October 9th, 2018 8:54 AM by Richard Sardella MLO.100007700/NMLS 233568
Yesterday the bond and mortgage markets were closed for Columbus Day, but equity markets traded. The DJIA added +39, the NASDAQ lost -52, and the S&P dropped -1. This morning in overnight trading the 10-yr note yield increased to 3.25% at 6:00 am EST, but by 9:00 am was unchanged from Friday’s close. MBSs opened -5 bps from Friday.
The only data today; at 6:00 am the September NFTB small business optimism index was in line, at 107.9 from 108.8 in August. That was a record high. Leading the decline were the 3 measures which led the August increase, with plans to increase inventories falling 7 points to a net 3%, while plans to make capital outlays and plans to increase employment each shed 3 points to a net 30% and net 23%, respectively. Smaller declines were also posted by 3 other components of the 10-yr making up the index, including earnings trends, which fell 2 points to minus 1.0%. Expectations are that the economy will improve and that now is a good time to expand — both retreated by 1 point to a still very strong net 33% each.
The CBO is forecasting the interest rate on the US debt will triple over the next 10 years to $1trillion, a record as a share of GDP. Fiscal spending will continue and the increasing interest rates will, according to the CBO, will cost an additional $1.9 trillion over the next 10 years. Interest spending will exceed Medicaid costs by 2020, defense by 2023, and all non-defense discretionary spending by 2025. Debt service in 2017 $263B, 1.4% of CDP; by 2025 costs will more than triple in dollar terms to $915B ( more than double as a share of the economy to 3.1% of GDP) by under current law.
The International Monetary fund (IMF) is revising global growth forecasts lower for the first time since 2016. The downgrade is being blamed on trade tensions; projecting a global expansion of 3.7% this year and next, down from the 3.9% projected three months ago. The new outlook suggests softening setting in and the overall performance masked divergence with mounting weakness in emerging markets from Brazil to Turkey. “There are clouds on the horizon. Growth has proven to be less balanced than we had hoped,” IMF Chief Economist Maurice Obstfeld told reporters Tuesday in Bali, where the annual meeting will begin tomorrow. “Not only have some downside risks we identified in the last WEO been realized, the likelihood of further negative shocks to our growth forecast has risen.” The fund downgraded its forecast for U.S. growth next year to 2.5%, down 0.2 percentage point from July after factoring in the impact of tariffs imposed by the Trump administration and retaliatory duties by other nations. It left its U.S. growth projection for this year at 2.9%.
At 9:30 am the DJIA opened down -45, the NASDAQ lost -5, and the S&P dropped -4. The 10-yr note yield stood at 3.22%, -1 bp (at 6:00 am 3.25%). MBS prices added +5 bps from Friday’s close and lost -6 bps from 9:30 Friday morning.
Headlines from Reuters this morning: China’s effort to support its decelerating economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth without triggering destabilizing capital outflows. Lennar Homes is in advanced talks to sell its real-estate lending unit, looking to offload the business at a time when the nation’s largest home builder and its peers are struggling alongside a stagnant housing market.
Stock indexes opened slightly weaker, but by 10:00 am were gaining momentum lower. The 10-yr is oversold in terms of the recent rapid increase and we expect another few days of consolidation after breaking 3.20% last week. The RSI has reached oversold readings now, but don’t expect any change in the bearish forecasts. Rates will continue to move higher. Equity markets are beginning to focus on the negative implications of higher interest rates. Tomorrow Treasury will auction $23B on 10-yr notes. Re-opening the issue from August, the demand will be important. A strong bid will support the consolidation, while weak demand won’t sit well. As the morning advances, MBS prices are moving higher. At 9:30 am they added +5 bps and by 10:00 am they were up +9 bps. Technical resistance for the 10-yr is 3.20%. Unless the equity markets completely collapse in a major selling binge, there isn’t much to improve rates in any meaningful way.
This Week’s Calendar:
6:00 am NFIB small business optimism index (expected 108.0, as released 107.9)
7:00 am weekly MBA mortgage applications
8:30 am September PPI (+0.2% overall and +0.2% for the core)
10:00 am August wholesale inventories (+0.8%)
11:30 am $36B 3-yr note auction
1:00 pm $23B 10-yr note auction
8:30 am September CPI (+0.2% overall and +0.2% on the core; yr/yr overall +2.4% overall and +2.3% on the core up from 2.3% in Aug)
1:00 pm $15B 30-yr bond auction
2:00 pm September Treasury budget (+$62.0B; also 2017 total fiscal deficit)
8:30 Sept import and export prices (imports +0.2%, exports +0.3%)
10:00 am October mid-month University of Michigan consumer sentiment index (99.5 from 100.1 in September)
PRICES @ 10:10 AM
10 yr. note: +4/32 (12 bp) 3.23% -1 bp
5 yr. note: +1/32 (3 bp) 3.05% -1 bp
2 Yr. note: unch 2.88% unch
30 yr. bond: +8/32 (25 bp) 3.39% -2 bp
Libor Rates: 1 mo. 2.284%; 3 mo. 2.414%; 6 mo. 2.626%; 1 yr. 2.957% (10/8/18)
30 yr. FNMA 4.5: 102.41 +5 bp (-6 bp from 9:30 Friday)
15 yr. FNMA 4.0: 101.62 unch (-1 bp from 9:30 Friday)
30 yr. GNMA 4.5: 102.58 +2 bp (+2 bp from 9:30 Friday)
Dollar/Yuan: $6.9261 -$0.0046
Dollar/Yen: 11314 -0.09 yen
Dollar/Euro: $1.1454 -$0.0049
Dollar Index: 96.07 +0.32
Gold: $1189.40 +$0.80
Crude Oil: $74.56 +$0.27
DJIA: 26,436.08 -50.50 (-114 at the low so far today)
NASDAQ: 7749.06 +13.11
S&P 500: 2885.05 +0.62
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.