Rate Markets Head Lower On Extreme Volatility

Markets are started today with more selling in stock indexes and better interest rates. At 8:30 am ET Jan personal income and spending; income increased +0.6% on forecasts of +0.4% (Dec revised to +0.1% from +0.2%), spending +0.2% on forecasts of +0.3% (Dec revised to +0.4% from +0.3%). PCE price index +0.1% as expected, yr/yr +1.7% with estimates at +1.8%; Core PCE +0.1% better than +0.2% expected, yr/yr +1.6% against +1.8% expected. No reaction from markets; it’s more of the old data that markets have already ignored with current expectations that the US economy and consumers are going to worsen this year.

The virus continues to spread, and the fear continues to increase. Germany quarantined 1,000, Switzerland banned large events, Iran and South Korea revealed more coronavirus cases. Nigeria, Africa’s most populous country, confirmed the first infection south of the Sahara desert, Mexico had its first preliminary positive test. At the same time, Australia, New Zealand, the Netherlands, and Britain all reported new cases, Iran reported 143 more infections.

The next FOMC meeting is March 17th and 18th. Increasingly, now markets are looking for the Fed to lower interest rates at the meeting. Markets are now pricing more than a full 25-basis-point cut and even looking to June for another cut. March expected to get a 25 basis point cut, a 100% probability, and 71% of a 50 basis point cut. Some believe that there’s no need for a cut other than supporting businesses managing their balance sheets. Rates are already pricing in a cut, but we don’t see how it will help the economic outlook. More and more analysts, economists, and Wall Street firms are lowering growth forecasts, some even forecasting no GDP growth this year. Forecasts these days are driven by increasing fears as the equity markets in the US are dropping rapidly. Before the virus, the stock market was in extreme overbought condition. It was stretched to excess; the virus was the trigger of the pullback. The near term bearishness about as overdone as the bullishness was at the beginning of February.

At 9:30 am ET, the DJIA opened -704. NASDAQ -250, S&P -84. 10 yr at 9:30 am 1.18% -9 bps, the 2 yr note down 23 bps to 0.92%. MBS prices +27 bps from yesterday and +26 bps from 9:30 am yesterday.

At 9:45 am ET, February Chicago purchasing mgrs. index expected at 45.8 from 42.9 in Jan; the index increased to 49.0.

At 10:00 am ET, another outdated report, the U. of Michigan final Feb consumer sentiment index expected at 100.9, increased to 101.0.

The weekend will tell us the direction of the rate markets for Monday. If the virus becomes more understood and the cases start to slide, rates are likely to jump higher. Of course, the opposite is also true.

Source: TBWS