Equity futures flashed red in overnight trading as stocks and Treasury yields fell. As the U.S. market opened, investors were quick to try to bid stocks and yields higher, but quickly ran into a wall.
December Housing Starts fell -11.2% MoM, which is being blamed on the government shutdown, even though the shutdown probably didn’t have much to do with housing starts falling. On a year-over-year basis, housing starts fell -10.9%, the largest drop since March 2011. Home price growth also slowed to +4.18% YoY, the weakest growth since September 2012.
Consumer Confidence rebounded with the stock market and beat all estimates as confidence is back near its cycle highs. Buying intentions for automobiles and homes fell to their lowest level since July and buying intentions for large durable goods fell to their lowest level since January 2015.
Vice Chair Richard Clarida of the Fed mentioned last night that the Fed has not determined with the size of their balance sheet should be. Expect the balance sheet unwind to continue until further notice.
Today’s $32 billion, 7-year Treasury auction saw strong bidding from domestic buyers which sent Treasury yields lower across the entire yield curve. Ten-year Treasury yields are once again hovering over a key support level that if broken to the downside, will see a rapid drop in bond yields.
U.S. CEO’s are quitting at a record pace, eclipsing the number who quit during the last recession. CEO’s have been stripping cash from their former employers by exercising large corporate share repurchases so they can cash out their large holdings of company stocks. CEO’s don’t quit when things are good, but when things are bad or are about to be bad.
Fed Chair Powell is testifying before Congress today and tomorrow, as part of his duties as Fed Chair. Many have been hoping the Federal Reserve will support direct monetization of our debt, which is referred to as “Modern Monetary Theory.” When asked about MMT, Powell said, “the idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong…” He put an end to any speculation that the Fed will endorse MMT by saying, “And to the extent that people are talking about using the Fed — our role is not to provide support for particular policies,”
The broad equity market was fairly flat on the day as 2,800 on the S&P 500 remains a very strong resistance level. In the past six months, 2,800 has signaled the top of the market four times. Bulls should take note.
Treasury yields fell after Fed Chair Powell said the Fed will not support Modern Monetary Theory. Many Treasury bond Bears have been gambling the Fed would by shorting Treasuries. When forming an investment thesis, it’s important to identify what the big players in the market are doing. If the Fed was planning on supporting MMT, the largest banks would know this and be unloading their U.S. Treasury bonds. Since the banks are buying Treasuries at a record pace, they already knew the Fed’s stance.
Ten-year Treasury yields closed at 2.644%, just over the Maginot line at 2.620%. Thirty-year yields also closed lower and are moving into a zone of heavy support but will break it when 10-year yields break lower. When yields break support, stock prices will fall from a lack of liquidity.
The American Petroleum Institute reported a surprise draw after five straight weeks of builds. Crude inventories are Crude -4.2mm (3mm exp), Cushing +2mm, Gasoline -3.8mm, and Distillates +400k. The official government report will be released tomorrow morning. Crude oil traded higher following the report.