The Sept Empire State manufacturing index at 8:30 was expected at -0.5% frm -14.9 in August, the index hit at -14.67. There was time not too long ago when the Empire State data got attention, now with the major weakness not many are paying attention using the excuse that NY is not a manufacturing center; true enough but when the index was strong the bulls made a case out of it. The orders index remained negative at -12.9 while the employment index fell to a three-year low of -6.2. The six-month outlook deteriorated to 23.3 from 33.6.
At 9:15 August industrial production, expected -0.2% declined 0.4%. August capacity utilization expected at 77.8% was at 77.6%. Industrial production has dropped six out of the last eight months, and it was the biggest monthly decline in the last 19 months. Like retail sales this morning, July industrial production was revised higher, frm +0.6% to +0.9%. The higher revision took the sting out of the August decline.
The DJIA opened +60 after trading down 25 earlier in the futures markets; NASDAQ +12, S&P +6. The 10 yr at 9:30 2.21% +2 bp. 30 yr FNMA 3.5 Oct coupon -13 bps frm yesterday’s close and -20 bps frm 9:30 yesterday.
Global data today; the euro-zone's trade surplus hit a fresh record in July, widening to 31.4B euro from 26.4B in June. Germany was responsible for 15.7B of the total. Germany's ZEW Economic Sentiment index fell to 12.1 in September from 25.0 in August. Consensus estimates had been around 18; the index of sentiment about current conditions was more upbeat, unexpectedly rising to 67.5 in September from 65.7 in August. Consumer prices in the U.K. remained flat in the year to August. The CPI had risen 0.1% y/y in July. French consumer prices were flat in the year to August, below expectations and the 0.2% y/y growth in July. The Bank of Japan maintained interest rate policy, as expected. The statement noted a leveling off of export growth due to the slowdown in emerging markets, but provided only subtle cover for an expansion of unconventional monetary policy measures at next month's meeting.
At 10:00 the last data today, July business inventories expected +0.1% frm +0.7% in June. Inventories increased 0.1% in line with forecasts; June inventories revised from +0.8% to +0.7%.
The Fed is all there is out there now for traders, expectations are still holding that the Fed won’t move at the meeting on Thursday. Since the global financial crisis when most every central bank cut rates rapidly 13 central banks over that time have attempted to increase rates, all of them have had to backtrack and lower them again. The Fed is likely well aware of those moves that were mistakes based on what occurred in those countries after the attempted increases. Central banks in the euro-zone, Sweden, Israel, Canada, South Korea, Australia, Chile and beyond have tried to raise rates in recent years, only to reduce them again as their economies stumbled. Is the US economy strong enough to withstand a rate increase now? We don’t believe it is, the US economy is better than most global economies in terms of growth but not yet strong enough for an increase ( one concern is the expected fall in auto sales that will occur). That is likely what the FOMC’s po0licy statement and Yellen’s press conference will imply.
No reason we can think of that warrants floating now, our models remain neutral and with the FOMC on Thursday it is very unlikely MBS prices will improve much, if at all. Although most believe the Fed will not move there is no compelling reason to make any major moves in stock indexes or the bond and mortgage markets.