The Market Today
Corporate Earnings Beat Estimates; Fedspeak Continues to Point to November
by Craig Dismuke, Dudley Carter
Mortgage Rates Continue to Rise, Applications Decline: The average 30-year mortgage rate has now risen in four consecutive weeks according to the MBA mortgage applications report, up 20 bps over that time to 3.23%. Mortgage rates are closing in on their highest level since the onset of the pandemic, just 13 bps from their cycle-high back in March. As they have risen, mortgage applications have turned lower. Mortgage applications for the week ending October 15 were down 6.3% on a 4.9% decline in purchase apps and a 7.1% drop in refis. Going back to January, when mortgage rates hit their lows, purchase apps are now down 22% while refi apps have fallen 38%.
Fed Communications with Two Weeks Left Before Critical Policy Meeting: The Fed will release its Beige Book report at 1:00 p.m. CT in anticipation of their November 2-3 policy meeting, at which many expect the tapering process to be announced. Speaking today are Vice Chair Quarles (12:00 noon CT), Altanta’s Bostic (11:00 a.m.), Minneapolis’s Kashkari (11:00 a.m.), Chicago’s Evans (11:00 a.m.), and St. Louis’s Bullard (11:00 a.m.).
Corporate Earnings Continue to Outpace Estimates – Tesla and IBM Ahead: The corporate earnings calendar picks up some steam today with 24 more companies reporting earnings. Of the 12 that reported before the open, 11 beat earnings estimates including Verizon. Twelve more companies will report after the close, including Tesla and IBM.
YESTERDAY’S ECONOMIC NEWS
Barkin Describes Businesses’ Efforts to Hire Workers: Richmond Fed President Barkin said he is hearing “four key barriers to employment” in conversations with businesses in his District. Skills “mismatches, family care, health and incentives. All these issues existed before the pandemic, but it’s fair to say they have intensified in the last 18 months.” He also noted that, “We’ve seen strong wage increases for entry-level positions, broadened education and child care benefits and more and improved flexible working conditions,” adding that, “We are hearing employers revising policies like drug testing, providing more in-house training, and reviewing hiring criteria to ensure relevant prior experience, when appropriate, can be recognized in place of a degree.”
Bowman Believes Retirements and Childcare Challenges Could Hold Back the Recovery: Fed Governor Bowman said Tuesday that early retirements and a drop in female participation due to childcare challenges could have lingering effects on the economic and labor market recovery. Bowman said, “The loss of these workers will limit the productive capacity of the economy, and may make it harder, or even impossible in the near term, to return to the high level of employment achieved before the pandemic.”
Waller Watching Inflation over “Next Several Months” to Determine Policy Path: Fed Governor Waller came out in support of kicking off the tapering process in November, but again tried to separate the reduction in monthly asset purchases from the future possibility for rate hikes. He currently expects “the pace of continued improvement in the labor market will be gradual, and I expect inflation will moderate, which means liftoff is still some time off.” However, he admitted he is “greatly concerned” about the risk that stronger inflation persists and acknowledged “the next several months are critical for assessing whether the high inflation numbers we have seen are transitory.” “If monthly prints of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may well be warranted in 2022,” Waller said.
Stocks Extended Climb Towards Records Tuesday, Curve Steepened; Moves Calm Wednesday: U.S. equity indexes climbed again Tuesday, closing in on record levels from early September, as the Treasury curve steepened sharply following a notable flattening in the prior week. The S&P 500 rose 0.7% Tuesday, notching its fifth consecutive gain and closing within 0.5% of its previous all-time high from September 2. The Nasdaq also improved 0.7% and the Dow added 0.6%. U.S. equities retreated in September amid concerns that persistent inflation could force the Fed to respond more quickly at a time when growth was being impacted by Delta and uncertainty around the U.S. fiscal situation was high. While some of those concerns remain, a strong start to the quarterly earnings season has helped solidify a recent uptrend for now. Moves in the Treasury market were also notable. Shorter and intermediate yields have rocketed higher in the weeks since the Fed signaled the possibility of a quicker taper and steeper fed funds path than investors expected. On Tuesday, however, shorter yields declined while longer yields rose. The 2-year yield fell 3.0 bps to 0.395% while the 10-year yield added 3.7 bps to 1.637%, a five-month high. The 6.5 bps of steepening between the 2-year and 10-year notes was the most significant daily increase since the day after the Fed’s September meeting.
A calmer tone in global equity markets overnight has kept U.S. index futures hovering within 0.1% of yesterday’s final levels at 7 a.m. CT. Treasury yields, however, have gradually and steadily erased an initial increase in Asian trading and were near session lows heading into the U.S. session. The 2-year Treasury yield opened 1.8 bps higher at 0.41% but, tracking similar declines for European yields, was 1.2 bps lower at 7:15 a.m. at 0.38%. Following a similar path, the 10-year Treasury yield was down 1.6 bps to 1.62% after initially rising more than 3 bps to 1.67%, not far from its pandemic peak of 1.74% at the end of March.