The Market Today

10-Year Yield Sinks to Lowest Level Since February


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Fed Minutes in Focus: The Fed will release the Minutes from its June 16 FOMC Meeting at 1:00 p.m. CT today.  Recall that the Fed surprised markets at that meeting by raising more of their infamous dots in 2022 and 2023 than expected.  The communications were also an open acknowledgement that they were now talking about the tapering process.  Nonetheless, they continued to maintain their preference for patience over the medium term despite developments which, in previous policy cycles, make have elicited a more reactionary response.

Job Openings Expected to Set New Record High: At 9:00 a.m. CT, the May Job Openings and Labor Turnover Report is expected to show another new record-high for job openings.  We will discuss the conundrum evident in the labor market in more detail in our 3Q Economic Outlook Webinar next Tuesday. (Registration Link)

Mortgage Applications Show Still-Slow Going for Housing: Mortgage applications for the week ending July 2 fell another 1.8% despite the average 30-year mortgage market rate dropping from 3.20% to 3.15%.  Purchase apps fell another 1.1% and are now down 25.5% from January.  Refi apps fell 2.3% and are down 38.6% since January.


24 HOURS OF MARKET ACTIVITY

Treasury Yields Fall to Mid-February Levels as Volatility in Other Assets and a Weak ISM Extend Last Week’s Rate Decline: Ending a positive run that had produced seven consecutive record closes, the S&P 500 slipped Tuesday on energy-led weakness across cyclical sectors. The index turned negative almost immediately after a positive open, with the downside momentum picking up as oil reversed lower and after the ISM’s Services PMI pointed to a sharper-than-expected moderation for activity (more below). U.S. WTI crude had reached a six-year high overnight following OPEC’s decision to call off production talks after the UAE balked at a tentative agreement, but ended the day down more than 2%. Also weighing on the S&P 500, financials fell 1.6% as Treasury yields tumbled in flattening fashion. The broader equity index ended the day down 0.2%, its first daily loss since June 23 but a far cry from its low of down 0.9%. After dropping 9.9 bps last week to 1.422%, a trend attributed to less concern about inflation, technical factors, and supply dynamics, the 10-year Treasury yield sank 7.6 bps Tuesday to 1.348%, its lowest close since February 23. While the disappointing ISM report cemented the move lower, majority of the drop had already occurred prior to its release, alongside the drop in equities and oil. The 2-year yield inched down 1.6 bps to 0.22% and the 5-year yield fell 6.1 bps to 0.80%.

The Nasdaq may open at a record again Wednesday based on early morning futures trading. The tech-heavy index has thrived in recent days amid the drop in interest rates, hitting a new all-time high yesterday despite the broader weakness. S&P 500 and Dow futures shook off more weakness during the Asian session and were marginally positive before 7 a.m. CT. Wednesday’s focus, however, will likely be on Treasury yields and oil prices, considering the steep declines for both in the prior session. While oil had recovered by around 1.5% at 7 a.m. CT, Treasury yields had extended their recent declines amid another daily drop in global sovereign borrowing costs. The 10-year Treasury yield had fallen 4.2 bps to 1.31%, a new low since the middle February, and was outpacing moves lower across Europe. Germany’s 10-year yield had shed 3.1 bps to -0.30%, its lowest level since early April.


NOTEWORTHY NEWS

ISM Services Index Cools More than Expected in June: Although still at a solid level historically, the ISM’s Services Index declined sharply more than expected in June. The drop from an all-time record of 64.0 to 60.1 disappointed expectations for a marginal dip to 63.5 and reflected a softer reading for each of the four underlying metrics that determine the topline PMI. The largest negative contribution came from a 6-pt drop in the employment index which contracted for the first time since December. The production index declined by a similar amount while the new orders and supplier deliveries indices fell by just under 2 points. Similar to the ISM’s Manufacturing Survey released last week, the comments section was chock-full of anecdotes that the loss of momentum reflected in the survey was more related to supply constraints than weakening demand, and that the related imbalances were driving prices higher.


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