Morning Report: Shades of 1937?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1871	-100	-4.87%
Eurostoxx Index	3103.0	-144.3	-4.44%
Oil (WTI)	38.83	-1.6	-4.00%
LIBOR	0.329	0.000	0.00%
US Dollar Index (DXY)	93.92	-1.084	-1.14%
10 Year Govt Bond Yield	1.98%	-0.05%
Current Coupon Ginnie Mae TBA	104.3	0.0
Current Coupon Fannie Mae TBA	104.1	0.1
BankRate 30 Year Fixed Rate Mortgage	3.86

The #1 trending topic on Twitter is #BlackMonday.

The global stock market sell-off continues this morning, with S&P futures down 64 handles. Bonds and MBS are up small.

Markets sold off hard overnight, with Japan down 4.6%, China down 8.5%, and Europe generally down 4.5%. Commodities are getting clocked, with oil down to $39 a barrel. Emerging markets are getting crushed.

The Chicago Fed National Activity Index rebounded from -0.07 in June to 0.34 in July.

The sell-off in risky assets over the past week has pushed out the market's forecast for the first rate hike out of the Fed. Futures are pricing in a first hike in the Dec - March timeframe. Over the weekend, Larry Summers penned an editorial in the Financial Times encouraging the Fed to stand pat for a while. He makes the point that the sell-off in assets has a tightening effect all by itself, and hiking rates in this disinflationary environment risks another 1937.

After stocks bottomed in 1932, the Dow Jones Industrial Average went on a tear, increasing almost fivefold in 5 years. In 1937, however they started a brutal 1 year bear market, where stocks got cut in half. The most common explanation for the sell-off was the Fed's tightening in late 1936 and early 1937. Now, there are a lot of reasons for the sell-off in the 1930s (markets sensing something afoot in Europe, FDR's undistributed profits tax, etc), but the Fed is very cognizant of their role in the "recession in the depression" and this will certainly guide their decision-making. 

With stocks hitting air pockets on the downside, you would expect to see Treasuries flying. Yes, they are up, but not by as much as you would expect. Supposedly there has been massive supply of Treasuries coming out of the Middle East, which is keeping a lid on prices.