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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, October 18, 2018 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||0.15||-0.01|
|2s/10s Tsy Spread||0.28||-0.02|
|2s/30s Tsy Spread||0.45||-0.02|
Today's Market Commentary
Recap – U.S. equities mostly ignored the Federal Open Market Committee (FOMC) meeting minutes (see below), with the S&P 500 finishing at its flat line yesterday following a volatile day of trading and being down as much as 1.0%. As for the other major averages, the Dow lost 0.4%, the tech-heavy Nasdaq remained unchanged, and the small-cap Russell 2000 lagged, losing 0.5%. Treasuries sold-off, with 10-year yields trading four basis points higher to 3.20% on the day (most after the FOMC minutes), while two-year yields rose two basis points to 2.89% (a new decade-high). The dollar rallied +0.57%, its best day in three weeks. Oil remains under pressure (West Texas Intermediate crude off 1.5% to $68.72 per barrel) following yesterday’s larger-than-expected bulge in American stockpiles.
The September FOMC minutes weren’t a game changer, but a number of officials saw the need to hike rates above the long-run level – which was already evident from the dot-plot of FOMC members’ projections. Some participants talked about risks associated with a stronger dollar or stresses in emerging markets. On inflation, three members now see the risks skewed to the upside and none see the risks to the downside. Although that was before the soft September Consumer Price Index print, so this may be slightly dated.
Housing continues to weaken as starts, permits and completions were down across the board. Housing starts declined 5.3% in September to a seasonally adjusted annual rate of 1.201 million units with single-family starts down 0.9% to 871,000. New building permits fell 0.6% month-over-month in September versus expectations for a 2.0% increase. The Mortgage Bankers Association’s mortgage applications declined 7.1% last week, the sharpest fall in over a year. The key takeaway is that the combination of higher rates and less favorable tax treatment under the new law are weighing on activity.
The U.S. Treasury released its semiannual foreign exchange report, which refrained from naming China as a “currency manipulator.” While the U.S. may have spared China that designation for now, there was a section dedicated exclusively to China in the Executive Summary – a clear signal from the Treasury that China is the disproportionate focus of the report. It states, “It is clear that China is not resisting depreciation through intervention as it had in the recent past,” but also notes that it is “deeply disappointed that China continues to refrain from disclosing its foreign exchange intervention.” Obviously, the markets did not take the story well; the Chinese off-shore yuan hit its weakest level in two years. The Shanghai Composite was crushed 2.9% as confidence continues to erode. This now takes the gauge down about 30% from its January high and to its lowest level since November 2014. It certainly didn’t help matters that President Trump announced his intention to withdraw from a postal treaty that gives favorable rates to Chinese companies shipping small packages into the U.S.
Today, it’s an uninspiring start to the day. U.S. equity futures are lower, pointing to a weak open on Wall Street as investors digest minutes from the Fed’s most recent meeting, which highlighted it is staying on course for rate hikes despite growing criticism from President Trump. The yield on the benchmark 10-year Treasury note and 30-year Treasury bond were three basis points higher at 3.21% and 3.38%, respectively, while the Philly Fed’s Manufacturing Business Outlook Survey (22.2 vs. 20.0) and U.S. jobless claims data have been released on the data front. Away from the data, the St. Louis Fed’s James Bullard will be speaking about the U.S. economic outlook.
October 15 - 19, 2018: The Week Ahead
Future Fed Expectations
|Probability of Fed Funds rate increase on November 8, 2018||2%|
|Probability of Fed Funds rate increase on December 19, 2018||76%|
**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.