Market Update: Tuesday, May 8, 2018

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Daily Insights

  • No deal? It is widely expected that President Trump will signal the U.S.’ withdrawal from the Iran nuclear deal at 2:00 p.m. ET. There could also be new sanctions on Iran to get concessions on various issues (ballistic missile program and Iranian support for terrorism). The President is expected to be light on specifics though, which could open the door to flexibility. Ahead of the announcement, WTI crude oil continues to consolidate above $70/barrel, the highest level since late 2014.

  • Will China sell its Treasury holdings? An important plotline relating to foreign demand for U.S. debt is the potential for China to liquidate its Treasury holdings, or at least threaten to, as a bargaining chip in ongoing trade and tariff negotiations with the U.S. In today’s Bond Market Perspectives, we dive into the topic, why we believe that will not happen, and other aspects of this headline-generating dynamic. Tomorrow’s 10-year Treasury auction could give insight into foreign investor demand for Treasuries, especially with yields near 3%. All else equal, we believe foreign demand will likely remain robust and help to restrain U.S. rates, given the largest-ever yield advantage of the 10-year Treasury to the 10-year German bund and other developed markets.

  • 10-Year Treasury yield can’t hold 3%. It has been two steps forward, one step back for longer-term Treasury yields. After rising above 3% in late April, the benchmark yield has been unable to retest the 3% level. One factor that could sustain downward pressure on yields is the Treasury futures market, which remains at historic net short levels. The positioning indicates market participants believe yields will move higher. However, this has been an important counter-cyclical indicator, as profits (or losses) on these positions can lead to buying Treasury futures to close them out, ultimately leading to a decline in interest rates over the short term.

  • Fed remains on its gradual track. Last week’s Federal Reserve (Fed) meeting did little to change the yield landscape, nor did the April jobs report. The jobs report fell in the “goldilocks” zone, with unemployment ticking down below 4%, but not spurring the level of wage growth that one would expect given such low unemployment. This keeps the Fed on track to hike two or three additional times in 2018, with our base case remaining two and the market pricing in a slightly higher chance of two than three. Today on the LPL Research blog we take a look at the the jobs report and other key economic data points from last week.

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Tuesday

Wednesday

  • PPI (Apr)
  • Japan: Trade Balance (Mar)
  • China: CPI & PPI (Apr)

Thursday

  • CPI (Apr)
  • UK: Trade Balance (Mar)
  • UK: GDP estimate (Apr)

Friday

  • Import & Export Price Indices (Apr)

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