The Market Today

More Brexit Uncertainty; Disappointing Corporate Earnings Reports


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Rates Tick Higher Slowing Applications; Home Price Report: Mortgage applications for the week ending October 18 fell 11.9% as purchase apps fell 3.6% and refi apps dropped 17.1%. The 30-year mortgage rate, according to the MBA, during the observation period rose from 3.92% to 4.02%.  Removing some of the week-over-week volatility, the 4-week moving average for purchase applications fell 1.9% but remains near the middle of 2019 range.  The 4-week moving average for refinance applications remains 132% above its 2018 average. At 8:00 a.m. CT, the FHFA will release its August home price index which is expected to show a continued slowing in the pace of home price gains.

More Corporate Earnings: Also on the calendar today are more 3Q earnings reports, including Ebay, Paypal, Tesla, and Microsoft after the close this afternoon.

 

YESTERDAY’S TRADING ACTIVITY

Brexit Confusion Buffeted Sentiment Tuesday: Following a steady move sideways through positive territory for most of Tuesday’s session, the S&P 500 turned negative around 1:30 p.m. CT after U.K. parliament dealt PM Johnson’s Brexit plans a blow just minutes after approving the broad framework of his agreement with the EU. At 1:15 p.m. CT, members of parliament voted in favor of the broader ideas of PM Johnson’s recently negotiated deal by a count of 329 to 299. However, they would also prefer more time to digest the details of the more-than-400-page plan. But at 1:32 p.m., by a vote of 322 to 308, they disapproved Johnson’s plan to fast-track the bill through the approval process by the October 31 deadline. While the first vote lessened the risk of a no-deal Brexit, the second softened hopes of avoiding another extension. A top EU leader said he would recommend to the EU countries to approve an extension while PM Johnson hinted that if the extension granted was too long, he would considering calling general elections. Despite the positive developments, continued uncertainty dinged the British Pound, pulled the S&P 500 down 0.4%, and knocked 3.9 bps off the 10-year Treasury yield.


OVERNIGHT TRADING ACTIVITY

Brexit Back and Forth Continues: A relatively quiet global economic calendar left investors to digest corporate earnings data Wednesday as they await the EU’s decision on whether, and for how long, to extend the current October 31 Brexit deadline. U.K. yields continued to move lower and were leading a wider drop across major global sovereign yields. Ireland’s prime minister threw his support behind the EU offering the U.K. a Brexit extension to allow parliament the time to more thoroughly sort through the details of the exit plan. U.K. PM Johnson met with leaders of the Labour opposition party to discuss a possible path for debating the deal that would introduce some certainty into the plans for exiting the EU. Countries from the EU are currently discussing options for possibly extending the October 31 deadline.

Corporate Earnings Offer Insight into the Uncertain Outlook: The global corporate earnings season is now earnestly underway and offering insight into how the uncertainty evident in global economic data is affecting companies’ bottom lines. The Nasdaq led losses yesterday before Texas Instruments reported a worse-than-expected outlook for revenue and earnings, with most of the blamed aimed at the ongoing trade tensions between the U.S. and China. The report has weakened chipmakers around the world on Wednesday. Tech was the biggest drag on Europe’s Stoxx 600 which was 0.3% lower shortly after 7 a.m. CT. Keeping an eye on earnings, U.S. futures slumped sharply after Caterpillar also lowered its earnings forecast for 2019 amid elevated economic uncertainty. Markets quickly recovered, however, to cut the S&P 500’s loss to just 0.2%. The 2-year Treasury yield was down 2.8 bps while the 10-year yield had dipped 3.1 bps.


NOTEWORTHY NEWS

Existing Home Sales Soft in September but Up 3% in 3Q: Existing home sales pulled back more than expected in September, down 2.2% for the month after rising 1.5% in August.  Sales were expected to fall to 5.45 million units annualized but fell to 5.38 million units. Even with the larger pullback, existing home sales were up 2.8% QoQ in 3Q and are now up 3.9% YoY. The 30-year mortgage rate held at an average of 3.61% in September, down from a peak of 4.94% last November.  Along with a slowing pace of price gains, the housing data has convincingly turned positive. Homebuilder confidence is up 3% YoY, new starts are up 2%, permits are up 8%, and new home sales are up 18%.  After dragging from economic growth in eight of the past nine quarters, residential investment is poised to add several tenths to growth in 3Q.

Richmond Fed Manufacturing Report Gives More Reason for Optimism: The Richmond Fed’s report on regional manufacturing activity in North and South Carolina, Maryland, Virginia, West Virginia, and Washington D.C. beat expectations giving yet another sign of hope from a regional manufacturing report. The New York Fed’s index also beat expectations last week.  The Richmond index rose from -9 to +8 on markedly better readings for new orders, shipments, local business conditions, and employment.  Expectations for capital expenditures did pull back, but the overall tone of the report was much-improved.  The national manufacturing indices remain discouraging, but the regional reports are now providing some nascent signs of optimism.


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