Rates tick higher as a deal to avoid a gov't shutdown looks promising

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Published Date 2/13/2019

Looks likely President Trump will go along with Congress and accept the bill moving to passage. The bill will give the President $1.375B to use, and if he looks hard enough, he might find other funds to divert for his wall. He isn’t supposed to like it but has to face the reality that standing firm is a loser both politically and for the economy. Shutdowns increase fears in the minds of investors that translate into pushing US and global equity markets down. Yesterday and early this morning the stock market improved on the belief there will be no shutdown. Early trading this morning in pre-open trading the stock indexes are following through from yesterday’s rally.

Still, the bill hasn’t been signed, it was expected today but partisan fighting over details as the legislation is being written may delay the release of text and put off voting until tomorrow. But those hang-ups aren’t expected to stop the deal from going through, according to people talking to the media familiar with the congressional negotiations.

The other focus this week; US/China trade is also moving forward although the prospects for an acceptable wide-reaching trade pact by March 1st is not likely. Trump has already opened the door to relaxing the deadline for higher tariffs if the current talks make significant progress.

Interest rates edged higher yesterday. The 10-yr added +2 bps to reach 2.68% with the DJIA running +372 points higher. MBS prices yesterday slipped 6 bps following the 10-yr. Early this morning the 10-yr was at 2.70%, up +2 bps from yesterday with MBS prices at 8:30 am EST down 8 bps from the close yesterday. There really isn’t much trading in the bond or MBS markets over the last six sessions. For more than a week the 10-yr has had no intraday movement from the opening in the morning to the close.

Data this morning; another week with MBA mortgage applications declining; overall composite are down -3.7%, purchase apps lost -6.0%, and refinance apps dropped -0.1%.

At 8:30 am ET the January Consumer Price Index , which was expected to add +0.1%, m/m was unchanged; CPI core (excluding food and energy) was expected to add +0.2% and did as expected. Yr/yr overall CPI added +1.6%, a little firmer than the 1.5% estimates; yr/yr core was expected up +2.1% but increased to 2.2%. Fractionally higher, but for the Fed nothing to be worried about. Tomorrow wholesale prices in January will be reported (+0.2% expected). CPI remains unchanged for a third straight month in January, leading to the smallest annual increase in inflation in more than 1-1/2 years, which would allow the Federal Reserve to hold interest rates steady for the time being.

At 9:30 am the DJIA opened up +100, the NASDAQ added +26, and the S&P bumped up +8. The 10-yr was at 2.71%, adding +3 bps.

We have been noting that our technical models were holding minor positive forecasts. As we said yesterday, “Our technical models still hold positive views, although if there isn’t improvement soon, the models and oscillators will give up the ghost.” This morning the weakness in Treasuries is unsettling, although with no inflation there's support. Currently, there is little reason for investors to add to safe haven investments in US treasuries. With the dollar increasing recently that also removes some of the incentives for foreign investors. The broader perspective is still supportive; US interest rates are likely to remain in narrow ranges. Take note that we still have a lot of the delayed economic releases from the shutdown. Stocks are gaining momentum since the shutdown and more positive trade talks with China help.

Source: TBWS

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