MARKET INFORMATION: Yesterday the markets finally realized declining oil prices and deflation in Europe do actually matter. The stock market got tagged while the rush to US treasuries sent the 10 down to 2.04% -8 bps; 30 yr MBS price yesterday increased 34 bps. This morning more decline in oil and other commodities has run the 10 yr to 1.97% at 9:00 am 30 yr MBS price +16 bps. Europe is headed to deflation, markets however still totally unwilling to accept that as fact. Getting closer though, we warned about deflation in Europe for the last two months but until yesterday based on markets action, we were the lone rangers. Oil is, and will continue, to lead commodity prices lower. Waiting for a reversal may be a very long wait; at the end of last year crude oil inventories according to the Energy Dept. were 1.14 million barrels and that doesn’t count the 700 million barrels in the SPR. Normally at the end of the year refiners draw down inventories, this year supply increased at the end of the year. The increase reflects 2014’s 1.2 million barrels-a-day surge in U.S. supply and also Saudi Arabia’s decision to keep pumping oil to maintain its market share. Yesterday’s sell-off in global equity markets has abated slightly this morning but the near term path for US stock indexes is lower. At 9:30 the DJIA opened +12, NASDAQ +12, S&P +2; 10 yr 1.99% -5 bp and 30 yr MBS price +30 bps. The general belief is that the fall in oil prices will help economies, especially those like Europe that are large importers of crude. Low oil prices, the idea goes, is that consumers will have more discretionally spending alternatives but investors are beginning to question the benefits of low prices for consumers against an increasing fear of deflation in Europe and to a lesser extent in the US. No pricing power and no increases in wages is not an economic stimulant as many are currently believing. We want to continue to remind that market volatility in stocks and interest rates is going to be at high levels. The 10 yr has fallen frm 2.30% to 1.97% (the low so far today) in just eight trading sessions; expect two way trading in the next few sessions. Stocks, crude, interest rates will experience wide swings as investors and traders re-compute the underlying fundamentals. We expect the 10 will test its low yield of last October at 1.86% but not likely on this run lower. Not easy to shake solid opinions that declining commodity prices are not necessarily a plus for economic growth. Two economic reports at 10:00; Nov factory orders were thought to be down 0.6%, as reported orders declined 0.7%. The more important report, Dec ISM services index expected at 58.0 frm 59.3 dropped to 56.2; the new orders component at 58.9 frm 61.4 in Nov and the employment component 56.0 frm 57.7. The overall and components above 50 still indicating expansion. No noticeable reaction to the reports. Currently all focus is on oil and deflation fears and the coming Greek election. Those are not the only issues facing markets, tomorrow the minutes frm the 12/17 FOMC meeting will be released and on Friday the always critical employment report (Dec). Both will juice up trading volatility. NFP jobs are expected up 245K, private jobs +238K and the unemployment rate at 5.7% down frm 5.8% in November.
Posted on: Tue, 06 Jan 2015 18:12:44 +0000
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