Stocks plunge and rates drop

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Published Date 2/5/2018

Massive volatility today in the equity and bond and mortgage markets. The DJIA dropped 1600 points at 3:00 PM ET, at 3:15 -900, at 3:30 -800. Stop orders hit and market sell orders generated huge swings this afternoon. Stock indexes were swinging wildly. What we are seeing now is what we have been talking about for the month. We were looking for a 10% decline on a closing basis and now very close to it, the DJIA dropped 10% from its high at 3:00, what we expected. Now might be a buying opportunity, the economy is strong, nothing has changed, wages increasing and the economic outlook still good. If you were tuned into CNBC, the comment from guests and the regular reporters you were treated to panic talk. The end of the world.

The huge increase in stock volatility today finally pushed the panic button for moves to safety to treasuries driving MBS prices higher with the 10 yr note yield at 3:00 down to 2.74% from 2.84% on Friday. Investors are scared momentarily. I am always surprised when markets swing around how quickly the sentiment changes. So far the only thing that has changed is that the Fed is expected to increase rates, there is no change in the economic outlook. This equity market was overbought; the majority traders agreed that the stock market was over-extend and a correction was widely expected. Now it is happening, and media and investors are shocked. The speed of the drop in stock indexes is the primarily causing unnecessary panic. This pullback widely expected but the speed not expected. A 10% correction that took just a few sessions generating the fear. Everyone expected a correction that led to fear instead of a buying opportunity, should stabilize tomorrow; if not then there is more wrong with valuations than we thought. The DJIA drop at is low is the largest intraday decline in the history of the DJIA.

This morning the Jan ISM services index was the highest in 20 years at 59.9 against 56.2 expected. New orders are arguably more important than any composite result and the reading, at 62.7, is back at last year's peak. And employment is a special standout, up more than 5 points to a very rare plus 60 score of 61.6 which is by the far the best of the post-2008 expansion. Further confirmation of strength comes from the breadth among industries with 15 of 18 reporting monthly growth including both mining and construction which have been very strong and explain this report's relative strength compared to Markit's services PMI where growth has been less spectacular and which excludes these two industries.

In the economic calendar tomorrow the Dec JOLTS job openings is expected at 5.900 mil from 5.879 mil in Nov. The US trade deficit expected -$51.9B. Neither data will likely have an impact on markets.

This Week’s Calendar;

Monday,

10:00 am Jan ISM Services index (expected at 56.2, as reported 59.9)

Tuesday,

8:30 am Dec US trade deficit (-$51.9B frm Nov -$50.5B)
10:00 am Dec JOLTS job openings (5.900mil frm 5.879mil in Nov)1:00 pm $26B 3 yr note auction

Wednesday,

7:00 am weekly MBA mortgage applications
1:00 pm $24B 10 yr note auction
3:00 pm Dec consumer credit (+$20B down from +$28B in Nov)

Thursday,

8:30 am weekly claims (235K +5K)
1:00 pm $16B 30 yr bond auction

Friday,

10:00 am Dec wholesale trade (+0.2%< Nov was +0.8%)

Source: TBWS

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