) 2.33% -4 bps from Friday
5 yr note: +3/32 (9 bp) 1.96% -2 bp
2 Yr note: +1/32 (3 bp) 1.51% -2 bp
30 yr bond: +23/32 (72 bp) 2.86% -5 bp
Libor Rates: 1 mo 1.237%; 3 mo 1.356%; 6 mo 1.524%; 1 yr 1.809%
30 yr FNMA 3.5 Oct: @9:30 102.96 +2 bp (+18 bp from 9:30 Friday)
15 yr FNMA 3.0: @9:30 102.66 +8 bp (+11 bp from 9:30 Friday)
30 yr GNMA 3.5: @9:30 104.09 +6 bp (+9 bp from 9:30 Friday)
Dollar/Yen: 112.15 -0.53 yen
Dollar/Euro: $1.1808 +$0.0066
Dollar Index: 93.28 -0.45
Gold: $1294.70 +$9.70
Crude Oil: $50.60 +$1.02
DJIA: 22,833.89 +72.82
NASDAQ: 6590.65 +10.92
S&P 500: 2550.43 +5.70
The monthly employment data is generally a wild report with forecasts not matching reality, sometimes better, sometimes worse. Today’s Sept. report no exception; even more a surprise than usual. The unemployment rate dropped to 4.2% from 4.4% (markets expected 4.4%). Non-farm jobs thought to be +100K declined 33K, private jobs thought up 117K were down 40K; manufacturing jobs estimated +11K were down 1K. The labor participation rate increased to 63.1% from 62.8% forecast. Average hourly earnings expected +0.3% increased to +0.5% and August earnings revised from +0.1% to +0.2%; yr/yr average hourly earnings increased to 2.9% from 2.5% in August.
The two hurricanes continue to play havoc with economic reports. The decline in jobs shouldn’t be taken seriously and will very likely see huge revisions when the October data is reported next month. The drop in payrolls was the first since September 2010. Payrolls are calculated from a survey of employers, which treats any worker who was not paid for any part of the pay period that includes the 12th of the month as unemployed. The unemployment rate at 4.2% the lowest since Feb 2001. Average hourly earnings, another impact of weather increased 0.5% and annually +2.9%; distorted by those that didn’t work or receive a paycheck was at the lower end of the pay scale; retail and hospitality. The 0.5% spike in earnings now matches July, which has been revised 2 tenths higher, as the strongest monthly surge of the expansion.
The bond and stock market didn’t like the report; stocks opened lower, the 10 yr note increased to 2.39% and MBS prices all saw selling at 8:30 AM EDT.
Rate markets pressured by the increase in earnings, no matter how distorted and the 4.2% unemployment rate. In a normal report not affected by unusual forces, the growth in earnings and the very low unemployment would be a huge red flag; and so far this it is. Any sniff of inflation with interest rates at these lows is going to be taken seriously. The bond and mortgage markets, already bearish, don’t need much excuse to increase selling. Stocks are extremely over-bought technically and to a lesser extent fundamentally, the decline in jobs provides a reason for some traders to book recent short-term profits. The Fed won’t take this report very seriously but the bond market will; any signs regardless of the background, that inflation may be heating will be met with concern and selling as we so far this morning.
The dollar strong this morning on the increase in US rates, but still much weaker than the last five months.
Summing: weather skews the Sept employment data. Interest rate markets have been on edge at the recent lows with fears of any increase in inflation regardless of any excuses about the weather. The Fed won’t take this report seriously, Janet Yellen commented on the report last week, that it distorted and continued to lead markets to the potential of another rate increase in Dec. Treasuries and MBSs have been technically bearish for a month now. A week ago I pointed to a gap in trading on the 10 yr from one day to the next; we noted it as a possible breakaway gap, which has been confirmed this week. Another chart gap this morning from yesterday’s high yield to this morning’s low yield; could well be an exhaustion gap. Momentum oscillators are now at extremely oversold levels and suggest a possibility of some improvement ahead, BUT do not act on it now. On three previous occasions since last March, the 10 increased to 2.40% where support occurred.
10 yr note: -12/32 (37 bp) 2.39% +4 bp
5 yr note: -7/32 (22 bp) 1.99% +5 bp
2 Yr note: -2/32 ( 6 bp) 1.53% +4 bp
30 yr bond: -29/32 (91 bp) 2.94% +5 bp
Libor Rates: 1 mo 1.237%; 3 mo 1.348%; 6 mo 1.513%; 1 yr 1.800%
30 yr FNMA 3.5 Oct: @9:30 102.78 -20 bp (-40 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.55 -11 bp (-23 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.00 -25 bp (-27 bp from 9:30 yesterday)
Dollar/Yen: 113.38 +0.50 yen
Dollar/Euro: $1.1696 -$0.0015
Dollar Index: 94.14 +0.23
Gold: $1263.80 -$9.40
Crude Oil: $49.42 -$1.37
DJIA: 22,763.93 -11.46
NASDAQ: 6584.58 -0.77
S&P 500: 2548.50 -3.57