By Danny Jasper, Senior Vice President, Capital Markets

The rally in mortgages continues for a second consecutive day Wednesday morning as China once again devalued their currency against the U.S. dollar, sending U.S. equities much lower and causing a strong flight-to-quality bid to U.S. treasuries.  Overnight currency trading showed the Yuan down another 1.6%, taking the two-day total to 3.5% lower vs. the U.S. dollar.

Investors are speculating that the People’s Bank of China (PBOC) is targeting a 10% total devaluation to get their currency back to pre-2010 levels, though at this point the PBOC target is still unclear.  A 10% move lower in the Yuan would translate to a roughly 2% increase in the value of the U.S. dollar. The move shouldn’t be a huge issue for the Fed and likely wouldn’t have an effect on Fed thinking for whether or not September is still on the table for their first rate hike.

However, if a global currency war ensues and other countries move to follow the actions made by China in an effort to stay competitive, the Fed would potentially have a much larger issue on their hands that would handcuff them from raising rates, as every 10% on average in U.S. dollar value increase creates approximately a 1% drag on economic growth.  After closing the day Monday at 2.23%, the 10-year treasury dropped to the 2.14% range yesterday and is currently down to 2.09%.  With limited U.S. economic data to digest, all focus is on the situation in China.

Economic Data: Mortgage Applications Increase Slightly

Today is a light day for U.S. economic data, with only the JOLTS (Job Openings and Labor Turnover Survey) report and MBA mortgage applications numbers.  The JOLTS report showed a drop in the number of job openings from 5.35 million to 5.249 million, which is still indicative of a strong labor market.  Mortgage applications for last week increased by 0.1%, with purchase applications falling 3.5% and refinance applications up 3.1%.  The 30-year fixed conforming average rate nationwide held firm at 4.13%.  Later today, the Fed will sell $24 billion in 10-year notes via auction.

Currently, equities are continuing a downhill slide after the DJIA fell over 200 points Tuesday.  The DJIA is down 222 points this morning and sits at 17,178.  If it holds here through market close today, it would be the largest two-day loss in equities since January.  The S&P 500 fell 20 points yesterday and is down another 25 this morning to 2,059.