The Market Today

TODAY’S CALENDAR

Mortgage Applications Dropped 1.7% Last Week: Mortgage applications pulled back 1.7% in the week ended October 5 as new purchase activity slowed and fewer existing mortgagors refinanced their current loans. The decline marked the first week out of the last four that saw a slowdown in overall applications. Purchase applications fell 1.1% and eased in both conventional and government mortgage products. Total refinancing slowed 2.6% and was also weaker across both loan types. For the week covered by the report, the 10-year Treasury yield rose 17.2 bps after solid economic data reinforced current strength of the U.S. economy. As a result, the MBA’s average 30-year fixed mortgage rate jumped 0.09%, the most in a week since January, and finally cracked the 5%-mark. The average rate of 5.05% was the highest since February of 2011, and continues to add to concerns around housing affordability.

 

Producer prices rose an as-expected 0.2% MoM in September, the first increase since June, while the YoY rate cooled from 2.8% to 2.6%, below the 2.7% economists had penciled in. Stripping out food and energy, the YoY increase was 0.1% softer at 2.5%. The core measure, which also removes trade categories, was up a more solid 0.4% MoM, the most since January, which kept the YoY rate at 2.9%. The strong month for core prices was in part due to firmer goods prices, both for consumers and capital equipment, but more so because of record jump in the transportation and warehousing category. That category rose 1.8% MoM, the most on records back to 2009, thanks primarily to a big increase in the cost of consumer airlines services. The cost of transporting consumers rose 5.4% in September, also a record back to 2009. While there was some broad firming in producer prices, the record month for airlines likely had an outsized effect on the overall core increase.

 

Later today, we will hear from 2019 voter Chicago Fed President Evans (11:15 a.m. CT) and current-year voter Atlanta Fed President Bostic (5:00 p.m. CT).

 

TRADING ACTIVITY

Yesterday – Treasury Curve Flattened for the First Time in Four Days as Longer Yields Moved Lower: Tuesday’s stock market moves in the U.S. were a mirror image of Monday’s with the Dow and Nasdaq flip-flopping for the top and bottom spots. After leading the way on Monday, the Dow trailed Tuesday with its 0.2% decline. The Nasdaq ultimately erased an 0.8% intraday rally to end almost exactly where it began. The S&P 500 remained stuck in the middle by posting a 0.1% loss. Within that index, energy companies led all sectors higher as crude prices rose. The industrials sector was the second worst sector with auto, building products, trading, and machinery companies especially weak. The materials sector finished last with its more-than-3% drop as companies within the containers and packaging space fell more than 4% on analyst downgrades. After ending last Friday at their highest levels in years, Treasury yields ended lower despite a recovery in equities and improvement in sentiment in Italy. After rising over 14 bps overnight, the Italian 10-year yield reversed and closed 9.2 bps lower. While yields in Germany and the U.K. rebounded and ended higher, the 10-year Treasury yield drifted 2.6 bps lower to close near its lows at 3.21%. The 2-year yield finished unchanged at 2.89%, matching its highest of the cycle. While it didn’t seem to have an impact, President Trump again commented on Fed policy, saying “I don’t like it” in reference to the Fed raising rates, “I think we don’t have to go as fast.”

 

Overnight – Mixed and Quiet: Global trading has been mixed but quiet ahead of Wednesday’s U.S. session. Stocks were positive across most of Asia but turned modestly lower in Europe. The Stoxx Europe 600 was down 0.3% with seven of 11 sectors below Tuesday’s closing level. U.S. equity futures have been choppy around the flatline, moving in and out of negative territory multiple times. At 7 a.m. CT, all three major indices were negative with the S&P 500’s December contract down 0.1%. With few macro-headlines of any consequence, investors remained attuned to Italian politics and a rebound in U.S. yields. Italy’s finance minister appeared before the Italian parliament for a second day to discuss the disagreement between the country’s government and the EU on its proposed fiscal budget. Despite the continued uncertainty, Italian assets have been well behaved with stocks higher and government bond yields lower. U.S. Treasury yields rebounded ahead of this morning’s producer price inflation report with the 2-year yield 1.3 bps higher to 2.90% (new cycle-high) and the 10-year yield up 1.7 bps to 3.22%.

 

NOTEWORTHY NEWS

Keeping Track of the Fed: On Monday, St. Louis Fed President Bullard (2019 voter) said “The U.S. growth surprise has been a factor in allowing the FOMC to normalize its policy rate along a projected path,” but noted that the economy “will likely need faster productivity growth in order to maintain current real GDP growth rates.” Recall that in June 2016, Bullard and the St. Louis Fed adopted a regime approach that pegged the appropriate policy rate for the then-current regime at 0.63%. On interest rates, he noted “I don’t think this is a situation where we need to get a lot higher with the policy rate in order to contain inflation,” adding “We’re good where we are, …We have inflation expectations really well centered at target. We should say from here on, we’ll react to the data.” When asked about a possible hike in December, he noted, “It will depend on the incoming data. Things are looking good today, I would say. But you never know until you actually get to the meeting.”

 

Tuesday morning, Dallas Fed President Kaplan (2020 voter) told members of the Economic Club of New York that “I believe we are reaching our dual mandate” and so “We should be raising the fed funds rate.” However, he said the long end of the yield curve tells him markets see the “prospects for future growth [as] somewhat sluggish or uncertain” and he still doesn’t “see inflation right now running away from us.” As a result, while he’s “comfortable” hiking three more times over the next several quarters, he isn’t yet convinced that the Fed should move past the neutral estimate.

 

In an appearance in Philadelphia, Philly Fed President Harker (2020 voter) hinted that a worker shortage could be a headwind that keeps the economy from repeating its recent above-trend growth. “We have a labor market with very little slack left, and the most common refrain I hear from employers is that they can’t fill the jobs they have, …If we want to keep the economy from stagnating, we need as many participants in the workforce as possible, …we also need a workforce that is trained and adaptive to change.”

 

Late Tuesday night, New York Fed President Williams (perennial voter), didn’t specifically address December, but his likely support was implied in his remarks. Williams said in Bali, “The Federal Reserve has attained its dual mandate objectives of maximum employment and price stability about as well as it ever has, …The U.S. economy is doing very well.” He referred to the strength of the domestic economy as the “primary driver” of his view that the Fed’s “path today is getting us back to normal interest rates or neutral interest rates relatively quickly, over the next year or so.” However, there are other benefits to continuing with gradual rate increases. Williams said low rates for a long period “probably add[s] to financial risks, or risk-taking, reach for yield, …Normalization of the monetary policy, I think, has the added benefit of reducing somewhat, on the margin, some of the risk of imbalances in financial markets.” Once at neutral, the Fed will be “well positioned for whatever may come, …If we need to raise rates more than expected we can do that in a reasonable way. If the economy slows we can adjust to that.”