The Market Today
Five-Year Treasury Yield Highest in Almost Seven Years as Bond Gurus Call for Another End to Bull Run
by Craig Dismuke, Dudley Carter
Today’s Calendar – Import Price Pressure Loses Momentum; Refinance Apps Remain Very Low Despite Weekly Pop; Fed-Non-Voter-Speak: Import prices for the month of December rose less-than-expected, up just 0.1% MoM at the headline level (exp. +0.4%) and falling 0.2% when subtracting petroleum prices (exp. +0.1%). Prices of imports from Canada and Asia were particularly weak while prices on goods from Europe saw a 0.4% gain. This marks the weakest monthly gain (decline) for the price of imports in a year-and-a-half. At core, the annual price gains fell from 1.4% to 1.3% and remains a tepid pace of growth. However, relative to the past five years, price gains remain near their highest levels. Either way, 1.3% YoY price gains does not strike fear of imminent inflation. Other factors do point to a sharper rise in inflation in 2018, just not the official inflation data.
Mortgage applications for the week ending January 5 rose 8.3% as purchase apps increased 5.0% and refi apps climbed 11.4%. This came as the 30-year mortgage rate actually ticked up from 3.85% to 3.87% (Bankrate.com) during the reference week. One explanation for the increase in applications would be the passage of the tax bill in the week preceding and the implications for mortgage interest deductions, etc… Taking a broader view, purchase apps remain high on a 4w/4w basis (removing some of the weekly noise), although the rate of increase slowed over the course of 2017. Refi apps, in contrast, are very low. The four-week average is now at its second lowest level since 2008, only surpassed by one report back in January 2017 after the post-election mortgage rate pop.
Chicago Fed Bank President Evans will speak on the economy this morning at 8:00 a.m. CT from the Lake Forest-Lake Bluff Rotary Club. Evans disagrees with the most recent rate hike. Most interestingly may be his take on the impact of tax reform on his inflation outlook. Also speaking is Dallas Fed Bank President Kaplan at 8:00 a.m. from Dallas in a Q&A. Neither officials are voting members this year.
Overnight Activity – Comments From China Create Overnight Disturbance in Treasurys: The unshakeable confidence that has so far defined global equity trading in 2018 finally showed the first sign of exhaustion overnight. Although there were some indices which continued to improve overnight (e.g. China, Hong Kong, U.K.), the broader trend is softer. Looking for catalysts, a much-needed breather, the upcoming earnings season, or yesterday’s rate rise (more below) would be reasonable candidates. After a policy tweak at the BoJ on Tuesday shook up the rates market, the Yen remains well bid on Wednesday signaling that investors remain thoughtful about the outlook for future accommodation in Japan. Looking at the U.S. currency, the Dollar is one of the weaker major players despite the recent run-up in rates. The sharpest drop in the Dollar coincided with the biggest jump in longer U.S. yields which occurred just after 4 a.m. CT. The moves were made after an opaque report hit the wires that Chinese government officials were considering slowing their buying of U.S. Treasurys. The 10-year Treasury yield spiked to just below 2.60% on the report and is currently up 3.9 bps at 2.59%. The 5-year yield is 1.9 bps higher at 2.35% and the 2-year yield is less than 1 bp changed. Oil prices are also up overnight and now at their strongest levels since near the end of the commodity’s crash in late 2014.
Yesterday’s Trading Activity – Stocks Reach New Records; Treasury Rates Rise: Stocks had another record day but it was the jump in Treasury yields that may have been the biggest surprise on Tuesday. All three major indices claimed a new record-high close with the Dow’s 0.41% gain earning it the day’s best individual performance. The S&P rose a smaller 0.13% as four of eleven sectors improved but managed to keep its perfect start to 2018 intact. Health care companies rose the most while financials finished in second place. Utilities, real estate, and telecommunications companies brought up the rear. The Nasdaq has matched the S&P’s strong start to 2018 going six for six on record closes. But as noted earlier, it was the sharp steepening of the Treasury curve that made some waves. The long end led a sell-off that pushed the related yields to their highest levels in some time. The 10-year yield rose 7.3 bps (biggest single-day spike since September) to 2.55%, its highest level since a five-day stretch in mid-March. The 30-year bond added 8.4 bps to 2.90%, its highest level since late October. The 5-year yield climbed 4.4 bps to 2.33%, an almost seven-year high. The 2-year yield remained well anchored, adding just 1.0 bps to 1.97%, which resulted in the curve steepening the most in a single day since November 2016. The spread between 2s and 10s rose to 58.1 bps. The price action in the Treasury market had some prominent voices within the fixed-income world debating what the moves meant for rates going forward. Bill Gross of Janus Henderson said Tuesday’s jump broke a more-than-two-decades trendline that confirmed a bear market ahead. However, Jeffrey Gundlach of DoubleLine Capital said it was too early for such a call and noted he’s watching for a break above 2.99% on the Long Bond.
Job Openings Dropped in November JOLTS Report: The BLS’s JOLTS report showed an unexpected tick down in the current number of openings to 5.879MM in November from a slightly stronger 5.925MM openings in October. After peaking at a 17-year series high in September, openings the number of openings has declined for two consecutive months. As a result, the openings rate fell to 3.8% from 3.9% in October; the openings rate had held at 4.0% for the four months ended in September. Other details of the report also experienced some softening. The number of hires slowed and while the hires rate lost 0.1% to 3.7%, it remained in line with its prior 12-month average. Quits also cooled but not enough to pull the quits rate off of its cyclical high.