Market Update: Tuesday, March 13, 2018

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Market Recap

  • U.S. markets finished mixed in choppy session; trade talk remains a focus, but few directional drivers overall. S&P 500 Index -0.1%, Nasdaq +0.4%, Dow -0.6%, Russell 2000 +0.3%.
  • REITs (+0.5%), utilities (+0.4%) benefited from Treasury yield decline, ended as day’s outperformers. Industrials (-1.2%), healthcare (-0.5%) lagged.
  • Positive breadth on NYSE (1.2:1); trading volume below average (~87% of 30-day avg.).
  • Treasuries strengthened; 10-yr. note yield -3 basis points to 2.87%.
  • Commodities: WTI crude oil -1.1% to $61.35/bbl.; COMEX gold near flat at $1324/oz.; industrial metals all higher; U.S. dollar mixed vs. major crosses.
  • Economic data: Very light day for releases; U.S. government monthly deficit slightly better than expected (-$215.2B vs. -$216B). Japanese Producer Price Index figures softer than anticipated (0.0% vs. 0.2%).

Overnight & This Morning

  • U.S. equities opened higher following in-line monthly inflation report, easing fears of increasing inflationary pressure but keeping the Federal Reserve (Fed) on track (details below).
  • European stocks mixed midday. Brexit discussions back in focus amid little economic data. STOXX Europe 600 +0.2%, DAX +0.2%, CAC 40 +0.5%, FTSE 100 flat.
  • Asian markets closed mixed following yesterday’s up-and-down day in the U.S., removal of term limits for Chinese President Xi Jinping. Nikkei +0.7%, Shanghai Composite -0.5%, Hang Seng flat.
  • Treasury yields continue decline; 10-yr. yield -2 basis points following constructive inflation report.
  • Commodities: Oil continues yesterday’s decline (-0.7% to ~$60.93/bbl.), gold -0.1% to ~$1319/oz., industrial metals broadly higher.
  • Economic releases: U.S. CPI report met expectations almost across the board with month-over-month core inflation coming in at 0.2%; year over year 1.89% (details below).

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Macro Notes

  • Inflation meets expectations, keeps Fed on track. The Consumer Price Index registered a 2.2% increase year over year in February, while the core reading, which strips out the more volatile food and energy components, rose 1.8%, both matching consensus estimates. The headline increase was driven by rises in house prices and rent, as well as clothing and auto insurance. Hourly wage growth was flat at 0.4%, adjusted for inflation. Overall, the data show few signs of a pending spike in inflation, but today’s reading keeps the Fed on track to raise rates next week and likely two more times over the balance of the year.
  • Small businesses remain optimistic. The NFIB Small Business Optimism Index increased to 107.6 in February from 106.9 the prior month, marking one of the strongest readings in the index’s 45-year history. Deregulation and lower taxes underpinned enthusiasm as taxes received the fewest votes as the number one business problem for small businesses, a result last seen in 2006; while expectations for higher sales were at levels not seen since 2007. Strong job creation and an increase in plans to boost compensation and capital spending were also highlighted in the report.
  • Kudlow emerging as frontrunner for chief economic advisor post. Reports indicate that cable news commentator Larry Kudlow has emerged as Gary Cohn’s likely replacement as the White House National Economic Council director. Kudlow was not initially seen as a frontrunner given his criticism of President Trump’s tariffs, but his views on free-market economics, his network of contacts throughout Congress, and the good rapport he has with the president, whom he has known for years, boosted him to the top of the list following two meetings with the president in recent days.
  • Move higher for Treasury yields hits pause. The 10-year Treasury yield has moved significantly higher in recent months, and at 2.84% is now about 0.5% above its December lows. Tax reform, concerns about the prospect of higher inflation, and increased Treasury supply have been the major drivers of the move. In recent weeks, however, yields paused their ascent as markets waited to see additional data related to inflation and how the bond market would digest increased Treasury issuance. After coming in above expectations in January, wage growth in February came in below expectations (at 2.6% year over year); while headline inflation at 2.2% and core CPI (which excludes volatile food and energy prices) at 1.8% both matched consensus. Treasury auction results for 4-week, 3-month, 6-month, 3-year, and 10-year securities were released yesterday and showed respectable demand, while 4-week and 30-year results will be released today. We continue to expect that the 10-year Treasury yield will end the year in its current range, between 2.75% and 3.25%.
  • Fundamentals remain solid for high yield. Despite broad pressure on fixed income due to higher levels of growth and inflation, higher deficit spending, and reduced central bank accommodation, lower-quality fixed income fundamentals are holding up. Defaults remain low, default forecasts are even lower, and bank lending standards are loosening at an accelerating rate. Investor flows have been negative year to date, but in our view this says more about what high yield has done than what it will do, given the dramatic outperformance of the asset class relative to broad high-quality fixed income since early 2016. We discuss high yield in more detail in this week’s Bond Market Perspectives, due out later today.

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Click Here for our detailed Weekly Economic Calendar

Monday

  • Monthly Budget Statement (Feb)
  • Gemany: Manpower Employment Outlook (Q2)
  • Japan: Machine Tool Orders (Feb)
  • Japan: PPI (Feb)
  • Japan: Manpower Survey (Q2)
  • China: Manpower Survey (Q2)

Tuesday

  • NFIB Small Business Optimism (Feb)
  • CPI (Feb)
  • Core CPI (Feb)
  • Real Avg. Weekly & Hourly Earnings (Feb)
  • Italy: Unemployment Rate (Q4)
  • BOJ: Outright Bond Purchase
  • BOJ: Minutes of Policy Meeting
  • Japan: Tertiary Industry Index (Jan)
  • Japan: Core Machine Orders (Jan)
  • China: Retail Sales (Feb)
  • China: Industrial Production (Feb)
  • China: Fixed Assets (Feb)

Wednesday

  • MBA Mortgage Applications (Mar 9)
  • PPI (Feb)
  • Business Inventories (Jan)
  • Retail Sales (Feb)
  • Germany: CPI (Feb)
  • Italy: Retail Sales (Jan)
  • Eurozone: Industrial Production (Jan)
  • Eurozone: Employment (Q4)
  • New Zealand: GDP (Q4)
  • ECB: Draghi
  • Bank of France: Villeroy

Thursday

Friday

  • Housing Starts & Building Permits (Feb)
  • Industrial Production & Capacity Utilization (Feb)
  • Jolts Jobs Openings (Jan)
  • U. of Mich. Sentiment (Mar)
  • Italy: CPI (Feb)
  • Eurozone: CPI (Feb)
  • Eurozone: Labor Costs (Q4)
  • Japan: Industrial Production & Capacity Utilization (Jan)
  • China: New Loan Growth & Money Supply (Feb)

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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