- U.S., Asian equities continue slide. (10:38am ET) The S&P 500 is lower this morning after posting its biggest loss of the year yesterday. Nine of 11 sectors fell, led down by energy (-1.7%) and materials (-1.0%); utilities and consumer staples bucked the trend to eke out minor gains. Overnight, the Bank of Japan left rates unchanged and raised growth forecasts, though the Nikkei fell 1.7%. Elsewhere in the region, India’s Sensex lost 0.7% while China’s Shanghai Composite remains closed for the week. In Europe, exchanges are modestly lower (STOXX Europe 600: -0.2%) as investors shrug off strong economic data, including Eurozone GDP that expanded at a faster rate than the U.S. last year for the first time since 2008. Meanwhile, WTI crude oil ($53.13/barrel) sits in the middle of this year’s range, COMEX gold ($1217/oz.) is up 1.7%, and the yield on the 10-year note is down 5 basis points (0.05%) to 2.44%.
- Muted returns for fixed income sectors last week. Most fixed income sector returns were muted to lower through Thursday. Friday’s weaker-than-expected fourth quarter gross domestic product (GDP) came in at 1.9%, compared to the economist survey of 2.2%. This helped fixed income sectors to recover slightly, as lower growth was interpreted to be less inflationary.
- Treasury prices bounce around to end the week slightly lower in price. Despite higher prices in Friday’s session as a result of disappointing economic data, prices ended the week lower with the U.S Treasury 10-year bond moving from 2.48% on Monday to 2.49% on Friday. The weekly price movement continued the pattern observed this January: prices have risen in Monday’s session, only to fall gradually throughout the week.
- Slightly flatter yield curve on the week. The 2-year Treasury yield was higher by 0.02% on the week, moving from 1.20% to 1.22%, whereas the 10-year Treasury finished higher by 0.01%. This decreases the 2-year to 10-year slope, a measure of the steepness of the yield curve, to 1.27%. The 2-year to 30-year yield slope was also narrower on the week by 0.01%, as the 30-year Treasury bond moved higher from 3.05% to 3.06%.
- Inflation expectations continue to rise. Inflation expectations as measured by the 10-year breakeven inflation rate rose last week from 2.00% to 2.08%. The new level is above the Fed’s 2% inflation target and is the highest reading year to date. Additional economic strength and improving oil prices could cause inflation to move higher.
- Bond prices lower in Italy and Germany. Italian bonds were cheaper on the week as yields moved from 2.01% to 2.25%. This dramatic move higher in yield was sparked by Wednesday’s Italian court decision to allow for early voting. Although expected to pass, sellers interpreted this as adding volatility to the bond market. The German bund 10-year prices were lower on the week, with the yield rising from 0.42% to 0.48%. This brings the spread between the U.S. 10-year Treasury and the comparable German bund to 2.01% (0.48% vs. 2.49%).
- What’s in a fixed income benchmark? Stock market indices are fairly easy to understand, while fixed income indices can be more opaque and less intuitive. In this week’s Bond Market Perspectives, we dig into fixed income benchmarks like the Barclays Aggregate, explaining their makeup and how market forces can change them over time.
- BOJ stands pat. As expected, the Bank of Japan (BOJ) left monetary policy unchanged this morning after its first meeting since the U.S. election. In his post-meeting statement, BOJ Governor Kuroda made several comments about the United States and how increased protectionism may hinder global economic growth. The BOJ did increase its estimate of Japan’s GDP, up to 1.4% from the earlier 1% forecast. The Japanese yen strengthened modestly overnight, while stocks in Tokyo fell 1.7%, carrying on the sell-off that began in the United States.
- The worst day of the year. The headlines will say it was the worst day of the year for equities, but the S&P still lost only 0.6% on the day. To put this in perspective, nine days in January 2016 closed at least 1% lower. Yesterday was down as much as 1.2% at the lows, but late-day buying helped stem some of the weakness. It is always nice to see late-day buying, as it can potentially be a sign of institutions buying into the weakness. Lastly, today is the final trading day of the month, a day that has been weak recently–four of the past five months have seen the S&P 500 close in the red on the final trading day.
- Did volatility just bottom? During the worst day of the year for equities, the CBOE Volatility Index (VIX) spiked more than 12%–its largest one-day jump since before the U.S. election. With the VIX near historically low levels, could this be the start of a higher period of volatility? For starters, the VIX often reaches a bottom in January, with only July and December reaching a calendar-year low more often. February following an election year has been the worst month, down 1.8% on average, again increasing the odds of higher volatility in the near term. When the VIX has been low (sub-15) there has always been worry how it is “too low” and an assumed blast of higher volatility could be right around the corner. The good news is historically a low VIX has been more bullish for equities going out three to six months than a higher VIX. We will take a closer look at this on the LPL Research blog later today.
- Employment Cost Index (Q4)
- Chicago Area PMI (Jan)
- Eurozone: GDP (Q4)
- Eurozone: CPI (Jan)
- Germany: Unemployment Change (Jan)
- UK Parliament Begins Debate on Article 50 (Brexit)
- Japan: Bank of Japan Meeting (No Change Expected)
- China: Official Mfg. PMI (Jan)
- China: Official Non-Mfg. PMI (Jan)
- India: GDP (2016)
- ADP Employment (Jan)
- ISM Mfg. (Jan)
- Vehicle Sales (Jan)
- FOMC Statement
- UK Parliament Expected to Vote on Authorizing Article 50 (Brexit)
- India: 2017-18 Budget Speech
- UK: Bank of England Meeting (No Change Expected)
- China: Caixin Mfg. PMI (Jan)