There is a modest risk-off tone to the market that is putting a bid in Treasuries as investors await the afternoon release of the FOMC minutes. The minutes, however, will be more hors d’oeuvre than entrée which will come on Friday with the Jackson Hole symposium (more on that below). Meanwhile, the risk-off tone is partially attributable to the dual Manafort/Cohen news and the political fallout that that may entail for the Trump administration and the November mid-term elections. It’s hard to game out where all this goes from here but the political uncertainty will likely weigh on equities. In the meantime, Politics 101 says the next move is to distract with other shiny objects like China trade, Turkey, NAFTA negotiations, and a host of other issues that can be brought to the fore which seems will keep the risk-off tendencies ascendant. In early trading the 10-year Treasury is up 5/32nds in price to yield 2.81% as the 2.80%-2.90% range looks solid.
|Economic News||2Yr-10Yr Treasury Spread||Agency Indications|
The minutes from the August FOMC meeting will be released later this afternoon and while that will be the key event for the day, this release frankly isn’t likely to garner the market moving impact of other minutes for a couple of reasons. First, the bigger Fed event this week starts on Friday with the annual Jackson Hole Symposium where central bankers across the globe gather and impress each other with their intelligence and monetary policy acumen. The second reason the minutes won’t carry overwhelming gravitas is a rate hike in September is a given and even a December rate hike is almost there as well.
Thus, there’s not much that is likely to be gleaned in the minutes that the market hasn’t largely priced in. The more compelling event will be the Friday speech at Jackson Hole by Fed Chair Jay Powell that is entitled ““Monetary Policy in a Changing Economy.” No details have been provided on what Powell will cover in that somewhat vague title but we suspect he might touch on the productivity conundrum, the flattened Phillips Curve and the lowered Neutral Rate and the impact they will have on monetary policy if their present state remains in place for the long-term.
Former Fed Chair Ben Bernanke often used the Jackson Hole gathering to illuminate with expansive speeches on monetary policy theories that other venues like FOMC statements and press conferences wouldn’t or couldn’t allow. He effectively bridged the divide between a completely academic treatise and operational monetary policy ideas. On the other hand, Janet Yellen didn’t try to break new ground with her speeches at Jackson Hole and we suspect Powell will be more in the mold of Yellen but he at least has the opportunity to surprise and perhaps make a declaration regarding the issues noted above.
The other Fed-related news of the week has to do with another broadside by President Trump on the rate tightening ambitions of the Fed remarking that it’s working at cross-purposes to the tax cuts and other economic-boosting policies. It’s interesting to note that while the stock market rally took a bit of a breather on the headline, and the dollar dipped a bit as well, the bond market hardly flinched and the reactive moves in the other markets were modest at best. We think that has it about right. We remain of the belief that Fed Chair Powell will continue to promote rate hikes as long as he thinks it appropriate given the Fed’s dual mandate. If anything, it’s likely to steel the Fed’s resolve to hike when a pause may also suffice just to prove their independence from an activist executive branch.
And in a final bit of Fed news Atlanta Fed President Raphael Bostic forcefully declared he would dissent on any rate hike that inverts the yield curve. While the September meeting is a given it will move the 2yr-10yr spread within arms reach of inversion so the December meeting– his last meeting in his current rotation a voting member—may be where he makes a stand.
Bostic was quoted as saying, “I pledge to you I will not vote for anything that will knowingly invert the curve and I am hopeful that as we move forward I won’t be faced with that, the market is going to do what the market does, and we have to pay attention and react.’’ While that’s a forceful statement his threat means little unless he can get a significant portion of the voting FOMC members in his direction. While some Fed regional presidents are sympathetic to Bostic’s position, they still make up a minority of policy makers. The guess here is that a December rate hike, still supported by the data, is done which inverts the 2yr-10yr curve. Given the obvious hesitance by a faction of the FOMC to countenance such an event, they may pause at that point to watch the economy perform in such an environment.
In other news, the weekly mortgage applications report is usually a third-tier data release, at best, but with five out of the last six weeks seeing declines in application activity the report has taken on increasing importance. The report has both purchase and refinance applications, and while refi’s have been declining for months given higher rates, the decline in purchase applications is a newer phenomenon and is now down 15.4% on a year-over-year basis. Applications lead closings by a month or two so continued weakness in purchase applications could signal slowing housing activity in the months ahead.
Recent housing sales releases have been of the middling variety with sales, both new and existing, moderating but not really falling. If the downward level of applications activity continues, however, it’s very likely the sales numbers will experience month-over-month declines. Analysts have been looking closely at data of all stripes for an impact caused by higher rates and housing, with higher prices and sticky wages, may be the canary in the coalmine in that regard.
2Yr-10Yr Treasury Spread
With Atlanta Fed President Raphael Bostic noting that he would not vote to knowingly invert the yield curve, it’s instructive to take a look at said curve today. The latest spread is 24bps, and assuming a 25bps rate hike in September and increasing odds of a December hike it’s looking more plausible that an inverted curve could become a reality before year-end. Bostic is just one voting member (whose term expires in 2019), and resistance to hiking into an inverted curve still looks to be a minority position on the FOMC. While ‘this time is different’ has been heard more than once, the recession-predictive ability of an inverted 2-10 curve is formidable. Thus, be on the lookout for more quotes like Bostic’s the closer we get to inversion. Maybe a pause is closer than we think?
Agency Indications — FNMA / FHLMC Callable Rates