- Markets begin week with mild losses. Equities finished Monday’s session slightly lower as investors await Wednesday’s Federal Reserve Bank (Fed) decision and any comments pertaining to the potential path toward rate normalization. Energy stocks, which closed down 1.1%, were further hurt by a 2.4% drop in the price of WTI crude oil; the consumer staples space was the best performing on the day, up 0.7%. COMEX gold prices increased by 0.8% and bonds continued last week’s losing streak, with the 10-year yield climbing 2 basis points to 1.90%. Final tallies: Dow -26.64 to 17977.11, Nasdaq -10.44 to 4895.79, S&P 500 -3.79 (-0.18%) to 2087.79.
- Crude takes stocks higher; earnings in focus. WTI crude is up 2% this morning, leading U.S. markets higher. Investors are also looking ahead to a slew of earnings results today, including tech giant Apple, which reports after the closing bell. The market expects no changes from the Fed’s April policy meeting that begins today, though wording will be key in Wednesday’s statement release. Gold is trading modestly higher and the yield on 10-year Treasuries is above 1.9%, matching the highest levels in a month. Overseas, European shares are near flat and Asian stocks finished mixed, with the Shanghai Composite up 0.6% and the Nikkei down 0.5%. Both recovered off of mid-session lows.
- High-quality bonds post worst week of 2016. The Barclays Aggregate Bond Index posted its worst performance of 2016 last week; but that’s not saying a lot, given its persistent strength this year and a still impressive 3.0% year-to-date return through April 25, 2016. Treasury yields increased by 0.08% to 0.15% between 2- and 20-year maturities last week. Modest weakness persisted yesterday. Yields overall, however, remain lower for the year, and the 10-year Treasury yield is still below the psychologically important 2.0% level.
- The ECB’s expanded quantitative easing is a tailwind for bonds globally and corporate bonds in particular. The European Central Bank (ECB) didn’t change interest rates last week, but it did share the details of its previously announced Corporate Sector Purchase Programme. The scope of ECB corporate bond purchases–both eligibility of bonds for purchase and amount–was wider than expected, suggesting a bigger boost to corporate bond prices than initially anticipated. On balance, the news was particularly positive for corporate bonds, although doubts linger on the actual implementation of the program given its size and the liquidity of corporate bond markets in Europe.
- Still all about oil for high-yield. High-yield bond and oil prices remain very tightly linked. A chart of high-yield bond spreads (inverted) continues to track extremely closely with oil price fluctuations. The rolling three-month correlation between high-yield spreads and oil reached -96% on Friday (April 22), an almost perfect inverse correlation and as strong as any point since oil weakness began in mid-2014. Default expectations among energy names continue to be a primary driver of high-yield bond prices.
- High-yield’s rally since mid-February is extreme. High-yield’s recent rally, which began on February 11, 2016, has been one for the record books. The Barclays U.S. High Yield Index outperformed the Barclays U.S. Aggregate Index by 12% from February 11 to April 22. Rolling 10-week outperformance of this magnitude has occurred just once in the last 15 years, during the recovery of 2009. The rally in high-yield has been driven primarily by relative strength in high-yield energy, the spread of which has halved since February 11, falling from 19.6% to 9.9% on April 22. The strength of the rally suggests caution going forward.
- Inflation expectations notch up to recent highs. Inflation expectations moved up last week, primarily in response to higher oil prices. The 5-year breakeven inflation rate implied by Treasury Inflation-Protected Securities (TIPS) and Treasury yields moved to its highest point since mid-July 2015. Although making a recent high, it is worth noting that the current 5-year breakeven of 1.6% is still below the 5-year average of 1.7% and 10-year average of 1.8%.
- Muni ratios decline as Treasury yields rise. Municipal bonds proved more resilient to Treasuries as the 0.12% to 0.15% rise in 10- and 30-year Treasury yields had a much more muted impact on the municipal market. As a result, municipal bonds outperformed Treasuries on the week. The Barclays Intermediate Municipal Bond Index was unchanged for the week, while the Barclays U.S. Treasury Index returned -0.8%. The notable disparity led to a sharp decline in municipal-to-Treasury yield ratios to the more expensive end of a three-year range.
- What to make of negative interest rates around the globe? Amid another batch of central bank meetings, this week’s Bond Market Perspectives publication, due out later today, discusses the negative rates experiment across the globe and potential implications for investors. The effectiveness of negative rates is questionable at this early stage, with knock-on effects to financial markets in the form of flatter yield curves, lower inflation expectations, and lower yields overall.
- Big money continues to show caution. On the heels of the smallest gain for the S&P 500 since last July that occurred on Friday, the S&P opened up lower yesterday, but finished down by only 0.2% by the end of the day. For the month, April is up 1.4%, which would be the second straight monthly gain after three straight lower months. Remember, that was the first three-month losing streak in four years. With the S&P 500 about 2% away from new highs, the overwhelming sentiment is still rather dour. The recently released Barron’s Big Money poll found only 38% of money managers were bullish or very bullish. This was down from 55% last fall and 45% a year ago. In fact, this was one of the lowest readings in the poll’s more than 20-year history. The two biggest worries are earnings disappointments and an economic slowdown.
- March durable goods report suggests that manufacturing limped into the end of Q1. Although core durable goods orders and shipments (a proxy for the business capital spending portion of gross domestic product [GDP]) posted modest month-over-month gains in March versus February, they fell short of consensus expectations. In addition, there were sharp downward revisions to the February data. In short, although oil prices rebounded in Q1 as the dollar weakened, the manufacturing sector remained under duress. The business capital spending portion of GDP is expected to be a drag on overall GDP when the Q1 GDP figures are reported later this week.
- Durable Goods Shipments and Orders (Mar)
- Case-Shiller Home Price Index (Feb)
- Pending Home Sales (Mar)
- FOMC Statement
- UK: GDP (Q1)
- Eurozone: Money Supply and Bank Lending (Mar)
- Brazil: Central Bank Meeting (No Change Expected)
- Japan: CPI (Mar)
- GDP (Q1)
- Germany: Unemployment Change (Apr)
- Japan: Bank of Japan Meeting (More QE Expected)
- Employment Cost Index (Q1)
- Personal Income and Spending (Mar)
- Kaplan (Hawk)
- Eurozone: GDP (Q1)
- Mexico GDP (Q1)
- China: Official Mfg. PMI (Apr)
- China: Official Non-Mfg. PMI (Apr)
- Dudley (Dove)