- Markets fall back as currencies in focus. Following a sharp overnight drop in the dollar, U.S. markets are inching lower in early trading. Yesterday’s session ended on a strong note as all three of the major indexes notched new all-time highs. Year-to-date leaders were the laggards as consumer staples, telecom, and utilities all closed in the red. Overnight, the Nikkei was hit hard (-1.6%) amid continued yen strength as the dollar/yen pair fell below 100; China’s Shanghai Composite and Hong Kong’s Hang Seng also closed lower. European shares are mostly following Asian markets lower in afternoon trading, with major indexes lower by more than half a percent. Boosted by the U.S. Dollar Index’s weakness (-0.97%), both WTI crude oil and COMEX gold are moving higher, with oil above $46/barrel; the yield on the 10-year Treasury has advanced to 1.57%.
- Treasury yields end week lower. Treasury yields across the majority of the curve moved lower last week, with the longer-end falling the most. The 10-year yield ended the week near the 1.5% level, which has been a point of support in recent weeks, before moving higher to close at 1.56% on Monday. We continue to believe that loose monetary policy from global central banks is likely to be a tailwind for Treasury prices over the near term, and that more consistently strong economic data are needed in order to drive yields measurably higher.
- Decreasing inflation expectations drive yields lower. A small decline in inflation expectations (which remain at very low levels), was a key driver of Treasury strength for the week, driven by weak inflation readings and a soft retail sales report. However, low rates were not a headwind for 3-, 10-, and 30-year Treasury auctions, which all saw solid demand, with strong overseas interest. Falling Treasury yields and foreign strength driven by even lower overseas rates point to a rising cost of safety, a concept that we explore further in this week’s Bond Market Perspectives, due out later today.
- Strong week for almost all sectors of fixed income. Non-Treasury sectors of the bond market enjoyed strong performance last week as well. High-yield and emerging markets debt rallied, buoyed by oil’s 6.4% price gain during the week. Investment-grade corporates also benefited from the overall decline in rates and a small decrease in spreads, with the Barclays U.S. Corporate Index returning 0.7% last week. The only sector in the red last week was preferred stocks, which faced the headwind of weakening financial stocks as a result of the yield curve flattening last week.
- Below-average municipal issuance for the week ahead. Municipal bonds managed another week of positive returns as the asset class benefited from, but failed to match the strength of, the drop in Treasury yields. The 10- and 30-year AAA muni-to-Treasury ratios remain near the middle of their recent range, near 93% and 97%, respectively. The coming week has only $6.6 billion scheduled for issuance, which is below average, but not all that surprising given a traditional lull in August issuance following a refinancing-driven increase earlier in the summer. Lower issuance, along with continued strong demand from investors, may be a tailwind for municipal bonds over the coming week.
- Consumer prices softer than expected in July, but service inflation at eight-year high. Headline Consumer Price Index (CPI) rose 0.8% year over year in July, while core CPI rose 2.2%; both readings were lower than expected and decelerated from June. Beneath the surface, however, the CPI for services (two-thirds of CPI) posted a 2.9% gain over the past year–the strongest reading in almost eight years–while the CPI for goods (one-third of CPI and largely driven by gasoline prices) fell 2.5%. As we approach the anniversary of the worst of the oil price declines in Q3 and Q4, the goods category should turn positive and drive headline inflation close to 2.0% or higher.
- Another set of solid housing starts and building permit data in July. At 1.211 million, housing starts exceeded expectations (1.180 million) in July and accelerated from the June reading of 1.186 million. The headline was better than the details, however, as most of the gain in starts in July came in the volatile multifamily area, which saw a 5% increase. Single family starts rose just 1% between June and July. Supported by low interest rates, a solid labor market, a pickup in household formation, modest home price gains in-line with incomes, and sound lending practices relative to the 2002-2007 housing boom, we continue to expect that housing will contribute positively to gross domestic product (GDP) growth in 2016 (as it has since 2011) via the residential investment category. However, at only 5% of GDP, housing has only a limited direct impact.
- More new highs. The S&P 500, Dow, and Nasdaq all closed at new all-time highs once again. Yesterday on the blog we looked at what happens when all three major indexes close at new highs at the same time–be sure to take a look if you haven’t already. One thing that hasn’t changed is the lack of volatility. The S&P 500 gained 0.28% yesterday and traded in a range of only 0.35%, making it the smallest daily range amid a new high over the past 12 new highs (dating back to May 2015). Also, the S&P 500 hasn’t closed more than 1% (up or down) for 26 straight days, the longest streak since one that ended at 26 days in December 2014.
- Market breadth continues to support higher prices. We’ve noted for several months one major difference between 2016 and 2015 was for the first half of this year, market participation had been much stronger. Technicians call this strong market breadth, meaning many stocks are participating in the rally. One way to look at market breadth is via advance/decline lines. This indicator simply adds up how many stocks advanced versus declined for the day and makes a running tally. New highs in advance/decline lines are a positive sign and signal a healthy market. Weakening breadth is a sign of internal weakness that usually leads to a weakening equity market. Turning to yesterday, various advance/decline lines made new all-times highs: the S&P 500, Nasdaq, NYSE, S&P Small Cap, and S&P Midcap. Today on the LPL Research blog we will take another look at market breadth and why 2016 looks nothing like 1999.
- More big names betting against the rally. Looking at the recent 13F filings, several big name investors have turned bearish on U.S. stocks. Names include Jeff Gundlach, Carl Icahn, and David Tepper–all lowered their equity position in the second quarter. This is nothing new, as many strategists and investors have been noting reasons to be worried all year now. Although we are aware of the reasons for caution, we continue to think there is more positive news than negative news and don’t see the likelihood of a major bear market starting now, and we would use all pullbacks to add to positions.
- Indonesia: Central Bank Meeting (Rate Cut Expected)