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, January 29, 2020 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Alloya Investment Services
Other Market Indicators
|2s/5s Tsy Spread||0.01||0.00|
|2s/10s Tsy Spread||0.18||0.00|
|2s/30s Tsy Spread||0.64||+0.01|
Recap – The coronavirus death toll in China has soared past 100 while the number of confirmed cases doubled overnight. Health officials around the world have confirmed more than 4,500 cases globally, more than triple the number from Friday. And domestically, while “soft” data improved with headline consumer confidence ticking up and the Richmond Fed seeing its second biggest rebound in its 27-year history, “hard” data collapsed as durable goods orders were a disaster. All of which explains (not in any way whatsoever) why the S&P surged to its best day since October 4.
Treasury yields jumped higher (up 3-4 basis points across the curve) along with stocks, but still remain notably lower on the week. The 10-year Treasury benchmark yield ended the day at 1.64%. Further in on the curve, fives closed at 1.47%. Finally, it should be noted that the market is now pricing in the possibility that the Fed will cut rates more than once this year. As discussed in this week’s Weekly Relative Value – Reality is Irrelevant – imagine how low rates will go when the economy does enter a recession.
Apple delivered blowout earnings and revenue, with net income for the latest period rising 11% to $22.24 billion, thanks to rising iPhone sales and soaring demand for add-ons like AirPods. In fact, Apple’s fastest-growing business segment, “Wearables, Home and Accessories,” is now bigger than Mac. Apple also reported $207.06 billion in cash on hand, hosting one of the largest cash piles of any U.S. company.
A black swan event? The coronavirus is spreading quickly as the number of confirmed cases in China approaches 6,000 and the death toll has climbed to 132. Meanwhile, the number of new countries reporting incidents of the virus has increased. Restrictions on travel to China are widening, with several airlines suspending flights to the country. Economists now predict that China’s GDP growth could “materially drop” from the 6% pace seen in the last quarter of 2019.
The Federal Open Market Committee (FOMC) meets today and is expected to open 2020 the same way they closed 2019: by holding rates steady. Today’s decision will be announced at 2:00 pm ET and it’s a bygone conclusion that there will be no change in benchmark rates. The statement is expected to reinforce the narrative for policy to stay on hold. The fireworks, if there are any, will come in the post-decision press conference at 2:30 pm, where Chairman Jerome Powell may speak about the rate of not-quantitative easing asset purchases, possibly flagging a reduction in the current pace as the repo market remains calm. The Fed might also discuss how global growth and the coronavirus outbreak may influence future rate decisions.
Today, December wholesale inventories and goods trade balance for the U.S. are due at 8:30 am, and pending home sales data out at 10:00 am. The Fed decision is at 2:00 pm. It is a huge day for corporate earnings with Facebook Inc., Microsoft Corp., Boeing Co., Tesla Inc., McDonald’s Corp. and GE among the many reporting results.
As I peer at the screens, global markets are stable this morning as the virus-related sell-off pauses. Overnight, the MSCI Asia Pacific Index slipped 0.2%. In Europe, the Stoxx 600 Index was trading 0.4% higher. S&P 500 futures pointed to further gains at the open, and the 10-year Treasury yield was at 1.63%.
January 27 - 31, 2020: The Week Ahead
Future Fed Expectations
|Select Probabilities based on the Futures|
|Probability of Fed Funds rate CUT on January 29, 2019||0%
|Probability of Fed Funds rate CUT on March 18, 2020||10%
**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.