- U.S. equities lower as Fed policy meeting kicks off. Major indexes are modestly lower in early trading as the Federal Reserve Bank begins its two-day policy meeting. Though no rate hike is expected with the presidential election looming, investors will be closely monitoring the Fed’s messaging for signs of its likely intentions at the December meeting. Overseas, stocks in Asia closed mixed as the Nikkei posted a modest gain (0.1%) after the Bank of Japan opted for the status quo at its most recent monetary policy meeting; the Shanghai Composite (0.7%) and Hang Seng (0.9%) also gained on upbeat manufacturing data out of China, while stocks in India and Korea slipped. European markets turned lower in afternoon trading, poised for a seventh straight decline, with traders focused on mixed corporate earnings amid a lack of economic data. Elsewhere, WTI crude oil ($46.88/barrel) is flat after yesterday’s 3.9% slide, COMEX gold ($1287/oz.) is up 1.1%, and the yield on the 10-year Treasury note is up 4 basis points to 1.86%.
- Treasury yields move higher. A string of positive economic reports last week helped push yields higher, with the 10-year Treasury yield jumping 11 basis points to end the week at 1.85%, its highest level since late May. Longer-dated Treasuries saw more price weakness (and a corresponding larger climb in yields) than short-term Treasuries, leading to a steepening of the yield curve. An increase in growth expectations drove most of the increase in Treasury yields for the week, in contrast to the past few weeks where rising inflation expectations have been the main driver. All these signs point to a bond market signaling that the economy may be ready for an interest rate hike. We dive into this topic in this week’s Bond Market Perspectives, due out later today.
- Tough week for fixed income. Rising rates mean lower prices for fixed income sectors, with longer duration areas such as government bonds (U.S. Treasuries and foreign bonds) and investment grade corporates seeing the most weakness. Bank loans were the only fixed income sector that managed a gain as the Barclays US High Yield Loan Index returned 0.06% for the week, though municipals and mortgage backed securities were among the sectors that lost the least.
- High yield takes a step back. The high-yield market has benefited from stabilizing oil prices recently, with spreads compressing as markets began to price in the possibility that the worst of oil defaults are behind us. The trend took a break last week, with spreads widening for the first time in six weeks, as oil reversed course and ended the week just below $50 on renewed skepticism of an OPEC production cut. Taken in context, the spread widening of 0.10% was minor compared to the 1.31% in compression that had taken place over the previous six weeks, and we continue to believe that the current valuations of high-yield bonds leave little room for error in economic and default forecasts.
- Municipal supply falls from recent highs. Supply in the municipal bond market, which has been near multi-year highs in recent weeks looks to be finally taking a breather. The Bond Buyer 30 Day Visible Supply fell from more than $21 billion last week, to just $13 billion as of Friday. Even after the large drop, supply remains above average ($9 billion) as it has for much of the year. Demand from investors has been able to offset the supply surge so far this year, and muni fund flows moved positive again last week according to Lipper data, after breaking a 54-week streak of consecutive inflows with a small outflow the week before.
- China continues to stabilize. Chinese economic data came in better than expected. Both the official and private sector manufacturing PMI came in at 51.2, better than both previously months and expectations. Non-manufacturing PMI release was 54, representing a positive trajectory. Better economic data give the Chinese government more leeway in dealing with important structural issues like its bad debt problem. Asian markets responded positively to this news.
- Down five in a row. The S&P 500 finished lower by only 0.01% yesterday, but was still down for the fifth consecutive day. This is the first five-day losing streak since June and third this year. What stands out about the past five days though is how small the losses have been. In fact, the past five days the S&P 500 is down only 1.17%. You have to go back to June ’96 the last time the S&P 500 had a less than -1.17% five-day losing streak (-1.06%). There have been 62 total five day losing streaks over this time.
- Goodbye October. The S&P 500 lost 1.9% for the third consecutive down month, which comes on the heels of a five-month win streak. You have to go back to 1975 and 1941 to find the most recent times that occurred. It was a very calm month, as the S&P 500 traded in a range of only 2.60%, which was the 7th tightest range for a month going back to 1970. Over the past three months the S&P 500 has dropped only 2.2% even though it was lower all three months. A 1.9% three-month drop in late ’84 is the last time there was a stronger three-month losing streak. Looking at the sector breakdown, financials and utilities were the only groups to sport a gain on a total return basis, while healthcare and real estate were the two big losers.
- The best six months of the year. Now that October has ended, equities begin the historically bullish timeframe of November to April. From 1950 to 2015, the S&P 500* has gained 1.4% on average during the May to October timeframe, while gaining 7.1% from November to April. We will look into this phenomenon much more over the coming days, but today on the LPL Research blog, we will take a closer look at sector seasonality as it pertains to November.
*Any data prior to March 4, 1957 is back-tested, as published by the index’s parent company, S&P DOW Jones Indices. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns.
- ISM Mfg. (Oct)
- Vehicle Sales
- Japan: Bank of Japan Meeting (No Change Expected)
- ISM Non-Mfg. (Oct)
- UK: Bank of England Meeting (No Change Expected)