Market Update: Tuesday, May 9, 2017


  • Stocks in Asia were mostly higher with South Korea’s KOSPI adding another 1% overnight after hitting a new record high in Monday’s session. Nikkei slipped 0.3% on disappointing wage growth data, Hang Seng +1.3% on bargain hunting in resource firms and flows from mainland China. Shanghai Composite little changed at +0.1%.
  • European stocks are mostly higher with STOXX 600 +0.4%. German DAX +0.6% despite disappointing industrial production data, France CAC (+0.2%) rebounding after shedding 0.9% in prior session.
  • U.S. markets opened higher after the S&P 500 and Nasdaq closed Friday at record levels. The dollar is strengthening, 10-year Treasury yield is up 2 basis points (0.02%) at 2.41%. WTI crude oil is giving back yesterday’s gains, currently near $46/barrel and COMEX gold is down 0.6%.


Fixed Income

  • U.S. Treasury yields higher on the week. Yields ended the week higher (prices lower) with the U.S Treasury 10-year note moving from 2.29% to 2.36%. However, year to date the U.S. 10-year Treasury is lower in yield by 0.09%. The entire Treasury yield curve saw similar moves with yields higher on the week. The 5-year moved from 1.81% to 1.89%, but again the 5-year yield is actually lower year-to-date by 0.04%.
  • International bond prices were lower in Japan and Germany. The Japanese 10-year yield inched higher on the week, moving from 0.01% to 0.015%. The 10-year German Bund saw a larger move higher, from .32% to .42%. This brings the spread between the U.S. 10-year Treasury and the comparable German Bund to 1.94% (.42% vs. 2.36%), still elevated relative to history, but off recent highs. The market- (and Euro-) positive outcome of the recent French elections likely removes at least one source of stress for the European Central Bank’s (ECB) outlook, and likely pushes forward its timetable for tightening, all else equal.
  • Breakeven inflation expectations decline as oil cheapens. The price of oil has been declining recently and inflation expectations followed oil lower last week. The 10-year breakeven inflation rate declined from 1.92% to 1.85% last Friday, according to Federal Reserve Economic Data. The 1.85% level is below the Fed’s 2% inflation target. Additional economic weakness and lower oil prices could cause inflation to move lower, but this may take time to materialize.
  • High yield prices move up despite oil moving lower. The spread of the Bloomberg Barclays High Yield Index to comparable Treasuries moved lower on the week from 3.64% to 3.58%. As spreads move lower, prices move higher, despite the lower oil prices. 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 believe that high yield offers an attractive yield in a low yield environment, but valuations remain a potential headwind.
  • Municipal news led by Puerto Rico filing for debt restructuring. Puerto Rico filed for Title III last week, which will likely end up being the largest debt restructuring in municipal bond history. This debt restructuring option is allowed under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). Title III does not apply to any state outside of Puerto Rico. Markets were not surprised by the filing given Puerto Rico’s issues were well known ahead of time, and Puerto Rico General Obligation debt due in 2035 traded at about 64 cents on the dollar on May 5, similar to its level heading into the filing. We dive deeper into the Puerto Rico filing and what it means for markets in this week’s Bond Market Perspectives, due out later today.

Macro Notes

  • Small business optimism remains high. The National Federation of Independent Businesses (NFIB) Small Business Optimism Index continues to hold strong post-election gains, dipping slightly to 104.5 in April from 104.7 in March, versus expectations of a decline to 103.8. The economic expectations component saw the largest decline, although it remains significantly elevated. Small businesses would likely be among the beneficiaries on the Trump administration’s policy agenda and continued optimism signals expectations remain high.
  • Single digits for the VIX. The Volatility Index (VIX) closed at 9.77 yesterday for the lowest close on the “fear gauge” since December 1993. Going back to 1990, this is only the 10th close beneath 10 and the first since January 2007. Many have noted this could be a sign that complacency is high and a contrarian warning. Be aware that the 1- and 3-month S&P 500 returns are positive after closes beneath the 10 level on the VIX (using the first signal in clusters), so it might not be the warning many claim.
  • How to interpret the jobs report, what it tells us. The monthly nonfarm payrolls report is an important indicator of economic health, but there are many ways to look at the labor market and multiple ways to interpret the data. In this week’s Weekly Economic Commentary, we discuss several key aspects of the report and what the data tells us about the employment landscape since the Great Recession.




Click Here for our detailed Weekly Economic Calendar



  • Monthly Budget Statement (Apr)
  • ECB: Draghi Speaks


  • Initial Jobless Claims (May 6)
  • PPI (Apr)
  • Eurozone: European Commission Economic Forecasts
  • UK: Bank of England Rate & Inflation Report
  • ECB: Publishes Economic Bulletin


  • CPI (Apr)
  • Retail Sales (Apr)
  • Germany: GDP (Q1 Prelim.)
  • Germany: CPI & PPI (Apr)
  • Eurozone: Industrial Production (Mar)

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.

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