- U.S. equities look to bounce back. (10:24am ET) Markets opened modestly higher this morning amid little economic data, with four Fed officials slated to speak today. On Monday, the S&P 500 (-0.2%) dipped, led lower by financials (-0.9%) and utilities (-0.7%). In Asia, South Korea’s KOSPI (+1.0%) led the region, the Shanghai Composite (+0.3%) also advanced, and the Nikkei (-0.3%) lost ground after reopening following Monday’s holiday. In Europe, stocks are slightly higher on strength from automakers and financials. Meanwhile, WTI crude oil ($49.00/barrel) is up slightly on chatter that OPEC will look to extend production cuts, COMEX gold ($1240/oz.) is looking to advance for the fifth consecutive day, and the yield on the 10-year Treasury is down 1 basis point (0.01%) to 2.46%.
- Treasury prices higher despite Fed hike. Treasury yields moved lower even though the Fed raised rates by 0.25% last week. Selling pressure early in the week led to higher yields across the front end of the curve prior to the Fed hike. The 10-year yield remained above mid-December highs through Tuesday’s session but fell after the rate hike on Wednesday, finishing the week lower by 0.08% to 2.50% after the market viewed the Fed commentary to be slightly dovish. The long end of the curve also finished the week lower by 0.05% to 3.11% on the 30-year bond.
- Yield curve flattens. The Treasury yield curve flattened as 7-year and longer bonds moved lower in yield on the week. The result was a flattening of the 2’s to 10’s slope, a measure of the steepness of the yield curve measured by the difference between 2-year and 10-year Treasury yields, ending the week at 1.17%, flatter by 0.05% from March 10. The 2’s to 30’s yield slope was also flatter by 2 to 1.78%.
- Fed fund futures show little concern for a May 2017 rate hike. The market is pricing in a 13% chance of a hike at the May 2-3 meeting, although expectations rise to 54% by June, and an 89% chance by December 2017. Markets are still pricing in a slightly slower trajectory than the Fed, but expectations are much more in line with Fed thinking than they were in early 2016.
- U.S. Treasury futures decline slightly. The latest Commitments of Traders report, released by the CFTC (data through March 14) shows that net-short bets in 10-year Treasury notes declined somewhat as traders covered on higher 10-year prices, although the net-shorts are still elevated. Traders did increase net-short positions in 3-month, 5-year, and 30-year bonds, a bet that these maturities will decline in value.
- Foreign bonds, preferreds, and EMD deliver solid week. Unhedged foreign bonds, preferreds, and emerging markets debt (EMD) were standout performers last week, with unhedged foreign bonds returning 1.65% (as measured by the Citigroup World Government Bond Index Unhedged), preferreds finishing at 1.14% (as measured by the BofA Merrill Lynch Hybrid Preferred Securities Index), and EMD closing up 0.79% (as measured by the JP Morgan EMBI Global Index). Treasury Inflation-Protected Securities and investment-grade corporate bonds also outperformed the Bloomberg Barclays Aggregate Index on the week. Bank loans were the only fixed income sector to decline on the week.
- Libor continues its rise. Libor continued to move higher last week, ending the week near 1.15% (a 7-year high) following the Fed rate hike. Libor is up from 1.06% a month ago and 0.62% a year ago (0.53% increase). This move higher is a positive for bank loans because in most cases, interest rate payments for the asset class float with moves in three-month Libor. We explore bank loans in more detail in this week’s Bond Market Perspectives, due out later today.
- U.K. inflation rising. This is due in large part to weakness in the U.K. pound (around 16% decline) since last June’s vote to leave the European Union. Headline inflation was 2.3% for the twelve months ending in February, higher than expected and up from the 1.8% return recorded just one month earlier in January. Food and fuel were major contributing factors, along with imported items like computers and other consumer electronics. U.K. Prime Minister Theresa May is now targeting March 29 to formally invoke Article 50 of the Treaty of Rome to begin the process of leaving the EU.
- Black swan warning? The CBOE SKEW Index hit an all-time high on Friday, suggesting an increased demand to be hedged against tail risk (aka a Black Swan event). We have heard a lot about how complacent investors are currently, but this would suggest there is indeed a good deal of concern at current levels. The previous record high occurred immediately following the June 2016 Brexit vote; since then the S&P 500 has gained more than 16%. This is only one instance, but it shows new highs in the indicator aren’t always bearish. Today on the LPL Research blog we will take a closer look at the Black Swan indicator.
- Another day, more muted moves. The S&P 500 fell for the third consecutive day yesterday, but all of the losses have been by 0.20% or less. In fact, yesterday was the 109th consecutive day the S&P 500 hasn’t closed down 1% or more. Should it not drop 1% today, it will tie the 110-day streak from early 1995, with the 112-day streak in 1985 next on the list. You have to go back to the 1960s for a longer streak. Last week on the blog, we took a look at what happens after streaks of more than 100 days or more without a 1% drop.
- Dudley (Dove)
- Existing Homes Sales (Feb)
- New Home Sales (Feb)
- Yellen (Dove)
- Kashkari (Dove)
- Kaplan (Hawk)
- Eurozone: Consumer Confidence (Mar)
- Japan: Nikkei Mfg. PMI (Mar)
- China: PBOC’s Zhou Speech