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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 25, 2022 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

Historic Treasury Curves as of 05/23/2022

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.22-0.03
2s/10s Tsy Spread0.23-0.04
2s/30s Tsy Spread 0.44-0.05
DJIA-30 31,928.62+48.38
NASDAQ 11,264.45-270.82
S&P-500 3,941.48-32.27
Dollar Idx 102.35-0.056
CRB Idx 313.75-1.44

Daily Commentary

Recap – Despite attempting late-day rallies, the S&P 500 (-0.8%) and Nasdaq (-2.3%) both finished in the red. The Dow was able to end the day +0.2%. Growth concerns are now slowly taking over from the inflationary anxieties of yesterday when it comes to the Fed. To wit: odds of a third straight 50-basis point hike in September fell from 55% to just 35%. Expectations for two consecutive 50-basis point moves in June and July remain the same. As such, Treasuries extended their flight-to-safety bid led by the short end of the yield curve (2-year falling 14 basis points; 10-year dropping 10 basis points; 30-year down 8 basis points.)

Investors were treated to more “growth unfriendly” news, this time out of Snap, Abercrombie and Best Buy, with more companies announcing negative earnings guidance. Price discounting and downside Consumer Price Index (CPI) surprises loom. Who knows? The Fed could be done after the next meeting. Add to that the plunge in new home sales that crushed the homebuilders 3% on the day. Overall, sentiment remains focused on the weak economic and earnings outlook. Increasing exposure to Treasuries seems appropriate as yields look set to fall further.

Manufacturing is staring to sputter. The incoming data points are weakening with the preliminary S&P Global composite Purchasing Managers’ Index (PMI) for the U.S falling to 53.8 in May from 56.0 in April. Order books in the services sector were squeezed to their lowest level since August 2020. In aggregate, the folks at S&P Global came out and said, “companies report that demand is under pressure from concerns over the cost of living, higher interest rates and a broader economic slowdown.” Indeed.

 On the docket today, the just released weekly Mortgage Bankers Association (MBA) mortgage application data showed mortgage applications falling 1.2% in the week ending May 20. April's durable goods orders (estimated at 0.6%) will be released at 8:30 am ET. In the early afternoon the latest Federal Open Market Committee (FOMC) minutes from the May meeting will be released. Today's bond auctions include $22 billion of 2-year floating rate notes at 11:30 am ET and $48 billion of 5-years notes at 1 pm ET.

Influential Federal Reserve Vice Chair Lael Brainard will also speak later today, and her comments may carry additional weight. Keep in mind that some Fed Presidents including Raphael Bostic (Atlanta), James Bullard (St. Louis) and Esther George (Kansas City) have begun padding their hawkish commentary with caveats that a pause could be in the offing when rates return to neutral.

 Back to the markets. Treasury yields are declining across the curve by between 1 and 3 basis points, with outperformance most notable in the belly, showing no signs of concession ahead of today’s 5-year supply. The 10-year Treasury yield is 2.72%. The long bond is 2.947%. On the front-end, twos and fives are yielding 2.514% and 2.740%, respectively. The yield curve has resumed its flattening trend with the 10-year/2-year spread at 22 basis points.

In equity markets, futures have given back earlier gains and are now pointing to a flat open. Weighing on equity sentiment is news that Apple's new flagship iPhones development schedule is reportedly hit by lockdowns in China. This could impact the manufacturing schedule and initial production volumes of the new phones. The dollar is higher while gold is seeing some profit taking at $1,855 per ounce. In the energy patch, West Texas Intermediate (WTI) crude is trading up at $111.05 per barrel. Finally, Bitcoin is trading directionless at just under $30,000 per token.

May 23 - 27, 2022: The Week Ahead

Economic Calendar - 05/23-27/2022

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations as of 05/23/2022

Expected Fed Funds Path as of 05/23/2022

Select Probabilities based on the Futures 
Probability of Fed Funds rate HIKE on June 15, 2022213%
Probability of Fed Funds rate HIKE on July 27, 2022198%

**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.