Daily Market Commentary

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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, April 27, 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

Market Indications

Other Market Indicators

2s/5s Tsy Spread 0.56 -0.01
2s/10s Tsy Spread 1.04 0.00
2s/30s Tsy Spread 1.70 0.00
DJIA-30 20975.09 -21.03
NASDAQ 6025.23 -0.27
S&P-500 2387.45 -1.16
Dollar Idx 98.94 -0.10
CRB Idx 180.58 -1.13

Today's Market Commentary

Recap – Stocks were mixed yesterday. The NASDAQ was basically neutral, being down 0.27 points. The Dow and the S&P were off slightly (-0.10% and -0.05%, respectively). This was mostly a reaction to a lack of details from President Trump’s tax reform plan. There were some ideas the business community and investors will favor, such as the lowering of the corporate tax rate from 35% to 15% and reducing the current seven individual brackets to three brackets. However, details are still to be released, and an uncertain outcome in Congress made the reception of the announcement more of a cautious golf clap than a rousing cheer. Democratic leadership (as expected) immediately came out against the plan, while many Republicans praised it (somewhat expected). Although the details are still forthcoming, this could be the most sweeping changes to the tax code since the Reagan Administration. One of the biggest sticking points will be the effect on the Federal deficit and the national debt. Also, special interest groups are already lobbying for their loopholes to be left alone in any reform (zero surprise on that one). This should be interesting. While tax reform is long overdue (in my humble opinion, at least), expecting it to happen quickly and efficiently is probably not realistic.

Moving on, there are several economic reports out today. Wholesale Inventories were down -0.1% month-over-month, and last month’s number was revised down from 0.4% to 0.2%. Also, Durable Goods orders came in at 0.7% on expectations of 1.3%. Durable Goods excluding Transportation was a -0.2% on expectations of +0.4%. Both numbers are indicative of a slowing economy. Later today, Pending Home Sales for March will be released. Economists are looking for a drop of 1.0%.

Tomorrow will bring the GDP Annualized number for the Q1 2017. This is the third and final release for the Q1, or the “actual” number. The expectation is for a print of 1%. This is a very weak number, and is significantly lower than the previous expectation of 2.1% growth. Coupled with the Atlanta Fed’s GDP Now number, which is currently tracking well below 1%, the U.S. economy could be moving into a significant slowdown.

Speaking of economic slowdowns, the Fed Funds Futures is predicting another rate increase in June (69% probability) and a 53.3% chance in December. If the Federal Open Market Committee were to do both rate increases and start slowly unwinding its balance sheet, an economic slowdown would only be exacerbated. It would also continue to flatten the yield curve (this is what happens historically when the Fed raises rates).

Finally, the Treasury curve is flat to selling off slightly this morning. The three, five and ten-year Treasury yields are currently at 1.45%, 1.83%, and 2.31%, respectively. Stock futures are slightly positive.

Economic Calendar

April 17 - 21, 2017: The Week Ahead

Future Fed Expectations
Sources: Bloomberg


Select Probabilities based on the Futures

Probability of Fed Funds rate increase on May 3, 2017 13%
Probability of Fed Funds rate increase on June 14, 2017 67%

**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.