The Market Today

Today’s Calendar – Rate Rise Continues to Weigh on Refinancings, Fed’s Evans Sees Strong Economy but “Nervous” about Inflation, Job Openings Expected to Remain Strong, FOMC Minutes in Focus: Total mortgage applications for the week ended October 6 fell 2.1% and was driven lower by another weekly decline in refinancing activity. The refinancing index declined 4.2% last week and has now dropped in each of the last four weeks. The last weekly increase for the refinancing index was the 8.9% jump in the week ended September 8; that week, the 10-year Treasury yield touched a new intraday, post-election low of 2.01%. From that recent bottom, the 10-year rose 33 bps to average 2.34% in the week covered by this report. Purchase activity was essentially flat WoW.

 

In early morning (U.S. time) remarks Wednesday from multiple appearances in Zurich, Chicago Fed President Evans struck a confident tone on economic activity but remained skeptical that inflation will quickly return to the Fed’s 2% price target. On the economy, Evans noted that “The state of the economy is quite strong,” and added that the European economy and broader global economy have improved. As such, “It makes sense to continue to increase policy gradually as we assess whether inflation is going to get to the 2 percent objective.” On the median projection for the next hike to come in December, “I really don’t see any harm in waiting longer just to take more stock of the inflation situation.” He said it’s too early for a call on December but noted ”There is room for honest discussion later this year whether it is the right time to raise rates.” With inflation metrics currently holding the keys to tighter monetary policy, Evans said inflation is disappointingly low and that blindly believing that the recent weakness in inflation will prove temporary makes him “nervous” against the backdrop of low inflation expectations. He cautioned, “We’d be well served in trying to get inflation up, even if that meant inflation went to 2 1/4 or even 2 1/2 percent — I think that’s what a symmetric inflation objective means.”

 

At 9 a.m. CT, the BLS will release the August JOLTS report which is expected to show a modest pullback from the record high level reached in July. If the results are as expected, openings would remain at their second highest level on record dating back to 2000 and continue to be one of the many indicators that support the story of a healthy and tightening labor market.

 

At 1 p.m. CT, the Fed will release the Minutes from the September FOMC meeting. As discussed yesterday, the focus is likely to be on the changes to the dot plot and what the general tone of the Committee is when it comes to the inflation mandate. As a refresher, the Fed announced at the September meeting an October start date for beginning the process of normalizing its balance sheet. The details of the plan have been available since June, talked about in Fedspeak ad nauseam, and therefore likely to provide little in the way of surprises. The dot plot is what caught the investors’ eye after the meeting. The Fed still expects one more hike this year and three in 2018 but removed a hike from 2019 (projecting two total instead of three) and lowered the longer-run rate from 3.00% to 2.75%. As such, markets will be interested in the general tone of the conversations on inflation and any information on what kept the near-term dots unchanged and what the catalyst was for projecting on less hike in 2019 and reducing the longer run, neutral rate.

 

Overnight Activity – The Dollar Moves Lower with Longer Treasury Yields as Markets Await the FOMC Minutes: U.S. equity futures point to a continuation of this week’s ups and downs for domestic stocks. Shorter Treasury yields were unchanged overnight but have moved slightly lower in early U.S. trading. Longer yields were lower and has extended that drop early in the U.S. session. The Dollar is weaker for a fourth day. The weakness in equity futures follows another day of nearly unchanged European equities and another solid start in Asia. The Euro Stoxx 600 has closed within 1 point, or 0.02%, of last Friday’s level in each day of trading this week. An index tracking shares in the Asian Pacific excluding Japan hit its highest level since 2007 while Japan’s Nikkei climbed to its strongest level since 1996. The 2-year yield is down 0.8 bps at 1.50% while the 5-year yield is 2.2 bps lower at 1.94% and the 10-year yield has shed 2.7 bps to 2.33%. The move lower in Treasury yields has developed despite a slight risk-on shift in European yields. Germany’s 10-year yield rose 1.7 bps while peripheral yields pulled back. Yields in Spain fell and stocks there rose on further developments in the drama in Catalonia. The leader of the Catalan government indicated Tuesday that the region had won the right for independence but tabled the result for now to allow for further talks with Madrid.

 

Yesterday’s Trading Activity – Treasurys Give up Rally to End Unchanged, Wal-Mart Boosts Dow to Another Record: The Dow led U.S. stocks to a daily gain Tuesday as the blue-chip index rose 0.31% to its 47^th record high of the year. The S&P recovered all of Monday’s losses after rising 0.23% and the Nasdaq lagged with a gain of 0.11%. Stocks gave up early gains but managed to recover steadily through the afternoon. Wal-Mart contributed nearly a third of the Dow’s almost 70-point gain after rising 4.5% in its biggest daily gain since May 2016. In its updated guidance, the Company projected 3% revenue growth for its upcoming fiscal year and a massive 40% gain in e-commerce sales. The Company also announced a $20B share buyback. Wal-Mart’s rise pushed consumer staples to the top of both the Dow and S&P. Treasurys were volatile Tuesday but ended nearly unchanged on the day. Yields dropped sharply around 9 a.m. CT and reached their daily lows just before 10 a.m. CT. However, momentum shifted and yields climbed steadily back to the close. After falling more than 4 bps intraday, the 10-year yield closed up 0.2 bps at 2.36%. The 2-year yield moved the most, rising 0.2 bps to 1.52%. Despite the recovery in yields, the Dollar remained weaker and closed near its session lows.