The Market Today

Trade-Driven Treasury Inversion Keeps Investors Cautious

by Craig Dismuke, Dudley Carter


Mortgage Applications Fell Despite Seventeen-Month Low for Mortgage Rates: Mortgage applications fell 3.3% last week despite the MBA’s average 30-year contract rate holding steady at 4.33%, a seventeen-month low (January 2018). Purchase applications declined 1.4%, marking a third consecutive dip and the fifth drop in the last six reports. Purchase applications strengthened from the second half of February through the first two weeks of April, but have pulled back since then even with a continued decline in the level of mortgage rates. Refinancing activity fell 6% last week after jumping 8.3% the week before, and have generally been weaker since the end of March. Lower rates should help affordability but seemingly softer interest in new mortgages shows no clear signs of sustained improvement.

Richmond Fed Survey Expected to Rebound in May: At 9 a.m. CT, the Richmond Fed’s Manufacturing Index is expected to have recovered in May, but remain below firmer levels from last year, before trade tensions between the U.S. and China ramped up and weighed on global markets and economic sentiment. A similar recovery was expected for the Dallas Fed survey yesterday, which instead fell unexpectedly to the second weakest level since the 2016 presidential election (more below).


Yesterday – Stocks Weakened on Continued Uncertainty, Treasury Inversion Deepened as Yields Tumbled: U.S. equities sold off to start the week following losses for European stocks after parliamentary elections there handed the traditional, mainstream pro-EU parties a smaller majority. Trade tensions tightened further last week and economic data last Thursday raised fears that the growing uncertainty had begun affecting the U.S. services economy. President Trump said over the weekend that China “probably wish[es] they made the deal that they had on the table before they tried to renegotiate it,” but that the U.S. is now “not ready to make a deal” since China backed away from its promises. The S&P 500 failed to hold an early jump and closed on it cheapest tick of the day, down 0.8% and at a two-month low. The index turned negative in the afternoon as a recent Treasury yield retreat intensified, with ten of the eleven sectors losing value and six of those down more than 1%. Financials found themselves in that group, hurt by a deepening inversion of the Treasury curve, which fell to new lows since at least early in 2018. After strong auctions of 3-month, 2-year, and 5-year Treasury debts, the 2-year yield fell 4.0 bps to 2.124%, the lowest since February 2018, while the 10-year yield lost a larger 5.4 bps to finish at 2.266%, a new low since September 2017. Compared with a 3-month T-bill rate of 2.34%, the spread between the bill rate and the 10-year Treasury yield reached -7.4 bps, the deepest inversion since August 2007.

Overnight – Investors See Little Reason to Increase Risk Positions: Investors continued to cut back their risk positions overnight in the absence of any news that might neutralize concerns about a trade war between the U.S. and China, and the negative ripple effects one would have on the global economy. In fact, a couple of official Chinese media outlets might have increased angst about recent deterioration of negotiations with write-ups implying the country could use its monopoly on rare earth metals to retaliate. An article published Wednesday by China’s People’s Daily newspaper, a mouthpiece for the Communist Party, asked rhetorically, “Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery.” “We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!” the paper added. Chinese stocks held up better than most markets in Asia on Wednesday while the major indices in Europe have traded down sharply, dragging the Stoxx Europe down 1.3% to its lowest level since March 8. U.S. futures were down 0.7% and hovering near their lows of the day around 7:30 a.m. CT and the recent rally in Treasurys remained intact. The 2-year yield had slipped 3.4 bps to 2.077%, a new low since February 2018, while the 10-year yield fell 3.8 bps to 2.227%, surpassing yesterday’s close which was the lowest since September 2017.


Home Price Gains Continued to Moderate Across Measures: The S&P CoreLogic Case-Shiller home price index reflected slower annual price gains for a twelfth consecutive month in March to the weakest rate since 2012. The 20-city index rose 0.1% in March, dragging the annual rate down from 2.95% to 2.68%, the slowest since August 2012. On a national basis, prices were up 3.72% from March 2018, the slowest pace of gains since September 2012. Separately, the FHFA confirmed the continued moderation in price gains. The FHFA index also rose a weaker-than-expected 0.1% in March, pulling the annual rate down to 5.0%, well below the 7.3% pace from March 2018 and the slowest since January 2015. Lower rates have so far had an uneven effect on the key housing reports, with the mixed demand metrics allowing price pressures to continue moderating.

Consumer Confidence Continued to Recover in May: Despite amped up trade tensions in the first few weeks of May, consumer confidence jumped more than expected to 134.1, past the 130.0 reading expected and the best print of the year. The gain pushed the index to one of its strongest marks of the cycle outside of a cluster of four stronger levels from late last year. Consumers were more upbeat about the current economic situation and, despite recent re-escalation of trade tensions between the U.S. and China, saw more good times ahead. While the report may not fully reflect concerns about trade, the sample collection period for this initial estimate ended May 16 and therefore includes several weeks of more severe rhetoric. Behind the new 18-year high for the current assessment, the spread between the “good” and “bad” assessments of current business conditions widened and the labor market differential hit a new cycle-high. Those themes were consistent with improvements in future expectations which strengthened from April but remained below better levels from the last couple of years. Net expectations for income growth cooled but remained solid from a cyclical perspective. Resilient confidence is an important positive indicator during a period of economic uncertainty and volatile consumer spending data.

Dallas Fed Survey Perpetuates Narrative of Negative Impact of Trade Tensions on Manufacturers: The Dallas Fed’s Manufacturing Activity index fell unexpectedly from 2.0 to -5.3 in May, the second lowest reading in nearly three years, on broadly weaker underlying fundamentals. May’s report disappointed expectations for a 4.2-point gain to 6.2. Outside of slightly firmer current shipments and a better reading on the number of workers, good news was hard to find. Production and new orders weakened in both the current survey and future outlook and planned hiring and capital spending dropped off. The general disappointment and concern were captured by two broader indices which showed business uncertainty at an eight-month high and expectations for activity six months from now at the second weakest level since President Trump was elected in 2016.

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