- Domestic markets slightly higher after calm trading day. Tax reform still dominates macro headlines, but flattening yield curve has also come into discussion. S&P 500 Index +0.1%, Dow +0.1%, Nasdaq +0.1%.
- Utilities, consumer staples led markets; industrials, energy, despite oil’s flat performance, lagged.
- 10-year Treasuries held firm, yields closed flat at 2.40%.
- NYSE breadth negative (1.3:1); exchange volume below average (95.4% of 30-day avg).
- Commodities – WTI crude oil saw little action, finishing at $56.73/bbl., COMEX gold moved higher (+0.3%) to $1278/oz.
Overnight & This Morning
- U.S. stocks lower in early trading, trimming yesterday’s slight gains.
- European equities eying sixth day of losses, shedding early gains after better-than-expected economic data boosted euro. STOXX Europe 600 -0.6%, DAX -0.2%, CAC 40 -0.4% midday.
- Asia modestly lower, economic data out of China disappointed, Chinese 10-year yields hit 3-year high. Nikkei flat, Hang Seng -0.1%, Shanghai Composite -0.5%.
- Treasuries continue to hold flat, 10-year yield 2.40%.
- Commodities – WTI crude oil retracing gains (-0.5% to $56.50/bbl.), gold edging higher (-0.5% to $1273/oz.), industrial metals mixed.
- U.S. Producer Price Index (PPI) results exhibited a welcome price gain, coming in above consensus expectations (PPI less food & energy -0.4% vs. +0.2% consensus).
- Tax reform making its mark on bonds. Two of the bigger stories in the bond market this week–weakness in corporate bonds and strength in municipal bonds–are closely tied to ongoing tax reform discussions. Corporate bonds (both investment grade and high yield) moved lower on the week as discussions of a potential cap on interest deduction for issuers made its mark. Municipal bonds, on the other hand, moved higher as a potential removal of tax-exemption for private activity, tax credit, and advance refunding municipal bonds issued after December 31, 2017 brought up the possibility of shrinking supply in the municipal space, causing the sector to rally. Importantly, tax reform
- Yield curve steepens as 10-year Treasury yield moves higher. 10-year Treasury moved 0.08% higher for the week, while 2-year only moved 0.03% higher, leading to a steeper yield curve for the week. However, even with the recent steepening, yield curve steepness remains near cycle lows, which is typically seen as a sign that bond markets are pricing in a slower path for growth and lower inflation. However, equity markets, and many other indicators that include improving economic data, strong earnings, and high consumer confidence disagree with the yield curve, and are painting a picture of brighter times ahead. We discuss this topic further in this week’s Bond Market Perspectives, due out later today.
- High-yield spreads widen on tax reform headlines. High-yield spreads saw a significant widening month to date, moving from a low of 3.4% on November 1 (as measured by the option-adjusted spread on the Bloomberg Barclays High Yield Bond Index) to 3.6% as of Monday’s close. Most of this widening has come since the tax reform plan was released on November 2. This, along with the fact that equity markets aren’t showing signs of stress after last week’s Federal Reserve Senior Loan Officer’s Survey for October showed a net loosening of loan standards by major banks, may indicate that the recent widening in spreads for both investment-grade and high-yield bonds is related to the potential for a cap on interest deductibility for issuers, rather than on a deteriorating economic situation.
- Another day, more records. The S&P 500 Index has now gone 49 consecutive days without a 0.5% close lower, the longest streak since 57 in 1968. Additionally, with the 0.1% gain yesterday, the S&P 500 avoided its first three-day losing streak in three months (66 trading sessions). This is the longest streak without a three-day losing streak in more than seven years.
- National Federation of Independent Business Small Business Optimism (Oct)
- PPI (Oct)
- Eurozone: GDP (Q3)
- Germany: GDP (Q3)
- Germany: CPI (Oct)
- Italy: GDP (Q3)
- UK: CPI & PPI (Oct)
- Eurozone: Industrial Production (Sep)
- Germany: ZEW Survey (Nov)
- Eurozone: ZEW Survey (Nov)
- Italy: CPI (Oct)
- ECB: Draghi, Yellen, Carney, Kuroda speak in Frankfort
- Japan: GDP (Q3)
- Japan: Industrial Production & Capacity Utilization (Sep)
- CPI & Core CPI (Oct)
- Empire State Mfg. Report (Nov)
- Retail Sales (Oct)
- Business Inventories (Sep)
- France: CPI (Oct)
- BOE: Carney
- Philadelphia Fed Mfg. Report (Nov)
- Import & Export Price Indexes (Oct)
- Industrial Production & Capacity Utilization (Oct)
- Eurozone: CPI (Oct)
- BOE: Carney
- Housing Starts & Building Permits (Oct)
- Canada: CPI (Oct)
- ECB: Draghi