It has been years since we saw this kind of uncertainty in the markets; global economic outlooks, whether the US can weather the storm of declining economies from China and emerging markets, deflation thoughts, central banks’ inability to continue supporting economies, and absolutely no fiscal support from politicians. The uncertain conditions have pushed market volatility to levels not seen since the financial collapse of 2008 and 2009. Yesterday the DJIA had a 600 point range, up 440 most of the day, then at about 2:30 the ndex reversed and ended at 4:00 down 200 points. The other two key indexes also lost their momentum in the afternoon. Treasuries and MBS markets yesterday didn’t bite on the afternoon reversal; prices did come off their lows of the morning but still ended lower, MBS price ended -21 bps while the yield on the 10 yr increased to 2.07% +7 bps.
Looked bad with that kind of close yesterday, it was reasonable to expect huge declines in US equities this morning after the afternoon reversal yesterday. Didn’t happen, prior to the 9:30 open this morning the DJIA futures were aiming at a +600 point open, NASDAQ +120 and S&P 52 point better than yesterday’s close. Early traded in the bond and o mortgage markets had MBS FNMA Sept FNMA coupon down 33 bps from yesterday’s close and the bellwether 10 yr yield up to 2.16% +9 bps from yesterday’s close.
At 9:30 the DJIA opened +394, NASDAQ +126, S&P +36. 10 yr note yield 2.16% +9 bps and 30 yr FNMA price down 27 bps from yesterday’ close and -33 bps from 9:30 yesterday.
At 8:30 this morning July durable goods orders were better than what had been expected. Overall, durables increased +2.0% on thoughts of a decline of 0.4%; excluding the volatile transportation orders up 0.6% against estimates of an increase of 0.4%. Adding to the strong data, June durables were revised from +3.4% to +4.1% and ex transportation to +1.0% from +0.8%. Economic gauges still important in the current market chaos and the better durables does add something to the bullish outlook still held by many traders and economists.
Weekly MBA mortgage applications were fractionally better, up 0.2% from last week; purchase apps +2.0% while re-finance apps down 1.0%. The unadjusted Purchase Index decreased 0.3 percent compared with the previous week and was 18 percent higher than the same week one year ago. Applications for government home purchase loans drove the increase; the seasonally adjusted FHA purchase index rose by 5.6 percent from the previous week while the seasonally adjusted VA purchase index rose by 5.2 percent over the week. Conventional purchase applications were essentially unchanged from the previous week. The refinance share of mortgage activity decreased to 55.3 percent of total applications from 55.5 percent the previous week. The FHA share of total applications increased to 13.1 percent from 12.9 percent the week prior. The VA share of total applications increased to 11.4 percent from 11.1 percent the week prior. The USDA share of total applications remained unchanged at 0.8 percent from the week prior.
This afternoon Treasury will sell $35B of 5 yr notes at 1:00 pm; yesterday’s 2 yr auction saw less demand than recent 2 yr auctions. Tomorrow $29B of 7 yr notes up for sale.
Looking to tomorrow; the preliminary Q2 GDP, expected from +2.3% on the advance report to +3.2%.
Jackson Hole begins on Friday; who will be there, who won’t? Central bankers and economists from around the world. The symposium is sponsored annually by the Kansas City Fed, but Janet Yellen won’t attend, neither will Fed Governor Daniel Tarullo, Chicago Fed Pres. Evens, San Francisco Fed Pres. John Williams; about half of the FOMC won’t attend. Hiding out and not wanting to be exposed to questions about rate increases or the current economic outlook that the Fed has blown for the last two years; constantly lowering previous growth estimates and way off on inflation predictions. It is important to keep in mind, Fed officials have no magic ball when looking into the future. From Greenspan to Bernanke and now the Yellen Fed, the track record for the Fed is sup-par.
No reason to attempt any predictions now; best to keep an open mind without taking any risks by floating. Stay clear of any risk now. Our technicals are testing critical levels on the 10 yr note this morning Monday and yesterday the 10 yr put in what we call an island reversal; gapping lower on Monday (yield) the gapping higher yesterday. In normal markets that kind of movement usually indicates a change in direction, in this volatile trading we can’t take it too seriously…yet. Treasuries and MBSs have not benefited from the equity market plunge as would might have been expected.
PRICES @ 10:05 AM
10 yr note: -23/32 (72 bp) 2.15% +8 bp
5 yr note: -11/32 (34 bp) 1.49% +6 bp
2 Yr note: -5/32 (15 bp) 0.68% +7 bp
30 yr bond: -58/32 (181 bp) 2.89% +7 bp
Libor Rates: 1 mo 0.197%; 3 mo 0.327%; 6 mo 0.522%; 1 yr 0.827%
30 yr FNMA 3.5 Sept: @9:30 103.75 -27 bp (-32 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Sept: @9:30 103.81 -13 bp (-23 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Sept: @9:30 103.97 -33 bp (-38 bp frm 9:30 yesterday)
Dollar/Yen: 119.63 +0.08 yen
Dollar/Euro: $1.1378 -$0.0139
Gold: $1223.60 -$14.70
Crude Oil: $39.13 -$0.18
DJIA: 16,020.80 +354.36
NASDAQ: 4612.49 +106.00
S&P 500: 1909.93 +42.32
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