Why rates went on a wild ride yesterday and how things are shaping up today
Published Date 7/19/2019
There are two things that pushed interest rates lower yesterday; the shooting down of an Iranian drone that was focusing on a US warship and remarks from NY Fed’s John Williams.
The Iranian situation is worsening, but there has been little increase in the overall condition. The mid-east is a hotbed of potential escalation of military confrontation, and that hasn’t changed much in the broader assessment. The shootdown is one of those one-off events.
The remarks in a speech by John Williams yesterday is a different issue. Williams, the vice-chairman of the Fed’s rate-setting committee and head of the regional Fed bank in New York that implements those policies, said when rates and inflation are low, policymakers cannot afford to keep their “powder dry” and wait for potential economic problems to materialize. He did not say whether that view meant he would support a cut later this month, but the headlines drove short term and middle of the curve rates down as much as 9 bps on the 2 yr note. Traders took his statements as an indication the Fed may be ready to cut rates more than had been thought.
This morning Williams is taking back his speech yesterday in what some are characterizing as a possible rebuke from Jerome Powel and some other Fed officials. The Fed has not changed its view that it is concerned about the future implications of a long term tariff war with China and Europe; concern but not panic. Today Williams has backed tracked and said his speech was an academic thought and not a direct comment on Fed policy. Not often, if at all, that a key Fed official is taking back what he or she said in such a direct manner. “It’s better to take preventative measures than to wait for disaster to unfold,”…. “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
The result this morning of the two issues driving rate yesterday is reversing what rate markets did yesterday. The 10 yr in early trade back to Wednesday’s level at 2.05% and MBS prices down 9 bps after increasing 9 bps yesterday. Also, stock indexes doing better this morning on strong earnings from Microsoft.
At 10:00 am ET, the only data today, mid-month U. of Michigan consumer sentiment index, expected 98.6 from 98.2 on the final June reading. The index came in at 98.4.
Over the last 30 days, the 10 yr and MBSs have been digesting the prolonged declines in rates and increasing MBS prices. That is likely to continue through next week and into the following week when the FOMC meeting and Powell’s press conference. A 25 bp cut in the Federal Funds rate is totally discounted in the markets now. What the policy statement and Powell’s press conference reveals on the 31st of July may dictate the next movement in interest rates. Next week is full of housing data; existing and new home sales, FHFA home price index and the first look at Q2 GDP; the week after the FOMC meeting on Wednesday the 31st and two days later on Friday 8/2 the July employment report.
Source: TBWS
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