The Market Today

Mortgage Applications Hit Highest Level Since the Election, Producer Price Inflation Subdued

by Craig Dismuke, Dudley Carter

Today’s Calendar – Mortgage Applications Hit Highest Level Since the Election, Producer Price Inflation Subdued: Mortgage applications for the week ended September 8 jumped 9.9% on healthy gains in both purchase and refinance activity. The 9.9% increase was the biggest since a 14.2% gain in early July 2016 when the 10-year yield fell to an all-time low of 1.36% in response to the initial Brexit vote. That same week, the MBA’s 30-year mortgage contract rate fell to 3.60% which was the lowest since 2013. In the current report, that MBA’s 30-year contract rate dropped to 4.03%, the lowest since the election. Purchase applications jumped 10.9%, the biggest weekly bounce since November 18, and pushed the index to its highest level since the middle of June. Refinance application activity increased 8.9%, the steepest since the middle of July, and lifted the index to its strongest level since last November. The strong weekly results obviously had a positive impact on the four-week averages for both indices; the refinance average has now improved in six consecutive weeks as rates have continued to slide.


In the producer price report, headline price increases were stronger in August than in July but fell short of economists’ expectations. Headline prices rose 0.2% MoM and 2.4% from a year ago; both were 0.1% below expectations. Stripping out food and energy, prices were up 0.1% MoM in August and 2.0% YoY, both 0.1% less than economists predicted. Producer prices for items that flow through to personal consumption were up 0.2% as higher energy prices offset weaker food prices. As has been the case for some time, the Fed will not find the building inflation pressures they are looking for to support another rate hike in the producer pipeline.


At 1 p.m. CT, the Treasury will release their monthly budget statement for August which is expected to show a wider deficit.


Overnight Activity – Weekly Momentum Moderates as Markets Steady: This week’s momentum trade slowed overnight as global equities and sovereign yields steadied after rising in the first two days of trading. Shares rose in Japan but fell in Hong Kong. Equities were somewhat firmer in France and Germany but slightly softer across broader Europe. After setting new all-time highs on Tuesday, the major U.S. exchanges may open lower based on futures trading. Global sovereigns have traded mixed overnight. The German 10-year yield is 0.2 bps higher while the 10-year French note yielded 0.7 bps less. The U.S. Treasury curve is little changed. The 2-year yield is up 0.4 bps while the 10-year note is flat with yesterday’s close. The Dollar trimmed its weekly gain, almost indiscernibly, and the Pound weakened despite the U.K.’s unemployment rate unexpectedly falling to a 42-year low of 4.3%. Crude prices rose for a third day as an IEA report estimated oil demand will grow by the most since 2015 and offset U.S. industry data showing an unexpected build of U.S. crude inventories.


Yesterday’s Trading Activity – Another Record Day for U.S. Stocks as Treasury Yields Rise for a Third Session: U.S. stocks rose Tuesday as the Dow gained 0.28% and the S&P and Nasdaq both added 0.34%. The daily improvements were enough to push the three to new records; it was the Dow’s first since August 7. The equity strength remained relatively broad based with 64.6% of S&P 500 companies and nine of 11 sectors moving higher. Telecoms and financials led but a third daily increase in longer Treasury yields finally weighed on the rate-sensitive utilities and real estate sectors. The 2-year Treasury yield rose 1.6 bps to 1.34% as the 10-year added 3.7 bps of yield to 2.17%. The reversal of last week’s flight to quality has steepened the curve between 2s and 10s by 5.6 bps since last Thursday, the largest three-day steepening in more than two months. The Dollar was essentially unchanged and remains at one of its weakest levels since January 2015. Among the market headlines Tuesday were comments from key Trump administration officials on tax reform (more below), the U.S. national debt surpassing $20T last Friday, and Apple’s unveiling of several new products (cellular watch, iPhone X, 4K Apple TV, wireless charging dock).


Mnuchin Talks Tax Reform: In an appearance at CNBC’s Delivering Alpha Conference, Treasury Secretary Mnuchin spent a good portion of his time talking up U.S. tax reform. Mnuchin said he is “incredibly hopeful” that tax reform will be a 2017 event but admitted that the 15% corporate rate touted by President Trump could be unachievable. Mnuchin told CNBC, “I don’t know if we’ll be able to achieve [a 15% corporate rate] given the budget issues. But we’re going to get this down to a very competitive level.” He hopes the ultimate tax reform plan voted on by Congress will be the product of bipartisanship, but said the administration is willing to use the reconciliation process if 60 votes can’t be tallied. Whatever shape the reform plan ultimately takes, Mnuchin said the White House is mulling backdating reforms and making it effective for all of 2017. In other tax-related news, Tuesday reports indicated that the President would attend a dinner with a small group of senators from both parties where the talk would be all about taxes. The President is also slated to visit up to 13 states in coming weeks to make a personal push for tax reform.


JOLTS Openings Jump to New Series Record in Strong July Report: Another month of unexpectedly strong employer demand for U.S. workers pushed the number of available positions to a second consecutive series high. The July JOLTS report showed job openings increased from 6.116M in June (revised down 47K) to 6.170MM, the most since the series started in 2000. The month-over-month increase left the openings rate unchanged at 4.0%, the highest in the series’ history reached three other times since 2000 (June 2017, July 2016, July 2015). Hiring also rebounded to its best level since 2015 and the hires rate increased to 3.8% matching its highest mark since early 2007. The separations data was also positive. Total separations rose because job quits rebounded to the third strongest level since 2001. Job quits are considered a positive indicator because it shows employees are confident in other employment opportunities the labor market affords. Layoffs pulled back after a big jump in June but the layoffs rate remained at 1.2%, the highest since February 2016. Disappointingly though, the strength of these metrics did not adjust the flatness of the Phillips Curve. Looking back, average hourly earnings grew just 2.5% YoY in July.

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