- U.S. equities up modestly after mixed Monday finish. Stocks in the U.S. are up in early trading as prices move in tandem with WTI crude oil. This comes after a mixed session on Monday that had little economic data to provide direction. Asian markets finished mostly higher overnight, buoyed by a weakening yen on the heels of a pledge by the Bank of Japan to intervene in the currency markets, should a continued rise threaten the country’s economy. The news boosted the Nikkei 2.1%; most other indexes in the region logged modest gains. Meanwhile, bank stocks are leading European shares higher thanks to better than expected results from Credit Suisse. Treasuries and COMEX gold are little changed, though industrial metals are sharply lower.
- Inflation expectations drive lower Treasury yields. Inflation expectations, implied by 5- and 10-year Treasury Inflation-Protected Securities (TIPS), declined by 0.1% last week. The decline was the primary factor behind conventional Treasury yields falling by 0.04% to 0.06% last week, with strength continuing Monday as doubts about global economic growth continue to linger following the April employment report and the latest China data.
- Bond yields and presidential elections. There is little material impact to Treasuries, historically, in a presidential election year. Presidential election years have often been slightly challenging for bond investors, but overall trends are little different from the average change in a given year. The election has had little lasting impact on bonds, frequently taking a backseat to Federal Reserve Bank (Fed) actions. We review the path of high-quality bond yields during election years in this week’s Bond Market Perspectives publication, due out later today.
- High-yield rally partially reverses. High-yield bond prices reversed course last week and the sector declined -1.6% (according to Barclays High-Yield Bond Index), underperforming the Barclays Aggregate by 1.4%. Oil’s 2.7% decline last week was a headwind for the high-yield sector, but late-week firming in oil prices did little to offset continued high-yield price declines. The strong connection between oil and high-yield spreads appeared to break down in recent days, suggesting last week’s decline was indicative of profit taking after a substantial rally.
- Municipal yields fail to match Treasury strength as supply builds. Municipal bonds managed a positive 0.3% return for the week (as measured by the Barclays Municipal Bond Index), roughly in-line with Treasuries, also up 0.3% on the week (as measured by the Barclays U.S. Treasury Index). This performance occurred despite the headwind of the 30-day visible supply hitting more than $14.6 billion, its highest level since October of last year. The 10- and 30-year municipal-to-Treasury ratios fell slightly to 89% and 94%, respectively, still near the bottom of their recent ranges. Higher valuations, rising supply, and rising dealer inventory suggest near-term caution.
- Supply focus. In the absence of material economic data this week, Treasury 3-, 10-, and 30-year auctions will be a focus for the bond market, as will the gradual start of what is expected to be a significant month of investment-grade corporate bond issuance. Corporate bond issuance is expected to be well above average, and investor demand for Treasury auctions as well as corporate debt sales may set the tone for bonds in coming days.
- Small business sentiment (93.6) ticked higher in April. But it remains about halfway between the Great Recession lows (82) and the post-recession highs of 102, hit in 2014. As they have since January 2009, high taxes and too much government regulation were cited as the “single most important” problem by respondents. In a typical month, roughly 20% of the responses come from the construction industry, which represents only around 5% of employment.
- Chinese inflation higher than expected, eases some deflationary fears. Chinese inflation data for April came in higher than expected, though the data still show producer price inflation negative, driven largely by weakness in the commodity markets. Producer prices fell -3.4%, which was still better than the expected -3.7% drop. Consumer prices rose at 2.3%, meeting expectations. Looking at inflation excluding food, prices were only up 1.1%. All told, the data are unlikely to have a meaningful impact on Chinese policymakers as they attempt to both reshape and reaccelerate the economy.
- A bearish technical event? A chart circulated over the last several days that showed the S&P 500’s 100-week moving average crossed above its faster moving 50-week moving average last week. The last two times this ominous event took place were in 2001 and 2008, right before two vicious bear markets. Here’s the part that chart won’t tell you: the four times before 2001 this happened (going back to 1977) the S&P 500 was up 24.1% on average. Today on the LPL Research blog, we will take a closer look at this event to assess if it is really as bearish as everyone has made it sound the past few days.
- JOLTS (Mar)
- Mester (Hawk)
- Rosengren (Dove)
- George (Hawk)
- Norway: GDP (Q1)
- UK: Bank of England Meeting (No Change Expected)
- Retail Sales
- Consumer Sentiment and Inflation Expectations (H1 May)
- Eurozone: GDP (Q1 – Revised)
- Malaysia: GDP (Q1)
- China: Industrial Production (Apr)
- China: Retail Sales