Market Update: Tuesday, September 26, 2017

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Market Recap

  • Major U.S. indexes lower on Monday, as cash rotated out of heavily-weighted technology sector. S&P 500 Index (-0.2%), Dow (-0.2%), Nasdaq (-0.9%).
  • Energy, telecommunications best performers on the day, technology the most notable decliner.
  • 10-year Treasury prices rose with yields -3 basis points (0.03%) to 2.22%.
  • NYSE breadth was positive (1.3:1); Nasdaq’s was negative (1.3:1).
  • WTI crude oil continued advance (+1.3%) to $52.17/bbl., COMEX gold rallied (+1.2%) to $1313/oz.

Overnight & This Morning

  • Stocks in Asia were mixed overnight, despite North Korea’s foreign minister saying Trump’s UN comments were a “declaration of war.” KOSPI, Nikkei -0.3%, Shanghai Composite, Hang Seng +0.1%.
  • European markets flat late in trading. STOXX Europe 600 +0.1%. Euro -1.4% since German election, -2.5% since its recent high on September 8.
  • Oil (-0.7%) lower for first session in more than a week, WTI crude $51.86/bbl.
  • Metals broadly lower, yet copper (-0.1%) outperformed; gold -0.7% to $1302/oz.
  • Rates steady. 10-year Treasury yield +1 basis point (0.01%) to 2.23%.
  • U.S. stocks look to bounce back from Monday’s losses, S&P 500 opened +0.1%.
  • In addition to Janet Yellen’s speech, we’ll receive data on housing prices, new home sales, consumer confidence later today.

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Key Insights

  • Federal Reserve Chair Janet Yellen speaks in Cleveland. The debate within the Federal Reserve (Fed) over the path of interest rates continued yesterday after the New York Fed’s President William Dudley continued to back one more rate hike this year, while Minnesota Fed President Neel Kashkari highlighted a lack of inflationary pressure. Yellen’s speech in Cleveland this afternoon may provide greater clarity.

Macro Notes

  • 10-year bounces off 2.25% level. The 10-year Treasury closed last week at 2.26% following heightened expectations for a rate hike at the Fed’s December meeting (expectations currently sit at 67% according to Bloomberg calculations). However, another spike in tensions related to North Korea pushed yields lower, with the 10-year yield declining to 2.22% at Monday’s close. Shorter-term yields followed a similar path last week, though declined less on Monday to leave the yield curve slightly flatter. The futures market for the 10-year Treasury continues to see an elevated net long position, indicating participants believe rates may move lower.  However, as we have seen in the past, if rates do begin to move higher, the unwinding of these long futures trades could cause rates to move higher at a faster rate than they otherwise would. We continue to believe the 10-year Treasury will end the year in a range of 2.25%–2.75%, and though hopes of significant stimulus by year end have faded, a surprise move in that direction could push the 10-year toward the 3% level.
  • Inflation expectations remain near top of recent range. Last week’s Fed meeting showed that the central bank continues to believe that inflation will rise toward their 2% target, though perhaps more slowly than they envisioned even in June. The Fed did say that they expected a slight bump in inflation due to hurricane related impacts, but expected additional near-term weakness before inflation moves toward its 2% goal in the medium term. Breakeven inflation expectations (as measured by the difference between the 10-year Treasury and 10-year Treasury Inflation Protected Security yield) hit their highest level since May (1.87%) last week, before moderating slightly following the Fed meeting to end the week at 1.84%.
  • Corporate spreads continue to tighten. Investment-grade and high-yield corporate spreads continued to tighten last week despite a relatively flat week for equities. Both sectors are approaching important psychological spread levels, investment-grade near 1% and high yield near 3.5%. Spreads are tight on a historical basis, but for good reason, given the current environment of strong corporate earnings and low defaults, even lower default forecasts for the coming year and positive forward indicators of defaults like loosening bank lending standards.
  • Puerto Rico’s crisis deepens. Hurricane Maria has devastated Puerto Rico, leading to deaths, destruction of their electrical grid, and likely leaving the territory without power for months. It could also impact the municipal bond market, due to the islands $70B+ debt burden and the tremendous recovery process ahead of it. In this week’s Bond Market Perspectives piece, we discuss the situation in Puerto Rico, how it is affecting bond prices of local issuers, and its potential impact on the broader municipal market.
  • Tax reform details leaking out. Though not officially due out until tomorrow, details of Republicans’ tax reform plan leaked out yesterday, though they had little market impact. The key proposals in the legislation include a target corporate tax rate of 20%, well below the current 35% but above President Trump’s desired 15% level, as well as full expensing of capital investments (though it would revert after five years), cutting the top tax rate for small business from 39.5% to 25%, doubling the standard deduction, and eliminating the deduction for state and local taxes.
  • Healthcare reform hopes deflated – again. After some previously failed attempts to repeal and replace the Affordable Care Act, Republicans are making yet another effort; however, with a looming Saturday vote, the GOP has seemingly failed to secure the necessary 50 votes in the Senate to pass the latest version of the Graham-Cassidy bill.
  • A closer look at the Dow nine-day win streak. Last week saw the end of a nine-day win streak for the Dow. Incredibly, it was the third nine-day win streak of the year – the first time this has happened since four in 1955. What stands out about this win streak though is the Dow gained only 2.9% during the streak, which is one of the weakest gains ever. What happens next? Today on the LPL Research blog, we take a closer look.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

Wednesday

  • MBA Mortgage Applications (9/22)
  • Durable Goods Orders (Aug)
  • Core Capital Goods Orders (Aug)
  • Pending Home Sales (Aug)
  • Bullard (Dove)
  • Rosengren (Hawk)
  • France: Consumer Confidence (Sept)
  • Germany: Retail Sales (Aug)
  • Eurozone: Money Supply (Aug)
  • China: Current Account Balance (Q2)

Thursday

  • Personal Consumption Core Price Index (PCE) (Q2)
  • Weekly Jobless Claims (9/23)
  • GDP (Q2)
  • Wholesale Inventories (Aug)
  • Kansas City Fed Manufacturing Activity Index (Sept)
  • George* (Hawk)
  • Fischer* (Dove)
  • Germany: Consumer Confidence (Oct)
  • Germany: CPI (Sept)
  • Eurozone: Consumer Confidence (Sept)
  • UK: Consumer Confidence (Sept)
  • Japan: Jobless Rate (Aug)
  • Japan: CPI (Aug)
  • Japan: Retail Sales (Aug)
  • China: Caixin China Manufacturing PMI (Sept)

Friday

  • Personal Income and Spending (Aug)
  • PCE Core Price Index (Aug)
  • Chicago PMI (Sept)
  • U of Mich. Consumer Sentiment (Sept)
  • Harker* (Hawk)
  • UK: GDP (Q2)
  • France: CPI (Sept)
  • France: PPI (Aug)
  • Germany: Unemployment Change (Sept)
  • UK: Current Account Balance (Q2)
  • UK: Money Supply (Aug)
  • Italy: CPI (Sept)
  • Eurozone: CPI (Sept)
  • Canada: GDP (July)
  • ECB: Draghi
  • BOE: Carney
  • IMF: Lagarde
  • Japan: Vehicle Production (Aug)
  • Japan: Housing Starts (Aug)
  • China: Manufacturing & Non-Manufacturing PMI (Sept)

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