The Market Today
Yield Surge that Cratered Stocks Tuesday Eases on Wednesday; Fiscal Watch Continues
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
Weekly Mortgage Applications and Pending Home Sales for August: Total mortgage applications fell 1.1% during the week of September 24. Purchase applications slipped 1.2% after jumping nearly 10% over the prior two weeks and refinancing activity pulled back 0.9%. Amid last week’s late-week rise in Treasury yields, the MBA’s 30-year contract rate rose from 3.03%, where it spent the prior five weeks, to 3.10%, the highest level since mid-July. Despite the small decline in the purchase index, the four-week average improved for a sixth week. With one week of data left for September, trends in purchase applications point to a solid gain for pending home sales in September after a projected improvement in August. At 9 a.m. CT, an August update from the National Association of Realtors is expected to show pending home sales rose 1.3% after declines of 2.0% in June and 1.8% in July.
Today’s Fed Communications: At 8 a.m. CT, Philadelphia Fed President Harker, who doesn’t vote on policy again until 2023, will discuss his economic outlook. Later in the day, Fed Chair Powell, San Francisco Bank President Daly, and Atlanta Fed President Bostic, all of whom vote on policy decisions this year, will speak at separate events.
YESTERDAY’S ECONOMIC NEWS
Home Prices Up 20% YoY but Monthly Pace of Gain Moderating: Monthly home price gains continued to slow in the July FHFA and S&P CoreLogic reports. The FHFA home price index rose 1.4% MoM in July, down from a recent peak of 1.9% in April and May. The gain was enough to bring the year-over-year rate up to 19.2%, its highest level on record back to 1991. Similarly, the S&P CoreLogic 20-city home price index rose 1.55% MoM, down from 1.83% in May. The gain brought the year-over-year rate to 19.95%, its highest level on record back to 2001. Home price gains are expected to continue moderating as affordability has deteriorated, an issue that is likely to be exacerbated by the recent uptick in longer interest rates.
Consumer Outlook Sours Further in September: The Conference Board’s September report showed consumer confidence dropping more than expected, down 5.9 points to a seven-month low as both the present conditions index (-5.5 pts) and the future expectations index (-6.2 pts) declined. The index tracking respondents who believe jobs are hard to get rose 2.2 points and the index of respondents expecting their income to decrease over the next twelve months rose 1.6 points. Consumers are increasingly negative on plans to make major purchases. Those saying they plan to buy a home over the next six months fell another 0.7 points to its lowest level since April, those planning to buy an automobile fell 1.9 points, and those planning to buy a major appliance dropped 3.5 points. Inflation expectations remain elevated at the highest non-pandemic level since 2011, but did inch lower by 0.2% in September.
Richmond Fed Disappoints with Surprise September Decline: The Richmond Fed’s Manufacturing Index fell from 9 to -3 in September, disappointing expectations for a small recovery to 10 and marking the lowest level since May 2020. The second sizeable monthly decline left the index down 30 points from a strong July reading. While current employment levels improved, orders and shipments contracted and indexes tracking prices paid and received rose again to new record-high levels. The forward-looking indicators were more positive, with shipments picking up and employment strengthening. However, prices paid also remained elevated and the prices received index, showing businesses expectations for passing higher costs along to consumers, increased again to a new record.
Powell and Yellen Testify before the Senate: As expected, Fed Chair Powell’s Senate testimony didn’t offer much additional color on his outlook for the economy or monetary policy relative to his press conference remarks following last Wednesday’s decision. He reiterated that the current inflation pressures are being driven by imbalances between supply and demand, not broadly stronger wage gains. Therefore, as these pressures abate, inflation pressures should moderate. Testifying alongside his former colleague and current Treasury Secretary Janet Yellen, Powell addressing a current fiscal topic, he said not raising the debt ceiling could have “severe” effects. Considering her purview, Secretary Yellen was more willing to expound. She said not raising the debt ceiling and precipitating a default “would be a manufactured crisis” and a “self-inflicted move of enormous proportions” that could have “catastrophic” effects, potentially including “a financial crisis and…recession.” She estimates the drop-dead date for doing so to prevent the Treasury from running out of cash is October 18. Speaking to the stalemate between Republicans and Democrats on raising the debt ceiling, Yellen said, “It’s a shared responsibility.”
Yield Surge that Cratered Stocks on Tuesday Eases on Wednesday: Tuesday’s rout of U.S. equities deepened throughout the day as Treasury yields rose to their highest level in some months amid inflation concerns and uncertainty around key fiscal developments grew. Yields have climbed steadily since early last Thursday after the Fed and Bank of England signaled within 24 hours of one another plans to begin the process of normalizing monetary policy soon. Overnight, 10-year yields for both countries had reached their highest levels since June after rising more than 20 bps over the last four sessions. The sharp increases led to losses for European equities and drove U.S. futures lower overnight. During U.S. trading, the major indexes fell further as tech companies led losses across nearly every sector. Energy was the only sector to closer higher on the day as worries about global energy supplies briefly lifted oil prices to multi-year highs. By the time the closing bell rang, the S&P 500 had declined 2.0%, its sharpest drop since May 12, while the Nasdaq slumped by a larger 2.8% in its biggest slide since March 18. The Dow fell 1.6%. The worsening situation in equities only briefly tempered the daily rise in Treasury yields. After touching 0.32% overnight, the 2-year yield ended unchanged at 0.30%, its highest level since March 2020. The 5-year yield rose 1.9 bps to 1.02%, ending below its overnight high of 1.04% but at its highest point since February 2020. The 10-year yield jumped 5.0 bps to 1.54%, closing near its daily peak and at the highest level since mid-June.
Tuesday’s global sell-off rattled markets across Asia Wednesday, driving a broad index of stocks across the continent down 1.2%. Equities in Europe and the U.S., however, are attempting to rebound as the surge in Treasury and other global sovereign yields has checked up. The Stoxx Europe 600 had recovered 0.9% after tumbling 2.2% on Tuesday and U.S. futures were higher by around 0.5%. Tech companies were leading the modest bounce as yields rolled over following a rapid four-day rise. The 10-year Treasury yield was 3.5 bps lower before 7 a.m. but still holding above 1.50%, outpacing 2-bp declines for 10-year yields in the U.K., Germany, and France. The U.S. economic calendar is relatively quiet before two barn-burner days on Thursday and Friday, leaving investors’ attention on Washington as they watch for signs of progress towards a continuing resolution that would prevent a government shutdown on Friday. The debt ceiling debate and President Biden’s Build Back Better plan will also remain focal points. At 7:45 a.m., the 10-year yield had pared its decline to 1.7 bps on the day and was trading at 1.52%.