Wednesday, May 31, 2023

Maekets slide before the debt ceiling vote later today

Dow slipped back 261, decliners over advancers 5-2 & NAZ declined 91.  The MLP index was down 1+ to 220 & the REIT index edged lower to the 353s.  Junk bond funds drifted lower & Treasuries were in demand, reducing yields (more below).  Oil was off to the 68s after yesterday's sharp decline & gold gained 10 to 1987.

AMJ (Alerian MLP Index tracking fund)


 

 




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The compromise bill to raise the debt ceiling passed its first major test in the House Rules Committee, where it advanced to the House floor in a 7-6 vote, with 2 of the panel's 9 Reps opposing it.  A floor vote on the Fiscal Responsibility Act is planned for tonight.  Late stage support from GOP Thomas Massie cleared the way for the bill to be approved by 7 of the 9 Reps on the committee.  The panel's makeup is heavily skewed toward the party in the majority, 9-4, a setup meant to ensure that legislation does not get held up by a few dissenters siding with the minority.  Shortly before the committee cleared the bill, the nonpartisan Congressional Budget Office (CBO) released its assessment of the bill's impact on federal debt & deficits.  The CBO estimated that if the legislation were “enacted and appropriations that are subject to caps” were carried out as planned, “budget deficits would be reduced by about $1.5 trillion” over the next decade.  The CBO “score” was in line with what both parties were anticipating, but the additional certainty provided by the numbers could help shore up the bill's support in a full House vote.  The legislation is the product of a deal hammered out by House Speaker Kevin McCarthy & Pres Biden to cap federal baseline spending for 2 years in exchange for Rep votes to raise the debt ceiling beyond next year's elections & into 2025.  The bill still needs to pass the full GOP-majority House & the Dem-controlled Senate before Mon, when the Treasury Dept projects the US would be unlikely to have enough money to meet its debt obligations.  Yesterday, a bloc of more than 20 conservative Reps announced they would oppose the compromise deal.  They accused McCarthy of caving in to the White House in exchange for “cosmetic” policy tweaks, & not the transformative change they were promised.

Debt ceiling bill clears key hurdle, teeing up final House vote

Mortgage rates shot higher last week, as stronger economic data stoked more fear that the Federal Reserve will not lower interest rates anytime soon.  In turn, mortgage demand dropped to the lowest level since the end of Feb.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) increased to 6.91% from 6.69%, with points rising to 0.83 from 0.66 (including the origination fee) for loans with a 20% down payment.  That was the weekly average according to the Mortgage Bankers Association (MBA), but other daily reads saw the rate head over 7%.  As a result, mortgage applications to refinance a home loan, which are most sensitive to rate changes, decreased by 7% last week from the previous week, seasonally adjusted.  Application volume was 45% lower than the same week one year ago.  Applications for a mortgage to purchase a home dropped 3% for the week & were 31% lower than the same week a year ago.  “Application volumes for both purchase and refinance loans decreased last week due to these higher rates,” said Michael Fratantoni, MBA's chief economist, in a release.  “While refinance demand is almost entirely driven by the level of rates, purchase volume continues to be constrained by the lack of homes on the market.”  With home prices starting to regain steam, mortgage rates higher & inventory levels still well below normal, potential homebuyers are getting hit from all sides on affordability.  The higher rates are, the less inclined current owners will be to list their homes for sale.  The vast majority of homeowners today have mortgages with interest rates below 5%.

Mortgage demand drops to the lowest level in three months

Treasuries declined as investors fretted over the debt ceiling bill, which the House of Representatives is expected to vote on later in the day, & awaited key jobs data.  The yield on the 10-year Treasury was trading 4 basis points lower at 3.654% & the 2-year Treasury yield was last down by more than 3 basis points at 4.436%.  Yields & prices have an inverted relationship & one basis point equals 0.01%.  Jitters over the Fiscal Responsibility Act, which would raise the US debt ceiling & therefore prevent the gov from defaulting on its debt as early as Jun 5, continued.  Yesterday it cleared a key vote in the House Rules Committee with a 7-6 majority & is now expected to go before the House floor today, according to a tentative House voting schedule.  It the bill passes the House vote, it would then also need to be approved by the Senate before it could come into effect.  Politicians on both sides of the aisle have criticized the compromise struck between Pres Biden & House Speaker Kevin McCarthy.  At least 20 Reps said that they would vote against the bill.  Uncertainty about whether the central bank will pause or continue with its rate-hiking campaign, which aims to ease inflation & cool the economy, at its Jun policy meeting has spread in recent weeks.

Treasury yields fall as investors await debt ceiling deal vote

New economic data continues to be sluggish.  But traders are more concerned about the very big vote in DC later today.

Dow Jones Industrials

 






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