The Market Today
China Allows Some Soybeans, German Data Weaker, U.S. Dealers Grab Cash
by Craig Dismuke, Dudley Carter
VINING SPARKS ECONOMIC OUTLOOK WEBINAR – THURSDAY: Vining Sparks will host our Economic Outlook Webinar Thursday morning at 10:00 a.m. CT. During the presentation, we will discuss recent developments with trade policy, the global shift to an easing bias from monetary policymakers, and our outlook for growth and rates in 2020. To sign up, please click here.
Fed’s Repo Operations Oversubscribed as Dealers Look for Liquidity: Treasury yields have moved lower this morning coinciding with the Fed’s 14-day repo offering of up to $30 billion that drew $62 billion in securities submissions. The Fed also accepted $75 billion of the $80.2 billion submitted in its overnight repo offering (results). According to a Bloomberg News story, “Primary dealers flocked to the Federal Reserve’s two-week operation on Tuesday, signaling a need for cash to satisfy liquidity demands through the end of the third quarter.”
Two Reports on New Home Prices Expected to Show Continued Slowing in the Pace of Gain: Two home price reports, the FHFA price index and the S&P CoreLogic index, are scheduled to be released at 8:00 a.m. CT. Home price indices have shown a slowing pace of price gains for new homes dating back to early-2018. Perhaps running into affordability challenges, the premium for the median price of new homes sold over the median price for existing homes sale has dropped from over 40% back in 2015 to 15% in August.
Which Consumer Confidence Report Is Accurate?: At 9:00 a.m. CT, the Conference Board’s September report on consumer confidence is expected to show a pullback in overall confidence. The Conference Board report has shown materially better results lately than the University of Michigan report, showing almost no dip in confidence as trade uncertainty has roiled other areas of the economy. Also at 9:00 a.m., the Richmond Fed Manufacturing Index is expected to remain soft but positive.
OVERNIGHT TRADING ACTIVITY
Outlook for Germany’s Economy Gets More Dire by the Day: The outlook for the German economy remained in focus overnight as a key sentiment indicator showed a modest upside surprise in the current assessment was offset by unexpectedly weak expectation. Following data yesterday which showed Germany’s manufacturing sector contracted at the quickest rate since the Great Recession, the IFO’s current assessment index improved unexpectedly in September, but remained at its second-weakest level since February 2015. Adding to the ongoing concerns about a domestic recession, expectations for the Germany economy weakened to their lowest level since June 2009. Nonetheless, German yields were little changed and the DAX edged into positive territory in a generally positive day for European assets.
Johnson’s Parliament Suspension Declared Unlawful: Eyes are also on a unanimous Supreme Court ruling in the U.K. that determined PM Johnson’s suspension of parliament was “unlawful, void, and no effect.” As a result, the parliamentary session will resume Wednesday, and “there will be full scope for urgent questions, ministerial statements and applications for emergency debates.” The U.K. is set to fall out of the EU without a deal in just over a month. The British pound and U.K. yields rose only modestly on the news.
China to Allow Increased Soybean Purchases: During the Asian session it was reported that China has increased the allowed amount of soybeans domestic companies could purchase from U.S. sellers. The reports follows a bit of confusion around the conclusion of last week’s meeting of mid-level Chinese and U.S. officials in Washington. Markets responded negatively last Friday to headlines that the Chinese delegation had cancelled a planned trip to the U.S. farmland. Creating the confusion, and seemingly unbeknownst to President Trump, Treasury Secretary Mnuchin said Monday the cancellation was made at the request of the U.S. Top-level officials from the two countries will meet in early October for further trade negotiations. Around 7 a.m. CT, the 2-year Treasury yield was down 0.4 bps and the 10-year yield was 2.2 bps lower. Futures on the S&P 500 were 0.3% stronger.
YESTERDAY’S TRADING ACTIVITY
Assets in the U.S. and Europe Diverged As Outlook Gap Remains Wide: The S&P 500 closed unchanged Monday and Treasury yields moved very little, after September PMIs reinforced worries that a global slowdown could feed back into the U.S. Treasury yields had moved lower overnight after PMIs from France and Germany both came up short of expectations. Germany’s composite index contracted for the first time since 2013 and the manufacturing contracted gathered steam, touching its softest level in over a decade. The U.S. PMIs released later Monday improved from August, highlighting the continued divergence between the U.S. and European economies. However, the services index was weaker-than-expected and its important employment index was notably discouraging (more below). U.S. and European markets also diverged following the reports. The Stoxx Europe 600 slumped 0.8% Monday while the S&P 500 was steady at unchanged. The 10-year yields in France and Germany dropped 6.9 bps and 5.8 bps, respectively, while the U.S. 10-year yield, which had initially declined with European yields, recovered to inch up 0.5 bps. The Dollar also strengthened against the Euro, but closed off its highs reached in overnight trading.
Vining Sparks’ Updated Projections, Bloomberg Survey Results: Economists, as reflected in the September Bloomberg Survey, lowered their expectations for interest rates and made slight adjustments to component projections for economic growth over the next several quarters. Projections for private investment, new home sales, and job growth are now lower; but, expectations for existing home sales are slightly stronger. To see Vining Sparks’s updated projections and select Bloomberg survey results, click here.
September PMIs Showed Activity Picked up, But Services Employment Contraction Grabbed Attention: The economy expanded in September according to the preliminary Markit PMIs, although the pace of expansion was uneven across sectors. The manufacturing PMI topped expectations at a five-month high while the services index improved, but by less than expected. Most key metrics within the manufacturing survey were firmer while the services sector employment index contracted for the first time in more than a decade. Despite the monthly improvement, both indexes remain at relatively weak levels
Williams Said Fed Assessing Reserve Levels: Unsurprisingly, Monday comments from current and former officials addressed last week’s liquidity crunch and how they assess the current outlook for the economy. New York Fed President Williams didn’t address the outlook in his appearance at a Treasury market conference, but did say that that Fed “will continue to monitor and analyze developments [in overnight funding markets] closely,” and “will assess the implications for the appropriate level of reserves and time to resume organic growth of the Federal Reserve’s balance sheet.”
Williams’ Predecessor Expects Standing Repo Facility: In an unscheduled appearance shortly after, the man who previously held Williams’ position gave his take on last week’s liquidity situation. “They’ll increase the size of their balance sheet. So, they’ll start to buy Treasury securities again,” William Dudley said. “And the second thing that they are going to strongly consider, I think, is introducing a standing repo facility,” to preemptively and more permanently address possible liquidity issues.
Bullard and Daly Were on Board with Recent Cuts: St. Louis President Bullard highlighted that Fed policy is “considerably more accommodative today than it was as of late last year,” but noted the Fed may ease again considering activity is slowing amid greater downside risks, but stressed the “decisions will be made on a meeting-by-meeting basis.” He also addressed recent stresses in overnight markets, saying he supports the idea of a standing repo facility. President Daly from San Francisco noted the U.S. economy is in a “good place” overall, despite weaker business investment. She supported both recent rate cuts in order to cushion against headwinds and said last week’s issues in funding markets related to the “distribution” of liquidity, not the overall level.