The Market Today

Yields Rise from Technically Stretched Levels

by Craig Dismuke, Dudley Carter


Purchase Applications Post Strongest Week In Three Months As Rates Near Three-Year Low: Mortgage applications rose 2.0% in total last week as refinancing activity stabilized and purchase applications recovered for a second week, notching their strongest weekly increase since early June. The improvements occurred as the MBA’s mortgage rate estimates followed Treasury yields to their lowest levels in nearly three years. The 30-year contract rate slipped from 3.87% to 3.82% last week, down 1.35% from last November’s 5.17% and the lowest since October 2016.

Producer Prices Show Modest Price Pressure from Services Sector: Producer price gains in August were firmer than the very low expectations with headline prices up 0.1% MoM (exp. +0.0%) and core prices up 0.3% MoM (exp. +0.2%). Goods prices were dragged down 0.5% by weakness in prices of food and energy items.  Apart from those two categories, core goods inflation was unchanged on the month.  Services prices showed more traction, up 0.3% MoM on strength in airfares and warehousing.  This marked one of the firmest readings for core services since 2012. All told, services prices have shown a hint of upward pressure (+2.7% YoY) while goods prices show very little pressure (+1.0% YoY).

Later Today: At 9 a.m. CT, the Census Bureau will release revisions to July’s wholesale inventories and trade sales.


Surging Treasury Yields Overshadowed Stocks For A Second Day: Stocks closed little changed again Tuesday thanks to a late-day surge that erased losses of as much as 0.7% for the S&P 500. The overnight updraft in yields gained steam during U.S. trading, pushing the 2-year yield up 8.3 bps Tuesday and leaving the 10-year yield 8.8 bps higher by the close. A lack of fresh catalysts kept the focus on recent trends that have led to a sharp upward yield reversal over the last several days. The turnabout started last week after news broke that the U.S. and China would meet in early October to discuss trade. In the days that followed, a key U.S. services PMI was stronger than expected, the August payroll report showed stronger wage momentum, there was chatter about loosening of the fiscal reins in Germany, and investors showed more caution about expectations for this week’s ECB meeting.

Yields Have Risen Sharply From Technically Stretched Levels: The ECB is expected to cut rates, but there is growing pushback against hopes for an immediate resumption of asset purchases under the central bank’s quantitative easing program. Cumulatively, these forces have pushed global yields up notably from multi-year lows reached last week. Since last Tuesday’s close, the 10-year yield has risen 27 bps. The 2-year yield has risen 25 bps since last Wednesday’s close. More than half of those changes have occurred over the last two days. At 1.68% and 1.73%, the 2-year and 10-year yields ended at their highest yields in more than a month.



Global Equities Firm Up While Bond Yields Wander: Global equities generally turned higher overnight while sovereign bond yields have moved in opposite directions. The MSCI Asia Pacific Index rose 0.9% and Europe’s Stoxx 600 had traded 0.7% higher around 6:45 a.m. CT. Economic calendars in the Asia, Europe, and the U.S. are relatively quiet Wednesday, leaving markets swaying about as they digest a couple of trade headlines out of China and wait for tomorrow’s ECB decision.

China Announced Exemptions List: After a local media outlet said yesterday that China would potentially offer to purchase more U.S. agricultural products, China’s Ministry of Finance issued an exemptions list on Wednesday of 16 U.S. products that will no longer be subject to 25% tariffs. The developments come as the two sides plan to meet early next month to try and make progress on softening the trade war, the negative effects of which are a major reason why the ECB and Federal Reserve are expected to cut rates over the next several days.

President Trump Offers Fed Some Advice Ahead Of Next Week’s Meeting: Earlier this morning, President Trump tweeted some advice to the “boneheads” at the Fed ahead of next week’s meeting. “The Federal Reserve should get our interest rates down to ZERO, or less,” he wrote, because there is “no inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing.” The markets continued to price in a 100% chance of at least a 25% rate cut at next Wednesday’s Fed meeting. Treasury yields were less than 1 bps lower at 7:30 a.m. CT.



Job Openings Continued Slow Descent Since Last November: Job openings declined to 7.2MM in a mixed July JOLTS report, continuing a slow descent since last November’s peak above 7.6MM. The ratio of unemployed workers to open job postings held below 1.0 for a seventeenth consecutive month, a sign of tightness in the labor market, but has loosened in each of the last three months. In the other details of the report, layoffs rose modestly but quits, a sign of confidence in the labor market, and hires also increased. The quits rate, which puts total quits in the context of overall employment, rose 0.1% to 2.4%, breaking a 13-month run at 2.3% and setting a new high for the cycle. The JOLTS data echoed the message from last Friday’s payroll report of a labor market that appears healthy, but is slowing.


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