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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, December 7, 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

Historic Treasury Curves

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.000.00
2s/10s Tsy Spread0.13+0.01
2s/30s Tsy Spread 0.39+0.02
DJIA-30 24947.67-79.40
NASDAQ 7188.26 +29.83
S&P-500 2695.95-4.11
Dollar Idx 96.75-0.31
CRB Idx 191.30-2.44

Today's Market Commentary

Recap – After tumbling as low as 800 points, the Dow Jones jumped to close at session highs, pulling the S&P with it and blasting the Nasdaq into the green, as a Wall Street Journal story quickly made the rounds across trading desks. The story was centered on the same dovish line first introduced by Fed Chair Jerome Powell last week, namely that the Fed is considering whether to signal a new wait-and-see mentality after hiking rates in December, which could slow down the pace of rate increases next year. How this was bullish for a market which already prices in less than one rate hike in 2019 is unclear, but it provided enough of an upward momentum boost to send the Dow sharply higher.

On the session, the Dow and S&P 500 closed -32% and -0.15%, respectively, while the Nasdaq ended in the green. The Dow and S&P 500 are now +0.92% and +0.84% year-to-date, respectively. The Nasdaq clung to its outperformance, as it is now +4.13% this year. In fixed income, Treasuries were well bid with the 10-year Treasury benchmark yield dropping another two basis points to close at 2.89%. Amazingly, since November 8, 10- year yields have plummeted by 35 basis points. In the commodity space, West Texas Intermediate oil oscillated around $50 per barrel as OPEC headlines jockeyed with OPEC inventory data. As for credit, high yield cash spreads were +15 basis points wider. For context, U.S. spreads are now at the widest since December 2016.

On the economic ledger, the U.S. trade deficit was reported at $55.5 billion in October (worse than the $55.0 billion expected and well down from the $54.6 billion revised print for September). This is the biggest U.S. deficit since October 2008, underscoring continued fallout from the trade dispute with China. The goods trade gap with China widened by 1.7% to a record. Those tariffs sure are working. Unfortunately, in reverse, especially soybeans.

In other news, U.S. factory orders tumbled in October – dropping 2.1% month-over-month (worse than expected), the biggest drop since July 2017... All of which is sending warnings about the U.S. economy. Is this the same U.S. economy that has “never been better?” That the Fed was so exuberant about just a month ago? Capex is the No. 1 story here and now.

Finally, yesterday’s ADP employment change report for November was a tad disappointing at 179 thousand (vs. 195 thousand expected). More interestingly, the recent tick up in initial jobless claims held with the print coming in at 231 thousand. The four-week moving average is now 228 thousand and the highest since April after dropping as low as 206 thousand in September. So, the climb, while not yet at concerning levels, is certainly notable and worth watching now on a week to week basis. Have jobs peaked?

Overnight, Fed Chair Powell delivered an upbeat message on the U.S. economy and the job market ahead of today’s payrolls release. He said, “Our economy is currently performing very well overall, with strong job creation and gradually rising wages,’’ while adding, “in fact, by many national-level measures, our labor market is very strong.’’ Elsewhere, the New York Fed’s John Williams said yesterday that the biggest challenge the policy makers are facing is achieving a soft landing. He said, “We have a pretty strong economy – unemployment pretty low, inflation near our goal – it’s just managing a soft landing, keeping this expansion going for the next few years.”

With whispers that the November jobs report would disappoint due to various factors such as winter storms and rising jobless claims, moments ago the Bureau of Labor Statistics (BLS) reported that November payrolls indeed fell short of expectations, printing at 155 thousand, below the 198 thousand expected, with the October number revised lower from 250 thousand to 237 thousand. However, confirming that this number was weather affected, the BLS reported that “workers unable to work due to bad weather” came in at a substantial 129 thousand, well above prior November months (2017: 84 thousand; 2016: 19 thousand; 2015: 97 thousand). The unemployment rate remained unchanged, as expected at 3.7%, already the lowest since 1968. And while hourly earnings rose at a hottish 3.1% year-over-year, and as consensus expected, on a monthly basis the increase was 0.2%, below the 0.3% expected, and potentially adding fuel to any dovish reversal by the Fed. So, while both the headline jobs print and wages came in weaker than expected, a big reason for this was weather. The question, however, is whether the market will focus on the one-time factors impacting the November print, or whether it will instead see this as “bad data,” which will then be interpreted as good news for stocks, as it means a Fed pause is even more likely.

After yesterday’s furious tumble and sharp, last hour rebound, U.S. equity futures have rebounded modestly as I type. That said, any tape bomb could change sentiment in a New York minute. In bond land, Treasuries are modestly lower with the 10-year Treasury benchmark yield at 2.90%. The long bond is at 3.17%. Further in on the curve, twos and fives are yielding 2.77% and 2.76%, respectively. Oil is higher, and the trade-weighted dollar index has softened a smidge

Later today, wholesale inventories month-over-month, will be reported (est. 0.7%, prior 0.7%). Also, at 10:00 am the University of Michigan Consumer Sentiment Index will hit the wires (est. 97, prior 97.5). Finally, at 3:00 pm Consumer Credit will be released (est. $15.0 billion, prior $10.9 billion).

Have a great weekend!

Economic Calendar

December 3 - 7, 2018: The Week 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 81%
Probability of Fed Funds rate increase on January 30, 201882%

**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.