- Dow, Nasdaq, S&P 500 Index made new highs yesterday; with the Dow inching closer to the psychologically important level of 23,000.
- Strong data out of China helped global markets, with inflation data out of China coming in quite strong as the PPI hit a six-month high.
- Financials, telecommunications led; REITs, healthcare, utilities lagged on an overall slow volume day ahead of a big earnings week.
- Treasuries fell on Monday; 10-year yield closing at 2.30%.
- Yield curve (as measured by the spread between 10- and 2-year yields) fell to 0.76%, the lowest level since last August, as short-term yields spiked (details below).
- WTI crude oil up again on Monday (+0.8%) to $51.86/bbl., but off its highs after early strength due to concerns in Iraq.
Overnight & This Morning
- U.S. stocks opened little changed as a big day of earnings gets underway, with focus also on the next Federal Reserve (Fed) President; President Trump interviewed John Taylor last week and is scheduled to interview Janet Yellen on Thursday.
- European markets are flat (STOXX Europe 50 +0.1%) as U.K. inflation came in at a 5-year high, Brexit talks continue, and Catalonia has until Thursday to scrap a bid for independence or lose regional powers. DAX (+0.1%), FTSE 100 (+0.2%) leading.
- Asian markets mostly higher, Nikkei (+0.4%) up 11 days in a row (details below). Korean KOSPI +0.2%, Hang Seng flat.
- Treasuries slightly lower with the 10-year yield up to 2.33%.
- Commodities – Oil +0.5% to over $52/bbl. extending recent gains. Copper continues to soar, at its highest level since 2014 on Chinese demand.
- U.S. dollar higher for fourth consecutive day as short-term rates surge and the chance of a rate hike in December is now 93% according to fed fund futures.
- Today’s economic calendar – September Import/Export prices, Industrial Production, October National Association of Home Builders Housing Market Index.
- Japan at 21-year highs. The Japanese Nikkei has closed higher for 11 consecutive days, which is the longest win streak in two years; taking it a step further, if the stock market is green tomorrow, it would be the longest win streak in nearly 30 years. This matters because the yen has showed some strength during this win streak (historically, the Nikkei and the yen trade inversely), but the Nikkei is also breaking out to 21-year highs. With a presidential election coming up on Sunday, the stakes are high for the world’s third largest economy. Current Prime Minister Shinzo Abe is expected to win and his current monetary policy (nicknamed Abenomics) may likely stay in place. Some of the recent economic data out of Japan has been better as well, so this is yet another potential positive for overall global growth as we head into 2018.
- 10-year Treasury yield retreats on inflation miss. The 10-year Treasury hit a peak of 2.36% last Tuesday, and hovered near the level until a miss on the Friday’s September Consumer Price Index report pushed yields lower to close the week at 2.27%. Reports on Monday that John Taylor had impressed President Trump in a recent meeting, and remains in the running for Fed Chair led yields higher on Monday, to close the day at 2.30%. Taylor advocates for a more transparent and rules-based approach to monetary policy, which markets believe could increase the chances of future rate hikes. Other candidates remain in the running, including former Fed Governor Kevin Warsh and current Fed Chair Janet Yellen.
- Yield curve flattest since August 2016. Short-term rates didn’t see the same decline as longer-term rates last week, leading to a flatter yield curve. Short-term rates are more directly driven by Fed policy, and though inflation missed expectations, a speech from Chair Yellen over the weekend continued to give markets confidence that a rate hike was still on the table for December (see more on this discussion in our Weekly Economic Commentary). The yield curve is now at its flattest level since August 2016, though the difference between the 10- and 2-year yields, at 0.76%, remains far from inversion, which has historically been a signal of recession ahead.
- Muni supply picking back up. The 30-day visible supply for the municipal market hit its highest level since January this morning, coming in at 17 billion. Using a five-day moving average, which tends to take out extremes in the index, the supply looks elevated, though not overly so. September tends to be a month that sees a lot of supply, though some of that supply appears to have been pushed back to October this year. While seasonal patterns would suggest that supply may moderate toward the end of October, November tends to see another influx of supply, which may be the case again this year as municipal bond issuers try to get ahead of a December rate hike.
- MBS performance picks up as Fed normalization begins. Contrary to what may be expected, given that MBS is one of the asset classes that will be most directly impacted by balance sheet normalization (the other being Treasuries), the Bloomberg Barclays U.S. Aggregate Securitized Mortgage-Backed Securities (MBS) Index has seen strength over the past month, outpacing many other high-quality bond sectors. We don’t expect the initial stages of normalization to impact the MBS market much given long lead times and a gradual pace, but over time it may become a bigger headwind, a topic we explore in this week’s Bond Market Perspectives.
- A closer look at the Nikkei. The Japanese stock market has gone nowhere for decades, but following the lead of many other global markets, it is now breaking out. In fact, it is in the process of making fresh new 21-year highs. Today on the LPL Research blog we take a closer look at what this could mean for the world’s third largest economy and global economy in general.
- Industrial Production and Capacity Utilization (Sep)
- Italy: Trade Balance (Aug)
- UK: CPI (Sep)
- Eurozone: CPI (Sep)
- Germany: ZEW Survey (Oct)
- Eurozone: ZEW Survey (Oct)
- Annual Meeting of the IMF and World Bank
- BOE: Carney
- Housing Starts (Sep)
- Building Permits (Sep)
- Beige Book
- Japan: Trade Balance (Sep)
- Japan: Imports & Exports (Sep)
- China: New Loans & Money Supply (Sep)
- China: GDP (Q3)
- China: Retail Sales (Sep)
- China: Industrial Production (Sep)
- Philadelphia Fed Mfg. Report (Oct)
- Leading Economic Index (Sep)
- UK: Retail Sales (Sep)
- Japan: All Industry Activity Index (Aug)
- Japan: Machine Tool Orders (Sep)
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