- Stocks near flat after two down days. (10:37am ET) U.S. equities are treading water this morning after a late-day rebound in yesterday’s session couldn’t bring any of the major averages above their flat lines. The S&P 500 closed down 0.2% to begin the second quarter; materials and consumer discretionary led the way lower, both sliding 0.4%, while telecom (+0.4%) and real estate (+0.2%) benefited from falling bond yields. Overnight in Asia, a number of major markets were closed for holidays; Japan’s Nikkei dropped 0.9% amid strength in the yen. In Europe, stocks are little changed with the FTSE 100 (+0.4%) displaying relative strength. Finally, WTI crude oil ($50.49/barrel) and COMEX gold ($1259/oz.) are both higher by nearly half a percent, and the yield on the 10-year Treasury is near the bottom of a 4-month range at 2.34%.
- Intermediate Treasury yields flat on week. 2-year Treasury yields moved higher by 1 basis point (0.01%) despite intermediate maturity yields ending flat last week. The market rallied slightly through Tuesday’s session as risk-off assets performed better after the failed healthcare vote on March 24. The market settled with the 10-year Treasury yield ending the week unchanged at 2.38%. The long end of the curve finished the week higher in yield by 0.02% at 3.02% on the 30-year bond.
- The yield curve continues to flatten. The Treasury yield curve remains flat relative to earlier this year as the 2’s to 10’s slope, a measure of the steepness of the yield curve, ended the week at 1.13%. That measure of steepness has fallen further to 1.09% as of April 3. The 2’s to 30’s yield slope was nearly unchanged ending the week at 1.75%.
- Strong 2-, 5-, and 7-year Treasury auctions last week point to international demand. The 2-year Treasury auction saw 53.6% indirect (foreign) participation up from 49.8% last month according to U.S. Treasury data. The 5-year auction was also well received with 68.9% of the $34 billion purchased by indirect bidders. The 7-year auction for $28 billion placed 71% in foreign hands above the 63% takedown in February, so international participation remains strong in U.S. Treasury auctions.
- U.S. Treasury futures decline slightly. The latest Commitments of Traders report, released by the CFTC (data through March 28, 2017) shows that net-short bets in the 10-year notes declined somewhat as traders covered on higher 10-year prices. The net-shorts are still elevated relative to history however.
- Preferreds, municipal high-yield, and EMD deliver solid first quarter. Preferreds, high-yield municipals, and emerging markets debt (EMD) were standout performers in the first quarter, with the BofA Merrill Lynch Hybrid Preferred Securities Index returning 5.8%, the Bloomberg Barclays High Yield Municipal Index finishing the quarter up 4.1% and the JPMorgan EMBI Global Index (EMD) closing up 3.9% on the quarter. The longer duration profile of these asset classes (especially preferred and high-yield municipals) helped performance, and a string of solid economic data and a continued search for yield in the market also played a role. In this week’s Bond Market Perspectives, we dive deeper into first quarter 2017 performance and look at which trends we think will continue through the remainder of the year.
- Manufacturing rebound continues. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) for March decelerated from 57.7 to a still strong 57.2, in line with consensus estimates (above 50 indicates expansion). Internal numbers were robust, with the employment component rising to the highest level since June 2011, solid new orders, and a meaningful rise in new export orders. Improving global growth, a stabilizing dollar, and a rebound in oil prices have all been contributing to the rebound in manufacturing, which may be part of a developing trend of accelerating business spending in 2017.
- Construction spending rises. Construction spending rose 0.8% in February after contracting in January. Spending came in below consensus expectations, but the miss was more than offset by a solid upward revision to January’s data. Growth was focused on residential construction, where tight supply and high prices are likely pulling builders back into the market, while spending on business construction contracted. The lack of business construction indicates that the recovery in business spending may still be patchy and rising confidence has not yet fully fed through to economic activity.
- Trade data positive despite slower trade activity. February’s trade deficit came in at $-43.2 billion, ahead of consensus estimates of $-44.5 billion and a sizable improvement on January’s disappointing $-48.2 billion. The data should provide a boost to first quarter 2017 gross domestic product (GDP), released later this month. The improved data were largely driven by a decline in imports (-1.8%), but did show a small gain in exports (0.2%), a positive sign for global growth, with the total value of exports rising to their highest level since 2012. The decline in imports outpaced the growth in exports, indicating slowing trade activity. While policy risks around trade remain, but the general macroeconomic backdrop for trade may be improving.
- Eurozone: Eurostat Retail Sales Volume (Feb)
- ISM Non-Mfg. (Mar)
- Eurozone: Markit Services & Composite PMI
- Initial Jobless Claims (Apr)
- Eurozone: Market Retail PMI (Mar)
- Change in Nonfarm, Private & Mfg. Payrolls (Mar)
- Unemployment Rate (Mar)
- Average Hourly Earnings (March)