Published Date 7/11/2017
Volatility in the stock market today; the DJIA at one point -166 at about noon, then the index recovered to close a little better. Stocks knee-jerked when Donald Trump Jr. released some of the e-mails with a Russian lawyer. The bond and mortgage markets quiet again today but with minor improvements, but did not react much when the stock indexes fell.
This afternoon the Senate announced it would delay its vacation; you know how hard they work and need a rest. Mitch McConnell, announced that the beginning of the late-summer break would begin in the third week of August. The Senate had previously been scheduled to start its standard August recess on July 31.
Leal Brainard, Fed Governor, saying today that the Fed may not need to lift short-term rates much higher to keep the economy on an even keel. She is ready for the Fed to begin reducing its balance sheet ($4.5 trillion). She is concerned that inflation isn’t increasing as the Fed and most economists have been believing. Finally, someone may be seeing the light.
Philadelphia Fed President Harker told the WSJ today that another rate hike may be necessary this year. "Let's start the process of ceasing reinvestment...Let's see how the market reacts to that, and then consider the third rate increase this year-whether that occurs or not." Inflation "could be transitory."
Fed officials must be on the same page but based on the two remarks today; it is hard to see it. Tomorrow Janet Yellen will testify at the House Financial Services Committee; Thursday at the Senate Banking Committee.
Treasury sold $24B of 3 yr notes this afternoon. The rate 1.573%, cover 2.87, indirect bidders took 52.7%, directs 9.9%. Based on the last 12 3 yr auctions it was a good one. The averages of the last 12; 1.268%, cover 2.80, indirects 51.9%, directs 8.6%. OK, but we are focused on tomorrow’s $20B 10 yr note auction.
Atlanta Fed GDPNow out this afternoon with its update based on data since the last update. The update lowered the Q2 GDP from 2.7% to 2.6%. “The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 2.6 percent on July 11, down from 2.7 percent on July 6. The forecast of second-quarter real GDP growth fell 0.2 percentage points to 2.5 percent after Friday's employment release from the U.S. Bureau of Labor Statistics. The model's estimate of the dynamic factor for June—normalized to have mean 0 and standard deviation 1 and used to forecast the yet-to-be-released monthly GDP source data—decreased from 1.08 to 0.34. The forecast of the contribution of inventory investment to second-quarter real GDP growth increased from 0.57 to 0.61 percentage points after this morning's wholesale trade report from the U.S. Census Bureau.” The next revision is this Friday.
Weekly MBA mortgage applications in the morning. Weekly crude oil inventories at 10:30 and tomorrow afternoon the Fed will release its Beige Book, Fed staff details from the 12 Fed districts.
MBS prices +11 bps from 9:30 this morning but with Yellen tomorrow and our technicals are bearish. When the stock market burped this afternoon the 10 yield fell to 2.35% -3 bps and has held most of it into the close.
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