The Market Today

Yields Rise on Japanese QE Changes

by Craig Dismuke, Dudley Carter


Manufacturing Index, Construction Spending, Auto Sales, and Fedspeak: This week’s calendar kicks off, in earnest, today with the release of the ISM Manufacturing index at 9:00 a.m. CT. Manufacturing activity has been hit particularly hard by the slowdown in global activity and uncertainty over trade policy.  The ISM’s index has plunged from the highest reading of the expansion last September to below 50 as of the August report.  It has now been below 50, the level indicative of contracting activity, just eleven months of the past 121.  On a positive note, a recent slowdown in inventory growth points to activity improving.  Also released today will be the August construction spending data (9:00 a.m. CT) and September’s vehicle sales totals.  Fed Vice Chair Clarida and newest Governor Bowman, the former Kansas banking commissioner, are scheduled to speak this morning.


Headlines From Japan Push Global Yields Higher: Global equities are mixed Tuesday but yields are on the rise after a couple of headlines out of Japan pushed prices of global government bonds lower. Stocks across most of Asia were stronger but Europe’s Stoxx 600 was down 0.3% around 7 a.m. CT. However, the focus was on the consensus move higher in major sovereign yields. Analysts pointed to a statement from the Bank of Japan that scheduled out its planned bond purchases for October. The ranges reflected reductions in purchases of maturities longer than one year while maturities of less than one year were held steady, an apparent effort to steepen the yield curve. Shortly after the statement’s release, an auction of 10-year Japanese government bonds (JGBs) printed the weakest coverage since August 2016 and the largest tail since March 2015.

Sales Tax Hike Takes Effect As Outlook Continues To Weaken: The 2-year JGB yield rose 3.2 bps to -0.30% and the 10-year yield added 6.1 bps to -0.17%. The auction change announcement comes on the same day a long-anticipated increase in the country’s sales tax rate from 8% to 10% took effect. Interestingly, higher rates of interest and sales tax, likely headwinds to activity, come at a time when global growth is already slowing and weighing on activity in Japan. While Japan’s jobless rate ticked down to 2.2% in August, the lowest since the early 1990s, a top survey of large manufacturing companies posted its weakest quarterly result since the second quarter of 2013.

Busy Day Of Headlines: Also making headlines Tuesday, a protester in Hong Kong was shot with a live round during a demonstration, the Reserve Bank of Australia cut its target rate 0.25% to a new all-time low of 0.75%, and reports indicated to the U.S. and North Korea will meet again to discuss denuclearization. Amid the rise in global yields, the 2-year Treasury yield was 5.2 bps higher at 1.67% around 7:30 a.m. and the 10-year yield had added 8.5 bps to 1.75%.


Trade Tensions Turned Back Some: Stocks rose Monday after a couple of officials contradicted Friday’s report that the White House might limit investment flows into China, and an important week for the economic data (more below) got off to a slow start. The Friday report pulled stocks and yields lower on fears it would frustrate upcoming negotiations, but was refuted by White House trade adviser Navarro who said on CNBC Monday, “Over half of it was highly inaccurate or simply flat-out false.” The U.S. Treasury also said over the weekend there were no such plans “at this time.”

Stocks’ Momentum Has Slowed But Solid 2019 Gain Remains In Tact: The S&P 500 rose 0.5% as 10 of its 12 sectors strengthened on the day. Energy companies closed in last place, down 0.8% on lower crude prices. West Texas Intermediate crude dropped 3.0% Monday following reports that Saudi Aramaco production had fully recovered from the damaged caused by drone attacks a couple of weeks ago. For month of September, the S&P 500 rose 1.7% and nearly reversed August’s 1.8% drop. While the 1.2% gain in the third quarter was the smallest of the year, it pushed the index’s year-to-date gain to 18.7%, the best start to a year since 1997.

Treasury Yield Partially Recovered From August Drop: In a relatively uneventful day of trading, the 2-year yield dipped 1.0 bp to 1.62% while the 10-year yield edged back 1.6 bps to 1.67%, both near the lows of the day. The 10-year yield rose 16.9 bps in September but is down 102.0 bps in 2019. The 2-year yield added 11.8 bps in September but has dropped 86.6 bps in 2019.


Mixed Monday Data: Monday’s economic data painted a mixed picture of economic activity in September. The Market News International’s Chicago Business Barometer fell more than expected and into contraction, matching its third-weakest level of the cycle. Readings on new orders, production, and employment were all weaker than in August. Elsewhere, the Dallas Fed’s Manufacturing Index was better-than-expected, but cooled from August and remained depressed relative to levels in 2017 and 2018. Production and new orders were softer while employment and capital spending plans perked up. The outlook uncertainty index did edge lower but future expectations were mixed.

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