Not a surprise this morning that US stock markets along with Europe’s markets are improving. The panic that set off huge declines on Friday and yesterday was like the coiled spring that let loose. Nothing has changed though, the world economic outlook is being re-thought to slower grower growth globally and here in the US. The bullish people out this morning on all financial news channels, back again talking up the outlook. For all of the talk and comments from numerous ‘experts’ ( I put them in quotes only to emphasize that for all of the comments, no one has seen this kind of economic condition before); central banks have propped up markets for years. The reality however is the growth worldwide isn’t what it was thought to be. Under the headlines of most al global data points the truth is, growth is not what has been thought.
Equity markets in Europe and here are better today. It isn’t over however, as we have been noting, market volatility is high and will remain high, swinging markets in wide moves, but the path is lower for equities in the near term and US interest rates will remain low throughout the remained of the year. Maybe not at the recent lows, but historically low. The Fed is likely done this year although the consensus now is for a Dec rate increase from the Fed; just as the consensus was for a Sept move until last week. If the Fed raises interest rates in September we are going to see the mother of all crashes. The world economy is sliding hard and fast. Geopolitical tensions are high. The domestic economy is far weaker than official stats reflect.
The People’s Bank of China reduced bank-reserve requirements by half of a percentage point, effectively adding 678 billion yuan (about $105.7 billion) to the Chinese economy. There was no stopping the selling in Chinese markets. Shares in Shanghai slumped 7.6% lower, following the worst one-day loss in more than eight years on Monday. China’s stock plunge has wiped out more than $1 trillion in value from equities over the past four days. Japan’s Nikkei closed 4.0% lower after staging a short-lived recovery. The European Stoxx Europe 600 index was 4.4% higher in early afternoon, on course for its biggest one-day gain since September 2011. Germany’s DAX rose 4.1%, France’s CAC 40 climbed 4.2%, and the U.K.’s FTSE 100 was 2.7% higher. The euro and the yen weakened against the dollar today after gaining strength against the dollar the past few sessions.
Two data points at 9:00; neither is critical. The June Case/Shiller 20 city index expected up 5.2% yr/yr, increased 5.0% and was up from 4.9% in May; unless you live in the 20 cities, Case/Shiller is nothing more than an indication of a national trend and doesn’t speak to most of the country. The June FHFA home price index expected up 0.4% was up 0.2% and yr/yr +5.6% down from 5.7% in May. The two monthly reports more a footnote but it is housing data and there is a lot of attention on housing now as possibly the last sector that may see growth. Most of what we read and hear is that housing is taking off, hope that is correct but so far improvement from five years ago is less than anemic.
At 9:30 the DJIA opened +320, NASDAQ +155, S&P +36. The 10 ye note rate at 2.08% +8 bps from yesterday’s close. 30 yr FNMA 3.5 Sept coupon -16 bps from yesterday’s close and -59 bps from 9:30 yesterday morning.
At 10:00; July new home sales +5.4% against +6.0% expected, 507K units compared to 516 expected. The median sales price $285,900 up 2.0% yr/yr. According to the sales pace here is a 5.2 month supply. Less than expected but not much, call it in line. August consumer confidence index was expected at 94.0 from 91, the index increased to 101.5 the second highest this year; toss that in the circular file, this report is nothing more than reflection of the stock market. Run that survey today and we would see a big decline in confidence. Another second tier report, the Richmond Fed manufacturing index expected at 10 from 13 in July came at zero.
At 1:00> this afternoon Treasury will auction $26B of 2 yr notes, the demand will be important; at the low end of the curve and more impacted by expectations about the Fed rate increase. Tomorrow $35B of 5 yr note and Thursday $29B of 7 yr notes will be auctioned.
We cannot stress strongly enough that financial markets here and around the world will continue to see very high volatility. We do not believe the US equity markets are going to turn on a dime and rally much, but look for days with strong selling. Markets will work to find equilibrium assessing the new reality that global economic outlooks have been lowered. US interest rates will also see extreme volatility moving back and forth with equity markets. Our technical bullish bias remains for the moment, as long as the 10 stays below 2.15% our models will remain positive. That said, the current uncertainty about global economies and here in the US, until markets calm down we do not want to assume any risk by floating mortgages now. Best to let markets settle, way too much risk now; no reason to assume risk at the moment.
PRICES @ 10:15 AM
10 yr note: -23/32 (72 bp) 2.09% +9 bps
5 yr note: -10/32 (31 bp) 1.43% +6 bp
2 Yr note: -2/32 (6 bp) 0.62% +4 bp
30 yr bond: -67/32 (209 bp) 2.83% -9 bp
Libor Rates: 1 mo 0.199%; 3 mo 0.331%; 6 mo 0.524%; 1 yr 0.833%
30 yr FNMA 3.5 Sept: @9:30 104.06 -16 b (-59 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Sept: @9:30 104.04 +4 bp (-5 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Sept: @9:30 104.36 -8 bp (-35 bp frm 9:30 yesterday)
Dollar/Yen: 119.53 +1.12 yen
Dollar/Euro: $1.1473 -$0.0146 (stronger dollar today)
Gold: $1148.00 -$5.60
Crude Oil: $39.62 +$1.38
DJIA: 16,225.81 +354.46
NASDAQ: 4664.34 +138.10
S&P 500: 1939.37 +46.16
About Al Hensling
Ranked among the Top 50 Loan Originators in the Nation for the past 20 Years Direct Lender offering Solution based Lending.