Credit leads fixed income sectors over past month. With interest rates moving higher over the past month, accompanied by a modestly-steepening yield curve and a rally in the equity markets, more credit-sensitive sectors of the fixed income market have outperformed. However, from a portfolio perspective, we prefer equity exposure over higher credit-risk areas like high yield, and we still think investment grade corporate debt is attractive. Despite spreads between investment grade debt and comparable maturity Treasuries compressing recently, we still believe there’s a little more room for spreads to fall given a healthy economic backdrop and corporate fundamentals, and the added price stability investment grade relative to more rate-sensitive sectors adds to the sector’s attractiveness if rates rise.
Divergence between economists, markets on rate hikes. While market-based expectations are suggesting the Federal Reserve (Fed) will sit tight this year, the Bloomberg-surveyed economists’ consensus points to one hike in 2019. Given expectations of a modest pick-up in inflation, we do see the possibility of a hike, likely in the second half of the year, but are confident that the economy could take it in stride if accompanied by the right messaging about further rate hike expectations.
European services data surprise to the upside. Markit PMI Services came in mostly higher than expected with activity in Italy and France moving back into expansionary territory in February after dipping into contraction in the prior month. The composite Eurozone reading hit a three-month high, helping to offset a drag in manufacturing. Still, overall growth in the region may struggle in 2019 to top the 1.2% annualized economic growth seen in the fourth quarter.
Historically quiet rates to start the year. The 10-year Treasury yield has bounced around in a 23-basis point (0.23%) range year to date, the second-smallest range at this point in the year since 1974. It may be difficult to imagine a breakout in either direction, but we expect the 10-year yield to end 2019 between 3% and 3.25%, or about 30 to 50 basis points higher than where the benchmark yield is trading now. Later today on the LPL Research blog, we’ll outline catalysts we think may help rates break out of the current range.
NEW Market Signals Podcast. In this week’s podcast, Chief Investment Strategist John Lynch and Equity Market Strategist Jeff Buchbinder focuses on the current bull market as it approaches its 10th birthday on March 9. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts!
- Markit US Services PMI (Preliminary, Feb)
- Markit US Composite PMI (Preliminary, Feb)
- ISM Non-Manufacturing Index (Feb)
- New Home Sales (MoM, Dec)
- Markit Eurozone Composite PMI (Feb)
- Eurozone Retail Sales (Jan)
- Durable Goods Orders (MoM, Jan)
- ADP Employment Report (MoM, Feb)
- Federal Reserve Beige Book (March)
- Initial Jobless Claims (Mar. 2)
- Nonfarm Productivity (QoQ, Q4 2018)
- Japan Leading Index (Preliminary, Jan)
- Japan Coincident Index (Preliminary, Jan)
- Eurozone Employment (Q4 2018)
- Eurozone GDP Report (Q4 2018)
- European Central Bank Rate Decision (March)
- Japan GDP Report (Q4 2018)
- Nonfarm Payrolls Report (MoM, Feb)
- Unemployment Rate (Feb)
- China CPI Report (Feb)
- China PPI Report (Feb)
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