Market Update: Tuesday, May 23, 2017

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Yesterday’s Market Activity

  • Stocks rose Monday. S&P 500 gained 0.5% to 2,394, only eight points-or less than 0.5%–from the record closing high set last week. Nasdaq fared better as technology (+0.8%) led.
  • Technology leads again, while only energy (-0.2%) fell-despite higher oil and natural gas prices. Technology is the best performing sector over the past month (+5.7%) and year to date (+18.8%), although defensives (real estate and utilities) have led over the past week, each with 1.1% gains.
  • 10-year Treasury yields inched one basis point (0.01%) higher to 2.25%.
  • WTI crude oil rose 0.9% to $51.13/bbl. ahead of weekly inventory data and amid continued speculation the Organization of the Petroleum Exporting Countries (OPEC) and Russia will extend, or deepen, production cut agreement.
  • U.S. dollar largely unchanged as markets weigh central bank activities, U.S. fiscal and trade policy prospects.

Overnight & This Morning

  • U.S. markets little changed early in the tape with few headlines; focus instead on White House budget, European data, terrorism, and the Federal Reserve (Fed).
  • Asian markets mostly lower overnight but only modestly. European markets slightly higher (including U.K.) on solid Eurozone economic data.
  • 10-year yield is at 2.24%, continues to price in weaker growth outlook than U.S. equity markets.
  • Dollar mixed versus major currencies. House hearing on Border Adjustment Tax, which we don’t think survives, unlikely to move currencies today.
  • Oil little changed amid talks of release Strategic Petroleum Reserve (SPR). WTI crude trading near $51/bbl. Gold down 0.1% near $1260.
  • Trump budget proposal cuts $3.6 trillion in spending over 10 years, including Medicaid and other social programs. Cutting entitlements is always politically difficult, but task will be even tougher in a politically divided Washington. Proposal includes boosts to defense, border security and infrastructure.
  • New home sales and two Fed speakers highlight relatively quiet U.S. economic calendar ahead of Federal Open Market Committee (FOMC) minutes and OPEC meeting later this week.

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Key Insights

  • Terrorism unfortunately in focus again. Last night’s horrific attack in the U.K. that left 22 dead will again shift focus to terrorism. Our thoughts and prayers are with those affected. Although the latest attack, like similar others, will likely have little impact on markets, it will add to the case for more spending on security and defense globally.
  • Stay focused on fundamentals. As we wrote in this week’s Weekly Market Commentary, we believe the best strategy for investors, amidst all of the political headlines, is to focus on the fundamentals of the economy and corporate profits. With stocks near highs and the economy and earnings strengthening, market participants appear to be doing just that. Still, intra-market analysis reveals waning confidence in the White House agenda, as so-called “Trump trades” that would be expected to do well should fiscal policy initiatives be implemented have been lagging.
  • European economies continue to firm. Strong German purchasing managers’ and business confidence surveys were released overnight, supporting European markets in midday trading.
  • White House budget only a start to what will surely be a difficult negotiation. Where the horse trading ends will be important in creating baselines for corporate tax reform.

Fixed Income

  • Treasury prices higher on the week. The flight to higher-quality U.S. Treasury bonds started after equity sell-off last Wednesday. Risk-off sentiment helped intermediate part of the curve outperform long end; 10-year yield down 10 basis points (bp) to 2.23%, 30-year lower by 8 bp. Year to date, 10-year is lower in yield by 22 bp. 30-year bond finished the week lower at a 2.90% yield. 2-year Treasury yields fell by 1 bp on the week, underperforming longer maturities, as this spot is more sensitive to Fed rate hikes.
  • The yield curve flattened to its lowest level year-to-date as 2’s to 10’s slope, a measure of yield curve steepness, ended the week at 95 bp, flatter by 9 bp from prior week. This is 33 bp tighter than the 128 bp in February as investors flocked to Treasuries to minimize risk. The 2’s to 30’s yield slope ended the week 7bp flatter at 162bp.
  • Inflation expectations are at year-to-date lows as 10-year breakeven inflation rate fell from 1.84% to 1.78% according to Federal Reserve Economic Data; now the lowest spread year to date as investors drive nominal Treasury bond yields lower, thus driving breakeven lower.
  • Municipal bonds performed well on the week. 10-year part of the municipal yield curve fell 9bp on the week. Municipal-to-Treasury ratio in 10 years now 97% (2.17% muni/ 2.23% Treasury). 30-year spot down 9 bp on the week. Muni-to-Treasury ratio in 30-years is 104% (3.01% muni/ 2.90% Treasury).
  • Yield is hard to come by. In this week’s Bond Market Perspectives, due out later today, we preview our quarterly Search for Income piece, which looks at our top income-generating ideas across fixed income sectors. With high-quality yields still near all-time lows, investors must take on additional interest rate risk, credit (default) risk, or equity sensitivity in order to gain meaningful yield. We look at some of our favorite sectors and discuss some of the nuances and risks associated with each.

Macro Notes

  • A large amount of European economic data was released Tuesday morning, generally very positive, especially in German manufacturing. Of particular note were German sentiment and business climate data, which bested expectations and have historically been a good indicator of future growth. Services data slightly under-performed expectations, but were still positive.

 

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Click Here for our detailed Weekly Economic Calendar

 Tuesday

  • New Home Sales (Apr)
  • Richmond Fed Report (May)
  • Germany: GDP (Q1)
  • Germany: Ifo (May)
  • France: Mfg. Confidence (May)
  • BOJ: Kuroda
  • Japan: All Industry Activity Index (Mar)
  • Japan: Machine Tool Orders (Apr)
  • Japan: Nikkei Japan Mfg. PMI (May)

 Wednesday

  • Markit Mfg. PMI (May)
  • Markit Services PMI (May)
  • Existing Home Sales (Apr)
  • FOMC Meeting Minutes (May 3)
  • France: Markit Mfg. & Services PMI (May)
  • Germany: Markit Mfg. & Services PMI (May)
  • Eurozone: Markit Mfg. & Services PMI (May)
  • Canada: BOC Rate Decision (May 24)

 Thursday

 Friday

  • GDP (Q1)
  • Personal Consumption (Q1)
  • Durable Goods Orders (Apr)
  • Capital Goods Shipments & Orders (Apr)
  • Italy: Business Confidence in the Mfg. Sector (May)
  • Italy: G7 Leaders Meet in Sicily

Saturday

  • BOJ: Kuroda

 

 

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

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