- Stocks tread water amid earnings releases. U.S. markets are near flat in early trading, following mixed results from a number of Dow components including Proctor & Gamble, Merck, and Caterpillar. Yesterday’s session saw notable outperformance of the Nasdaq (+1.0%) relative to the S&P (+0.5%) on the back of a 1.2% gain in the technology sector; telecom, healthcare, and energy all closed in the red. Overnight, markets in Asia finished mixed with the Nikkei rising to a 6-month high on a weaker yen, while the Chinese yuan made a new 2016 low against the dollar. European stocks are mostly higher in afternoon trading as the German DAX (+0.3%) has climbed into positive territory for 2016. Meanwhile, Treasuries are mixed as the yield on the 10-year Note sits at 1.76%, WTI crude oil is at $50.50/barrel, and COMEX gold is up 0.6% to $1,270/oz.
- 10-Year holds in 1.7% range. The 10-year Treasury held on to recent increases in yield last week, having been driven higher by an increase in inflation expectations, which also held last week. The Headline Consumer Price Index (CPI) rose 1.5% year over year in September, accelerating from the 1.1% year-over-year gain in August and reaching the highest level since October 2014. The 10-year breakeven inflation rate now stands at 1.69%, its highest level in over six months.
- Does rising inflation mean it’s time for TIPS? Rising (though still historically benign) inflation expectations, coupled with continued slow and steady growth have led some to ask if we’re entering a period of stagflation that may benefit Treasury Inflation Protected Securities (TIPS). Stabilizing oil prices may lead headline inflation higher in the near-term, which would benefit TIPS. However, in the longer-term our expectation for range bound to slightly higher interest rates, driven by continued slow and steady growth in the U.S., may mean yield becomes a stronger driver of returns in the bond market, putting TIPS at a disadvantage to other high-quality areas of the bond market. We explore this subject in more detail in this week’s Bond Market Perspectives, due out later today.
- Rate hike expectations slowly climb. Market-implied expectations for a Federal Reserve Bank (Fed) rate hike in December topped 70% for the first time in over four months. The climb is attributable to steady domestic economic data, including inflation, and perhaps, a presidential election season that is looking less uncertain. Despite the market consensus of a December rate hike, 70% is still nowhere near 100%, as market participants know that much could happen over the next two months, potentially driven by weak domestic data or by forces outside the U.S. (e.g. continued concerns surrounding Brexit) that could derail a cautious Fed.
- Libor holds recent increases. Similar to Treasury yields, increases in Libor held last week as well. As discussed previously, Libor had been driven higher by money market reform (in addition to increasing rate hike expectations). Those increases in yield appear to be sticky and not reversing post implementation date. The increase in Libor is one reason why we have started to warm to bank loans, relative to other credit segments, as Libor rate above 1% will mean that many bank loans floating rates will begin to actually float, a potential tail wind for the sector.
- Municipal supply remains elevated, while demand tailwind wanes. Municipals cheapened relative to Treasuries again last week, as elevated supply remains a headwind for the market, on balance. October is on pace to set a record for new issuance (following August and September, which set new issuance records for their respective months) helping 2016 remain on pace to be the highest year ever for new issuance. Compounding that, the streak of municipal fund inflows came to a stop last week, with an outflow hitting the market after 54 straight weeks of inflows. Investors are perhaps becoming more cautious around the Fed decision and the U.S. election, or switching to individual bonds rather than mutual funds so as to not be subjected to other investors’ outflows.
- Holding pattern continues. Equities continue to trade in a tight range, with the S&P 500 now closing within 3% of the all-time high for 82 consecutive days. You have to go back 21 years the last time that happened. Here’s what is interesting about that, today could be the 50th consecutive day it hasn’t made a new all-time high. So the S&P 500 is up near record levels, but simply can’t make new highs. At the same time, it isn’t selling off aggressively either. Today on the LPL Research blog we will take a closer look at this phenomenon and what it could mean going forward.
- S&P CoreLogic Home Price Index (Aug)
- Germany: Ifo (Oct)
- European Central Bank’s Mario Draghi speaks in Berlin
- Advance Goods Trade Balance (Sep)
- New Home Sales (Sep)
- Fed quiet period begins
- Durable Goods Orders and Shipments (Sep)
- U.K. GDP (Q3)
- Eurozone: Money Supply and Bank Lending (Sep)
- Japan: Consumer Price Index (CPI) (Sep)
- Japan: Tokyo CPI (Oct)
- Employment Cost Index (Q3)
- GDP (Q3)
- Germany: CPI (Oct)