- Equities lower after Monday rally. Stocks are down in early trading, a day removed from a broad advance in the major averages. WT crude oil is adding to yesterday’s more than 3% climb that boosted the energy sector to a 1.6% gain. Technology was also a big winner on the day, led by Berkshire Hathaway’s disclosure of a more than $1 billion position in Apple. Overnight, Asian equities finished mixed, with the Nikkei closing up 1.1% and the Shanghai Composite moving slightly lower; in afternoon trading, European markets are pulling back after hitting two-week highs earlier in the session. COMEX gold, Treasuries, and the dollar are all holding steady.
- Yield curve flattens to late 2007 level. A 0.08% decline in longer-dated Treasury yields (10- and 30-year) coupled with a slight rise in the 2-year Treasury yield, pushed the yield curve to its flattest level since 2007, just below the lows reached in March of this year. Despite a solid retail sales figure, weak retail earnings and a miss in jobless claims were drivers for reduced growth expectations, which pushed longer yields lower.
- Strong overseas demand for Treasuries evident in auction data. Despite Treasury yields at the bottom of their recent trading ranges, 3- and 10-year Treasury auctions received strong demand last week. The 30-year auction, although slightly weaker on an overall demand basis, witnessed very strong demand from foreign investors (indirect bidders), who took down an above-average 60% of the offering. Foreign demand for Treasuries remains strong in light of lower developed yields abroad and received an additional boost from Asian-based investors returning from the Golden Week holiday.
- The opportunity in mortgage-backed securities (MBS). Although MBS valuations are only average, a sluggish start to 2016 and scenario analysis show the sector may add value in a continuation of the range-bound trading environment that has characterized high-quality bonds. MBS may offer benefits in a flat to rising rate environment. We discuss this in more detail in this week’s Bond Market Perspectives, due out later today.
- Oil gives high-yield a helping hand…again. Although it was a down week for equities, high-yield (represented by the Barclays U.S. High Yield Index) returned 0.5% last week and outperformed the Barclays Aggregate, despite the headwind of investor outflows. A 3% rise in oil prices, which continued Monday and powered high-yield bond prices again, helped further defuse default fears and offset poor sentiment from the stock market declines. Flow data indicate that investors are moving up in quality from high-yield to investment-grade corporates, but flows do not necessarily dictate performance. Investment-grade corporate funds received their 10th straight week of inflows with $1.1B in inflows last week, following $2.1B the week prior. High-yield flows were nearly opposite, with a $1.9B outflow last week and $1.8B the week prior, per Lipper data.
- Fed rate hike expectations roughly unchanged last week. A strong retail sales report and hawkish comments from Boston Federal Reserve Bank (Fed) President Eric Rosengren and Kansas City Fed President Esther George helped keep short-term Treasury yields anchored, despite a rally in intermediate- to long-term issues. Rosengren’s comments were more noteworthy as he is a dovish-leaning Fed voter. He said that based on market pricing, the market was being overly cynical about the fundamental strength of the U.S. economy. Market-implied rate hike expectations remain very benign; one Fed rate hike by the end of 2016 is priced in at a 72% probability, and the first rate hike isn’t fully priced in until the April 2017 meeting.
- Municipal bonds: rising supply but demand insatiable. The forward 30-day calendar of municipal bond issuance increased again to just over $17 billion as of yesterday, its highest level since December 2014. However, demand continues to be strong with municipal bond mutual funds recording another $1B+ in inflows–the 19th consecutive week of inflows for the asset class (according to Lipper). Strong demand coupled with Treasury strength pushed the average municipal AAA 30-year yield to a new all-time low of 2.44% yesterday. Although strong demand remains a positive, rising supply and a traditionally difficult month of June present a near-term risk for municipals, although a modest one at that.
- April CPI not enough to convince the Fed to raise rates in June. Led by a 3.4% month-over-month increase in energy prices, the Consumer Price Index (CPI) posted a stronger than expected 0.4% month-over-month increase in April and was up 1.1% from a year ago. CPI excluding food and energy (core CPI) rose 0.2% month over month and 2.1% from a year ago. Beneath the surface, CPI for services (two-thirds of CPI) rose 2.7% year over year, right in the middle of its recent range. CPI for commodities (one-third of CPI) fell 1.4% year over year; but if oil and gasoline prices stay in their recent range, CPI for commodities will turn positive in the second half of 2016 and push overall CPI close to 2%.
- Bounce off the 50-day. The S&P 500 bounced back nearly 1% yesterday, once again finding support near its 50-day moving average. This comes on the heels of dropping close to 1% in two of the previous three days. In fact, in four of the past five days, the S&P 500 has moved at least 0.8% (up or down). We haven’t seen volatility like that since the mid-February lows. Technically, the S&P 500 is potentially forming a bearish chart pattern, and it is sitting on a big level of support currently. Today on the LPL Research blog we will take a closer look at this chart pattern.
- CPI (Apr)
- Japan: GDP (Q1)
- Russia: GDP (Q1)
- FOMC Minutes
- UK: Unemployment Rate (Mar)
- Philadelphia Fed Mfg. Index (May)
- Leading Indicators (Apr)
- G-7 Finance Ministers Meeting in Japan
- Eurozone: Minutes of the April ECB Policy Meeting Released
- Indonesia: Central Bank Meeting (No Change Expected)
- Existing Home Sales (Apr)
- Japan: Imports and Exports (Apr)