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Daily Market Commentary

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.

Friday, April 26, 2019 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

Historic Treasury Curves

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.00+0.01
2s/10s Tsy Spread0.21+0.01
2s/30s Tsy Spread 0.63+0.01
DJIA-30 26462.08-134.97
NASDAQ 8118.68+16.67
S&P-500 2926.17-1.08
Dollar Idx 98.17-0.02
CRB Idx 184.71-1.25

Market Commentary

Recap – The S&P 500 dropped a small -0.04% yesterday. The Nasdaq (+0.21%) got a boost from Facebook and Microsoft results, while the Dow (-0.51%) got hit almost entirely due to a -12.95% drop for 3M following a disappointing set of results. Meanwhile, the U.S. dollar – which has been part of the reason for the weakness across emerging markets recently – did at least ease off yesterday, closing flat. Treasuries also had a quieter day with 10-year yields creeping up one basis point.

On the data front, the preliminary March durable and capital goods orders data came in above market. Core capex orders printed at +1.3% month-over-month versus expectations for +0.2% while durable orders excluding transport rose +0.4% month-over-month (vs. +0.2% expected). Both series were also revised higher in prior months as well.

The other data that were released yesterday included the latest weekly claims reading which revealed a surprisingly 37 thousand uptick to 230 thousand (vs. 200 thousand expected). However, one-offs appeared to be in play again with strikes at New England supermarkets flagged as a reason behind the spike.

Lastly, the Kansas City Fed manufacturing survey for April fell to five from 10, remaining in positive territory for the 29th consecutive month, the longest streak since February 2008.

Well, if it isn’t 3M one day (worst session for the stock since 1987 with its 12.9% plunge), then it’s Intel the very next (stock was down 7% in the after-hours market with revenue guidance cut for the entire year). Both cyclical bellwethers are throwing cold water on the bullish-growth narrative (3M especially is the poster child for the industrial heartland), even with the solid top-line gains at Microsoft.

To be sure, Amazon is doing great. Amazon showed first quarter profits far above expectations, at $7.09 per share, versus Bloomberg consensus expectation for $4.67. Meanwhile, revenues also grew strongly with a +47% gain in sales by Amazon Web Services, their cloud computing business. But that is a market-share-grab story while the other two truly are canaries in the coal mine from a macro standpoint (the cloud clearly is also serving as a boon for both Amazon and Microsoft). Finally, how can anyone be claiming that the U.S. economy is on solid ground, understanding how many companies are surpassing estimates that were simply driven down too much, when UPS profit slumps 17% (sorry, but weather was not the only story) and the stock gets pummeled 8%? What is more economy-sensitive than delivery services?

Let’s not forget that the earnings recession seems to have arrived with the first quarter on pace thus far for a 3% year-over-year decline even with many of these “beats off beaten-up estimates” and second quarter forecasts now pointing to a 0.5% dip. Both quarters at the start of the year were seen by the consensus as slightly positive; now they are negative, yet the stock market is up 17% in what is the best year since 1987. Go back to 1987, and you’ll see that the way the year started didn’t reflect how it ended.

On the trade front, Bloomberg reported the White House might concede to a Chinese proposal that would give less protection for the U.S. pharma products in China (proposed eight years) than they receive at home (12 years and new NAFTA 10 years). President Xi Jinping also reiterated China’s commitment to keeping the currency stable by saying that China won’t engage in currency depreciation that harms other countries.

On the political landscape, former Vice President Joe Biden officially launched his presidential campaign yesterday. He is viewed as more moderate than most of the rest of the Democratic field and has consistently polled at the top of the pack. It remains to be seen if he can maintain his initial strong position as the grind of the campaign accelerates.

The best, and arguably the most disturbing, article of the day goes to America Learns to Love Deficits. My lord. I recall starting in this business in the early 1980s when all anyone talked about were the budget deficits. Today, the budget deficit is at a record high 5%. And this is happening when the economy is the “strongest ever.” And there is absolutely no concern expressed anywhere from Wall Street to academia to the media about the amount of debt any entity can take on (including governments). It seems so surreal to those of us who have been market participants and pundits for a long time, can remember the 1970s through the early 1980s, how global policymakers were solely focused on killing high and rising inflation rates, and at the same time get structural fiscal imbalances under control. Now we see columns on how America loves deficits.

Looking at the day ahead, the focus then turns to that first quarter GDP print. First quarter GDP came in at 3.2%, 50% higher than the 2.3% expected, and was the highest first quarter GDP (which is not only the weakest quarter of the year, but also a quarter notorious for its residual seasonality). That was the great news. The not-so-great news: the number was driven entirely by “one-time items” such as a surge in inventories and a far smaller trade deficit, pushing net trade sharply higher, neither of which is sustainable. Meanwhile, both consumption and fixed investment dipped from the fourth quarter, with personal consumption expenditures (PCE) and capex adding just 1.1%, or about a third, of the bottom line GDP number.The Fed’s preferred inflation measure, PCE price index excluding food and energy, slowed to 1.3%, well below policy makers’ 2% objective.

U.S. Economy Grows 3.2% in Q1 2019


Later today, the final April University of Michigan Consumer Sentiment Survey revisions follow. Away from that, the other potentially market-sensitive event is a meeting between Japanese Prime Minister Abe and President Trump at the White House.

In early trade, U.S. equity futures are pointing to a flat open once trade commences in NYC. Meanwhile, the dollar is notably weaker and Treasury yields are sliding after GDP surprised dramatically to the upside. Currently, the 10-year Treasury yield has declined three basis points to 2.50%. West Texas Intermediate is set for a third straight decline as attention has shifted from Iranian exports to sky-high U.S. stockpiles.

Have a wonderful, weekend!

Economic Calendar

April 22 - 26, 2019: The Week Ahead

Economic Calendar

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations

Expected Fed Funds Path


Select Probabilities based on the Futures 
Probability of Fed Funds rate CUT on May 1, 20190%
Probability of Fed Funds rate CUT on June 19, 20197%

**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.