The Market Today
Caution Returns with Brexit Risk
by Craig Dismuke, Dudley Carter
Mortgage Applications Pull Back but Remain Positive Versus Year-Ago Levels: Mortgage applications for the week ending December 13 fell 5.0% despite mortgage rates holding fairly steady week-over-week. The 30-year mortgage rate, according to the MBA report, held at 3.98% during the reference week while the 15-year rate rose from 3.37% to 3.40%. Mortgage rates have ticked up minimally from their lows back in August when the 30-year rate dropped to 3.82%, just 16 bps below today’s level. In the December 13 report, purchase apps fell 2.1% and refi apps fell 6.5%. The trends for purchase and refi apps remain stronger than they were back in 2018, but refi activity has eased up a bit as rates quit falling.
Fedspeak: Central Bankers Do Not Like Alternative Currencies: Fed Governor Brainard spoke at an ECB event in Frankfurt overnight, making headlines in her criticism of cryptocurrencies as a global payments solutions, including Libra. She said Facebook’s digital currency project would face a “core set of legal and regulatory challenges.” At 11:40 a.m. CT, Chicago Bank President Evans is scheduled to speak at the Economic Club of Indiana in Indianapolis.
Stocks Gains Capped by Return of Brexit Uncertainty: Tuesday’s gains weren’t impressive on their own, but they were sufficient to nudge each of the three major U.S. equity indexes to new all-time highs for a second time this week. Sentiment has been boosted this week by hopes that last week’s phase-one trade deal between the U.S. and China will give the global economy a much-needed dose of confidence. Positive U.S. economic data (more below) further supported risk assets. However, renewed uncertainty around Brexit kept overall optimism in check and had earlier dragged the Stoxx Europe 600 down 0.7% from Monday’s record close. PM Johnson appears to be taking measures to thwart any chance that the Brexit transition period could be extended beyond 2020, placing a no-deal Brexit back on the list of possible outcomes. The S&P 500 finished the day a marginal 0.03% higher. Treasury yields too finished essentially unchanged. The 2-year yield closed down 0.4 bps at 1.62% while the 10-year yield added 0.9 bps to 1.88%.
A Quiet Overnight Session: An absence of any meaningful headlines overnight left global markets little changed as investors remained cautious amid the renewed risk of a no-deal Brexit. After slumping 1.5% on Tuesday, the British Pound fell a smaller 0.3% on the renewed Brexit worries. Broad indexes tracking equity shifts across both Asia and Europe were little changed while U.S. futures had inched just above even for the day before 7 a.m. Treasury yields also edged higher but were less than 1 bp changed while similarly small moves were seen across most European sovereign curves.
German Confidence Adds to Recent Uptick: Germany’s yield curve has steepened a bit with its 10-year note yielding 2.1 bps more after a positive economic release. Germany’s Ifo Business Climate index improved by more than expected and for a fourth consecutive month in December, a turn that has pushed the index from near a six-year low to a six-month high. In other daily data releases, Japan’s exports shrank from a year earlier for a 12th consecutive month, albeit by less than expected, while imports contracted for a seventh time and at the sharpest rate since late 2016. Core inflation in the Eurozone was unrevised at 1.3% in November.
Continuing the upbeat tone from housing starts and building permits, the second wave of economic data released Tuesday – industrial production, manufacturing output, and the latest read on job openings – topped expectations.
End of GM Strike Gives Manufacturing Output an Unusually Large Boost in November: Both total industrial production and the manufacturing subcomponent rose 1.1% in November, modestly outpacing respective expectations for gains of 0.9% and 0.8%. Manufacturing output benefited from gains across multiple sectors, but the biggest boost came from auto activity ramping back up following the end of the GM worker strike. Auto production surged 20.2% in November, the largest gain of the cycle and one of the strongest months on record, following a cumulative decline of 17.3% in September and October. On a year-over-year basis, however, manufacturing activity declined 0.8%, clearly reflecting the effects of the trade uncertainty which has knocked the pace of output well off its 3.5% annual pace from September 2018.
Job Openings Post Surprise Rise in October But Slowing Trend Still In Place: In the latest JOLTS report, total job openings rose unexpectedly in October to 7.267MM but remained 4.3% below the level from October 2018. Global uncertainties, primarily tied to trade tensions, have helped pulled job postings down from their all-time high set last November. In the reports’ other metrics, hires slowed but quits inched higher and layoffs declined; all three remained off their better levels of the cycle.
Fed Officials Echo Unchanged 2020 Dot Despite Differing Broader Beliefs: Boston Fed President Rosengren dissented each time the Fed lowered rates in 2019, but said “this is a good time to patiently assess the economy” in light of those cuts “and the fact that monetary actions take effect with some lag.” Summarizing his outlook, he said “Labor markets are strong, inflation is moving to target, and growth is likely to be somewhat above potential.” Nonetheless, he expects the Fed will be “patient for a fairly material period of time until we actually see a significant change in the outlook.” Earlier in the day, Dallas Fed President Kaplan gave a nod to the recent improvement in financial conditions saying the risks to the outlook now appear more balanced. However, he added that “I don’t think inflation is going to pick up,” and went on to say he believes it will require a “material change” in the outlook to warrant the Fed making an adjustment to interest rates. Kaplan, who votes on policy in 2020, expects no change to interest rates next year.