Market Update: Tuesday, February 27, 2018

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Market Recap

  • U.S. markets broadly higher to kick off the week. Tax reform benefits cited as day’s tailwinds. S&P 500 Index +1.2%, Nasdaq +1.2%, Dow +0.7%, Russell 2000 -0.1%.
  • Broad sector strength, with telecommunications (+1.8%), technology (+1.6%) leading; utilities (-0.3%) the only decliner.
  • Positive breadth on NYSE (2:1) trading volume very light (~82% of 30-day avg.).
  • Treasury yields dipped; 10-yr. note yield -1 basis points (-0.01%) to 2.86%.
  • Commodities: WTI crude oil (+0.7% to $64/bbl.); COMEX gold higher to $1335/oz.; industrial metals finished mostly higher; U.S. dollar mixed against major crosses.
  • Economic data: January U.S. new home sales below expectations (593K vs. 640K). Positive news from release was the revision of prior month’s data from 625K to 643K.

Overnight & This Morning

  • Domestic equities opened near flat, markets holding off for Federal Reserve’s (Fed) testimony on monetary policy (details below).
  • European markets mixed-to-flat, follows cooling indications of Eurozone economic sentiment, in-line German inflation data (+1.4% year over year). STOXX Europe 600 -0.2%, DAX -0.1%, CAC 40 +0.1%, FTSE 100 +0.1%.
  • Asian markets finished mostly lower. Markets digesting potential for Chinese President Xi’s term extension, concerns regarding yen price risks. Nikkei +1.1%, Shanghai Composite -1.1%, Hang Seng -0.7%.
  • Treasury yields rising; 10-yr. note yield +1 basis point to 2.87%. Dollar stronger vs. major crosses.
  • Commodities: Oil declining (-0.3% to ~$63.65/bbl.); gold -0.2% to ~$1330/oz.; industrial metals remain mostly higher.
  • Economic releases: U.S. new durable goods orders declined more than anticipated (-3.7% vs. -2.0%), monthly domestic international trade deficit wider than expected (-$74.4B vs. -$71.3B). Eurozone economic sentiment index fell for second straight month (from 114.9 to 114.1); results not overly concerning as they still maintain a strong level.

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Macro Notes

  • Fed Chair Powell’s first Congressional testimony. In prepared remarks ahead of his first semi-annual monetary policy testimony, Fed Chair Powell reiterated the key takeaways from the central bank’s January meeting; namely confidence in its near-term growth outlook for the U.S. economy, its expectation that inflation is on track to hit its 2% target over the medium term, and its call for “further gradual increases in the fed funds rate.” In that regard, the market is now starting to align with the Fed’s previously communicated expectation that it will raise rates three times this year. But with the landscape continuing to evolve since Powell agreed to take the top spot at the Fed–volatility resurfaced, interest rates spiked, budget deficits widened, and (most importantly for the Fed) inflation has begun to show signs of life. The focus will be on his ability to “strike a balance between avoiding an overheated economy and bringing Personal consumption expenditures price inflation to 2% on a sustained basis.” In other words, effectively withdrawing monetary stimulus while the White House implements fiscal stimulus. As communicated in our Outlook 2018: Return of the Business Cycle publication, our expectation remains for three hikes this year, though we now see four as more likely than two.
  • What lies ahead for yields? The 10-year Treasury yield is off recent highs, but remains near the top of its recent range and near multi-year highs. We do expect that a strong global economy, the potential for a measured rise in inflation, a domestic growth boost from the impact of tax cuts, and the potential for increased debt issuance due to deficit spending may lead to higher Treasury yields over the course of the year (to a range of 2.75% to 3.25% at year-end 2018), though we don’t expect the move to be as direct as the one we’ve seen recently. Several indicators had started to show that the recent rise in yields may be due for a break, including a near-record net short in Treasury futures, a disconnect with the copper/gold ratio, and a large yield differential to other developed nations. These indicators are also now off recent extremes, indicating that yields may trend sideways for a while before ultimately moving higher this year.
  • Is it time for TIPS? The uptick in wage growth and inflation in January has investors focused on inflation, and when investors think of inflation, they often think of Treasury Inflation-Protected Securities, commonly known as TIPS. TIPS offer a semi-annual adjustment to principal and corresponding interest payments based on movement in the Consumer Price Index (CPI). TIPS prices move with changes in inflation expectations (known as breakeven inflation expecations), though the inflation adjustment that TIPS provide is ultimately based on actual CPI. If actual CPI is higher than market expectations, investors benefit by getting a larger than expected adjustment. However, we remain cautious on TIPS; and discuss this in more detail in this week’s Bond Market Perspectives, due out later today.
  • Another big gain. The S&P 500 gained 1.2% yesterday, on the heels of a 1.6% gain on Friday. This is the second time this month the S&P 500 has gained 1% on consecutive days, but it hasn’t made it to three in a row since late June 2016 following the Brexit vote. Considering the big sell-off in late January and early February, it is quite impressive that the S&P 500 is up 4% for the year and only 3.3% away from new highs.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

Wednesday

Thursday

  • Personal Income & Spending (Jan)
  • Core PCE (Jan)
  • Italy: Markit Adaci Mfg. PMI (Feb)
  • France: Markit France Mfg. PMI (Feb)
  • Germany: Markit Germany Mfg. PMI (Feb)
  • Eurozone: Markit Eurozone Mfg. PMI (Feb)
  • UK: Money Supply and Bank Lending (Jan)
  • UK: Markit UK Mfg. PMI (Feb)
  • Italy: GDP (2017)
  • Australia: Commodity Index (Feb)
  • Brazil: GDP (Q4)
  • Japan: Consumer Confidence (Feb)
  • Japan: Tokyo CPI (Feb)
  • Japan: Monetary Base (Feb)

Friday

  • Univ. of Mich. Sentiment (Feb)
  • Eurozone: PPI (Jan)
  • Canada: GDP (Dec)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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