- Stocks waffle after Monday losses. (10:26am ET) U.S. equities are straddling breakeven in early trading, after losses in the week’s first day of trading. The S&P 500 closed 0.3% lower yesterday as investors locked in profits from the latest leg of the stock market rally that began in November. Materials (-0.7%) and financials (-0.6%) led the way down, while small caps (Russell 2000 -0.7%) also underperformed. Overnight, Asian equities closed mixed with the Shanghai Composite advancing 0.3% while the Nikkei slipped 0.2%. European stocks are slightly lower in the afternoon session (STOXX Europe -0.2%), heading for a third straight day of losses as Deutsche Bank continues to weigh on sentiment and German industrial orders showed a 7.4% decline, the largest drop since 2009. Meanwhile, the yield on the 10-year Treasury is up to 2.51%, WTI crude oil ($53.42/barrel) is higher by nearly half a percent, and COMEX gold is slightly lower at $1219/oz.
- Treasury prices moved lower on the week. Treasury bonds were lower in price for the week ending March 3, as the risk of a Federal Reserve Bank (Fed) rate hike in March increased. On Tuesday, hawkish commentary by Fed President Dudley caused rate hike expectations to spike from 50% to over 76% as measured by Bloomberg’s probability index (WIRP). Fed Chair Yellen finished the week with more hawkish commentary, increasing the implied probability of a Fed rate hike to 96%. 2-year Treasuries were weaker by 18%, cheapening from a 1.12% yield to 1.32% to end the week. The 5-year yield climbed from 1.80% to 2.02%, and the 10-year rose from 2.31% to 2.49%.
- The yield curve flattened. The Treasury yield curve “bear flattened”, which is when shorter maturities decrease more in price than longer maturities. The result was a flattening of the 2’s to 10’s slope, a measure of the steepness of the yield curve, ending the week at 1.17%. The 2’s to 30’s yield slope was also flatter by 0.07% to 1.76% as the 30-year Treasury bond finished the week at 3.08%. Increased new-issue supply with Tuesday’s $24 billion 3-year notes, Wednesday’s $20 billion 10-year notes, and Thursday’s $12 billion 30-year bonds, may impact the shape of this week’s yield curve.
- Inflation expectations are slightly higher. The 10-year breakeven inflation rate finished the week slightly higher, going from 2.00% to 2.02% according to Federal Reserve Economic Data. The 2.02% level is above the Fed’s 2% inflation target. Although economic data was strong last week, market inflation expectations remain relatively muted.
- Credit spreads narrowed, making corporates more expensive relative to Treasuries. The Bloomberg Barclays US Aggregate Corporate Average OAS index which measures the yield spread relative to U.S. Treasuries, finished the week at 1.12%, down from 1.18% on the prior Friday. The historical average since 1989 has been 1.35%. For context, the highest spread for this index reached 5.55% on December 31, 2008. High-yield spreads moved the most on the week with the Bloomberg Barclays High Yield Average OAS index finishing the week at 3.49%, down from 3.75% the prior Friday. Generally, tighter option-adjusted spreads equate to higher bond prices, a positive to bond holders while widening spreads can negatively impact bond prices. Although neutral on corporates, we continue to believe that current high-yield bond valuations leave little room for error in economic and default forecasts.
- Municipal supply begins to build. Supply in the municipal bond market is building with California set to bring the largest municipal offering of the year to market this week pricing a $2.4 billion general obligation bond deal. Market participants will be closely monitoring this deal for indications of how this highly rated credit ([Aa3/AA-/AA-] with stable outlooks from Moody’s, S&P Global, and Fitch) will perform in the primary market. The Bond Buyer 30 Day Visible Supply grew from $9 billion the prior week to $14.8 billion as of Friday, March 3.
- ACA replacement bill proposed by the House. The reaction on both sides of the aisle to the Affordable Care Act (ACA) replacement proposal released yesterday highlights the challenges that lie ahead related to getting the first phase of the healthcare overhaul done. Budgetary constraints, “anti-entitlement” sentiment, and a small Republican majority in the Senate will make passage difficult, meaning a scaled-down version is likely. From a market perspective, we remain focused on the implications of the healthcare battle for corporate tax reform, which we expect to be delayed into late 2017 or possibly even early 2018. The number of insured patients, a key metric for healthcare investors is likely to fall, but by how much remains very difficult to predict.
- Weakness under the surface? The S&P 500 fell 0.3% yesterday, which was the sixth consecutive day of alternating between higher and lower closes. What stood out about the action was potential weakness under the surface. Yesterday was the first day since November 4, 2016 the New York Stock Exchange (NSYE) saw more issues close at a 52-week low than 52-week high. Taking it a step further, the S&P 500 was also less than one percent away from a new all-time closing high yesterday. The last time there were more lows than highs and the S&P 500 was less than one percent from a new high was July 2015.
- Red is rare in 2017. The S&P 500 finished lower yesterday, but should it close in the red today that would end a very unique streak. It has now been 25 consecutive trading sessions the S&P 500 hasn’t closed lower two days in a row. That sums up rather nicely the persistent bid equities have seen so far this year. It made it to 25 in a row last summer and early 2014 before that. The last time it made it to 26 consecutive days (so that would happen if green today) was more than five years ago in early 2012. That streak made it to 29 straight days without back-to-back losses.
- China: Imports and Exports (Feb)
- Japan: Economy Watchers Survey
- Initial Claims (3/5)
- Challenger Job Cut Announcements (Feb)
- Household Net Worth and Flow of Funds (Q4)
- European Union leaders Summit in Brussels Begins
- Eurozone: European Central Bank Meeting (No Change Expected)
- Employment Report (Feb)
- European Union leaders Summit in Brussels Continues