- Major U.S. indexes mostly higher as markets gear up for next round of corporate earnings. S&P 500 Index +0.2%, Dow flat, Nasdaq +0.3%, Russell 2000 +0.1%.
- Utilities and energy led market performances; healthcare and financials lagged.
- Breadth on NYSE (1.4:1); NYSE volume ~96% of 30-day avg.
- Treasury yields turned in a flat performance; 10-yr. note finished yielding 2.48%.
- Commodities: WTI crude oil up +0.7% to $61.88/bbl., COMEX gold flat at $1320/oz., industrial metals closed broadly lower.
Overnight & This Morning
- U.S. equities started up for the day, continuing strong run at the top of the year.
- Asia finished in the green again. Japan led following yesterday’s public holiday. Nikkei +0.6%, Shanghai Composite +0.1%, Hang Seng +0.4%.
- European stocks higher, economic data indicates improving picture for continental Europe. STOXX Europe 600 +0.3%, Germany DAX +0.2%, CAC 40 +0.5%.
- Treasury prices retracting; 10-yr. yield +2 basis point (+0.02%) to 2.50%.
- Commodities: Oil continuing to rise (+0.3%) to ~$61.92/bbl., gold slightly lower (-0.6% to ~$1312/oz.), industrial metals mostly lower.
- Economic releases: Eurozone unemployment rates fell in-line (8.7%), German industrial production figures soundly beat expectations (3.4% vs. 1.7%).
- 10-year Treasury yield moves higher. Treasury yields appear to be in an uptrend, driven higher by rising inflation expectations. The 10-year breakeven inflation rate has traded above the Fed’s 2% target, closing at 2.03% on January 8, 2018. This is the first time inflation expectations have been above 2% since March 2017. The breakout in inflation expectations may lead to a rise in real rates, which could press nominal Treasury yields marginally higher in the short term. The Consumer Price Index (CPI) reading on Friday may give further insight into inflation dynamics. We continue to believe that increasing levels of growth and inflation may push long-term interest rates higher, and we expect the 10-year Treasury yield to end 2018 in the 2.75-3.25% range. In this week’s Bond Market Perspectives, due out later today, we will close the book on fixed income for 2017 and summarize our fixed income views for 2018 following passage of the new tax law.
- Corporate bond spreads tighten. Spreads on both investment-grade and high-yield bonds have tightened to start 2018. The option-adjusted spread on the Bloomberg Barclays High Yield Index fell to 3.2% on January 8, 2018, its lowest level since 2007. There are good reasons for spreads to be tight: a steady and strengthening economy, declining defaults, low volatility, steady oil prices above $60 per barrel, and strong equity markets. Moody’s also lowered their default forecast for the coming year to 1.7%, a very low rate on a historical basis. Even given this improvement in the fundamental outlook, we still believe high yield is on the expensive side of fair value at current spread levels. Tight spreads indicate investor confidence in corporations’ creditworthiness, but they also limit future returns, which will almost necessarily be driven primarily by the yield component of return.
- The first five days are in the books. After 5 trading days, the S&P 500 is up an impressive 2.8%; the best start to a year since 2006. Along the way it has closed green each of the 5 days, for the longest win streak to start a year since 6 in 2010. It has also made new highs all 5 days to kick off the new year, meaning it’s a day away from tying the all-time record of 6 back in 1964. Meanwhile, the Nasdaq has made new highs 5 days in a row as well, a day away from tying the record of 6 in 1999. Our latest post on the LPL Research blog takes a look at why a good start of the year historically has yielded strong full year results.
- Nat’l Federation of Independent Business Small Business Index (Dec)
- Jolts Job Openings (Nov)
- Kashkari (Dove)
- Germany: Industrial Production (Nov)
- Germany: Trade Balance (Nov)
- Germany: Current Account (Nov)
- France: Trade Balance (Nov)
- France: Current Account (Nov)
- Italy: Unemployment Rate (Nov)
- Eurozone: Unemployment Rate (Nov)
- Germany: Imports & Exports (Nov)
- China: New Loan Growth & Money Supply (Dec)
- China: CPI & PPI (Dec)
- MBA Mortgage Applications (Jan 5)
- Import & Export Price Indexes (Dec)
- Wholesale Inventories (Nov)
- Evans (Dove)
- Bullard (Dove)
- France: Industrial Production (Nov)
- UK: Industrial Production (Nov)
- UK: Trade Balance (Nov)
- UK: National Institute of Economic and Social Research GDP Estimate (Dec)
- Bank of Italy: Monthly Report “Money & Banks”
- BOJ: Outright Bond Purchase
- PPI (Dec)
- Weekly Jobless Claims (Jan 6)
- Philadelphia Fed Manufacturing Index Revisions
- Monthly Budget Statement (Dec)
- Dudley (Dove)
- Germany: GDP (2017)
- Italy: Retail Sales (Nov)
- Eurozone: Industrial Production (Nov)
- ECB: Account of the Monetary Policy Meeting
- Bank of England: Credit Conditions & Bank Liabilities Survey
- Japan: Leading Index (Nov)
- Japan: Current Account Balance (Nov)
- Japan: Trade Balance (Nov)
- China: Imports & Exports (Dec)
- China: Trade Balance (Dec)
- Japan: Eco Watchers Survey (Dec)
- CPI (Dec)
- Core CPI (Dec)
- Retail Sales (Dec)
- Business Inventories (Nov)
- Rosengren (Hawk)
- France: CPI (Dec)
- Italy: Industrial Production (Nov)