Stocks rebound and rates remain flat

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Published Date 10/12/2018

Two days of massive selling in the US and global equity markets that dropped the DJIA 5.1%, down 1378, NASDAQ -409, S&P -152. This morning we're starting with a nice recovery heading into the weekend, in pre-open trading before 9:30 am ET the DJIA +389. Too much in too short of time, not unexpected but equally still soft as the world contemplates weaker growth (IMF) and increasing interest rates. Inflation though hasn’t increased and the Fed still forecasting little to no increase in the inflation rate out to 2020. The bond and mortgage markets didn’t have much movement since Wednesday. Historically a move in equities like we had would have pushed money into safe places, not so in this massive increase in volatility. The 10 yr hardly moved, and MBS prices remained generally quiet since Wednesday.

Sept import and export prices released this morning; imports were expected to have increased 0.2% as reported +0.5% (August revised from -0.6% to -0.4%). Yr/yr import prices +3.5% down from 3.7% in August. When excluding a 4.1% monthly increase in prices of imported petroleum, import prices come in unchanged. Discounting by foreign sellers are keeping prices of finished goods flat, cross-border price inflation posing no immediate threat to domestic price stability. Export prices expected +0.3% were reported unchanged from August; yr/yr +2.7% down from 3.6% in August.

At 9:30 the DJIA opened +390, NASDAQ +180, S&P +41. 10 yr note 3.16% +1 bp. MBS prices at 9:30 -5 bps from yesterday’s close and +5 bps from 9:30 yesterday.

At 10:00 am the mid-month U. of Michigan consumer sentiment index, estimates were for 99.5 down from 100.1 in Sept; the index as reported 99.0.

Today banks will kick off earnings season with earnings. Next week Q3 earnings season begins in earnest. This morning Jamie Dimon, JPMorgan Chase, a recent critic of Trump and his antics is repeatedly questioned about Trump and his Federal Reserve criticism, refused to add any negative comments looking a little more supportive (as framed by media). “He complimented the administration’s "negotiating tactic" on China and predicted a trade deal. He said the relationship between big business and the White House is "active and good." And the same week Trump said the Fed had "gone crazy," Dimon said he had "never seen a president who wanted interest rates to go up." (Bloomberg News)

Difficult to do, but when ignoring the stock markets and the global drop in equity markets, looking just at the interest rate markets there has been little change. Of course, we can’t totally push the global equity markets from the equation; the bond market remains bearish with no change in the outlook that rates will continue to move higher. There was little flight to safety into Treasuries as would have been expected given the severe drops in all major markets. The 10 yr has slipped 8 bps so far this week; however, that was expected after the rapid rate increase the previous month. The consolidation is what we expected, likely it would have occurred regardless of the weak equity markets.

Source: TBWS

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