- Markets edge lower as earnings season begins. U.S. stocks are slipping in early trading, along with oil (-0.5%) following the release of the monthly International Energy Agency report; Alcoa is down sharply after the company unofficially kicked off earnings season with disappointing results. Yesterday’s session saw all three major averages close at least half a percent higher; energy (+1.5%) led the way up, though all 11 sectors finished in the green. Asian markets were mixed overnight, as the Nikkei (+1.0%) hit a 5-week high while the Hang Seng lost 1.3%. European markets are slightly higher in afternoon trading, boosted by upbeat economic sentiment readings. Finally, Treasuries are lower across the curve this morning as trading resumes after the Columbus Day holiday; the yield on the 10-year Note has jumped 0.06% to 1.78%, COMEX gold is down slightly, and the dollar index (+0.5%) is now at its highest level since early March.
- 10-Year yield tops 1.7% and holds…for now. Back to levels seen in mid-September, the yield on the 10-year Treasury has once again breached the 1.7% mark. We have mentioned that a run of good data may have been necessary to lift the 10-year out of its 1.50-1.63% range. That run of good data may have come last week, with ISM manufacturing and non-manufacturing readings exceeding expectations, an uptick in consumer sentiment, and decent payrolls data. One confirmation of good data being partially responsible is that rate hike expectations have increased alongside Treasury yields. The market-implied chances of a hike at the December 2016 meeting increased from 61% to 68% over the last week. The market is still largely overlooking the November meeting, pricing it at just a 17% chance, unchanged from last week.
- Inflation expectations notch up with oil strength. WTI crude oil, which was up another 3.3% last week, has been pushing up breakeven inflation rates. Breakeven inflation rates have been tracking fairly tightly with oil – the 10-year breakeven inflation rate is up almost 0.15% over the last month, as the price of oil has gained over 11% over the same period.
- High-yield and EMD diverged last week. Both high-yield and emerging markets debt (EMD) have enjoyed standout years thus far. They have also directionally moved together, a pattern that broke last week. High-yield returned 0.5% (Barclays US High Yield Index) while EMD fell by 0.3% (JPMorgan EMBI Global Index). While both sectors were boosted by an increase in the price of oil which drove down spreads over comparable Treasuries last week, the increase in interest rates was more of a headwind for EMD, as its duration (5.9 years) is elevated relative to high-yield (4.0 years).
- Municipals cheapen slightly as supply weighs. Primary supply, represented by the 30-day visible supply of bonds to be offered, declined from its very high level hit at the end of September, which had been the highest level seen since 2002. That elevated supply, along with a rise in Treasury yields, led the Barclays Municipal Bond Index to lose 0.62% last week. Long-term municipal bonds managed to lose less than Treasuries as is typical during rising rate environments, but intermediate-term bonds actually underperformed slightly. Secondary supply remains elevated but municipal demand, which just recently hit one straight year of weekly inflows, has been insatiable and sufficient to take on the elevated supply.
- What does money market reform mean for investors? SEC mandated money market reform goes into effect this Friday. The market has been aware of this upcoming event for more than two years, and its impacts are already largely priced in. We take a look at the impact to markets, including the impact of the related ongoing rise in the London Interbank Offered Rate (LIBOR) in this week’s Bond Market Perspectives, due out later today.
- Checking in on housing. In this week’s Weekly Economic Commentary, we take a look at the health of the housing market this week, looking at key drivers of housing supply, demand and pricing. We continue to expect that housing will add to gross domestic product (GDP) growth here in 2016 and in the years ahead, but at under 4% of GDP. It is not large enough to help the economy accelerate much.
- The 50-Day Moving Average. The 50-day moving average on the S&P 500 continues to cap the S&P 500’s progress. The S&P 500 tried to clear this trendline yesterday, but couldn’t close above it once again. It has had trouble with this area for two weeks now. What is interesting about this is the Russell 2000 found support near this trendline yesterday. In fact, the past two weeks it has consolidated above its 50-day moving average. Historically, small cap outperformance has been bullish for overall equity markets and small caps have led since the February lows. Should this continue, it could be a positive sign.
- Small Business Sentiment (Sep)
- Monthly Budget and Statement (Sep and Fiscal Year 2016)
- Germany: ZEW (Oct)
- Japan: Economy Watchers Survey (Sep)
- Singapore: GDP (Q3)
- China: CPI (Sep)