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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.

Tuesday, December 11, 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

Market Indications

Market Indications

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.000.00
2s/10s Tsy Spread0.130.00
2s/30s Tsy Spread 0.40-0.03
DJIA-30 24423.26+34.31
NASDAQ 7020.52+51.27
S&P-500 2637.72+4.64
Dollar Idx 97.21+0.70
CRB Idx 181.64-2.50

Today's Market Commentary

Recap – The S&P 500 was down as much as 2% in the morning before closing with a 0.2% gain on the back of two sectors — Tech and Aerospace & Defense. The Dow, with a massive 619-point swing from the intraday lows, finished with a 35-point gain (+0.14%). The Nasdaq gained 0.74%. This intense market volatility is characteristic of a bear phase; it doesn’t tend to happen very often in bull markets. Have equity markets bottomed? Ask one of the old Wall Street strategists who didn’t call the topping process for U.S. stocks in September 2018 for that answer. I’m sure they’ll give you an answer if you give them commissions.

In bond land, 10-year Treasuries finished one basis point higher at 2.86%. The 2s/10s yield curve flattened by another basis point and is now back within one basis point of its cyclical closing low. The recent yield curve moves continued to weigh on financials (-1.40%), which took the four-day move to -8.81%, the biggest drop since August 2015. Since September 20, the regional banks are off 17.5%. In the credit space, high-yield credit spreads widened another seven basis points to 4541 basis points. Investment grade spreads widened by three basis points to 156 basis points.

The only data release yesterday was the October Job Openings and Labor Turnover Survey (JOLTS) report, which showed job openings rising slightly to 7.079 million and more or less in line with the consensus.

Recession Odds Rise – The New York Fed’s recession model (based on the yield curve) rose from 14.1% in October to 15.8% in November. This where it was in November 2008. It was below 11% a year ago. Note that this metric doesn’t peak at 100% before the recession — but rather 30%-40%, so on a “normalized” basis. As such, the model is basically saying that recession odds are between one-third and fifty-fifty. I should add that the St. Louis Fed’s recession model jumped last month to its highest level since the angst of March 2016. It is right where it was in September 2007, June 2000 (recession nine months hence), April 1990 and December 1980. A pretty consistent story here of rising recession risks for 2019.

Overnight, there were no data releases of consequence, but we did come off a round of very weak Chinese export and import data over the weekend. And that huge downward revision to Japan’s third quarter GDP data (to -2.5% at an annual rate from -1.2%) continues to resonate.

After several days of precipitous market drops, and following yesterday’s dramatic Apple-led intraday rebound (the biggest since February) S&P futures and European stock markets are sharply higher even as Asian shares slipped. Investor sentiment was boosted by fresh prospects of a thaw in the trade war following overnight news that Chinese Vice Premier Liu discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin. This, coupled with a report this morning from Bloomberg that China is moving toward cutting its trade-war tariffs on imported U.S.-made cars, is a step which had previously been brandished by President Donald Trump as a concession won during trade talks in Argentina. This should be slightly reassuring for markets as it shows that the U.S.-China trade talks haven't fallen apart in the aftermath of the Huawei CFO’s arrest.

On the negative side, a Chinese court just ruled that Apple can no longer sell old iPhones in the domestic market. The U.S. and China can talk all they want, but this is more than just a trade war. Brace yourselves for a prolonged economic “cold war,” my friends. How it all ends is highly uncertain. Only Donald Trump holds the key when it comes to the decision to hike (and expand) the 10% tariff to 25%.

In terms of the day ahead, the November National Federation of Independent Business (NFIB) Small Business Optimism reading has been reported and came in well below the consensus forecast (104.8 vs. 107). After rebounding in October, final producer prices grew slower in November (at 2.5% year-over-year, and the weakest since August 2017). None of this should be a huge shock as the market’s inflation expectations have collapsed as oil’s price has plunged. However, the core Producer Price Index surged to 2.7% year-over-year – near its highest since September 2011.

Asian equity markets stabilized overnight, and Europe is sharply higher with gains of approximately 2%. Elsewhere, futures on the S&P 500 are higher by approximately 1% in pre-market trade.

In fixed income land, Treasuries are mixed. Currently, the 10-year Treasury benchmark is priced at 2.87%. The long bond is yielding 3.12%. Further in on the curve, twos and fives are at 2.75% and 2.74%, respectively. The flattening of the yield curve continues. See this week’s Weekly Relative Value for more on the yield curve and what it means.

Economic Calendar

December 10 - 21, 2018: The Weeks Ahead

Economic Calendar


Future Fed Expectations

Sources: Bloomberg

Future Fed Expectations

Expected Fed Funds Path


Select Probabilities based on the Futures 
Probability of Fed Funds rate increase on December 19, 2018 71%
Probability of Fed Funds rate increase on January 30, 201872%

**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.