Market Update: Tuesday, October 4, 2016

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  • Overseas up, U.S. flat on Brexit news. Domestic equities opened flat this morning after the Dow, S&P 500, and Nasdaq all shed 0.3% yesterday, weighed down by defensive sectors utilities and consumer staples; heavily weighted technology and financials also underperformed. European markets are green across the board in afternoon trade, led higher by the FTSE 100 (+1.7%) as the British pound slipped to a new 31-year low against the dollar on concerns over a hard Brexit. Overnight in Asia, Japan’s Nikkei Index (+0.8%) built on yesterday’s advance while the Hang Seng gained 0.5%. Elsewhere, WTI crude oil ($48.75/barrel) has retraced a small part of its four-day rally, COMEX gold has continued its slide to a new three-month low below $1300/oz., and the yield on the 10-year Treasury note is up 3 basis points to 1.65%.

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  • Treasury yields remain range bound, follow global pattern. The 10-year Treasury yield saw less volatility last week than it has in recent weeks, closing the week at 1.61%, near the midpoint of its recent 1.5-1.7% range. Both 10-year yields and yield curve steepness continue to track closely with German and Japanese government bond yields, showing the impact of global growth and central bank policies on U.S. rates.
  • Inflation expectations creeping higher. Breakeven inflation, as measured by the difference between the 10-year Treasury yield and 10-year Treasury Inflation-Protected Securities (TIPS) yield has been creeping higher in recent weeks, driven by slight improvements in August Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) inflation numbers, as well as comments from the Bank of Japan that it may be willing to accept more than 2% inflation in the near term. While Friday’s close at 1.6% is an improvement from lows near 1.3% earlier this summer, inflation expectations remain benign overall, and still well below the Federal Reserve Bank’s (Fed) 2% target.
  • High-yield spreads contract as oil gains. Following a recent bout of volatility on the back of higher rates, high-yield spreads contracted to end the week close to near-term lows. The move higher in oil was the biggest driver, with the high-yield energy spread contracting more than 0.21%, while ex-energy only tightened by 0.02%. We view high-yield as on the expensive side of fair value given default expectations, though we believe a small allocation to credit-sensitive areas of the bond market, such as bank loans or high-yield bonds, may be suitable for some investors given the yield advantage in a low-yield environment.
  • Muni issuance continues to be strong. $14 billion in new municipal bond issuance is expected for the coming week, and the 30-day calendar is showing $23 billion as of Friday, the highest level since October 2002. Municipal supply this year has been above average, and this week’s influx may be a near-term headwind for the asset class, along with valuations that are near the top of their recent range. However, this year has also witnessed very strong demand (see our recent blog, “Will Municipal Bonds Make 52 Weeks of Consecutive Inflows?” for more information), which may help to offset any supply or valuation induced headwinds.
  • Will Q4 be a repeat of last year? With the Fed pointing to another December rate hike this year, investors can’t help but get a sense of déjà vu. There are notable differences in the state of fixed income markets this time around, however, and as such, different opportunities may present themselves. We look at this in more detail as we preview what investors may expect in fixed income markets during Q4 in this week’s Bond Market Perspectives piece, due out later today.
  • Manufacturing stabilizing, capital spending on the mend. At 51.5, the September reading on the manufacturing Institute for Supply Management (ISM)–a good leading indicator of future S&P 500 earnings growth–was above expectations (50.4) and above the August reading of 49.4. The 51.5 reading in September suggests that real gross domestic product (GDP) growth is running at around 2.5%. The details of the report were solid as well, with large increases in the new orders and production components. The improved manufacturing data reflect the uptrend in oil production that has been in place since late spring, as well as the stable dollar, which has turned into a tailwind for manufacturing here in the second half of 2016.
  • Solid September vehicle sales. At a 17.7 million annualized pace, vehicle sales in September were above expectations (17.5 million) and way above August’s 16.9 million reading. Sales in Q3 averaged 17.4 million, above the 17.1 million Q2 average, which will provide a nice boost to consumer spending in Q3. Year to date, sales have averaged 17.3 million, just below the 17.4 million pace set in 2015, which saw sales hit a 10-year high.

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Tuesday

  • Vehicle Sales (Sep)
  • US Vice Presidential Debate (Farmville, VA)
  • Lacker (Hawk)
  • India: Reserve Bank of India Meeting (No Change Expected)

Wednesday

Thursday

  • Challenger Job Cut Announcements (Sep)

Friday

Saturday

  • IMF/World Bank Fall meetings in Washington, DC

Sunday

  • IMF/World Bank Fall meetings in Washington, DC

Click Here for our detailed Weekly Economic Calendar

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

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