The Market Today

Markets Convulse Overnight as Fears Escalate

by Craig Dismuke, Dudley Carter


Overnight – Markets Convulse as Stocks Quickly Erase Overnight Rise After Yield Decline Wins Out: U.S. equities and Treasury yields decoupled in the second half of Tuesday’s session and the divergence initially widened overnight. Equity futures firmed while the 10-year Treasury yield fell to its lowest level since October 2016. Global stocks, which steadied Tuesday after China stabilized the yuan, appeared to ignore Wednesday’s weaker fix that nearly encroached a key market level. The PBOC raised its daily fixing rate from 6.9683 to 6.9996, weakening the yuan for a fifth day while keeping it inside 7 per dollar. The offshore yuan, a market-based measure less influenced by the central bank, weakened back near a record low. The recent devaluing of the yuan led to the White House slapping a currency manipulator label on China Monday night, and has been a major force behind the fear-based fall in Treasury yields this week. The 10-year yield dropped another 5.1 bps just before 7 a.m. CT to 1.65%, a new 34-month low. In addition to the trade worries, German industrial production was weaker than expected and three foreign central banks (New Zealand, India, Thailand) followed the Fed’s lead by cutting rates, all surprising expectations with the size of the rate adjustments. Ten-year yields in Germany (-0.60%), France (-0.34%), and the U.K. (0.44%) each dropped more than 5 bps to a new all-time low, and positive yields across Europe continue to disappear. While U.S. equities had held up, futures cracked under the weight of worrisome lower yields just after 7 a.m. CT.

As of 7:30 a.m. …

  • 10-Year Treasury yield down 7 bps to 1.64%
  • 2-Year Treasury yield down 2 bps to 1.56%
  • U.S. Long Bond yield down to 2.15%, within 5 bps of its 2016 all-time low
  • 2s10s spread down to lowest of cycle at 8.6 bps
  • German 10-year yield at its lowest ever: -0.60%
  • French 10-year yield at its lowest ever: -0.34%
  • U.K. 10-year yield at its lowest ever: +0.44%
  • Dow futures pointing to 213 point decline at the open
  • Gold up to 1,493, its highest level in 6 years and up 5.7% in August alone
  • Fed Funds Futures contracts at new highs, pointing to FF rates now being 1.015% by YE20

Today’s Economic Data – Mortgage Applications, Consumer Credit, Chicago’s Evans: Today’s economic calendar is fairly quiet with mortgage applications, consumer credit, and one scheduled speech from Chicago Fed Bank President Evans.  Mortgage applications for the week ending August 2 rose 5.3% on an 11.8% increase in refis and a 2.0% decrease in purchase apps.  While overall applications remain low, the four-week moving averages for both categories have improved as rates have fallen, just not as much as might have been expected.


Yesterday – Stocks’ Pop Didn’t Convince the Treasury Market: Stocks recovered a portion of Monday’s steep decline while a modest early uptick in Treasury yields dissipated in the afternoon. Asian stocks declined before sentiment picked up during the European session and held over throughout U.S. trading. The U.S. designated China as a currency manipulator just after Monday’s market close, sparking a sharp risk-off response early in Asian trading on Tuesday. The PBOC, however, kept its daily peg stronger than the psychological 7-per-dollar level, easing fears of a rapid devaluation and lifting spirits ahead of the U.S. session. The S&P 500 nearly erased its opening jump but recovered in the afternoon to close 1.3% higher. Eleven of the index’s twelve sectors strengthened Tuesday while energy fell behind in negative territory. Despite a recovery in equities, oil prices slipped for a second day to push U.S. WTI to its weakest level since mid-June and Brent into a bear market. Treasury yields, however, ended little changed on the day after giving up their early morning recovery. The 10-year yield traded within a 10-bp range Tuesday, opening down 3.7 bps before rising as much as 6.4 bps, but ended 0.5 bp lower at 1.70%. The 2-year yield tracked a similar path, but held onto more if its gains to close up 1.0 bps at 1.58%. The spread between the two sank to 11.5 bps, the tightest since March and less than 1 bp from its cycle low from December.


JOLTS Data Showed Labor Market Remained Solid Prior to Recent Deterioration: The latest JOLTS report showed a greater-than-expected 7.348MM open jobs in June and July’s tally was revised up by 61k to 7.384MM. In addition to the modest decline in total openings, the number of hires, quits, and layoffs all ticked lower. In the context of the overall labor market, openings continued to exceed the number of unemployed, the hires rate was unchanged and remained below its cycle peak, and the quits rate held steady for a 13th consecutive month at its best level of the cycle. The layoffs rate dropped back to match its best level of the cycle. While qualitatively dated considering recent developments around trade and the outlook, the June data showed that global uncertainties had yet to notably impact the labor market prior to recent deterioration in trade tensions.

Fed’s Biggest Dove Signals Markets May Be Expecting Too Much: Consistent with comments from a couple of his colleagues on Monday that they would be monitoring trade developments, St. Louis Fed President Bullard said the Fed, “cannot reasonably react to the day-to-day give-and-take of trade negotiations.” Keeping balance to his outlook, he said “there are a lot of good things going in the economy,” while admitting trade tensions are a “key risk” that cause the economy to slow more than expected. And although he does “not expect this uncertainty to dissipate in the quarters and years ahead,” he said he has already adjusted his models and outlook for a high level of trade volatility. He continues to expect another rate cut by the end of the year but said he like Chair Powell’s characterization of the July cut as a “mid-cycle adjustment.” He also echoed an idea from Powell’s press conference that the 0.25% July cut should be viewed as part of a cumulative change that’s occurred this year. After describing the policy shift this year as a “sea change,” he noted “While additional policy action may be desirable, the long and variable lags in the effects of monetary policy suggest that the effects of previous actions are only now beginning to impact macroeconomic outcomes.”

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