Logo for Alloya Investment Services

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.

Wednesday, May 31, 2023 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

Graph1 053023

Other Market Indicators

Market Indicators
2s/5s Tsy Spread-0.65-0.02
2s/10s Tsy Spread-0.78-0.02
2s/30s Tsy Spread -0.57-0.01
DJIA-30 33,042.78-50.56
S&P-500 4,205.52+0.07
Dollar Idx 104.50+0.34
CRB Idx 255.49-5.20

Daily Commentary

Recap Stocks were relatively quiet with the S&P 500 finishing flat. Nvidia (+3.0%) became the seventh U.S. firm to, albeit briefly, join the trillion-dollar club during intra-day trading. Meanwhile, there was a lot of downward movement along the entire Treasury curve: 2- year (-10 basis points), 5-year (-11 basis points), 10-year (-10 basis points) and 30-year (-6 basis points). The Commodity Research Bureau (CRB) commodity index fell 2.0%, a move by virtue of West Texas Intermediate (WTI) declining 4.1% ahead of this weekend’s OPEC+ meeting.

The calm before the storm? Markets are tiptoeing into Wednesday’s House vote. While it looks as if the deal will pass, investors must remain cautious. The fundamental backdrop remains weak and the U.S. 2s/10s yield curve is inverting further back to where it was in early March (-78 basis points).

Home price deflation intact. On a year-over-year basis, the Case Shiller Composite 20-city price index has moved to -1.2% — entering deflationary territory for the first time in over a decade. A year ago, the year-over-year pace was closer to +21%. Recall that the data are two months delayed, back when mortgage rates were beginning to fall, a development that has since reversed and will be reflected in future months.

Graph from Bloomberg of the Case Shiller 20 City Index YOY%.

I am looking forward to the next round of inflation reports. The nationwide rental data is still deflating into May. Food prices are down and gas prices have dropped modestly. The Manheim used-car price index tumbled -2.1% in May. Imported prices of everything automotive were flat in April. When you look at the details of the personal consumption expenditures (PCE) deflator, to little fanfare, air fares, delivery services, hotels/motel, ground transportation, auto rental/leasing, admissions to movies, live entertainment and sporting events all deflated in April; and price movement faded sharply in the restaurant and personal care industries. Nobody even noticed this! Not a word was spoken of this favorable trend in the service sector.

Oh, but what about the super-tight labor market? Well despite the media distortions it is no tighter today than it was in late 2019 when the Fed funds rate was 1.75% and inflation was running close to 2%. So, give me a giant break. This Fed is more consumed by ensuring that inflation gets crushed as quickly as possible after being so thoroughly embarrassed by the 2021-2022 inflation bulge.

Graph from Bloomberg of CPI YOY%.

And then we hear talk about inflation and comparisons to the 1970s. Well, it’s just not so. During the past 12 months there was one month of inflation at 9% (June 2022). In the 1970s, inflation was 9% or higher two-thirds of the time. And no one seems to notice that the inflation rate has fallen by over 4% from the peak in just 10 months. For some perspective, there have been only three other times in the past seven decades that inflation has plunged so fast (1975, 1982 and 2009). All recessions and like today, nobody saw it coming, seemingly believing that interest rates don’t matter, there are no policy lags, and that the business cycle has miraculously been repealed.

In news overnight, the big downside shocker was the further slippage in China’s manufacturing Purchasing Managers’ Index (PMI) to a five-month low of 48.8 in May from 49.2 in April. This was not supposed to be part of any reopening recovery but some of the deeper economic challenges in the country are now being exposed. Have a look at “China’s Fading Recovery Reveals Deeper Economic Struggles” in the Wall Street Journal.

In the pre-open, U.S. futures are in the red but just a little. Bonds are in rally mode for a second straight day. The 10-year Treasury yield is down 5 basis points to 3.64%. Not even hawkish comments out of Cleveland Fed President Loretta Mester putting in a vote to approach the 6% mark for the Fed Funds rate could knock the bond market down today. The DXY dollar index has popped to 104.5. Copper and iron ore have extended their losses. Spot gold is flat while WTI is off 0.7% and now below $69 per barrel — how inflationary is that?

On the docket today, we have a number of Fed speakers including Fed Presidents Susan Collins (Boston), Patrick Harker (Philadelphia) and Fed Governors Michelle Bowman and Philip Jefferson. The Fed releases the Beige Book. On the data front, earlier this morning it was reported that Mortgage Bankers Association (MBA) mortgage applications fell 3.7% for the latest week. Purchase applications were down 2.5% while refinancings declined 6.9%. Later this morning the MNI Chicago PMIs and April Job Openings and Labor Turnover Survey (JOLTS) job openings will be released.

The Week Ahead

Investors head into this week positioned as if the U.S. debt ceiling crisis will be resolved one way or another.

The major economic release of the week will be the May jobs report on June 2. A drop in monthly payroll additions to 180,000 from 253,000 in April is anticipated and the unemployment rate is seen inching up to 3.5% from 3.4%. Average hourly earnings are forecast to decline to a +0.3% pace from +0.5% in April.

The jobs report will arrive less than weeks before the next Federal Open Market Committee (FOMC) meeting and is likely to kick off more debate on whether the Fed will raise rates again.

Other key reports include the March Case-Shiller house prices, May Institute for Supply Management (ISM) Manufacturing and May vehicle sales.

Monday, May 29th -----

All U.S. markets were closed in observance of Memorial Day.

Tuesday, May 30th -----

9:00 am ET: S&P/Case-Shiller House Price Index for March.

10:00 am ET: Dallas Fed Survey of Manufacturing Activity for May.

Wednesday, May 31st -----

7:00 am ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

9:45 am ET: Chicago Purchasing Managers Index for May.

10:00 am ET: Job Openings and Labor Turnover Survey for April.

2:00 pm ET: The Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

Thursday, June 1st -----

8:15 am ET: The ADP Employment Report for May. This report is for private payrolls only (no government). The consensus is for 160,000 payroll jobs added in May, down from 296,000 in April.

8:30 am ET: The initial weekly unemployment claims report will be released. The consensus is for 234,000 initial claims, up from 229,000 last week.

All day: Light vehicle sales for May. The consensus is for light vehicle sales to be 14.5 million in May, up from 14.3 million in April (seasonally adjusted annual rate).

10:00 am ET: ISM Manufacturing Index for May. The consensus is for the ISM to be at 47.0, down from 47.1 in April.

10:00 am ET: Construction spending for April. The consensus is for a 0.2% increase in construction spending.

Friday, June 2nd -----

8:30 am ET: Employment Report for May. The consensus is for 180,000 jobs to be added and for the unemployment rate to increase to 3.5%.

Economic Calendar

May 30 - June 2, 2023: The Week Ahead

Graph2 053023

Future Fed Expectations

Source: Bloomberg

Graph3 053023

Graph4 053023

Select Probabilities based on the Futures
Probability of Fed Funds rate HIKE on June 14, 202359%
Probability of Fed Funds rate HIKE on July 26, 202343%

**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.