Stocks took a hit yesterday on increasing interest rates and increasing belief the Fed will increase the FF rate at its Dec meeting. Alcoa, the first to report Q3 earnings, disappointed and didn’t meet forecasts. Trading in the FF funds futures market have a 63% probability on a Dec rate hike. Not a done deal by any means however; the betting on a rate hike is highly volatile and moves on any news or comments.
This morning the weekly MBA mortgage applications declined as would be expected with the recent increase in rates. Apps declined 6.0%, purchases down 3.0% re-finances dropped 8.0%. The re-finance business is going to slow as rates increase. Comparable to a week a year ago, however, unadjusted purchase applications were 27% higher, a sharp reversal of the 14% year-on-year decline seen in the prior week. At 62.8 percent, the refinancing share of mortgage activity was 1.4 percentage points smaller than in the previous week. A bounce up in mortgage rates from historical lows most likely gave both buyers and refinancers reason to pause. The average interest rate on 30-year fixed-rate conforming mortgages ($417,000 or less) rose 6 basis points to 3.68%.
At 11:30 am Treasury will auction $24B of 3 yr notes. At 1:00 pm $20B of 10 yr notes (the 10 a re-opening of the note issued in August). The demand after the recent increase in rates for the 10 yr will be closely watched. If demand is weak in comparison to recent 10 yr auctions it will add more push to higher rates; a strong demand should support the market and may improve the very near term outlook.
At 2:00 pm this afternoon the FOMC minutes from the Sept meeting will be released; at the meeting there were three dissenters that wanted an increase at the meeting, the most that voted against the majority since 2014. The minutes may provide more detail and always gets media attention, but since Yellen held a press conference after the meeting and took questions the minutes may not hold any surprises.
At 9:30 the key indexes opened unchanged (DJIA +1, NASDAQ +1, S&P +2). 10 yr note rate 1.70% +2 bp. FNMA 3.0 30 yr coupon -5 bps frm yesterday’s close.
OPEC and Russia talking about a cut in production the last week. We don’t expect it to happen as we have noted. This morning OPEC reported an increase in its oil production in September to the highest in at least eight years and raised its forecast for 2017 non-OPEC supply growth, pointing to a larger surplus next year despite the group's deal to cut output. OPEC's report is the latest to show output is hitting new peaks. The September figure is the highest since at least 2008, according to a Reuters review of past OPEC reports. Crude trading lower this morning ahead of the 10:30 release of weekly inventories.
There is no way to sugar coat the rate markets now. Technicals bearish, the fundamentals bearish. Markets worry about a rate increase in Dec, the unprecedented coming election, and concerns about the exit of Briton coming soon.