Leading indicators double October expectations

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Published Date 11/20/2017

Slightly lower prices in MBSs and the 10 yr. note in early trade this morning, but nothing significant. Interest rates at the long end, including MBSs, have been unchanged for a month with minor blips but not trending either higher or lower. This week, liquidity will thin with the holiday and not much expected on the tax cuts. The House passed its version last week; last Friday the Senate Finance Committee voted 14-12 in favor of sending the tax bill to the Senate floor. The Senate is expected to vote during the final week of November. Trading activity will begin to thin out by Wednesday noon and only second stringers managing the desks on Friday. Both the bond and mortgage markets will close early Friday.

Yesterday Pres. Trump indicated he would not oppose removing the plan to end the penalty for those who do not buy insurance, one of the keys in Obamacare. Ending the penalty is meeting with resistance from some Senators concerned that if the penalty is removed, many will choose to go without insurance, particularly young people who don’t usually have many health issues thus leading to less revenue to cover older citizens. Trump changing his view, adding to the prospects the Senate bill will have less of a hurdle for passage. White House budget director Mick Mulvaney said on CNN’s “State of the Union” on Sunday. “If it becomes an impediment to getting the best tax bill we can, then we are OK with taking it out.” Republicans can only lose two votes in the Senate if a bill is passed (assuming that no Democrat would vote for the bill).

At 10:00, October leading economic indicators, expected +0.6% after declining 0.2% in September; as reported LEI exploded, +1.2%; one of the strongest months we have seen in years. No reaction to the increase; LEI is a composite of six various monthly reports that as we have noted have been better overall than markets were expecting.

There are two key data points this week: October existing home sales (Tuesday) and October durable goods orders (Wednesday); other than those two, markets are focused primarily on the tax cuts. Tax cut plans have and will continue to have, a dominant influence on markets. Tax cuts are a reality; only the details now that must be resolved. Democrats won’t vote for any tax cuts; not because they don’t think it necessary, all political. Markets concerned about the economy and the impact cuts will have on the economic outlook. Politicians concerned more about the mid-term elections next November.

90% of all trading over the last two months has kept the benchmark 10 yr. note between 2.40% and 2.30%, mortgage rates also locked in tight ranges. This week isn’t likely to move rates out of the range. Talks and comments from the White House and Congress over the tax bill(s) will get ink but not likely to have any real changes in rate markets or the stock indexes. The lack of inflation supporting the long end of the curve is making it easy to use the treasury markets as a hedge against anything that may go wrong in equity markets. Looking at the options markets, there has been a big increase in hedging against an equity market sell-off; total open interest for options on the $244B SPDR S&P 500 ETF Trust, or SPY, rose to the highest since October 2011.

This Week’s Calendar:

Today
- 10:00 am October leading economic indicators, expected +0.6%, as reported +1.2%
Tuesday
- 10:00 am October existing home sales (+0.9% at 5.44 mil from 5.39 mil)
Wednesday
- 7:00 am weekly MBA mortgage applications
- 8:30 am weekly jobless claims (240K -9K)
- 10:00 am U. of Michigan final November consumer sentiment index (98.1 from 97.8 two weeks ago)
- 2:00 pm FOMC minutes from October/November meeting
Thursday
- Gobble-Gobble
Friday
- Early closes for stock and bond markets (stocks at 1:00 pm, bonds at 2:00 pm)

Source: TBWS

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