Manufacturing, wild markets, and rates

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Published Date 12/28/2018

The stock market’s final hour yesterday contained one of the wildest runs we have experienced in this entire equity market decline; the widest swing in 10 yrs. With trade volumes thin 90 minutes into the close, the DJIA swung 871 points from its level at 2:45 pm ET. The DJIA spent the day down 600 points. While most were thinking the rally on Wednesday was a one-and-off day, at the end of the day yesterday the stock indexes shrugged off the weakness with the DJIA adding +260 points, the NASDAQ adding +25 and the S&P increasing +21. This morning in pre-open futures trades the DJIA index up 160 points. The 10 yr at 8:30 am was 2.76%, down -1 bp, with MBS prices generally unchanged.

Both chambers of the U.S. Congress convened for only a few minutes late on Thursday but took no steps to end a partial federal government shutdown before adjourning until next week. The shutdown is on track to continue into next week and possibly drag on well into January. More Americans blame President Trump than congressional Democrats for the partial U.S. government shutdown, according to a Reuters/Ipsos poll released yesterday, as the closure stretched into its sixth day with no end in sight. In a statement yesterday, White House spokeswoman Sarah Sanders said, “The president has made clear that any bill to fund the government must adequately fund border security.”

Yesterday’s moves in the stock indexes fueled the idea that the worst is now over for stocks. The declines, after being excessively overbought, have now been ‘corrected’ and it’s a great buying opportunity — at least that is the general take looking at comments this morning from fund managers. The last two weeks have been absent of China/US trade remarks, a relief for the moment. Markets appear to be non-plussed over the government shutdown so far; still, it won’t last as long if Democrats and Republicans don’t strike some adeal.

At 9:30 the DJIA opened up +155, the NASDAQ added +39, and the S&P bumped up +16. The 10-yr stood at 2.76%, -0.5 bp., and the DJIA was down -0.5 bp.

At 9:45 am the December Chicago purchasing managers index was expected at 62.4 from 66.4 in November; the index hit at 65.4. Growth in new orders and employment did ease in December, but not backlog orders or production which posted solid gains. Indications of easing in capacity stress are special positives as supplier deliveries improved and prices paid, despite continuing reports of tariff-related pressures on metal and lumber costs, fell for a fifth straight month and by the largest monthly margin in nearly four years.

At 10:00 am the National Association of Realtors November pending home sales were reported. They were expected to be up +0.5%, but declined 0.7%; yr/yr sales were down 7.7%. Pending sales in November posted a low single-digit contraction in both the South and Midwest to offset low single-digit gains in Northeast and West. Pending sales take one to two months to close with today's report offering advance indications for final resales in December and January.

The stock market move yesterday is being seen as a possible bottom in the two-month decline in stock indexes, but that may be a bit optimistic. Not many key traders, money managers, or Wall Street first string people are working, second team managers this time of year are watching the store rather than making major trade decisions. This happens every year during the last two weeks in December. Look for more volatility again today. Already 10 minutes into the open and the DJIA has lost most of its opening improvement.

Japan’s 10-year bond yield fell below zero for the first time since September 2017 as a slide in global equities fuels a rally in government debt around the world. The benchmark yield dropped 2.5 basis points this morning to minus 0.005%.

In the bond and mortgage markets, after the major drop in rates was fueled by the stock market, our models and other momentum oscillators are losing a little steam in the last two weeks, although the bellwether 10-yr note yield has fallen from 2.82% to 2.75% this morning. Monday the bond market will trade until 2:00 pm.

Source: TBWS

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