Kind of a quiet trade early this morning, the US stock indexes very early were weaker but by 9:00 returned to about unchanged from yesterday. Treasuries and MBSs opened about unchanged. Yesterday’s massive selling in US stocks has fed into Europe’s markets this morning; not only Europe but Asian markets are also weaker.
August import prices were expected -0.8% but declined 0.5%; export prices were thought to be -0.1%, as reported down 0.2%. YR/yr import price down 0.9%, export prices yr/yr -0.2%. The declines re-affirm the deflationary fears that are increasing, led primarily by Europe where inflation in the EU is at a meager 0.4%. Much of the decline in imports comes from the rapid decline we are experiencing in oil prices. Strength in the dollar is containing import-price inflation which, according to Wednesday's FOMC minutes, has the doves at the Federal Reserve concerned that inflation will remain below the 2% policy target. This chart shows today’s data and it is a graphic look at what is happening to prices in the last three years. Tilting at windmills; central bankers looking of inflation but see nothing.
The only thing on the calendar the rest of the day; Treasury will report the Sept budget, expected +$72B; also the annual deficit as the US fiscal year ended at the end of Sept. Not a market mover.
At 9:30 the DJIA opened -14, NASDAQ -31, S&P -3. 10 yr 2.31% -1 bp; 30 yr MBS price -6 bps from yesterday’s close.
How about the price of crude oil recently? Early this morning $84.20 -$1.57; two months ago traded over $100.00. Gasoline prices are declining, good for consumers but we doubt it will amount to a lot more discretionary spending. Meanwhile the Saudis are increasing output; not a normal reaction when a commodity price is falling but the Saudis have a different reason. They do not want to lose their global market share; in an attempt to hold it the plan is to drive the price down to levels that makes US fracking production uneconomical. For the first time in 45 years the US is producing enough oil to meet our domestic demands; let’s not think about cutting domestic production.
The IMF, the World Bank, the Federal Reserve are all changing their outlooks now. Lower global growth than what was thought just three months ago has shaken that hard core bullish outlook for US and global equity markets. As long as the little people (consumers) don’t see improvements in their paycheck and worry about having enough income to pay bills, there is little reason to believe the equity markets, earnings and inflation have any foundation for continued improvements. This is earnings season, it will last another three weeks; what the reports reveal should provide another level of analysis for economists and analysts.
The bond and MBS markets are technically overbought when seen in the near term. It will take more hard selling in equities now to trump the overbought oscillators. At 10:00 the 10 yr is unchanged this morning and MBSs a little weaker in price. Key indexes opened weaker but as we hit the send button the indexes have managed to improve a little. We recommended locking yesterday afternoon, we hold to that this morning. Still bullish that there is more improvement ahead, presently it is time to ease off.
PRICES @ 10:00 AM
10 yr note: -1/32 (3 bp) 2.32% unch
5 yr note: -1/32 (3 bp) 1.57% +1 bp
2 Yr note: -1/32 (3 bp) 0.45% unch
30 yr bond: -2/32 (6 bp) 3.05% unch
Libor Rates: 1 mo 0.151%; 3 mo 0.229%; 6 mo 0.324%; 1 yr 0.567%
30 yr FNMA 3.5 Nov: @9:30 103.14 -6 bp
15 yr FNMA 3.0 Oct: @9:30 103.71 -6 bp
30 yr GNMA 3.5 Oct: @9:30 104.29 -11 bp
Dollar/Yen: 107.93 +0.09 yen
Dollar/Euro: $1.2639 -$0.0052
Gold: $1222.70 -$2.60
Crude Oil: $85.26 -$0.51
DJIA: 16,705.47 +46.22
NASDAQ: 4357.88 -20.45
S&P 500: 1930.30 +2.09