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Market Update

12/11/2015

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A good start this morning; at 8:30 the 10 yr note sat right on its key pivot at 2.20% -4 bps frm yesterday’s close. MBS prices +16 bps frm yesterday’s close after declining 19 bps yesterday. No movement, just caveating in a very narrow range the last week. 8:30 this morning Nov retail sales were +0.2% and ex auto sales +0.4%. Nov producer price index +0.3% overall and +0.3% excluding food and energy, markets were expecting 0.0% and the core +0.1%. Inflation based on PPI slightly higher but no reason to think inflation is increasing with oil taking prices down for most all commodities in the industrial sector and pressuring global equity markets. The data didn’t move interest rate markets on the initial reaction; the 10 yr stuck at 2.20% and MBS prices on the initial reaction +15 bps frm yesterday’s close. Retail sales were the best in four months but still didn’t meet market expectations for a 0.3% increase; ex auto sales however, up 0.4% was slightly better than 0.3% expected. PPI was the highest since last June; prices paid for goods fell 0.1% in November after 0.4% drop in Oct. Service prices jumped 0.5%, the most in more than a year. 80% of that advance was due to higher margins received by wholesalers and retailers.

 Global stocks under pressure today with oil continuing to fall and the IEA out today saying the oil glut in 2016 will likely be more than this year. The Stoxx Europe 600 declined 1.3% in early afternoon European trading today, following three consecutive days of decline, taking losses for the week to 3.3%. Yesterday US stock indexes increased with investors and traders stepping into energy related stocks. Not a good idea and today prior to the open at 9:30 stock index futures were following Europe lower. OPEC this week refused to cut production. 

 At 9:30 a huge selling binge to start the day. The DJIA opened -200, NASDAQ -53, S&P -21. The 10 yr note yield dropping below the key resistance at 2.20% at 2.17% and testing long term averages (100 and 200 day). MBS prices up 23 bps frm yesterday’s close and +7 bps frm 9:30 yesterday. 

 Two 10:00 reports; Oct business inventories expected +0.1% were unchanged,, the 2nd weakest this year and will have a dampening impact on Q4 GDP. The mid-month U. of Michigan consumer sentiment index was expected at 92.0, the index at 91.8 frm Nov 91.3. No noticeable market reaction to the two reports; markets already seeing large moves this morning. 

 The Fed is the center piece now, the FOMC meets next Tuesday and Wednesday. The general consensus is the Fed will increase the FF rate 0.25%; it would rock markets hard and further reduce the Fed’s credibility if there isn’t a rate increase. Markets mostly have discounted the increase in current prices of interest rates and the stock market has mostly adjusted to the increase. It isn’t the increase that may roil markets, it’s the policy statement wording about Fed thinking on further increases. Yellen has stated she wants a ‘gradual’ path to higher rates; how that is presented will be key, as well as her press conference and the Fed’s quarterly forecasts for inflation and economic growth. On inflation expectations, the Fed has mis-judged it for over a year now; believing what the Fed believes is in itself a risky decision. 

 We have noted over the last week that market volatility would remain at high levels; the week has been volatile with oil dropping and adding uncertainty for investors, the FOMC next week and the stimulus from the ECB. Today expect more volatility in the bond and stock market. The indexes opened quite weak, likely to weak. Potential intraday wide moves in oil and equity markets is possible. Global divergence with central banks causing investors and money managers to re-think relationships and market impacts. 

 High volatility with the FOMC next week. Our models now have turned slightly bullish with the 10 yr breaking below 2.20% this morning. The 10 is testing its one day low yield set on Dec 1st when the note dropped to 2.15% and looked strong. It lasted one day then rose to 2.36% on the Nov employment report. These levels for treasuries and MBSs have in the past met with selling. The stock market is driving the price declines in treasuries and MBSs; stocks being driven lower by expectations of lower oil and commodity prices, but the sentiment remains edgy. We will begin floating, we have to respect the technicals although we don’t feel comfortable with it.

 

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Market Update

12/10/2015

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The day started quietly with little change in the rate markets and early trade in stocks had the indexes generally quiet. At 8:30 weekly claims unexpectedly increased 13K to 282K, the highest level in the last five months, the 4 wk average 270.75 up frm 269.25, still holding at the 270K level. Claims were expected to be abut unchanged; there was no noticeable market reaction to the increase. There has been a continuing decline in claims over the last three years.

Also at 8:30 Nov import and export prices; import prices were thought to be -0.8% were down just 0.4%, yr/yr import prices -9.4% up frm -10.5% in October. It was the fifth straight month, highlighting the drag on inflation from cheap oil, a strong dollar and slow overseas growth.  Export prices expected -0.3% were down 0.6%, yr/yr -6.3% up frm -6.7% in October. No reaction to the report.
 
The stock market opened -13, NASDAQ and S&P -1. The 10 at 2.21% unchanged, MBS prices -3 bps frm yesterday’s close and +1 bp frm 9:30 yesterday. 

 This afternoon at 1:00 pm Treasury will complete this week’s borrowing with $13B of 30 yr bonds re-opening the Nov issue. Yesterday’s 10 yr auction was decent but not over-whelming. With the FF rate increase coming next week the demand for longer dated treasury debt has been good. The strong dollar contributing to good foreign demand. The dollar however has lost a lot of ground recently although still strong comparatively, the dollar has lost about $0.05 against the euro in the last couple of weeks with the ECB cutting rates while the Fed is expected to increase rates next week. Most European sovereign debt is rallying this morning, with yields at the 10-year maturity falling by 3-4 basis points in most countries. European government bonds have recovered the majority of their losses from the European Central Bank rate decision last Thursday.
 
The Bank of England held its main policy rate at 0.50% in an 8-1 vote, citing subdued wage growth and low oil prices. Officials said that "there would need to be a sustained firming in domestic cost pressures, compared with current rates" to move inflation up towards the BoE's 2% target. No matter where one turns there is no inflation and no inflation on the horizon except for guessing by some central banks, the Fed particularly continuing to believe it is coming. Crude oil down, commodities lower, some wage pressures but not much, global growth slow to flat or declining…China the poster boy for economic slowing. The long end of the yield curve is confirming that inflation is not in the picture for maybe a year or two, 10s and 30s holding well with low rates. 

 This week markets have had little to look at in terms of key economic measurements. Tomorrow though the report of the week, Nov retail sales expected +0.3% both with and without auto sales. Also tomorrow Nov PPI, expected 0.0% overall and +0.1% for the core (ex food and energy). U. of Michigan and Oct business inventories also released tomorrow. 

 Still a neutral outlook near term. The 10 yr note isn’t likely to break below its brick wall at 2.20% today so any movement will likely be small price declines rather than any significant improvement in MBS prices today. 


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Market Update

12/4/2015

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The Nov employment report added all that is needed for the Fed to make the move that the Fed has been talking about for the last eight months. The report was slightly better in terms of job growth from what had been thought. The unemployment rate unchanged at 5.0%; non-farm jobs +211k and revisions frm the previous two months added another 35K jobs in Sept and Oct. Private jobs increased 197K. Average hourly earnings +0.2% as expected, up 2.3% yr/yr. The labor participation rate 62.5% up 0.1% frm October. The U-6 unemployment 9.9%, down frm 11% last Nov. If there was any thought the Fed would pass on increasing the FF rate it should have gone up in smoke this morning. The Fed’s credibility is on the line, it has been but today’s report is strong enough that if the Fed holds off credibility would be extreme. The FF rate increase will be 0.25% with comments that the Fed is not on a pre-conceived plan to increase rates on a regular basis, but gradually; a point most Fed officials have said a number of times.  But there are a couple of comments today that the Fed will do anther increase at the March meeting…..that demonstrates the uncertainty within markets now.
 The economy has added an average 210,000 jobs a month this year, down from last year’s strong pace of 260,000 but still healthy enough to satisfy Janet Yellen. Private-sector workers, on average, earned $25.25 an hour in November, up 2.3% from a year prior indicating workers are gaining leverage as unemployment falls and the labor market tightens. The construction industry led last month’s job creation, adding 46,000 jobs. Retailers added 31,000. 


Yesterday the ECB’s credibility was brought into question; the stimulus announced was less than what Mario Draghi had led markets to believe since his remarks last month. No additional monthly bond purchases just a six month extension of the present €60B a month. Given the disappointment in markets yesterday it is clear markets were expecting something in the neighborhood of €80B per month. Stock markets were hit, interest rates increased in Europe and the US , the dollar crumbled against the euro currency. The Fed is on deck, if there is no FF increase on the 16th of this month markets will be left in confusion, suspicion and chaos. 
 Market reaction to the employment data initially sent rates higher and prices lower but quickly saw some minor recoveries. The 10 yr yield hit 2.36% +3 bps frm yesterday’s close and right on the high yield back on Nov 9th  on the October employment report before the three week decline. MBS prices started 15 bps lower but also flipped with treasuries. Yesterday’s selling in stocks and rate markets was a near term over-reaction; although the direction was understandable the amount of selling suggested some kind of technical panic. 

 At 9:30 the DJIA, after initially trading lower in the futures markets, opened +65, NASDAQ +13, S&P +8. The10 yr note yield 2.30% -3 bps frm yesterday’s sell-off. FNMA 3.5 30 yr coupon +19 bps frm yesterday’s close and -12 bps frm 9:30 yesterday.
 
The Oct US trade deficit expected at -$40.6B was -$43.9B. 

 Some improvement this morning but markets are still subject to increased volatility now. Expect market volatility in stock and bond markets next week. Technicals were heavily damaged yesterday, and with the uncertainty and volatility hanging over markets presently we suggest taking advantage of any price improvements to lock in deals now. 


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