Market Commentary - February 2nd, 2018
The 10yr UST climbed 0.18% last week to 2.84% while the 30yr breached 3% for the first time since last May. While triggering some market anxiety, most economists do not see rising yields impacting economic growth until the 10yr UST approaches 4%.
While last week's 3% pullback probably felt unsettling because it had been a while - this was the first -3% week since before election, a record streak of 448 days. However, a 20,000-foot view tells you that since 1920's this has happened 628 times, an average of seven times per year.
Bianco Research reiterated an important observation regarding the market's seeming transition from a deflationary mindset toward an inflationary mindset. This translates to worries about higher inflation leading to higher yields and lower stock prices. The deeply negative correlation since GFC between VIX and 10yr inflation B/E's has been rapidly rising over past 12 mo.
TBAC estimates the $1.5t tax cut will increase U.S. Treasury borrowings to $955b this year and $1.13t next year from a $519b last year, the first sustained acceleration since the GFC.
The Fed met last week and while keeping rates on hold, they reiterated an upbeat view of the economy and maintained an expectation of three hikes during 2018.
The pace of Fed balance sheet unwind is projected to double this quarter, to $8 billion a month from $4 billion a month last quarter. Given the relatively small increments, we don't anticipate this alone would push rates higher or MBS spreads to gap out any time soon.
The -10% move in the USD last year and -3.7% this year reminds us that a weaker USD advantages the U.S. & emerging markets, while a stronger USD advantages Europe & Japan.
Bespoke pointed out an interesting fact about S&P 500 returns over the past 25 years - that a disproportionate amount of returns occurs after hours. SPY return after hours since 1993 has been 568% while during market open hours was -5.2%!
ECB Governors speaking anonymously last week discussed a short 'taper' period once the ECB QE program of $37b/mo expires in September 2018.
Recent tariffs levied by the U.S. administration and public sparring between the European Union and POTUS have stirred up speculation and tough talk regarding 'trade wars'.
We're half way through earnings season with a blended growth rate of 13.4% and beat rates of 75% on earnings and a FactSet record 80% on sales - this despite analysts upping their EPS estimates at a higher rate coming into earnings season than any time in over 10 years.
The January jobs report handily beat consensus estimates, registering 200,000 jobs and maintaining the unemployment rate at 4.1%. The most surprising detail was robust 0.3% wage growth in January along with upward revision to December. YoY wage growth of 2.9% is the highest rate of the recovery.
The ISM Manufacturing survey registered 59.1, climbing to a level often associated with overheating and difficulty finding workers.Conference Board released its consumer confidence index, which improved slightly MoM, but remains below its recent highs from November.Benign December headline and core PCE of 1.7% and 1.5% respectively show very few signs of inflation concerns to end the year.
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