The Market Today
Market Swings Continue; Trump Takes another Swipe at Powell
by Craig Dismuke, Dudley Carter
Today’s calendar will bring a slew of housing data beginning this morning with the MBA Mortgage Applications report for the week ending October 19. Applications rose 4.9% on a 2.0% increase in purchase apps and a surprising 9.7% increase in refi apps (a bounce-back from the 9.0% decline in the previous week. The weekly noise in the data appears to have been related to Hurricane Michael making landfall on October 10 and the overall trends are unlikely to be altered. Mortgage rates actually ticked higher during the reference period. According to the MBA report, the average 30-year mortgage rate from to 5.11%, the 15-year rate held at 4.50%, and 5/1 ARM rates rose from 4.34% to 4.47%.
At 8:00 a.m. CT, the FHFA home price index is expected to show a 0.3% MoM increase in home prices, which have broadly shown a weakening pace of annual gains lately. At 9:00 a.m., September’s New Home Sales report is likely to show a pullback in sales after a 3.5% increase in August.
Also on the calendar today are the Markit Manufacturing and Services PMIs (8:45 a.m. CT) and the release of the Fed’s Beige Book at 1:00 p.m.
Bullard (10:30 a.m.), Bostic (12:00 p.m.), Mester (12:10 p.m.), and Brainard (6:00 p.m.) are all schedule to speak. We will be most interested to hear from Brainard given her historically moderate positions, relative to other Fed officials’ views.
Yesterday – Stocks Notably Trimmed Early Losses, But Risk-Off Tone Kept Treasury Yields Lower: Stocks closed lower on Tuesday, but losses cemented by the final tick were much smaller than they could have been. The major indices tumbled at the open amid an overnight sell-off in global equities and after a couple of big U.S. companies missed earnings (3M) or showed concerns about tariff-related cost increases (Caterpillar). However, the S&P 500 bottomed just after 9 a.m. CT at down 2.3% before reversing into a slow and steady climb that limited the daily damage to just 0.6%. Energy companies were a clear downside outlier, falling 2.7% in response to plunge in the cost of crude. U.S. WTI and Brent crude both sank more than 4%, the biggest one-day loss since July, after Saudi Arabia’s energy minister said that OPEC is operating in “produce as much as you can mode.” The industrials sector, where 3M and Caterpillar both reside, was the second worst performer. Real estate companies and consumer staples, two sectors that can benefit in times where investors are seeking safety, gained on the day to lead all sectors. The daily flight to quality that knocked equities lower was also responsible for the shift lower in the Treasury curve. The 2-year yield fell 2.9 bps to 2.88%, the 5-year yield dropped 3.8 bps to 3.01%, and the 10-year yield closed down 3.0 bps at 3.17%. All three daily changes reflected a small moderation off their daily lows.
Overnight – Treasury Yields Remain Lower Amid Mixed Overnight Session: Caution kept U.S. equity futures contained for most of the overnight session following mixed results in Asia and despite European equities strengthening. After sinking Tuesday to a its lowest level since 2016, the Stoxx Europe 600 had recovered nearly 0.7% on Wednesday with most sectors in positive territory. Other European assets, however, were less cheerful. Despite the strength in local stocks, the German and French yield curves were hardly changed and the Euro was notably weaker. Against the U.S. Dollar, the Euro slipped 0.6% to $1.14, its weakest level since August 16. The loss followed disappointing PMIs from Germany that were released ahead of softer-than-expected PMIs for the Eurozone as a whole. The bloc’s services PMI fell to a 24-month low (October 2016) while the manufacturing PMI dropped to its weakest in 26 months (August 2016). Other major economies diverging downwardly from a strong U.S. pace has been highlighted recently as a risk to global economic activity. Ahead of U.S. trading, U.S. futures had erased their overnight losses with the Dow leading the way. Among a morning of mostly positive earnings results, shares of Boeing, the most heavily-weighted Dow component, were up more than 4.7% after topping analysts’ estimates. Even against the recovery for equities and the quiet night for global sovereigns, Treasury yields were down between 3.0 and 3.5 bps inside of 30 years. The 10-year yield had pulled back 2.5 bps to 3.14%, its lowest level since October 2.
Fed Presidents Point to a December Hike and More in 2019: Atlanta Fed President Bostic (2018 voter) acknowledged the recent market volatility, combining it with trade policy uncertainty as the two headwinds he singled out. However, he upped his growth forecast for this year and next and as a result still supports gradually raising rates to a neutral setting, which he believes is still “a few rate hikes away.” He also said he’s on board with a fourth rate hike this year. Dallas Fed President Kaplan (2020 voter), whose comments overlapped Bostic’s, said he too support gradually raising rates to a neutral setting and expects the next to come in December. He added that two more are “likely” in the first half of next year but said he’s in the bottom half of the Fed’s neutral range estimate of 2.50% to 3.50%.
President Trump “Maybe” Regrets Appointing Powell as Fed Chair: In a Tuesday evening interview with the WSJ, President Trump said he “maybe” regrets picking Jay Powell to chair the Fed. From the WSJ, “President Trump escalated his attacks on Federal Reserve Chairman Jerome Powell, saying the head of the nation’s central bank threatened U.S. economic growth and appeared to enjoy raising interest rates. In an interview Tuesday with The Wall Street Journal, Mr. Trump acknowledged the independence the Fed has long enjoyed in setting economic policy, while also making clear he was intentionally sending a direct message to Mr. Powell that he wanted lower interest rates. ‘Every time we do something great, he raises the interest rates,’ Mr. Trump said, adding that Mr. Powell ‘almost looks like he’s happy raising interest rates.’ The president declined to elaborate, and a spokeswoman for the Fed declined to comment. Mr. Trump said it was ‘too early to say, but maybe’ he regrets nominating Mr. Powell.”