Market Brief – Wednesday 2/12/20

In a repeat of yesterday, stocks rose overnight on contracting Eurozone industrial production data, Treasury yields rose and crude oil rose on hopes OPEC+ will cut production. Investors were also looking forward to Fed Chair Powell’s testimony before the Senate today where he said the next economic downturn will see massive amounts of Quantitative Easing, which is bond bullish and stock bearish.

Japan’s January Machine Tool Orders crashed -35.6% from this time last year. Eurozone Industrial Production fell -2.1% in December and -4.1% from this time last year as a sign the Eurozone is heading into a recession before one of its largest trading partners, China, was inflicted by the Coronavirus.

Mortgage applications rose +1.1% over last week with purchase applications falling -5.8% and refinance applications rising +5.0%. When refinance applications rise faster than purchase applications, it forces banks to adjust the maturity of their collateral to match the length of the new mortgage. With banks needing to buy 30-year Treasuries against this massive increase in refinances, it puts downward pressure on long-term Treasury yields.

The Department of Energy reported crude oil inventories as Crude: +7.459mm (+2.987mm expected), Cushing: +1.668mm, Gasoline: -95k (+546k expected), and Distillates: -2.013mm (-557k expected). Crude remained slightly over $51 per barrel following the report. The market is showing its hand as $50 per barrel is the critical level for crude oil. Should it sustainable break that price level, look for heavy selling and much lower crude oil prices.

The New York Fed accepted bids for $40.6 billion of overnight dollar loans.

Today’s 10-year $27 billion Treasury Note auction was met with strong demand as foreign bidders took 61.3% of the auction and domestic bidders took 14.8% of the auction, leaving securities dealers with 23.9% of the auction. Treasury yields were flat following the auction.

Stocks closed higher as computer-based trading strategies continue to buy stocks based on their two-year lookback volatility formula. Treasury yields closed higher but managed to find buyers. After consolidating between October 2019 and late January 2020, Treasury yields are once again in a small consolidation pattern that will lead to significantly lower Treasury yields and much higher bond prices.