- Stocks flat as earnings season approaches. (10:20am ET) U.S. equities are little changed in early trading after a range-bound session on Monday left the S&P 500 down 0.4%. Energy (-1.5%) and the rate-sensitive telecom (-1.1%) and utilities (-1.3%) sectors led the decline, while healthcare (+0.4%) advanced following corporate earnings and buyout announcements. Overseas, Asian indexes were mostly lower following the domestic weakness; the Nikkei (-0.8%) and Shanghai Composite (-0.3%) both fell, though the Hang Seng rose 0.8%. European stocks are near flat in afternoon trading; the STOXX 600 is unchanged. Elsewhere, U.S. dollar weakness is helping support WTI crude oil prices ($51.80/barrel), which fell 3.8% yesterday on renewed oversupply concerns, while COMEX gold ($1189/oz.) is moving higher and Treasuries inch lower; the yield on the 10-year Treasury is up a basis point to 2.38%.
- Treasury yields move lower during first week of new year. The 10-year Treasury yield continued its recent breather last week, losing 3 basis points (0.03%) to close the week at 2.42%. Technical factors, shorts in the futures market, and the downward pull of global yields may continue to put downward pressure on yields in the near-term, though we do believe that ultimately rates will move moderately higher over the course of the full year, a subject we discuss further in this week’s Bond Market Perspectives, due out later today.
- Yield curve flattens for week. Short-term rates, which are driven more by Fed policy, were basically flat last week, while long-term rates fell slightly, driven by economic and inflation expectations, leading to a flattening of the yield curve. Though the yield curve has flattened from its post-election highs in recent weeks, it remains significantly steeper than it was pre-election, indicating that markets are still pricing in faster growth and inflation expectations based on President-elect Trump’s policies.
- Inflation expectations remain range bound near 2%. Part of the reason for the drop in longer-dated Treasury yields last week was a small drop in inflation expectations. Expectations have hovered between 1.9% and 2% for the past couple of weeks, but have had trouble moving above the Fed’s ultimate target of 2%. We continue to believe that stable oil prices could drive headline inflation above 2% over the course of the year, which could benefit sectors such as TIPS, though interest rate sensitivity remains a headwind for the sector, leaving us neutral overall.
- Municipal to Treasury ratios stable on the week. Though municipal bond funds experienced yet another week of outflows ($2.9 billion for the week ended 12/28), a seasonal lull in supply helped overall performance of the Bloomberg Barclays Municipal Bond Index (0.51%) outperform the Bloomberg Barclays US Aggregate Government – Treasuries Index (0.18%). This meant that 10- and 30-year AAA municipal-to-Treasury ratios became slightly more attractive than the previous week’s levels, at 94% and 101% respectively, but reflecting valuations that are just slightly more expensive relative to their five-year average.
- High-yield spread breaks 4% level. Following several weeks of hovering near the 4% level, the spread of the Barclays High Yield Index to comparable Treasuries broke below 4% and stayed there through the end of the week. We continue to like high yield for its above-average yield in a still low-yield environment, though valuations continue to be a potential concern as the high-yield market appears to be pricing in most of the good news from Trump’s pro-business policies and continued stability in oil prices, indicating less room for error in this asset class.
- Libor moves above 1%. Libor, which had been range bound just below the 1% level following the Fed’s rate hike, finally moved above 1% this week. This level is key for the asset class as many bank loans hold a Libor floor of 1%, meaning rates don’t truly float until they are above that level. Bank loans are sensitive to the economic environment like high-yield bonds, meaning any equity market weakness could impact them, but we continue to believe that their above-average yield and ability to float with Libor may be beneficial this year given our view of a moderate rise in rates by year end.
- “Animal spirits” evident in the first post-election National Federation of Independent Business Small Business sentiment index. The index rose more than 7 points between November and December 2016, the largest one-month increase in nearly 40 years. The 105 reading on the index in December 2016 was the highest in 12 years. Capital spending plans among the survey respondents surged by 8 points, and are at the highest level in 15 years. Small businesses account for the majority of hiring in the U.S. economy and are a key driver of capital spending.
- Perfect 11 for 11? Based on Thomson Reuters data, all 11 S&P sectors may produce year-over-year earnings growth for the fourth quarter of 2016. Should this be achieved, it would be the first time since the third quarter of 2011. The biggest potential stumbling block? Industrials will need a 3.5% upside surprise to produce an annual gain. See our latest Weekly Market Commentary for a preview of the upcoming earnings season.
- Strong start to 2017 for healthcare. Healthcare leads all sectors so far in 2017 with a 3.4% return (vs. S&P 500 up 1.4%), led by biotech which has gotten a boost from a high-profile industry conference. The only S&P industry groups to match biotech’s strong start: internet and internet retail. It’s early-just five trading days are in the books-but the strength is an encouraging sign following a very disappointing 2016 for the sector, which was weighed down by scrutiny on drug price increases and overall policy uncertainty.
- Small ranges and small caps still lagging. The S&P 500 sank 0.4% yesterday, but didn’t do much after the initial gap lower, as it traded in a range of only 0.3%, one of the smallest daily ranges in recent memory. Small intraday moves are nothing new, as the S&P 500 has now gone 16 straight days without trading in greater than a 1% daily range. This is only the 10th time that has happened the past 20 years, but the fourth time since last August. Additionally, the S&P 500 hasn’t closed lower by more than 1% on the day for 61 consecutive days, only the fourth time the past 20 years that the streak has cleared 60. Last, small continued to lag large caps, with the Russell 2000 down 0.7% yesterday. Although it is very early in the year, small caps have been weak relative to large caps so far.
- Over the last month, the LPL Financial Current Conditions Index (CCI) rose 1 point to 224. The CCI has risen well off its 2016 lows and now sits near the middle of its seven-year range. Shipping traffic and credit spreads were the largest positive contributors to the CCI over the last month, while declining mortgage applications and a rise in the CBOE VIX (a measure of stock market volatility) were the largest detractors; no individual factor made an outsized positive or negative contribution.
- Trump News Conference
- Brazil: Central Bank Meeting (Rate Cut Expected)
- Initial Claims (1/7)
- Yellen (Dove)
- Harker (Hawk)
- China: Imports and Exports (Dec)
- Japan: Economy Watchers Survey (Dec)
- Japan: Machine Orders (Nov)
- Japan: PPI (Dec)