U.S. manufacturing activity hits 13-year high

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Published Date 10/2/2017

MBS prices started generally better this morning after declining 19 bps Friday, even though the bellwether 10 yr. note barely moved. This week has the key monthly employment data (September) and a number of other data points before we get to Friday. In early pre-market trading in the US, stock indexes were better: at 8:45 am the 10-yr. note at 2.33%, generally unchanged from Friday.

Let us be the first to bring up the month of October’s travails in the stock market: you are likely to hear about it a few times. October is the month that has seen the two worst stock market collapses during the last 100 years. Oct 29th, 1929, the US stock market marked the beginning of the Depression that lasted over 10 years (even though in 1932 the DJIA actually recovered and made a new high before finally capitulating). Monday, October 19th, 1987 US and global markets crashed; the S&P dropped 20+%. When the dust settled after three sessions of selling that actually began the prior Thursday, it turned out much of Wall Street had been selling short. OK, it isn’t likely to happen this month, but it will get noticed by media. Sidebar: the ’87 crash marked the end of many Wall Street brokerage firms; over 15 firms closed or merged into six or eight firms, consolidating trading and risk.

Two reports at 10:00 am: Sept ISM manufacturing index expected at 58.0 from 58.9, increased to 60.8, the highest reading in years. August construction spending, expected +0.3%, was up 0.5%, but July, originally reported -0.6% was revised to -.12%. The strong ISM index pushed the 10 yr. up 1 bp to 2.34% and MBSs prices slipped to +2 bps from +9 bps at 9:30.

The near-term key technical support for the 10 yr. note is 2.32/2.34%; the last two sessions have kept the 10 in check and so far this morning in early trading still holding. A break above the 2.32% area will push the 10 to 2.40%, the last vestige of support and would project to this year’s high rate of 2.62%. The yield on the note rose 30 basis points in September, its biggest monthly move this year. The risks are building that 2017’s unexpected rally in Treasuries will now break if fresh economic stimulus from Washington delivers stronger growth, higher inflation, and larger budget deficits. Look it another way: as long as the US and global equity markets continue to gain, there is very little likelihood that interest rates will move; or if North Korea resurrects geopolitical tensions. Much also depends on the appetite from foreign investors that have been supportive for US debt markets.

A sad day in America: the mass shooting in Las Vegas. A very disturbing trend of lone wolves.

This Week’s Calendar:

Monday
- 10:00 am Sept ISM manufacturing index (expected at 58 from 58.9; as reported 60.8)
  - August construction spending (expected +0.3% from -0.6% in July, spending increased 0.6% but July was revised to -1.2%)
Tuesday
- Sept auto and truck sales (expected at 16.7 million from 16.1 million in August)
Wednesday
- 7:00 am weekly MBA mortgage applications
- 8:15 am Sept ADP private jobs (+150K from 237K in August, we expect August jobs will be revised lower)
- 10:00 am Sept ISM services sector index (55.9 from 55.3 in August)
- 3:15 pm Janet Yellen speaks
Thursday
- 8:30 am weekly jobless claims (265K -7K) August US trade deficit (-$42.6B from -$43.7B in July)
- 10:00 am August factory orders (+0.9% from -3.3% in July)
Friday
- 8:30 am Sept employment data (unemployed. rate 4.4% unch, non-farm jobs +95K, private jobs 117K, average hourly earnings +0.3%, average hourly earnings yr./yr. 2.6% from 2.5% in August, manufacturing jobs +11K, labor participation rate 6 62.8% from 62.9% in August)
- 10:00 am August wholesale inventories (+0.7%)
- 3:00 pm August consumer credit (+$16.0B from +$18.5B in July)

Source: TBWS

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