Morning Report: Global sell-off continues

Posted on October 11, 2018 by Brent Nyitray

Vital Statistics:

Last Change
S&P futures 2758.75 -22
Eurostoxx index 359.68 -7.24
Oil (WTI) 71.9 -1.3
10 year government bond yield 3.18%
30 year fixed rate mortgage 4.95%

 

Stocks are heavy yet again as the global sell-off continues. Bonds and MBS are up.

 

The stock market sold off heavily yesterday on no real news. There wasn’t any one particular catalyst – some in the business press are blaming Powell’s comments last week, others are pointing to a lack of stock buybacks ahead of earnings, and others are talking about the FAANG stocks giving up their leadership position. Whatever the reason, it is important to keep in mind that the stock market is less than 5% from its all time high, and the VIX is hanging around in the low 20s. Stocks don’t go up in a straight line, and they don’t go down in one either.

 

The global sell-off is creating a flight to quality.  The 10 year bond yield is back below 3.2%. Mortgage backed securities will lag that move, generally wanting to make sure that it is “real.”

 

Notwithstanding the recent moves, investors have generally been pulling money out of bond ETFs. Note that shorter-duration funds did receive inflows, more evidence that money market instruments are beginning to attract assets after a long slumber.

 

The Producer Price Index rose 0.2% last month, in line with expectations. Transportation services (i.e trucking, rail and air freight charges) were the source of inflationary pressure. Energy prices are probably driving that, although labor shortages are an issue as well, especially in trucking. The PPI was the first of 3 inflation readings this week. We will get CPI today and Import / Export prices on Friday.

 

Wholesale inventories rose by 1% in September, which follows a strong increase in July. This should provide a boost for third quarter GDP numbers.

 

Hurricane Michael made landfall last night as a Category 4 storm. Initial damage estimates from Wells Fargo top $10 billion. Expect to see an uptick in delinquencies towards the end of the year. Gulf Oil production will be affected as well, although oil prices are generally correlating with every other asset as the global sell-off gathers momentum.

 

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