- U.S., Europe higher with earnings in focus. (11:06 am ET) U.S. equities are moving higher this morning as traders eye earnings from General Motors and Dow component Disney, among others. The gains come as major indexes look to bounce back from modest losses in Monday’s session which saw energy stocks (-0.9%) lead to the downside as oil prices pulled back amid dollar strength; tech and industrials were the only sectors to finish positive. Overseas, trading in Asia left indexes mostly lower in a relatively quiet session; the Nikkei (-0.4%) was weighed down by a strengthening yen amid risk-off posturing, while the Shanghai Composite (-0.1%) and Hang Seng (-0.1%) fell modestly. In Europe, the STOXX 600 is up half a percent on upbeat corporate earnings. Elsewhere, WTI crude oil ($52.25/barrel) is lower, COMEX gold ($1235/oz.) is higher, and 10-year Treasury yields are down a basis point (0.01%) to 2.40%.
- Friday’s Treasury price action was unexpected. After Friday’s nonfarm payrolls data printed showing the creation of 225,000 new jobs, the stock market rallied. Bond prices reacted higher in the morning session despite the strong data, only to dissipate in the afternoon on hawkish commentary from San Francisco Federal Reserve Bank (Fed) President Williams and Chicago Fed President Evans related to raising rates three times in 2017. On the week, bond prices moved higher in the shorter part of the yield curve, unchanged for 10 years, and lower in price for 30 years (0.05%). Considering the strong economic data, fixed income held its value much better than expected, as wage inflation data were muted.
- Slightly steeper 2’s to 30’s yield curve on the week. The 2’s to 10’s slope, a measure of the steepness of the yield curve calculated by subtracting the 2-year Treasury yield from the 10-year Treasury yield, was unchanged on the week at 1.28%. The 2’s to 30’s yield slope was wider on the week by 0.05% to 1.9%, as the 30-year Treasury bond finished wider by 0.05% at 3.11%. Increased new issuance may impact the shape of the coming week’s yield curve, with $61 billion in 3-, 10-, and 30-year bonds pricing by Thursday.
- Inflation expectations are slightly lower on the week. 10-year breakeven inflation expectations (calculated as the difference between the 10-year Treasury yield and 10-year Treasury Inflation-Protected Security [TIPS] yield) moved higher on Wednesday after the strong ADP payrolls data were perceived to be inflationary, before falling back to end the week at 2.05%, following slower-than-expected wage gains in Friday’s employment report. The current level remains just above the Fed’s 2% target, a level it has held for several weeks.
- Italian bonds fall, German bonds rise. Year to date, the Italian 10-year yield is up 0.42% as the country is working through banking sector weaknesses and a potential exit from the European Union. French elections are causing some rate volatility resulting in cheaper bond prices as yields in the country’s bonds have risen by 0.40% year to date. The German bund 10-year yield was lower on the week by 0.05% (ending the week at 0.41%). This brings the spread between the U.S. 10-year Treasury and the comparable German bund to a still attractive 2.02% (0.41% vs. 2.43%), off its recent peak, but still elevated relative to history.
- High-yield bonds stabilize. High-yield bonds, which returned 17.13% last year, according to the Bloomberg Barclays High Yield Bond Index, have continued to see strength, returning a solid 1.95% year to date. Stability in oil prices has helped high yield’s spread to Treasuries stabilize in recent weeks near 3.8%. We continue to believe the high-yield sector’s above-average yield is attractive in the current environment, though current spreads price in much of the impact of potential regulatory and economic reform from the Trump administration, leaving less room for error.
- Bond Market Perspectives on MBS. In volatile, risk-off markets, when stocks and corporate bonds may lose value, mortgage-backed securities (MBS) have, historically, tended to outperform and aid in diversifying portfolios. At almost 30% of the broad Bloomberg Barclays Aggregate Index, MBS are an option suitable investors should not ignore. We take a closer look in our Bond Market Perspectives, due out later today.
- Trade narrows unexpectedly in December. Trade unexpectedly narrowed in December, but border tax proposals as part of any corporate tax reform, or tariffs imposed by the new administration or Congress could significantly alter the path for trade in 2017 and beyond. At $44.3 billion in December 2016, the nation’s trade deficit on goods and services was smaller than expected ($45.2 billion), and narrower than the $45.7 billion deficit in November 2016. As has been the case for several decades, the trade deficit on goods ($65.7 billion) far exceeded our persistent trade surplus on the service side ($21.4 billion). Trade was a small drag on gross domestic product (GDP) growth in 2016, and absent any major change in trade policy, we expect that trade will be a small plus for GDP in 2017.
- February, now what? As we noted yesterday in our Weekly Market Commentary, the month of February is historically troublesome for equities. Since 1950, the S&P 500 is up just 0.03% on average and higher only 55% of the time. Things get worse during a post-election year, as the month is down 1.8% on average, making it the weakest month of the year. Today on the LPL Research blog, we will take a closer look at this troublesome month and examine what sectors historically do well and which ones do not during the shortest month of the year. Since 1997, we found that materials and energy have consistently outperformed, while utilities and technology have been the two weakest sectors. Be sure to read the blog later today, as we break it all down in much more detail.
- The most boring market ever? As we’ve been noting all year, the lack of volatility we’ve seen from equities so far this year is historic. Yesterday was another example of this as equities gapped modestly lower at the open, then trended sideways in a very small range the rest of the day. Incredibly, the S&P 500 has now gone a record 35 consecutive days without a 1% daily range, breaking the all-time record of 34 days from 1995. It doesn’t stop there though, as the S&P 500 has closed within 1.5% of its all-time high for 60 consecutive days – tied for third-longest over the past 45 years. This year is nearly a mirror opposite of 2016, as that year started off with historic volatitly. As we saw last year though, periods of volatility (or a lack of volatility) don’t last forever – thus greatly increasing the odds of much higher volatility later this year.
 Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
- UK: House of Commons to Vote on Article 50
- India: Reserve Bank of India Meeting (Rate Cut Expected)
- Mexico: Central Bank Meeting (Rate Hike Expected)
- China: Money Supply and New Loan Growth (Jan)
- China: Imports and Exports (Jan)
- Fischer (Dove)