Morning Report: Durable goods disappoint

Vital Statistics:

 

Last Change
S&P futures 3010 7.25
Oil (WTI) 56.09 0.04
10 year government bond yield 1.77%
30 year fixed rate mortgage 4.03%

 

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down small.

 

Durable goods orders disappointed as trade fears and global economic weakness weighs on the manufacturing sector. The headline number was down 1.1%, versus expectation of a 70 basis point drop. Much of the weakness was driven by a drop in aircraft, probably related to the issues with the Boeing 737 Max.  Ex-transportation, orders were down .3%. Most worrisome was the drop in core capital goods, which is a proxy for business capital expenditures and signals that business is concerned about future growth. You can see the deceleration in growth in the chart below:

 

capex

 

Initial Jobless claims fell to 212,000, which is a historically strong number. So despite the weakness in the manufacturing sector, the labor market remains relatively robust.

 

Delinquencies ticked up marginally in September to 3.53%, but are down 11.2% from a year ago. Foreclosure starts came in at 39,400 which is up about 9%, but still down a YOY basis. Prepay speeds are still elevated, up 121% from a year ago. With high prepay speeds, you can expect to see weakness in the higher coupon MBS, which is why increasing the loan rate doesn’t buy the borrower much in terms of adding lender credits. It also makes loans with lots of Fannie Mae adjustments (investment, cash out etc) almost impossible to get a par rate.

 

The Fed is increasing the amount of liquidity in the system, possibly as a result of the cash crunch last month in the repo markets. “It’s just more evidence the Fed will not back off as year-end gets closer,” said Mike Schumacher, global head of rate strategy at Wells Fargo Securities. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.” Separately, the Fed funds futures are pricing in a 94% chance of a rate cut next week.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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