July 8th, 2019 9:10 AM by Richard Sardella MLO.100007700/NMLS 233568
"What was apparent in the way markets reacted today was that the 50 bp cut had become universal within markets (investors, money managers, and traders); that surprised many. Here we were thinking a potential of 50 but also thought markets were still debating it." The June employment report was much stronger than was thought, sending interest rates up and stock indexes down a little by the end of Friday. Hand-wringing reached excesses with media and pundits talking about whether the Fed would not lower rates in three weeks when the FOMC convenes. On a key report that jobs are holding strong tossed all of the fundamental weakness in growth in the US and globally out the window; MBS prices declined, the 10-yr increased 9 bps and moved back over the key 2.00% level.
After the weekend the bond market is back to the belief the Fed will cut rates by 0.25%. We believe the Fed will lower the Federal Fund rate. No inflation, a 10-yr growth that has set a record, global issues increasing and the trade issues with China provide plenty of reason for the cut. (China is now saying it won't negotiate as long as the tariffs are in place; President Trump doesn't appear likely to back off). If, however, the Fed were to conduct a study of how the US and global markets would react, interest rates would move higher although will hold at still historic low rates. Where the damage would escalate would be US and global equity markets. The current expansion, the longest in history and regardless of the media and most analysts that praise the future outlook, equities are increasingly more perilous. The Fed knows it, big investors know it, money managers know it, and traders know it; the Fed actually has to lower the Federal Funds rate at least 0.25%. And it isn't just the Fed. Central banks around the world are ready to do the same thing; save the growth with financial stimuli.
The keys this week: Jerome Powell at the House and Senate Wednesday and Thursday, Treasury auctioning $78B of notes and bonds ($24B of 10s and $16B of 30s) and June CPI and PPI.
Some global data: Japan's May Core Machinery Orders decreased 7.8% m/m (expected -3.6%; last 5.2%), falling 3.7% yr./yr. (expected -3.9%; last 2.5%); June Economy Watchers Current Index ticked down to 44.0 (expected 43.9) from 44.1. Eurozone's June Sentix Investor Confidence fell to -5.8 (expected 0.3) from -3.3. Germany’s May Industrial Production increased 0.3% m/m (expected 0.4%; last -2.0%). Protests continued in Hong Kong, with demonstrators marching through an area that is popular with tourists from the Mainland.
Morgan Stanley cut its global equities allocation to the lowest in five years, and downgraded its investment recommendation to underweight, saying the outlook for stocks over the next three months looks particularly poor. Profit forecasts remain too optimistic, as measures of manufacturing health around the world keep deteriorating, strategists including Andrew Sheets wrote in a note Sunday. Expectations for looser central bank policy are high, leaving little to boost already elevated equity prices, they said. (Bloomberg)
This morning Iran threatened to restart deactivated centrifuges and ramp up its enrichment of uranium to 20 percent purity as its next potential big move away from a 2015 nuclear agreement that Washington abandoned last year. The threats, made by the spokesman for Tehran's nuclear agency, would go far beyond the small steps Iran has taken in the past week to nudge its stocks of fissile material just beyond limits in the nuclear pact. That could raise serious questions about whether the agreement, intended to block Iran from making a nuclear weapon, is still viable. Iran is increasingly becoming a huge concern both here and in the EU that has stood by the 2015 agreement, however, now there are questions whether the EU, China, and Russia can continue. The US squeezing Iran's economy and President Trump saying, "Iran should be very careful."
At 9:30 the DJIA -yr. stood at 2.02%, down -2 bps. MBS prices added +13 bp from Friday’s close and +16 bp from 9:30 Friday.
We are not expecting the 10-yr note to be back below 2.00% today, and likely it will stay in narrow ranges with Powell's testimony and Treasury borrowing. Mortgage rates are continuing to be very good and should be seen as such. Rates may continue to work lower, but those that wait for it may have a tough ride, with uncertainty increased after the jobs data Friday and geo-economic and political concerns.
This Week’s This Calendar:
3:00 pm May consumer credit ($17B)
6:00 am June NFIB small business optimism index (104.5 from 105.0 in May)
10:00 am May JOLTS jobs openings (7.400 mil from 7.449 mil in April)
1:00 pm $38B 3 yr. note auction
7:00 am weekly MBA mortgage applications
10:00 am Jerome Powell testifies at the House Financial Services Committee
1:00 pm $24B 10 yr. note auction
2:00 pm Minutes from June FOMC meeting
8:30 am June CPI (unch, yr./yr. 1.6%; core +0.2%, yr./yr. +2.0%)
10:00 am $16B 30 yr. bond auction
2:00 pm June Treasury budget
8:30 am June PPI (+0.1%, yr./yr. +1.7%; core ++0.2%, yr./yr. +2.2%)
PRICES @ 10:00 AM
10 yr. note: 2.02% -2 bp
5 yr. note: 1.81% -2 bp
2 Yr. note: 1.85% -2 bp
30 yr. bond: 2.51% -3 bp
Libor Rates: 1 mo. 2.366%; 3 mo. 2.311%; 6 mo. 2.209%; 1 yr. 2.191% (7/5/19)
30 yr. FNMA 3.5: @9:30 102.38 +13 bp (+16 bp from 9:30 Friday)
15 yr. FNMA 3.0: @9:30 101.99 +8 bp (-7 bp from 9:30 Friday)
30 yr. GNMA 3.5: @9:30 103.41 +9 bp (+10 bp from 9:30 Friday)
Dollar/Yuan: $6.8798 -$0.0138
Dollar/Yen: 108.67 +0.19 yen
Dollar/Euro: $1.1216 -$0.0010
Dollar Index: 97.34 +0.05
Gold: $1404.60 +$4.50
Crude Oil: $57.82 +$0.31
DJIA: 26,770.00 -151.12
NASDAQ: 8084.31 -77.79
S&P 500: 2973.49 -16.92
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.
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