Market Update: Tuesday, October 24, 2017

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Market Recap

  • U.S. equities finished near worst levels of the session. Dow (-0.2%), S&P 500 Index (-0.4%) broke six-session win streaks, Nasdaq (-0.6%).
  • Rate-sensitive utilities only sector above par; telecommunications (-1.0%), industrials (-0.8%), biggest decliners.
  • Treasuries stronger across the curve;10-year note -1 basis point (0.01%) to 2.37%.
  • Breadth on NYSE negative (2:1); Total exchange volume up slightly (100.7% of 30-day average).
  • Commodities COMEX gold (+0.2%) modestly higher at $1283/oz., industrial metals saw a nice jump despite risk-off trading.
  • President Trump noted via Twitter his decision on the next Federal Reserve (Fed) chair would come “very, very, soon” but provided no details.

Overnight & This Morning 

  • U.S. equities look to rebound after yesterday’s declines; upbeat earnings from several Dow, S&P 500 components helped major indexes open higher this morning.
  • Major European indexes mixed, but little changed late in session amid low volumes; traders await outcome of Thursday’s European Central Bank meeting–Draghi is expected to outline tapering plan. STOXX Europe 600 -0.2%.
  • Asian markets shrugged off U.S. weakness finishing mostly higher overnight. Japan posted a record 16th consecutive advance. Chinese stocks closed mixed as 19th Communist Party Congress concludes. Shanghai Composite +0.2%, Hang Seng -0.5%.
  • Treasuries slide with 10-year note +4 basis points (0.04%) to 2.40%.
  • Commodities – Gold -0.2% despite an uptick in the dollar, WTI crude oil (+0.9% to $52.4/bbl.) moving higher, industrial metals retracing yesterday’s upward moves.

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Macro Notes

  • 10-year Treasury yield testing 2.4%. The 10-year Treasury yield hit its highest level since May, closing at roughly 2.4% yesterday after rising 8 basis points (0.08%) last week. Longer-term yields were pressed higher last week by the Senate’s steps towards potential tax cuts and John Taylor’s candidacy for Fed chair. John Taylor is seen as a relatively hawkish choice, given his “Taylor rule” background and his previous statements about how interest rates should be higher. It will be an important indicator for the direction of yields if the 10-year can hold above this 2.4% level.
  • Markets increasingly pricing in a December rate hike. Market-based rate hike expectations–as calculated by Bloomberg–continue to show almost no chance of a November rate hike, but a greater than 80% expectation for December. The potential for a hawkish Fed chair is pushing longer-term rate hike expectations higher as well. Expectations for the number of rate hikes in 2018 are up to 1.4, versus the Fed’s own estimate of 3. Market expectations for 2019 have also moved slightly higher, and now stand at 0.6 rate hikes (versus 2.3 based on the Fed’s latest Dot Plots). The takeaway is that market expectations are moving toward the Fed, though a wide disparity remains between the two sets of estimates.
  • What really matters for the Fed in 2018? The decision on who will be the next Fed chair continues to make headlines- but is it the biggest factor for the future path of monetary policy? The Fed chair is certainly influential, and the height of the Fed chair relative to their predecessor has coincidentally tended to predict the direction of rates over their term. But joking aside, the Fed chair, while influential, has only one vote on policy, just like the other eleven members of the Federal Open Market Committee (FOMC). In this week’s Bond Market Perspectives, due out later today, we take a look at the current vacancies on the Fed’s board of governors, and how those picks, along with a rotation of voting Fed presidents on the FOMC may have as large an impact on the Fed’s future path of policy as the chair decision itself.
  • High-yield spreads continue to tighten. The yield spread of high-yield bonds to comparable maturity Treasuries tightened further last week, and at 3.3% continues to be on the expensive side of fair value in our estimation. This is the tightest spread since 2014, before the oil crash. Although fundamentals like defaults, default forecasts, and bank lending standards remain solid, return potential is limited given spreads at these tight levels.
  • What does eventual higher volatility mean? The S&P 500 fell 0.4% yesterday, which was actually the largest drop in about seven weeks. This is how 2017 has gone, very few big moves – but a solid upward bias. Think of it like this, the absolute value of the average daily change so far this year is only 0.30%–which is the lowest for a full year since 1964. What does this mean? Volatility will likely rise over the coming years, but is this a bad thing? Today on the LPL Research blog we look at other times volatility was low and what happened next.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Markit Manufacturing & Services PMI (Oct)
  • France: Markit France Manufacturing & Services PMI (Oct)
  • Germany: Markit Germany Manufacturing & Services PMI (Oct)
  • Eurozone: Markit Eurozone Manufacturing & Services PMI (Oct)
  • BOJ: Outright Bond Purchase
  • ECB: Bank Lending Survey
  • Japan: Cabinet Office Monthly Economic Report for October

Wednesday

Thursday

  • Wholesale Inventories (Sept)
  • Weekly Jobless Claims (Oct 21)
  • Advance Report on Goods Trade Balance (Sept)
  • Retail Inventories (Sept)
  • Kansas City Fed Manufacturing Index (Oct)
  • Germany: Consumer Confidence Index (Nov)
  • Eurozone: Money Supply (Sept)
  • Italy: Consumer Confidence (Oct)
  • BOJ: Outright Bond Purchase
  • Japan: CPI (Sept)

Friday

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