Russell 2000 small cap decline continues, bond yields keep rising

The Russell 200 and other major indices reversed morning strength as traders digested Fed chair Powell’s lunchtime remarks, which were read as bearish on interest rates. Ten-year bond yields flirted with five percent, making equity markets look stretched. Oil rose sharply above $90 on fears that the Mid-East crisis would hit supply.

Bottom-line: Risk-off

TODAY’S MAJOR NEWS

Powell warns that rate rises aren’t over until inflation falls

Inflation is still too high, and more interest rate increases are possible if the economy remains hot, according to Federal Reserve Chair Jay Powell. "Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy," Powell said today. The next rate-setting meeting is scheduled on November 1. Powell is also watching the recent surge in long-term bond yields, up more than 50 basis points since the Fed’s September policy meeting on September 20. "We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy," he said.

Fed fund futures are trading 99% odds this morning that the central bank will hold rates steady when they meet in two weeks, although the odds of another rate hike by January are nearer 50 – 50. Wall Street seems to be finally believing the Fed’s promise to keep rates “higher for longer.” Higher yields at the long end of the yield curve are doing much of the work of the Fed, as acknowledged in recent statements by members of the central bank

Existing home sales are at the lowest level since October 2010

• Home sales fell 2% in September on last month and 15.4% over one year, according to the National Association of Realtors
• This is the slowest pace of sales since October 2010, when the market was in the midst of a foreclosure crisis.
• Homes for sale at the end of September fell 8% from a year ago
• The median home price was up 2.8% compared to a year ago

Labor market remains tight

We’ve now seen two weeks of solid gains for continuing claims despite notable drops in the weekly numbers, sending mixed messages – although the labor market remains tight on balance.

• First-time claims for unemployment benefits fell to 198,000 in the week ending October 14, below an expected 211,000, down from 211,000 the previous week
• The four-week moving average for claims fell to 205,750, down from 206,750 in the previous week
• Continuing claims for the week ending October 7 rose by 29,000 to 1.734 million, while the four-week moving average rose by 19,000 to 1.694 million

TODAY’S MAJOR MARKETS

Russell 2000 leads market decline

• The broadly-based Russell 2000 continued to lead the equity decline, down 1.1% after lunch, while the Nasdaq and S&P 500 fell 0.9% and 0.8%, respectively
• Foreign equity markets joined the sell-off overnight, led by a 1.9% decline in the Nikkei 225, 1.2% in the FTSE 100 and 0.3% in the DAX
• The VIX, Wall Street’s fear index, breached twenty to 20.8

Bond yields continue to rise

• 10-year yields traded up to 4.99%, with 2-year yields at 5.17%
• The dollar index fell 0.3% to 106.2
• Versus the dollar, Sterling and the Yen were unchanged, while the Euro rose 0.5%

Oil rallies strongly

• Crude oil prices resumed their bullish trend, up 2.2% to $90.2 per barrel, with traders again eying the hundred-dollar mark
• Spot gold prices rose 0.9% to $1,985 per ounce, while silver prices fell 0.2% to $23.0 per ounce
• The grain and oilseed sector was mostly lower in sluggish trade
• Soybean prices had been the leader to the upside, but the lead November contract saw buying interest evaporate near several layers of significant chart resistance.

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]