A good week for the interest rate markets. Mortgage interest rates declined about 10 to 12 basis points, the 10 yr note yield continued to find strong technical support at 3.50%. The Treasury once again successfully sold $123B of notes in four auctions. Consumer confidence measured by The Conference Board declined more than expected, implying that consumers may not be as convinced of a recovery as the equity markets. Personal spending in September declined, new home sales were expected to be up slightly in September but declined 3.6%. Finally the stock market ended the week on what looks like the beginning of the long over-due correction that even the most bullish have been expecting for the past month. The DJIA declined 259 points last week, the rate markets benefited.
No Treasury auctions to think about, but replacing supply concerns the FOMC met on Tuesday and Wednesday with the policy statement at 2:15 Wednesday afternoon. There is an increasing buzz among traders that the Fed will alter the policy statement a little to take away market perception and that the Fed will keep interest rates (FF rate) low for a “considerable” period; removing “considerable” with verbiage that allows the Fed more flexibility in the future.
On Friday, we will get the October employment report; estimates are for job losses to be a lot less than in the past year, non-farm job losses are expected -175K as the week begins, with the unemployment rate increasing from 9.8% to 9.9%. This week, markets will contend with economic reports of substance; ISM manufacturing on Monday, Oct auto and truck sales on Tuesday, ISM services on Wednesday (and the FOMC statement), Thursday weekly jobless claims. We expect market volatility to remain high with the 10 yr note and mortgages confined to their narrow ranges that have kept interest rates for mortgages in a 15 basis point range for six weeks. Technically, the rate markets still have a very slight bearish bias as the week begins.
Last week, we discussed the volatility in U.S. equity markets, and that not only continued this week, it became more aggressive. But unlike the prior week’s modest moves, the major averages closed sharply lower this week as the dollar rebounded against the other major currencies. The S&P 500 lost 4%.
Once again the declines were broad-based as all ten sectors in the index ended lower, led by Materials (-7.1%) and Financials (-6.9%). The dollar was the biggest, if not the only, catalyst this week. In fact, the charts of the major indices are almost exact inverses of the U.S. Dollar Index (DXY). A weak dollar benefits the economy as it boosts exports, and investors are trading stocks based on the moves in the currency.
For example, equities attempted to rebound at the open on Monday, but the attempt stalled and a spike higher in the DXY late that morning led to a spike lower in the major indices. The volatility really came through in the last three sessions of the week.
A third day of gains in the DXY on Wednesday led to sharp declines in equities. Then a reversal in the greenback and modestly better-than-expected GDP figure on Thursday helped equities regain the prior day’s declines. The Advance reading for third quarter GDP came in at 3.5%, its first gain in four quarters, slightly better than the 3.2% consensus.
But those gains were short-lived as a resumption in the dollar rally on Friday led to the major indices making fresh week lows. Third quarter earnings season did continue this week, but there were fewer big names so they took a backseat. For the most part, companies continued to beat on the bottom lines, but top line figures and guidance were mixed.
Another round of longer-term Treasury auctions also took a back seat — $123 billion in 5-year TIPS and 2-, 5- and 7-year Notes — as they no longer seem to have as direct an influence on the equity markets. Looking ahead to next week, third quarter earnings season will wind down with even fewer big names on the calendar. The dollar will most likely remain in focus until the end of the week, when the always highly-anticipated Non-farm Payrolls figure is released for October.