- Global markets steady ahead of Yellen testimony. (10:08am ET) The major U.S. indexes opened barely lower after reaching record heights Monday, and ahead of Fed Chair Janet Yellen’s two-day testimony to the Senate Banking Committee that began this morning. All but one sector advanced Monday for the second straight session; financials (+1.1%) and industrials (+1.0%) led the pack while telecom (-1.3%) starkly underperformed. In Asia, both the Shanghai Composite and the Hang Seng closed near flat after China CPI came in above expectations, however, the Nikkei (-1.1%) bucked the wait-and-see approach as concerns over conglomerate Toshiba weighed. In Europe, markets are largely unchanged in afternoon trading as gains in automakers have been offset by losses in healthcare. Elsewhere, WTI crude oil ($53.49/barrel) is rebounding from yesterday’s 1.7% slide, COMEX gold ($1233/oz.) is up 0.6%, and the yield on the 10-year Treasury note is up 5 basis points (0.05%) to 2.48%.
- Treasury auctions weigh heavily on yields. Treasury prices moved higher on the week with the 10-year Treasury yield starting at 2.49% and ending the week at 2.41%. Prices moved higher after Tuesday’s successful $24 billion 3-year Treasury auction which saw foreign (indirect bidders) buy 70.5% of the auction. Wednesday’s trading session began with prices moving higher but a poor 10-year auction later in the day led to cheaper Treasury prices. Thursday’s $15 billion 30-year auction was well received with foreign bidders buying 66.2%, well above the 6-month moving average of 61.6%.
- Yield curve flattens for week. The 2-year Treasury yield fell by 0.01% on the week, from 1.21% to a 1.20%, while the 10-year finished the week lower in yield by 0.08% to 2.41%. This reduces the yield curve steepness (as measured by the difference between 2- and 10-year yields), to 1.21%, down 0.07% on the week.
- Inflation expectations remain range bound near 2%. Inflation expectations decreased from 2.05% on Monday to 2.00% on Friday. Oil had little impact after the market shrugged off higher-than-expected crude inventory builds of 13.8 million barrels (vs. estimates of +2.5 million) as reported by the Department of Energy (DOE) on Tuesday. We continue to monitor oil prices, which could drive headline inflation higher.
- Shorter-maturity Municipals outperform U.S. Treasuries. Municipal prices moved higher on the week with the 2-year Municipal Market Data (MMD) AAA yield lower by 0.06% on the week from 1.08% to 1.02%. The 5-year muni was higher in price with the yield lower from 1.62% to 1.52%. The 10-year muni yield finished the week 0.05% lower, moving from 2.33% to 2.28%. The longer 30-year maturity also finished lower in yield by 0.03%. Declining municipal yields led to 10-year and 30-year AAA-municipal-to-Treasury ratios that are on the cheaper side of their recent range, finishing the week at 95% and 101%, respectively.
- Greek yields come under pressure. The Greek 2-year saw lower prices on Thursday February 9, with yields moving from 8.23% to 9.95%. The loss quickly dissipated in Friday’s session as investors stepped in to buy, pushing yields back down to 8.7% after rumors that the International Monetary Fund (IMF) and the European Union might work together to resolve the Greek debt crisis. The Greek yield curve (as measured by the difference between 10-year and 2-year yields) is inverted by 1% as the yield on the 10-year is lower at 7.61%. Inverted curves usually signal an economic recession.
- Happy anniversary to high yield and oil! Oil’s recovery from a bottom of $26/barrel one year ago (February 11, 2016) has led to standout performance by high yield, as measured by the Bloomberg Barclays High Yield Index, over the last year. That performance has left spreads over comparable Treasuries near post-recession lows, limiting future return potential. In this week’s Bond Market Perspectives due out later today, we dig into market internals, credit quality, default expectations and what may be in store for the asset class in the year to come.
- Small business optimism continues to improve. This reflects the possibility that President Trump and a GOP-led Congress will reduce regulation, simplify the tax code, cut tax rates, and improve the nation’s infrastructure. The small business sentiment index accelerated from December 2016 (105.8) to January 2017 (105.9), and exceeded expectations (105.0). The 105.9 reading was just shy of the 106 to 107 readings hit on this index in 2004, and three points below the all-time high of 108 hit in 1983.
- Chinese inflation beats expectations. Consumer inflation rose 2.5% on a year-over-year basis, slightly ahead of both expectations and previous data. However, producer price inflation rose 6.9% year over year, much higher than both history and expectations. The gains in producer prices are largely attributable to higher costs in the commodity sector, including oil, gas, coal mining, and steel production. The data provide impetus for the central bank to tighten monetary policy, which would also further support the yuan. Chinese stocks were flat overnight, with the yuan marginally stronger.
- Eurozone GDP data mildly disappoints. The region’s economy grew at just 0.4% for Q4 2016 and 1.7% for all of 2016, in both cases 0.1% lower than expected. Both Germany (Europe’s perennial strongman) and Italy (one of the weaker countries) disappointed. Spain grew at 0.7%, leading the larger countries in the region. Forward-looking indicators, such as PMIs and sentiment data still point to a stronger year in 2017. Stocks across Europe were largely unchanged this morning, although the euro was marginally higher.
- NFIB Small Business Optimism Index (Jan)
- Fed Chair Yellen’s Semiannual Monetary Policy Testimony to Congress-Senate
- Kaplan (Hawk*)
- Eurozone: GDP (Q4)
- Germany: ZEW (Feb)
- CPI (Jan)
- Retail Sales (Jan)
- NAHB Housing Market Index (Feb)
- Fed Chair Yellen’s Semiannual Monetary Policy Testimony to Congress-House
- Housing Starts (Jan)
- Philadelphia Fed Mfg. Report (Feb)
- G-20 Foreign Ministers meeting
- Eurozone: Account of the 01/19/17 European Central Bank meeting released
- Leading Indicators (Jan)