- U.S. stocks resume advance. U.S. equities are following overseas markets higher this morning after the Dow, S&P 500, and Nasdaq all finished with minor losses on Monday. Losses were due in large part to the heavily weighted healthcare sector, which offset energy stocks’ 1.2% rise on a nearly 3% surge in oil; WTI crude oil is above near $43/barrel this morning. The rally continued overnight in Asia as optimism over China’s Consumer Price Index (CPI) data pushed the Shanghai Composite up 0.7%. The Nikkei Index gained the same percentage, touching a two-week high. Europe is also positive in afternoon trading, poised to advance for a fifth straight session, as corporate earnings are surprising to the upside. Elsewhere, COMEX gold is trading lower near $1348/oz., and Treasuries are strong as the yield on the 10-year note is little changed at 1.57%.
- Is the turn higher in yields finally here? Friday’s jobs report led to a jump in Treasury yields, but more consistency is likely required to witness a steady move higher in bond yields. Last week’s gross domestic product (GDP) reading and Institute for Supply Management (ISM) manufacturing release did not dispel the sluggish growth environment, and the Bank of England reinforced the theme of market-friendly central banks with a powerful dose of stimulus. The 1.6% level on the 10-year Treasury brought out buyers in July and may do so again now. Investors waiting for a more pronounced move higher in yields may have to wait longer. We explore this in more detail in this week’s Bond Market Perspectives, due out later today.
- Fed rate hike expectations increase but remain benign. What the jobs report did accomplish was to help keep investors honest, or at least respect prospects of a 2016 rate hike. Expectations for a hike at the September meeting increased to 26%, with the expectations for the December meeting moving to essentially a coin flip. Still, markets aren’t pricing in a full rate hike until September 2017 and the overnight rate five years into the future remains a very subdued 1.5%, according to futures.
- Yield curve steepens on the week but still at level reflective of sluggish growth. The yield curve, as measured by the differential between 2- and 10-year Treasury yields, increased modestly last week after hitting a post-recession low in July. Still, when viewed over a longer-term time frame, the slope of the yield curve, while still substantially away from being negative, or inverted, continues to suggest sluggish growth.
- High-yield spreads stagnate at 5.5%. High-yield spreads continue to hover near 5.5% over comparable Treasuries, a level that has helped slow additional strength. Implied default rates (4.1% for the overall high-yield market) indicate that the market believes that the worst of energy-related defaults may be behind us. Much of the good news for high-yield bond investors is already priced in, our view, but moderating default risk may keep prices supported near current levels.
- Muni mid-summer supply surge eases. After a whopping $10 billion-plus week of new issuance, intermediate municipal bonds still managed to outperform Treasuries last week, with the Barclays Municipal 7 Year Index returning -0.1% and the Barclays Treasury Index returning -0.7%. Long-term municipal prices were more mixed relative to Treasuries, where supply had a greater impact. The Bond Buyer 30-Day Visible Supply Calendar decreased from a high of $16.2 billion to $11.4 billion as of August 8, but remains above the long-term average of $9.2 billion, as an above-average (for the summer) dose of new supply hits the market again this week.
- Treasury auctions take center stage for bonds this week. In the absence of any significant data, other than Friday’s retail sales release, bond market focus will fall on Treasury auctions of new 3-, 10-, and 30-year securities. The 10- and 30-year will provide good gauges of investor demand, especially overseas investors. Increased currency hedging costs may decrease foreign participation, and therefore, indirect bidder participation will be closely scrutinized. Overseas investor demand has been a key driver of domestic bond strength in 2016.
- Chinese data near expectations. Chinese consumer prices came in at 1.8% over the past year, in-line estimates, while producer prices showed deflation of -1.7%, still less than the -2% decline expected. Chinese stocks were up overnight. Casino stocks in particular did well, showing signs of strength in the economy, at least for the wealthy and upper middle class who can afford to travel to Macau, the Chinese version of Las Vegas.
- A slow day. Yesterday was one of the slowest days of the year, as the S&P 500 moved in a range of only 0.35%—the 4th tightest range of the year. What made yesterday even more unique though is the S&P 500 also made an intra-day new all-time high (although it didn’t close at a new high). The last time the S&P 500 made an intra-day new high and traded in a smaller daily range was Christmas Eve 2014. The lack of volatility continues as well, as the S&P 500 hasn’t dropped more than 1% since immediately after Brexit. In fact, it has been 29 trading days since the last 1% drop—the second longest streak this year.
- NFIB Small Business Optimism Index (Jul)
- Productivity (Q2)
- India: Reserve Bank of India Meeting
- China: New Loan Growth and Money Supply (Jul)
- Japan: Machine Tool Orders (Jul)
- JOLTS (Jun)
- Monthly Budget Statement (Jul)
- South Korea: Central Bank Meeting (No Change Expected)
- China: Industrial Production (Jul)
- China: Retail Sales (Jul)
- China: Fixed Asset Investment (Jul)
- Retail Sales (Jul)
- Consumer Sentiment and Inflation Expectations (H1 Aug)
- Eurozone: GDP (Q2-Revised)
- Japan: GDP (Q2)