- U.S. equities near flat; earnings, Fed, France in focus. Major domestic indexes are little changed this morning as the Federal Reserve (Fed) kicks off its two-day policy meeting, earnings from bellwether Apple, among others, are due out, and France’s closely watched second round of its Presidential election looms. Yesterday saw U.S. indexes finish mostly higher, with the Nasdaq (+0.7%) outperforming the S&P 500 (+0.2%), which gained on the backs of the technology (+0.8%) and real estate (+0.6%) sectors; while utilities (-0.6%) and telecom (-0.8%) lagged. Overnight, Asian indexes were mixed as the Shanghai Composite (-0.3%) dipped on a disappointing April Caixin Manufacturing Purchasing Managers’ Index (PMI) report, while the Nikkei (+0.7%) and Hang Seng (+0.3%) posted slight gains. In Europe, major indexes are trading higher as the STOXX 600 Index (+0.4%) benefited from positive economic reports and stronger than expected earnings. Finally, bonds are pulling back with the yield on the 10-year Treasury up to 2.34%, COMEX gold is unchanged near $1254/oz., and WTI crude oil is recovering slightly, up 0.4% to $49.03/barrel.
- U.S Treasury yields higher on the week but lower on the month. Despite weaker economic data pointing to lower inflation, the U.S Treasury 10-year bond moved from 2.24% to 2.29%. The U.S. 10-year Treasury fell in yield by 0.11% for the month. The 5-year bond saw similar moves with yields higher on the week from 1.77% to 1.81%, but lower in April by 0.12%. Typically, stock prices and bond prices move in opposite directions. However, in recent weeks stocks have seen gains while bonds prices have only decreased slightly. This disconnect indicates the stock and bond markets may be telling different stories about the pace of economic growth moving forward. We take a look at this disconnect in this week’s Bond Market Perspectives, due out later today.
- U.S. Treasury futures are now net long. The latest Commitments of Traders report, released by the Commodity Futures Trading Commission (data through April 25, 2017) shows that net-long bets in 10-year Treasury notes have increased to a 10-year high. This is quite a swing in sentiment as traders went from record short bets earlier this year to a 10-year high on net-long positions. Traders focused primarily on the steep part of the yield curve (5 to 10 years) to increase net-long positions in 5-year and 10-year bonds, a bet that these maturities will increase in value (and that the yields will decline).
- Breakeven inflation expectations rise, despite oil decline. The price of oil has been declining recently, but inflation expectations did not follow oil lower last week. The 10-year breakeven inflation rate, as measured by the difference between 10-year Treasuries and 10-year TIPS yields, rose from 1.84% to a 1.92% over the course of last week.
- High yield prices move up despite oil moving lower. The spread of the Bloomberg Barclays High Yield Index to comparable Treasuries fell on the week from 3.82% to 3.64%. High-yield spreads are closely correlated to stocks, so last week’s equity performance helped move credit spreads lower in the sector. We continue to like high-yield for its above average yield in a still low yield environment, but valuations are a potential headwind.
- Emerging market debt (EMD) spreads continue to tighten, but risks remain. The average yield advantage of EMD above Treasuries decreased from 3.34% to 3.24% on the week, with spreads hitting their lowest level since oil prices started to fall in late 2014. Higher growth rates in emerging market countries, coupled with the additional yield offered by the sector, has driven performance year-to-date. Fed rate hikes and protectionist trade policy remain risks for the asset class, leaving us neutral overall.
- Municipal to Treasury ratios stable on the week. Municipal bond funds experienced inflows of $144 million for the week ended April 26th according to Lipper data. The 10- year municipal-to-Treasury ratio richened to 92% and the 30-year AAA municipal-to-Treasury ratio cheapened to 102%. It is rare that 10- and 30-year ratios move in opposite directions, but additional demand in the shorter maturities driving prices higher appears to have been the culprit in this case.
- Manufacturing activity slowed in April but remains solidly in expansionary territory. The Institute for Supply Management (ISM) purchasing managers’ index dipped to 54.8 in April, falling short of consensus forecasts of 56.5 and below March’s 57.2 level. Measures of new orders, employment, and prices paid fell, while exports were a bright spot with a small increase. Importantly, this reading is still solidly in expansion territory (above 50), is well above the 2016 average (51.5), and continues to send a positive signal for capital spending and corporate profits. Also note that lower customer inventories suggest a near-term pickup in manufacturing, as did just-reported first quarter 2017 GDP data.
- ISM Non-Mfg. PMI (Apr)
- FOMC Rate Decision (May 3)
- Eurozone: GDP (Q1)
- Eurozone: Markit PMI (Apr)
- Eurozone: Retail Sales (Mar)
- Change in Nonfarm, Private & Mfg. Payrolls (Apr)
- Unemployment Rate (Apr)
- Labor Force Participation & Underemployment Rates (Apr)
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.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
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