Good Monday A,M.,
This being a holiday shortened week, the first thing that comes to mind is we could see some additional volatility. Over the weekend, VP Pence told China and the world the US is in no rush to make a trade deal, then yesterday the EU told the Brits, there is no renegotiation of Brexit. This could be tough for Ms. May to keep her office. This a.m., stocks are getting beaten up. The Dow down 400 points, Equities are suffering from an article written by the WSJ, which stated that Apple had cut production on its new iPhone. The only data out today was that NAHB housing (Home Builders) missed expectations by a long shot. With housing and durable goods (which are dependent on housing ie.. washers, dryers, etc..) accounting for 70% of GDP, I am becoming more interested what that Q4 number will look like. Will the Fed be able to continue to raise rates beyond December is a great question. My thoughts are from the economic data we see now and are expecting, the Fed will likely need to pump the brakes a bit. Another rate hike in December has an increasing probability of inverting the yield curve (lots of debate on this subject, and I don’t disagree that our economy continues to morph where the metrics of health and strength are shifting however, to me, an inverted yield curve is still a negative indicator. There is no way to expect long term economic growth when rates of return are better on the short term).. Bonds are still benefiting from the sell off in equities (and market concerns). The 10-yr is at 3.06% and It feels like we just need one little push to get us back to a 2 handle. I wont be surprised if we get there this week.
If you are looking for some not so light reading, here is an interesting piece from CNBC. I don’t have the best reading comprehension, so admittedly, had to read it three times to get it. It makes a strong case for why rates may not continue to go up.
Wishing you a great start to a Happy Thanksgiving, make today great!
Good morning on this fantastic Friday,
Bonds opened up strong today and with the last 3 days of higher highs and higher lows, I guess we can say we are in an uptrend (higher prices, lower rates). Vice Fed Chairman Clarida came out with some hawkish commentary (first in a while) saying that he can see that the global economy is slowing and that there are signs of that slowing beginning to effect the US. He went on to say that the a neutral position on rates is reasonable and that we are pretty much there now. This leads the market to believe that the Fed rate increases could be coming to an end. This along with the turmoil over Brexit is giving bonds some added boost. Stocks are doing ok as they seem to be settling down from the rout this week. With Thanksgiving next week, we would have to expect that come Monday, volumes will be down and volatility will be up. I know I have written a bunch about why it is important to close below certain technical levels and with a picture being worth a thousand words, please see the graph below from Matt Graham on the 10-yr treasury note. The bottom yellow line is our target (3.08%). We need to close below it or we will likely continue to be in a consolidation pattern with yields heading to 3.20+. Currently the 10-yr is at 3.08% (not a coincidence, this is the line of resistance we need to fight through to get to the next trading range) and mortgage bonds are +23bps. It has been a good week for bonds. Keeping fingers crossed it continues.
Enjoy the weekend and first, make today great!
Good Thursday AM,
A little bit of data today, retail sales should be mattering more but, for the moment, are not. Bonds are up, equities are down, and I am wondering if we are just getting a head fake for the moment on the turmoil in the UK. Late yesterday PM May announced her cabinet had approved the Brexit deal in what appeared to be unanimous fashion. Shortly thereafter, a prominent member of her cabinet resigned… so clearly there is a less unanimity on the deal than markets expected. UK Parliament still needs to vote on the deal, which now seems a bit shaky. The British pound is dropping to the lowest point in more than a year. But how does it affect us… well indirectly if our currency is stronger, it makes buying US goods in foreign currencies more expensive and conversely, it makes foreign goods cheaper for us to buy, The cheaper goods are, the lower inflation is, low inflation helps bonds and so on. This said, I can’t imagine Brexit being a long term catalyst to lower rates, and along with today’s strong retail sales data, I think the afternoon trading (when Europe is closed) could look bit different. Hopefully I am wrong but if not, then I sense the other reason for bonds to improve will be that stocks have rolled over. Currently the Dow is down today and is clawing back some of the early losses. The 10-yr is at 3.09% and a very important level. If we can hold here or better for a few days (let’s say Monday although with next week being a holiday week, trading is likely to be atypical), the 10-yr could run to the 2.80’s… that would be great. If we fail to hold, we are likely going to head back to the high point of the trading range at 3.25% and pray that holds… if not, the 10-yr could run to 3.60% and we would get coal for the holidays. Today’s data releases are below:
- Unemployment Jobless Claims: Actual 216K, Consensus 215K, Last 214K.
- Retail Sales: Actual 0.8%, Consensus 0.5%, Last 0.1%.
- Retail Sales Ex-Autos: Actual 0.7%, Consensus 0.5%, Last -0.1%.
- Philadelphia Fed Index for Nov: Actual 12.9, Consensus 20.0, Last 22.2.
- Import Prices for Oct: Actual 0.5%, Consensus 0.0%, Last 0.5%.
- NY Empire State Index for Nov: Actual 23.3, Consensus 20.0, Last 21.1.
Make today great!
Good Morning on this fabulous Wednesday,
The only important data today was CPI which came in dead on expectations. End result, minimal inflation. Looking forward, the recent sell off in oil already has expectation for the December CPI to be weaker. There is a lot of non-economic data out today (most of it mentioned yesterday, Brexit negotiations, China Trade, etc.) which, despite a positive start of the day, has equities struggling and now negative. The Dow is down about 100 points and Mortgage bonds are getting a little love. The recent pattern has been for stocks to battle during the a.m. and give up in the afternoon. Bonds have benefited later in the session. If that holds true today, we could see the 10-yr dip below 3.11% (currently 3.12%) which would be a first step towards improving rates. There is no real conviction in the trading yet. The range is 3.12 – 3.25 on the 10-yr. We have moved up and down that channel a few times. We get a little nervous around 3.25 and a little excited about 3.12 (so I am a little excited right now). This of course does not yet change the longer term bias. The Fed is still expected to (and markets have priced it a 75% chance of a ) hike rates again in December and three times in 2019 (I have a hard time seeing that as it would appear the economy may be slowing).
Wish there was more for this best day of the week.
Make today great!
Good Tuesday AM,
I hope you enjoyed the Veteran’s Day yesterday and had an opportunity to thank those who protect us. The bond market was closed yesterday (hence no update) however equities were not. They rarely miss a chance to miss a chance… with that, the Dow closed down more than 600 points yesterday. If you were thinking things were starting to settle down after two weeks of stock gains, well I’m not sure we are there yet. There is just too much going on the world and the information is just too readily available that elicits a reaction. Some of the news yesterday was:
- Brexit is on the ropes as the EU and the Brits are not able to come to a final agreement. That could be pretty impactful for Europe…
- Italy is likely not going to reduce its expenses and bring its budget in line, which then poses risks for banks and bond holders pushing money from Europe likely to the US (would you rather own an Italian 10-yr bond at 3.4% or a US 10-yr bond at 3.16%?).
- Talks between the US and China seem to be moving forward to thwart additional tariffs.
- China growth is slowing and the PBOC is showing signs of stress.
- Apple shared tanked on news of iPhone sales slowing.
For today, bonds are better than where we left them on Friday, which is a good thing. Will the volatility and market disruptions give bonds an opportunity to improve further? I kind of think so. I wouldn’t bet on it yet, but I am leaning toward stocks continuing to struggle and bonds benefiting. We will know more tomorrow with the CPI (anything below 2.40% should be bond friendly). Stocks are currently up a bit, but it is a small bit and there is lots of room left to trade today. Not to be a pessimist, but I wouldn’t be surprised to see stocks sell off into the afternoon and bonds improve. We have the 10 year auction at 11 and it would be really helpful for that to go well. The 10-yr is at 3.16% currently. If bonds are going to rally, we would be looking for a dive below 3.11% in the next few days.
And I love graphs… always have… just makes learning fun, right? Well here is a graph from the MBA on Homeownership which identifies where the buyers are (a friend asked me that same question earlier this a.m.). The under 35 group is the only group which has expanded during the last 5 years…
The focus of this week’s chart is the homeownership rate of the 35 and under age group. At 36.8 percent in the third quarter of 2018, this the highest homeownership rate for this group in five years. All age groups saw a steady decline in homeownership rates since the last recession and these rates have since leveled off and begun to show slow increases. However, the 35 and under group has seen its homeownership rate increase in five of the last six quarters, which is in line with a growing segment of the millennial generation hitting peak housing demand age. In terms of the overall number of owner occupied households formed, we saw 1.5 million more households in the third quarter compared to a year ago, which puts us on pace for the strongest year since 2004.
Overall, the strong economy and these positive demographics should support strong housing demand for the next several years, even with higher mortgage rates and positive home price growth. We expect housing supply to increase slightly and wage growth to accelerate over the next two to three years, helping to bridge the gap between home price growth and income.
Make today great!