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Weekly Relative Value
Published at the top of each week by Balance Sheet Solutions, Weekly Relative Value tracks market and economic trends, analyzes key releases and watches ongoing political developments.
Commentary prepared by Balance Sheet Solutions, LLC, a wholly owned CUSO of Alloya Corporate Federal Credit Union. Balance Sheet Solutions is a leading broker/dealer, investment advisor and ALM risk management consultant to credit unions.
Thursday, September 21, 2017 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Balance Sheet Solutions
|2s/5s Tsy Spread||0.43||0.00|
|2s/10s Tsy Spread||0.83||0.00|
|2s/30s Tsy Spread||1.37||0.00|
Today's Market Commentary
Recap – The S&P 500 finally snapped its run after six consecutive sessions of moving in an intraday range of less than 0.35%, closing +0.06% (with a range of around 0.5%). However, the Volatility Index closed below 10 (9.78) for the first time since the day preceding President Trump's "Fire and Fury" speech on August 9. After trading with no great conviction in the lead up, 10-year Treasury yields spiked around six basis point immediately after the Federal Open Market Committee (FOMC) announcement, but has since retraced three basis points of the move and is now priced at 2.26%. The dollar rallied just before the announcement, but then range traded. In terms of the economic data released yesterday, existing home sales for August were soft (-1.7% month-over-month vs. +0.2% expected).
FOMC Update – Yesterday we learned stopping reinvestment is a sideshow for now, and the market still cares more about the probability of a December hike and where the Fed thinks inflation is heading. Just briefly on the balance sheet run-off, they have committed to reduce the balance sheet by $10 billion per month ($6 billion U.S. Treasury and $4 billion mortgages) with an incremental increase every three months until we get to $50 billion.
Regarding rates, the Committee and Fed Chair Janet Yellen were on the hawkish side. The Fed is on track to raise rates once more this year and three times in 2018. Yellen recognized inflation has been running low recently, but put higher than expected blame on one-off factors. At the same time, she noted monetary policy operates with a lag and labor market tightness will eventually push inflation higher.
Do the dots matter? Beyond 2017, the FOMC will see a huge upheaval of its board, which could easily mean current members' thoughts are meaningless in a few months. Furthermore, Trump's fiscal plans (or lack of them) could completely change the debate. So, it’s difficult to read too much into the current FOMC's forecasts. That said, December is very much live with the probability of a rate hike, moving from a shade under 50% to 64%.
Jumping back to politics, and specifically Trump, a Politico article suggested the ‘Big Six’ tax reform negotiators are due to release an update at some stage next week. The article suggests the blueprint will include a corporate tax rate target of “lower than 20%.” The article also suggests that the announcement will include a move away from full and immediate expensing, which we should hear more about in a scheduled address by President Trump on September 29. Also, watch for a possible return of the heath care bill soon as various news outlets are suggesting Senate Majority Leader Mitch McConnell plans a vote next week.
Looking at the day ahead, data due out includes: initial jobless claims (which are expected to spike to 300 thousand, reflecting the recent storm and hurricane impacts), Philly Fed business outlook, Federal Housing Finance Agency House Price Index and the Conference Board’s Leading Economic Index.
September 18 - 22, 2017: The Week Ahead
Future Fed Expectations
|Probability of Fed Funds rate increase on September 20, 2017||2%|
|Probability of Fed Funds rate increase on November 1, 2017||3%|
**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.
The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Balance Sheet Solutions to discuss your specific situation and objectives.