Daily Commentary
Commentary prepared by Alloya Investment Services, a division of the wholly owned CUSO of Alloya Corporate Federal Credit Union. Alloya Investment Services is a leading broker/dealer consultant to credit unions.
Thursday, April 18, 2024 at 8:00 am CT
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Alloya Investment Services
Market Indications
Other Market Indicators
| Market Indicators | ||
|---|---|---|
| 2s/5s Tsy Spread | -0.32 | 0.00 |
| 2s/10s Tsy Spread | -0.35 | -0.01 |
| 2s/30s Tsy Spread | -0.23 | 0.00 |
| DJIA-30 | 37,753.31 | -45.66 |
| S&P-500 | 5,022.21 | -29.20 |
| NASDAQ | 15,683.37 | -181.88 |
| Dollar Idx | 105.82 | -0.07 |
| CRB Idx | 294.44 | -2.40 |
| Gold | 2,382.90 | +21.45 |
Daily Commentary
Recap – Two more Fed officials chimed in yesterday with no rate cuts for some time to come (Fed Governor Michelle Bowman and Cleveland Fed President Loretta Mester) and the 10-year Treasury yield still manages to drop -8 basis points (to below 4.6%). And just as the world sees oil prices going higher, West Texas Intermediate (WTI) traded lower by more than -3% to below $83 per barrel as U.S. crude stockpiles jumped to a 10-month high of 2.7 million barrels last week. Meanwhile, the stock market is starting to see some impulsive selling and the dip-buyers are staying put for now. To wit: The S&P 500 is riding a four-day losing streak and is now down a rare -4.4% so far this month. This is typical of market rallies based solely on momentum and speculation. The swings can be vicious, especially when price to earnings (P/E) multiples are near the all-time highs. Greed is good, until it isn’t.
Take note that the transport sector has taken it on the chin. The group sagged -1.7% yesterday and is down nearly -8.0% so far this month. This is key because transports are the most economic cyclically sensitive sectors in the U.S. economy. As less and less goods are shipped across the country, Knight-Swift’s stock plunged -4.4% yesterday after issuing a profit warning. First quarter earnings per share (EPS) is now expected to come in 50% below originally expected. At the same time, J.B. Hunt’s stock plummeted -8.1% after posting worse than expected earnings and revenues. Could this be the canary in the coal mine and calls into question the longevity of the run of hotter economic data of late.
It's not just the transports. I should also add that the bank stocks are also off -8.0% so far in April, and the homebuilders are in official “correction” mode, down -10.5%, as the Fed’s renewed hawkish tone is now being heeded in the sectors that are most susceptible to such verbal policy shifts.
Must read of the day goes to the front-page Financial Times (FT) article titled “U.S. Deficit Poses ‘Significant Risks’ to Global Economy, Warns International Monetary Fund (IMF)”. The federal deficit is expected again to top 7% of gross domestic product (GDP) this year. For comparison this massive fiscal deficit is more than triple the average of 2% in the rest of the developed world. So if you’re wondering why the U.S. economy has outperformed, now you know.
Never before has the fiscal deficit been so large when the economy is not in a recession. Never! So, the robust economic growth in the United States has nothing to do with “American Exceptionalism” but everything to do with the government’s relentless intervention into the economy.
Consider this. In the past year alone, government intervention has been responsible for half of the GDP growth seen. The other half owing to the drawdown in excess personal savings, as well as the credit card boom which now looks to be on its last legs.
I keep hearing that the boom in bond supply has been responsible for the recent spike in yields, but that is not true. Supply actually has a rather weak relationship with Treasury yields. When yields were hitting their highs last summer, the markets were pricing in endless Fed tightening. At the yield lows late last year, we were priced for six cuts. Now, four months and +80 basis points later, it has boiled down to the market pricing in just one to two cuts. It’s not about new issue activity. It’s about Fed policy expectations.
The proof of the pudding is in the eating. The Treasury International Capital System (TICS) data for February, showed net foreign buying of Treasury securities surging to $88.8 billion (up from $46.3 billion in January), which was the most active international interest in the U.S. bond market in ten months. For all the chatter about a “buyers strike,” it is showing everywhere except in the data. Indeed, global investors have not reduced their holdings of Treasury securities since April 2022.
On the docket this morning, Fed speakers including Michelle Bowman, Fed Presidents John Williams (New York), Raphael Bostic (Atlanta) and Susan Collins (Boston) will be the key highlights.
Have a great day!
Economic Calendar
April 15 - 19, 2024: The Week Ahead
Future Fed Expectations
Source: Bloomberg
| Select Probabilities based on the Futures | |
|---|---|
| Probability of Fed Funds rate CUT on May 1. 2024 | -3% |
| Probability of Fed Funds rate CUT on June 12, 2024 | -19% |
**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 Alloya Investment Services to discuss your specific situation and objectives.