- Stocks set to post another month of gains. Major U.S. indexes are modestly higher this morning as traders prep for a string of key economic data this week, capped off by U.S. nonfarm payrolls on Friday that may sway the Federal Reserve Bank’s (Fed) decision on a rate hike when it meets next month. Today’s action follows a 2.3% rise in the S&P 500 last week, led by technology stocks, though financials also got a boost from hawkish comments on Friday from Fed Chair Janet Yellen. Overseas, a 3.4% jump in the Shanghai Composite lifted Asian markets overnight, while European shares are range bound after consumer prices and employment figures came in as expected. Elsewhere, the dollar continues to strengthen, pushing down precious metals; WTI crude oil is moving in and out of positive territory, and the yield on 10-year Treasury notes is higher after ending last week at 1.85%.
- High-quality bond yields marginally changed for the week. Treasury yields remained within broader ranges with little change on the week. Of note, the yield curve, as measured by the yield differential between 2- and 10-year Treasuries, closed at 0.94%–back to a post-recession low; in addition, inflation expectations have begun to decline despite continued strength in oil prices. Fed fund futures show a 70% probability of a hike at either the June or July Fed meeting. These last points suggest the bond market continues to express skepticism of any rate hike.
- Record investor demand at last week’s Treasury auctions. Despite Treasury yields not far above 2016 lows, the Treasury’s auctions of 2-, 5-, and 7-year securities collectively witnessed record investor demand, both domestic and foreign, as dealers accordingly took down a record low percentage of the auctioned bonds. The demand is a reflection of still negative investor sentiment, and the combination of foreign central bank easing coupled with Treasuries’ yield advantage to other high-quality government bond markets.
- Average high-yield bond spread closes below 6%. High-yield bonds and oil remain tightly correlated, as continued oil price resilience support additional price gains for high-yield bonds. The average yield spread declined to 5.9% last week, increasing an already impressive rebound. Still, high-yield bonds remain very sensitive to oil prices, which presents a risk. We view high-yield bonds as fair to slightly expensively valued given the expected continued rise in defaults. We discuss high-yield bonds in more detail in this week’s Bond Market Perspectives publication, due out later today.
- Municipal bond valuations cheapen slightly after several weeks of improvement. Average 10- and 30-year AAA municipal-to-Treasury yield ratios increased to 92% and 99%, respectively, up slightly on the week from 90% and 98%. After municipal bond prices lagged comparable Treasuries during the first quarter of 2016, municipal bonds had richened versus Treasuries for most of the second quarter until modest weakness last week. Elevated selling and higher new issuance weighed on the market; but better balance greets the market ahead of a traditionally challenging month of June, which has posted negative returns in 7 out of the past 10 years.
- April spending points to Q2 GDP around 3.0%. Inflation-adjusted personal spending, which accounts for two-thirds of gross domestic product (GDP), was running 3.0% above its Q2 average according to data released earlier this morning, effectively putting a floor on Q2 GDP. This morning’s robust April spending data keeps the Fed on track to raise rates by 0.25% at either the June or July Federal Open Market Committee (FOMC) meeting.
- GDP gap. This week’s Weekly Economic Commentary, due out later today, discusses the unusual gap that has opened up in the past 10-20 years between Q1 and Q2 GDP. Over long periods of time, GDP growth in any one quarter should be close to any other quarter; but over the past 10 years, GDP growth in Q1 has averaged -0.3% while Q2 growth has averaged 2.4%, and Q1 GDP has been the slowest quarter of growth in 6 of the past 10 years.
- Japan further delays sales tax increase. The Japanese government again decided to delay the implementation of a second round of increases to its value-added tax (VAT), a type of sales tax. This move was widely expected, though the government announced intentions to delay the tax increase until 2019, which was a surprise. This may portend additional policy actions by the Bank of Japan at its meeting on June 2. Japanese industrial production increased 0.3% during the first quarter, well ahead of the expectation of a -1.5% decline. Overall, the yen weakened and Japanese equities rallied on this news.
- Strong gains last week. The S&P 500 gained 2.5% last week, its best weekly gain in 12 weeks. It is now looking at its first three-month win streak in two years. The recent strength comes on the heels of the first three-month losing streak in more than four years. In fact, this could be the fourth straight year May finished in the green. Lastly, today is the last day of the month and this day has been weak lately, down in 8 of the past 10 months.
- Everyone is neutral. With the S&P 500 less than 2% away from a new all-time high, there isn’t much excitement. In fact, the recent American Association of Individual Investors (AAII) sentiment poll showed nearly 53% of those polled were neutral. This was the highest neutral level in 26 years. Given how frustrating things have been to bulls and bears alike, the camp of neutral seems to be the place to be. Today on the LPL Research blog we will take a closer look at this development and what it could mean for future S&P 500 gains.
- Jam-packed June. As discussed in this week’s Weekly Market Commentary, due out later today, June is filled with major market events that may go a long way toward determining the near-term direction of the equity markets. They include an OPEC meeting, central bank meetings for the Fed, European Central Bank, and Bank of Japan, as well as the “Brexit” vote, a referendum on whether the U.K. will remain in the European Union.
- Week ahead. The May jobs report, the Fed’s Beige Book, an OPEC meeting, a European Central Bank meeting, as well as May reports on vehicle sales, manufacturing, and the service sector Institute for Supply Management (ISM) are all on the docket this week as markets begin what is shaping up to be a critical month of June. Please see our Weekly Global Economic and Policy Calendar for details.
- Personal Income and Spending (Apr)
- PCE Inflation (Apr)
- Dallas Fed Mfg Index (May)
- Eurozone: CPI (May)
- Eurozone: Money Supply and Bank Lending (Apr)
- China: Official Mfg. PMI (May)
- China: Official Non-Mfg. PMI (May)
- China: Caixin Mfg. PMI (May)
- ISM (May)
- Vehicle Sales (May)
- Beige Book
- UK: Money Supply and Bank Lending (Apr)
- OECD Economic Outlook Released
- Brazil: GDP (Q1)
- Challenger Job Cut Announcements (Apr)
- ADP Employment (May)
- OPEC Meeting in Vienna
- Eurozone: European Central Bank Meeting (No Change Expected)
- Employment Report (May)
- ISM Non-Mfg. (May)
- Evans (Dove)
- Mester (Hawk)