- Equities little changed in early trading. U.S. markets are near flat this morning amid news that Apple has been ordered to pay nearly $15 billion in back taxes to the European Union. The S&P 500 began the week with a 0.5% gain, which was led by financials despite interest rates falling broadly and the yield curve continuing to flatten; the 10-year Treasury closed 0.07% lower at 1.57% and remains near that level. Overnight, Asian markets finished mostly higher, with the exception of Japan’s Nikkei which slipped 0.1% amid a flurry of economic data releases; European markets are trading higher late in the session. Meanwhile, the dollar continues to strengthen, WTI crude oil is up almost 1%, and COMEX gold is down modestly near $1320/oz.
- Fed voices push yields higher but momentum wanes this week. Janet Yellen’s widely anticipated Jackson Hole speech, in addition to hawkish comments by other Federal Reserve Bank (Fed) members, was enough to send rates meaningfully higher on Friday. The 10-year Treasury yield moved through its 1.6% resistance level, but has since fallen back below that this week. Treasury auctions were strong, on balance, as indirect bidders (foreign investors) took down a record-setting 69% of the offering in the 5-year auction on Wednesday. The 2- and 7-year auctions last week also saw above average demand from foreign buyers, though not record levels, which is logical given the uncertainty of Yellen’s impending speech on Friday. We believe the idea of foreign buyers pressuring Treasury yields downward, all else equal, remains intact.
- Near-term rate hike expectations continue to be volatile. Markets perceived comments by Fed Chair Yellen and Vice Chair Fisher to be hawkish on balance, and as a result rate hike expectations, as implied by Fed funds futures, moved higher last week. The odds of a September rate hike now sit at 21%, while a 54% chance of a rate hike is priced in for December. Expectations for near-term meetings have been volatile year-to-date, though longer-term expectations have been more consistent. Markets continue to price in a much shallower path of rate hikes than the Fed forecasts, with a long-run (5 year) expected rate of just 1.65% compared to the Fed’s median forecast of 3%.
- High yield’s strength continues. High yield continues to rally, boosted by the tailwind of inflows into the asset class over the last few weeks. The Barclays US High Yield Index has outperformed the Barclays Aggregate by 8.8% YTD and by 17.3% since the market’s low on 2/11/2016. The price of oil’s recovery from under $40 in early August to the upper $40s has been another tailwind for the market as of late. Although high yield was able to shrug off oil’s recent decline without too much weakness, we still believe that oil remains a potent driver of the high yield market, and for that reason caution remains warranted.
- Libor continues to move higher. Libor has been increasing in recent weeks, with the total increase in 3-month U.S. dollar Libor of 0.2% almost equivalent to a Fed rate hike. There are several drivers putting upward pressure on the widely used benchmark rate, most notably money market reform regulation, but also Fed rate hike expectations, foreign demand for dollars, and regulation-driven calculation changes. We talk more about these drivers, as well as what the increase in Libor means for investors, in this week’s Bond Market Perspectives, due out later today.
- Municipal bonds outperform Treasuries as rates move higher. Municipal bonds outperformed Treasuries last week, with 10- and 30-year AAA Muni to Treasury ratios nearing recent lows at 87% and 94% respectively. Much of the move for the 10-year ratio came on Friday, as Treasury yields moved higher following Fed Chair Yellen’s comments. A relatively light $6.7 billion of new issuance is expected for the coming week, and this, coupled with the potential for continued strong demand from investors (muni funds have now experienced 47 consecutive weeks of net inflows according to ICI data), may act as tailwinds for the muni sector in the week ahead, helping to offset the headwind of higher valuations.
- European morning data dump. A host of post-Brexit vote data was released overnight. We are very careful to use the term “Post-Brexit Vote” since the actual Brexit has not occurred and there is not much clarity on how the Brexit will be handled. One of the more important data points is confidence readings. The usual caveats apply; there can be a large variance between how people feel and how they act. That said, confidence numbers in business, industrial and services sectors declined more than expected. European stocks in Germany, France and other countries, though not the U.K., have gained just under 1% this morning.
- A small gain, or was it? The S&P 500 gained 0.52% yesterday, which might not sound like a lot but it was the second largest gain going back six weeks. In fact, going back 30 trading days, 15 have been higher and 15 have been lower. Looking at those 15 gains only a 0.86% jump on August 5th was higher. Even though the S&P hasn’t had any large gains over this timeframe, it is still slightly higher the past six weeks. On the LPL Research blog yesterday we looked at how historically tight the trading range has been recently. Today on the blog we will take one last look at this historic trading range. Going back 30 days, the S&P 500 on a closing basis has traded in a range of 1.54%, the smallest 30 day range since December 1965.
- Germany: CPI
- ADP Employment (Aug)
- Rosengren (Dove)
- Eurozone: CPI (Aug)
- China: Official Mfg. PMI (Aug)
- China: Caixin Mfg. PMI (Aug)
- Employment Report (Aug)
- Lacker (Hawk)