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.
Monday, March 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 | -0.40 | +0.03 |
2s/10s Tsy Spread | -0.44 | +0.03 |
2s/30s Tsy Spread | -0.26 | +0.03 |
DJIA-30 | 38,905.66 | -137.66 |
S&P-500 | 5,142.56 | -22.75 |
NASDAQ | 16,128.53 | -49.20 |
Dollar Idx | 103.31 | +0.52 |
CRB Idx | 278.32 | +2.78 |
Gold | 2,162.19 | -12.20 |
Daily Commentary
Recap – The Dow and S&P 500 endured a rare dip last week, and the Nasdaq Composite was off -1.0%. The tech-laden index has now slipped for two weeks in a row for the first time since October (though it is still up +6.4% for the year). The small-cap Russell 2000 sank -2.1%. The market rally is now in the midst of a pause (or pullback) that commenced with Nvidia's March 8 downside reversal.
Bond markets are quiet even with a bearish article in the Wall Street Journal (WSJ) “Suspense For the Federal Reserve As Growth Downshifts and Inflation Lingers”.
Final note: I keep hearing about how runaway fiscal deficits and debts are the primary cause of higher bond yields in the U.S. That is not true. There is a low correlation between fiscal policy and the bond market, and that relationship only rises insofar as these deficits generate inflationary pressures. There have been countless times when the U.S. government had runaway deficits in years when Treasury yields have come down. It also begs the question as to how it is, if government deficits and debts are the be-all-that-ends all, countries like Greece with a whopping 183% debt-to-gross domestic product (GDP) ratio could have a 10-year yield of 3.41%? Portugal has a 3.06% 10-year yield with a 113% debt-to-GDP ratio. Meanwhile, Italy has a 132% debt-to-GDP ratio and a 3.69% 10-year bond rate.
The current 4.3% yield on the 10-year Treasury is higher than these other fiscal basket cases, and there is only one reason why: It goes to show that monetary policy has a far more powerful influence on current market rates than fiscal policy (or anything else, for that matter).
The Week Ahead
Last week was all about the data, and this week is all about central banks. First up, the Bank of Japan (BOJ) tomorrow, the Fed Wednesday and Bank of England (BOE )on Thursday. The BOJ meeting could be a watershed moment if the Japanese central bank finally has the nerve to move out of negative interest rate policy (NIRP) in the aftermath of what proved to be the biggest surge in annual pay negotiations (over 5%) in more than three decades.
Recent data showing inflation hasn't dropped as fast as expected has pushed out market forecasts for Fed rate cuts this year to three from six. The question, then, is whether a few months of stubborn inflation data will be enough to prompt a further tweak from the Fed. As such, all eyes will be on the Federal Open Market Committee (FOMC) which is set to release its latest monetary policy decision and updated economic projections at 2:00 pm ET on Wednesday afternoon. No change to policy is expected. More importantly, does the Fed still think it will cut rates three times in 2024?
There is a serious risk that the dot-plots shift from three cuts this year to two at Wednesday’s FOMC meeting, but the bond market has already been reset to expect not-too-much out of the Fed this year. The futures market reflects just a 58% chance that the Fed will cut interest rates at least once by July. At the end of last year, it was pricing in a 75% chance of at least one cut by March! As an aside, a June cut is now seen as a coin flip by the swaps market and is pricing in -71 basis points of cuts for all of 2024, down from the -150 basis point expectation at the turn of the year.
On the U.S. data front, the March National Association of Home Builders (NAHB) index is released today at 10:00 am ET, February housing starts tomorrow and then the Philadelphia Fed manufacturing index on Thursday (for March) along the Conference Board’s leading economic indicator and existing home sales (both are for February).
Monday, March 18th -----
10:00 am ET: The March NAHB homebuilder survey. The consensus is for a reading of 48, unchanged from 48.
Tuesday, March 19th -----
8:30 am ET: Housing starts for February. The consensus is for 1.435 million annualized, up from 1.331 million.
Wednesday, March 20th -----
7:00 am ET: The Mortgage Bankers Association (MBA ) purchase applications index is released.
2:00 pm ET: FOMC Meeting Announcement. No change to policy is expected at this meeting.
2:00 pm ET: FOMC Projections. This will include the FOMC participants' projections of the appropriate target federal funds rate along with updated economic projections.
2:30 pm ET: Federal Reserve Chair Jerome Powell holds a press briefing following the FOMC announcement.
Thursday, March 21st -----
8:30 am ET: The initial weekly unemployment claims report will be released. The consensus is for 212,000 initial claims, up from 209,000 last week.
8:30 am ET: the Philadelphia Fed manufacturing survey for March. The consensus is for a reading of -2.5, down from 5.2.
10:00 am ET: Existing home sales for February from the National Association of Realtors (NAR). The consensus is for 3.94 million annualized, down from 4.00 million.
Friday, March 22nd -----
No releases.
Weekly Relative Value (WRV) will not be distributed this week. The next WRV is scheduled to be released on Monday, March 25.
Have a great day!
Economic Calendar
March 18 - March 22, 2024: The Week Ahead
Future Fed Expectations
Source: Bloomberg
Select Probabilities based on the Futures | |
---|---|
Probability of Fed Funds rate CUT on March 20, 2024 | -01% |
Probability of Fed Funds rate CUT on May 1, 2024 | -08% |
**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.