The Market Today

Yields Rise as Global Growth Synchronizes

by Craig Dismuke, Dudley Carter

Today’s Calendar – The Second Engine (Business Investment) Is Firing According to September Durable Goods Report:  The September Durable Goods Orders report blew out expectations on a much better-than-expected increase in capital goods shipments, stronger-than-expected new orders, and a jump in the always volatile aircraft component.  Headline orders rose 2.2%, beating economists’ estimates of 1.0%.  Nondefense aircraft orders rose 31.5%, data which is excluded from the core measure given its month-to-month volatility.  Excluding all transportation items, orders for goods designed to last longer than three years rose 0.7%, also beating expectations.  As for business investment, capital goods orders excluding defense and aircraft rose 1.3% versus expectations of just a 0.3% increase.  This bodes well for 4Q business investment.  Leading the growth were strong gains in fabricated metal product manufacturing (+1.7%) and computer and electronic product manufacturing (+1.6%).  Shipments of those same core items, reflecting business investment in 3Q, rose 0.7% and also beat expectations of just a 0.1% increase.


At 8:00 a.m. CT, the August FHFA Home Price Index is expected to increase 0.4% MoM.  At 9:00 a.m., September’s New Home Sales report is expected to show another hurricane induced drop of 1.1% following August’s 3.4% drop.


Overnight Activity – Sovereign Yields Higher as European Data Strengthens: Sovereign yields continued to push higher Wednesday as economic data in Europe boosted sentiment. German yields were the first to make a move to the upside after a survey of German businesses showed confidence unexpectedly improved in October. The Ifo’s business climate index rose to a new all-time high for records dating back to the early 1990’s. Germany’s 10-year yield was up over 2 bps and the Euro was firmer against every major currency save the British Pound. Just minutes later, the ONS reported that the U.K. economy grew a stronger-than-expected 0.4% QoQ in 3Q. U.K. yields shot higher and the British Pound rallied, both leading moves in their respective asset classes. The U.K.’s 2-year yield rose 5.8 bps while the 10-year yield added 8.1 bps as investors adjusted for the potential impact the data may have on the BoE’s monetary policy decision at next Thursday’s meeting. Previously, the BoE has indicated a rate hike may be warranted in the coming months. Treasury yields were pushed higher earlier by European yields but added to those gains after this morning’s estimate-topping durable goods data. The 2-year yield was up 2.4 bps (1.62%, highest since October 2008) and the 10-year yield added 4.9 bps (2.47%, the highest since March). The 2.40% yield level, pushed through in yesterday’s trading, was seen by traders as a key psychological top before 2.50%. The Dollar is underperforming only the Euro and British Pound and U.S. equity futures are off slightly.


Yesterday’s Trading Activity – Treasury Yields Rebound as Equities Recover on Solid Corporate Earnings: The three major equity indices rebounded Tuesday but the rate of gains differed in degree. The Dow’s outsized 0.72% gain (168 points) was enough to push the index to another record close while smaller gains for the S&P and Nasdaq left those indices several points short of another milestone. The Dow industrials sector surged nearly 3% and contributed 150 points to the index’s net 168 point gain. Caterpillar and 3M were the sector’s (and the Dow’s) biggest gainers after reporting better-than-expected quarterly earnings results. Financials were the second best performing sector, likely a derivative of higher yields. Treasury yields climbed steadily starting at midnight Tuesday and finished near their daily highs. The 2-year yield rose 1.7 bps to 1.58% while the 10-year yield increased 5.1 bps to 2.42%, the highest since March. Interrupting the steady climb was a bit of volatility in late-afternoon trading. The swings followed reports that indicated President Trump took a show-of-hands poll among GOP senators to discern their preference for the next Fed chair. John Taylor was said to have received the most raised hands.


Congress Blocks CFPB Rule Barring Certain Arbitration Clauses: With the tie-breaking vote of Vice President Pence, the Senate narrowly passed a bill preventing the CFPB’s proposed rule on limiting arbitration clauses in consumer loan contracts from taking effect next year. From the WSJ: the vote “…handed the financial industry its most significant legislative victory since President Donald Trump took office and was a rebuke of Consumer Financial Protection Bureau Director Richard Cordray, who pressed ahead with his agenda in defiance of Republicans. The move is one of the final steps in killing a CFPB rule barring fine-print requirements for arbitration in contracts between consumers and banks. …The CFPB’s rule prevents companies from including in consumer contracts arbitration clause that blocks class-action lawsuits, though it doesn’t ban arbitration entirely. Such clauses are commonly used for a range of financial products, including credit cards, certain auto loans, payday loans and private student loans. It was set to go into effect next year.”

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