The Market Today
Lack Of Trade News Shifts Focus To European Politics
by Craig Dismuke, Dudley Carter
Mortgage Applications Show Refis Continue to Jump but Less Compelling Data on New Purchase Apps: Mortgage applications for the week ending August 23 fell 6.2% on a 4.0% drop in purchase apps and a 7.6% decline in refi apps. According to the MBA report, mortgage rates did tick higher during the observation week, with the 30-year rate up from 3.90% to 3.94%. Looking at the broader trend, the 4-week average for refis continues to move higher (up 211% from the beginning of the year) while the average for purchase apps is less encouraging despite the precipitous drop in mortgage rates (up 3% from the beginning of 2019 but down 11% since May).
FEDSPEAK: There are two Fedspeakers on the tape today, Richmond Bank President’s Barkin will speak at 12:20 p.m. CT while San Francisco’s Daly is scheduled to talk at 5:30 p.m.
YESTERDAY’S TRADING ACTIVITY
Confusion About The State Of Trade Weighed On Markets: Financials were the biggest drag on the S&P 500 Tuesday as the inversion of the yield curve intensified in the face of conflicting messages about the state of U.S.-China trade negotiations. For a second day, China’s Foreign Ministry said it was unaware of the phone calls President Trump said had taken place over the weekend, calls in which he claimed China said they wanted to return to the negotiating table. His signal that negotiations could resume sparked a recovery in global markets Monday that left stocks higher and erased a notable drop lower in yields.
Inversion Intensifies In The Face Of Uncertainty: With a lack of clarity on the outlook, yields resumed their decline and ended Tuesday notably lower and flatter. An auction of 2-year Treasury notes saw solid demand and was awarded above where the 10-year yield was trading at the time. The additional supply, however, did keep some upward pressure on shorter yields. The 2-year yield dropped just 1.7 bps by the close to 1.52%, while the 10-year yield rallied more sharply. The longer yield closed down 6.4 bps at 1.47%, leading to the deepest inversion to the 2-year since 2007. Treasury trends turned up the heat on U.S. financials, which led broader losses across most sectors. After jumping at the open, the S&P 500 fluctuated lower to a daily decline of 0.3%.
OVERNIGHT TRADING ACTIVITY
Market Focus Shifts From Trade Policy To European Politics: A lack of movement on the trade front overnight left the U.S. Treasury curve near its deepest inversion of the cycle, and shifted the market’s focus from Asia to Europe. Equities closed mixed around the Asian continent but were broadly weaker across Europe. The Stoxx Europe 600 had declined around 0.7%, led by weakness in Germany and France. The U.K.’s FTSE 100 and Italy’s MIB were also lower, but cushioned somewhat by political developments in those countries.
Italy Appears On Its Way To New Coalition Government: Coinciding with the smaller equity losses in Italy, the country’s yield curve dropped notably on reports the Five Star Movement and Democratic Party were likely to strike a new coalition government that would keep Conte as Prime Minister. The previous coalition, between the Five Star and the League, broke down earlier in August after the League’s Salvini called it unworkable. Italy’s 10-year yield was trading 15 bps lower to 0.98%, a new all-time low.
Suspended Parliament Would Tighten Window For Opposition To Thwart No-Deal Brexit: Driving the resilience of U.K. equities Wednesday, the British pound slid as much as 1% against the Dollar overnight after PM Johnson announced he would ask the queen to suspend parliament shortly after members make their way back from a summer recess. The move, seen by many as a political tactic to tighten the window of opportunity for opposition to thwart a no-deal Brexit, would effectively lengthen another upcoming recess by two weeks, nearer to the October 31 Brexit deadline. The development would add to the “growing possibility of a hard Brexit,” a risk Fed Chair Powell listed in his Jackson Hole speech as part of an “eventful” stretch since the July 31 rate cut.
U.S. Curve Inversion Holds As 10-Year Keeps Inching Toward All-Time Low: At 7 a.m. CT, U.S. equity futures were down 0.1% to 0.2% and the Treasury curve held its flattening tone. The 2-year yield was 1.2 bps lower at 1.498% and the 10-year yield had dipped 2.4 bps to 1.448%, less than 10 bps from its all-time low of 1.358% from July 2016.
Manufacturing Picks Up To A Low Level Across The Richmond Fed District: A second round of reports Tuesday showed manufacturing activity picked up more than expected across the Richmond Fed District in August, and consumer confidence continued to weather the trade tensions overall. The Richmond Fed’s index rebounded 13 points from its second weakest reading of the expansion, pushing back into positive territory but holding at a low level relative to the prior thirty-two months. While the monthly gain was driven by strength across most current activity indices, a reading of current employment remained soft and several forward-looking expectations softened.
Consumers See Today As Better Than Tomorrow: A similar trend was seen in the underlying shifts of the Conference Board’s consumer report for August. The headline confidence index held up much better than expected at 135.1, the second best level of the year, but on divergent results in the current assessment and future outlook. The current assessment jumped to a new high since 2000, helped out by an improved assessment of business conditions and a new 18-year high for the labor market differential. Expectations for the next sixth months, however, cooled to their second best level of the year on broadly softer details. Consumers also seem to be paying attention to the current market tone. The share of consumers who expect interest rates to move lower hit its highest level since March 2009.