Market Snapshot October 4, 2018

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Good Thursday AM,

 

Bonds had an exceedingly bad day yesterday. The 10-yr moved up from 3.07 to 3.12 quickly on some stronger data and Fed comments. By mid-morning, and as soon as it hit 3.13%, it was game over, selling created more selling and when the dust settled, we awoke this morning to a 10-yr note at 3.20%. Mortgage bonds lost 67bps yesterday and are down another 7 this a.m. Rates are likely .25% worse than where they were just 24 hours ago. It was the worst single day rout since the days following the 2016 election, and one of the worst days I can remember in a decade.

 

Dan Rawitch had some pointed comments this a.m.: Fed Chairman Powell proved himself unfit for the job yesterday. He made what was either an arrogant or a stupid comment yesterday, by telling the market that he is nowhere near finished raising rates. This in turn has sent the global markets in a tail spin and imploded the bond markets. While this does become self-correcting at some point, because as the DOW caves and housing slows, the yield curve will invert. This happens because in the end, the FED can only control the short end of the market. So, he raises the short end, while the long end gives him the finger and long term rates fall. The short end rises and the long end falls, I am referring to bond rates and not prices. An inverted yield curve has preceded the last 3 or more recessions. You can see where this is going. It does not help you in the short run, but it will lower rates and drive more business in the longer-term. We just don’t know when. At this point, the market will struggle to find a bottom and then likely retrace in the coming days.

 

There is no reason to dwell on the past, so whats on the horizon? It’s very much the same as it was before yesterday. Friday’s jobs report and more granularly, the hourly wage component,  is going to be the driver. Has yesterday’s sell off given us a bit of a cushion should tomorrow’s data be surprisingly strong? Yes I think so. If the data is weak, will we see some improvement in rates? Yes I think so. If you are risk tolerant, I can understand the argument to float. I know I’ve shared my thoughts on the inter-connectivity to our global economy, but to drive the point home, when you would think that stocks are the beneficiaries of selling in bonds, the Dow is actually off 300 points today as a result of the run-up in rates and concerns higher rates will slow down the economy/impact profits.

 

Make today great!