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Market Brief – Tuesday 10/22/19

Stock and bond investors continue to duke it out with stock investors trying to bring the bond market down in order to flush bond investors back into stocks. Stock investors are running out of time as the market is being led by only a few stocks now and volatility is low. Bond investors know the economic data remains on their side, yet the market keeps pressing interest rates higher. Only one side will win, and the battle is soon to end as stock investors are running out of road.

The bond market has been leaving clues to investors that it will be the winner, as several gaps between closing and opening yields have been made recently. Nearly every gap in yields, or price in the case of stocks, is eventually filled. The more gaps formed, the more likely those gaps will be filled in the short term. Ten- and thirty-year yields have a couple of gaps, with one right near their all-time lows.

Treasury yields gapped down in overnight trading and rose in early trading to close their overhead gaps while stock prices got off to an early start as stock investors try to push stock prices back to their all-time highs. It is worth noting that back in September when stock prices came near their all-time highs, 10-year Treasury yields hit 1.9%. With stock prices back near their September highs, 10-year Treasury yields are holding at 1.8%, validating the bond market is not buying into the equity market euphoria.

The USDA has admitted that the Fall growing season has ended due to freezing temperatures. However, the USDA has also decided to maintain its lofty yield estimates without any downward revisions, as if the crops have matured to perfection. Why the USDA is doing this is unknown, but until the final harvest numbers come in, crop prices are likely to remain low.

The New York Fed pumped $99.9 billion of short-term liquidity into the markets today. The 14-day term repo operation was 1.5 times oversubscribed as bids for $52.5 billion in loans came in against the NY Fed’s $35 billion offer. Overnight repo demands also increased as the NY Fed accepted $64.904 billion of bids. The NY Fed also purchased $7.501 billion of short-term Treasury Bills this morning but had offers of $41.472 billion, making the offer 5.5 times oversubscribed as the banks scramble for liquidity.

Validating my view that long-term interest rates are too high, Existing Home Sales missed expectations for a -0.7% drop in September by falling -2.2% for the month. Existing home sales SAAR fell from 5.50 million to 5.38 million as lower interest rates are not offsetting higher home prices. Home prices are up 5.9% over this time last year with housing inventory at a 4.1-month supply.

The Richmond Fed Survey of Manufacturing Activity shows improvement as the survey rose from -9 in September to +8 in October, showing manufacturing is improving. Manufacturers added employees, but wages fell as the workweek increased. While the report did show improvement, prices received crashed indicating that lower prices aren’t low enough to increase demand.

Today’s $40 billion 2-year Treasury Note auction saw strong demand as foreign bidders took 54.8% of the auction and domestic bidders took 14.0% of the auction, leaving securities dealers with 31.2% of the total auction. Yields dipped slightly following the auction.

After winning the first motion, Boris Johnson’s “program motion” to expedite the Brexit withdrawal was defeated. Brexit will now have to take a more reasonable timetable. After briefly turning higher on the passage of the first bill, stocks and Treasury yields fell after the second bill was defeated.

After injecting nearly $100 billion into the financial system today, the S&P 500 couldn’t hold 3,000 points as it closed four points below the psychological mark. Treasury yields fell along with stocks following the Brexit vote that will slow the process down. Crude oil rallied today on hopes that OPEC+ may further cut production at their upcoming December meeting.

The American Petroleum Institute reported crude oil inventories as Crude: +4.45mm (+2.75mm expected), Cushing: +1.988mm, Gasoline: -702k, Distillates: -3.491mm. Crude oil fell in after-hours trading following the report.