Market Update: Tuesday, March 14, 2017


  • Global equities take a step back. (10:06am ET) U.S. markets opened lower this morning after producer price index data came in above expectations, rising for the fourth consecutive month. Trading was muted Monday as most sectors gained ground, but no S&P 500 sector moved more than 0.3%. Overseas, Japan’s Nikkei (-0.1%) and China’s Shanghai Composite (+0.1%) also ended little changed while India’s Sensex (+1.7%) closed at a 2-year high. European stocks are moving lower across the board in afternoon trading; the STOXX Europe 600 is down 0.3% as investors trade cautiously ahead of tomorrow’s Dutch elections. Meanwhile, WTI crude oil continues to slip as it trades below $48/barrel, COMEX gold is seeking support just above $1200/oz., and the yield on the 10-year Treasury note has fallen 2 basis points (0.02%) to 2.60% after closing at a nearly 3-year high.


  • Treasury prices fall as market adjusts for potential Fed rate hike.  Treasury yields moved higher last week as the market priced in the potential for a Federal Reserve (Fed) rate hike at this week’s Federal Open Market Committee (FOMC) meeting. Selling pressure early in the week led to higher yields across the curve as rates moved above the mid-December highs. The yield on the U.S. 10-year Treasury finished higher by 0.09% to 2.58%, but not before hitting 2.61% early on Friday, a new high for the year. Keep in mind that yields moved lower in the month following the December 2015 and 2016 Fed rate hikes so we will be tracking this if the Fed raises this week.
  • International bond prices followed U.S. Treasuries lower. Italian bonds were cheaper on the week as yields moved 0.26% higher, from 2.09% to 2.35% on Friday. Prices of Spanish bonds also fell, with yields moving 0.20% higher from 1.68% to 1.88% as higher yields in the U.S. lured investors away. Higher quality bonds in Germany performed better with the 10-year finishing the week slightly cheaper, as yields moved from 0.35% to 0.48%. This puts the U.S. 10-year advantage to the German 10-year at 2.10% and climbing as U.S. rates move higher.
  • Treasury yield curve steepens on the week. The 2-year Treasury was higher in yield but less dramatically than the 10-year, leading to a steeper yield curve. Generally, when the Fed hikes rates, the 2-year cheapens more than the longer bonds. This occurred earlier in the month so last week the 10-year caught up. This brings the 2’s to 10’s slope, a measure of the steepness of the yield curve, to 1.22%. We discuss the relative value of different bond maturities across the yield curve in more detail in this week’s Bond Market Perspectives, due out later today.
  • Inflation expectations range bound at the 2% level. 10-year breakeven inflation finished the week slightly lower, moving from 2.01% to 2.00%. The 2.00% level meets the Fed’s 2% inflation target. Declining commodity and oil prices have held inflation in check at this time.
  • U.S. Treasury futures declined slightly. The latest Commitments of Traders report, released by the Commodity Futures Trading Commission (data through March 7) shows that net-short bets in 10-year Treasury notes declined somewhat as traders covered towards the end of February on higher 10-year prices. The net-shorts are still elevated however. Traders did increase net-short positions in 2-year, 5-year, and 30-year bonds, a bet that these maturities will decline in value.
  • High-yield corporate spread widens amid heavy supply. The spread between high-yield corporate and U.S. Treasury yields widened from 3.40% to 3.80% on the week. Much of this move can be attributed to increased new issuance supply as issuers try to get ahead of the Fed rate hike. Also as we wrote in last week’s blog, high yield has outperformed year to date, returning 2.59% prior to last week as measured by the Bloomberg Barclays High Yield Index. This strong start, coupled with stellar performance last year of 17%, has many investors taking profits ahead of potential rate hikes and volatility in the oil market.
  • Healthcare reform road gets tougher. We still think Republicans stand a good chance of getting healthcare reform done in the next several months, but the analysis from the non-partisan Congressional Budget Office (CBO) released yesterday makes the road bumpier. The report scored the Republican House “repeal and replace” plan as leaving 14 million more people without insurance in 2018 and 24 million by 2026, most of this resulting from cuts in Medicaid funding. Although the House bill was never going to become law, the road through Congress just got tougher politically and market participants will likely get more reminders that the path is bumpy and corporate tax reform could be slimmed down relative to expectations and could slip into early 2018.
  • China releases second-tier economic data showing stability. Fixed Asset Investments (basic infrastructure) continues to be a major driver of the economy, and produced a better-than-expected report. Industrial production was also strong, gaining 6.3% – better than expectations and previous readings. The one disappointment was retail sales, which although it grew at 9.5%, was below expectations and previous readings. Though the government would like higher retail spending, overall the data suggest that the Chinese government has the ability to shift its focus from economic growth to dealing with property price bubbles and the over-leverage in the real estate market.
  • Does a lack of volatility mean complacency? The S&P 500 traded in a range of only 0.25% yesterday, the smallest range this year and one of the tightest ranges ever going back 50 years. Small ranges are nothing new, as the S&P 500 hasn’t traded in a daily range of more than one-percent for 59 consecutive days, an all-time record. Additionally, the S&P 500 hasn’t closed down by 1% or more for 104 consecutive trading days, one day away from tying the longest streak since late 1995. Could this historic lack of volatility be a sign of massive investor complacency? Be sure to read the LPL Research blog later today as we take a closer look at this important question.


Click Here for our detailed Weekly Economic Calendar



  • Empire State Mfg. Report (Mar)
  • CPI (Mar)
  • Retail Sales (Mar)
  • FOMC Decision (Rate Hike Expected)
  • FOMC Economic Forecasts and “Dot Plots
  • Yellen Press Conference
  • General Election in the Netherlands
  • China’s Premier Li Holds Annual Press Conference


  • Philadelphia Fed Mfg. Report (Mar)
  • US Debt Ceiling Reinstated
  • President Trump to Release His FY 2018 Budget
  • UK: Bank of England Meeting (No Change Expected)
  • Japan: Bank of Japan Meeting (No Change Expected)



Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

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High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

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