The Day Ahead: ADP, ISM, FOMC

Interest rates are rallying and U.S. equity futures are pointing slightly upwards following yesterday’s mid-term elections and ahead of the FOMC’s newest policy announcement.

The 2s/10s curve is 2bps flatter at 222bps wide. The 10yr note is +7/32 at 100-16 yielding 2.567%(-2.7bps). The December delivery FNCL 3.5 is +0-07 at 100-21 and the FNCL 4.0 is +0-04 at 103-00.

S&P 500 futures are trading 1.50 point higher at 1,194.25 and Dow futures are 18 points up at 11,170

Republicans picked up 60 seats in the House and 6 seats in the Senate in Tuesday’s mid-term elections. The GOP now has 239 representatives versus the Democrats’ 183 in the House, well above the 218 needed for a majority. Democrats retained control of the Senate with 51 representatives versus the GOP’s 46.

John Boehner of Ohio is to replace Nancy Pelosi as speaker of the House.

Meanwhile, investors are awaiting the FOMC decision this afternoon, in which the central bank is expected to divulge details of a new quantitative easing program. Investors also anticipate a positive employment report this Friday.

Key Events Today:

7:00 ― As homeowners take advantage of low mortgage rates, the weekly MBA Mortgage Applications index continues to exhibit a high level of refinancings, but demand for purchase applications remains weak at near 14-year lows.

Today’s data for the week ending Oct. 29 indicated that mortgage loan applications decreased 5% from one week earlier. Refinancings fell 6.4%, marking the third straight decline, while purchased advanced 1.4% but remain down 28% versus this time last year. 

Also, the average 30-year fixed-rate mortgages increased to 4.28% from 4.25%.

8:15 ― The ADP Employment Report, a tool used for predicting the “official” employment numbers on Friday, is expected to report that 20k new private jobs were created in October. The report’s usefulness isn’t always clear though ― last month it said 39k private jobs vanished in September, while two days later, the Bureau of Labor Statistics said 64k jobs were created.

10:00 ― The ISM Non-Manufacturing Index, which measures the services, construction, and financial sectors, is anticipated to come in at 53.5 in October, pretty unchanged from the 53.2 a month before. At just a few points above the 50 level indicating growth, the index suggests the economy is growing but only modestly, much like the GDP report last Friday.

“Employment conditions improved marginally in October, and freight volumes picked up, reversing a slight decline in the preceding month, but new orders momentum probably eased downwards,” said economists at IHS Global Insight, who added that financial market conditions also generally improved.

2:15 ― The Federal Reserve is expected to release the details of a proposed second round of quantitative easing in the latest FOMC Meeting Announcement.

Economists at BBVA say the market has already priced in $1 trillion of additional long term treasury securities purchases, but the final number and timeline are still unclear. 

“A gradual approach is feasible, and the announcement amount could be significantly smaller than expected,” BBVA said.

The forecasting team at Deutsche Bank believes the Fed will decline from committing to a total amount of asset purchases. Instead, it could provide a maximum amount of Treasury buying to undertake between FOMC meetings, which are every six or seven weeks.

“We envision the Committee stating its intention to purchase up to $125 billion of Treasuries on an inter-meeting basis, with policymakers then reviewing those purchases at the ensuing meeting,” Deutsche Bank predicts. “This means we could see $1 trillion of additional Treasury purchases per annum in addition to the roughly $400 billion in maturing MBS that will be replaced by Treasuries.”

IHS Global Insight believes asset purchases may be calibrated to the performance of the economy. 

“So if growth and inflation revive fairly quickly, the Fed could adjust its end target downwards, and vice versa,” they wrote. “Market expectations have been all over the map, but at this point at least $500 billion is already discounted in rates and equities, so if the Fed announces less than this amount the market reaction would be mildly negative.” 

 
ISSUANCE
* 09:00 Treasury Refunding Announcement (3-, 10- and 30-year coupons) (e:$70 bln)
* 11:30 Treasury auctions $25 bln 56-day SFP bills
* Fannie Mae note announcement
* Seminole Tribe, $330m 7-year [talk 7.75-8%]; BAML; Pricing 11/3
* Telefonica, benchmark 5-year expected; Citi/DB
* Banco do Nordeste do Brasil, USD 5-year; DB/HSBC/UBS
* IPIC, benchmark deal expected; BAML/GS/HSBS/NBAD/RBS/StanChart
* KazMunayGas, USD deal expected; CS/RBS/UBS
* Odebrecht Drilling, $1.5 bln 10-year; BBS/DB/HSBC/Santander; roadshow this week
* Sinochem, benchmark 2-part 10s/30s [talk low 200s(10s);mid 200s(30s)]; Citi/HSBC/UBS