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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, September 22, 2021 at 9:00 am ET
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 09/20/2021

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.62+0.01
2s/10s Tsy Spread1.110.00
2s/30s Tsy Spread 1.630.00
DJIA-30 33,919.84 -50.63
NASDAQ 14,746.40+32.50
S&P-500 4,354.19-3.54
Dollar Idx 93.25+0.04
CRB Idx 218.31+0.22

Daily Commentary

Recap – As they say, it’s not where you open, it’s where you close that matters. Yesterday, the stock market peaked at 9:48 am ET. After that, the S&P 500 fell 0.9% and the Dow fell 1.1%. For the session, both indices closed down 0.1%. As was the case exactly 24 hours ago, U.S. equity futures are flashing green in the pre-open trade. Europe is up 0.9% and Asia-Pacific fell 0.7%.

Bond markets are very little changed. The 10-year Treasury yield is at 1.333%. The long bond is 1.863%. Further in on the curve, twos and fives are yielding 0.218% and 0.842%, respectively. The dollar index is flat as a pancake. Bitcoin, after slipping below $40,000, has rebounded back above $42,000 ($458,000 shy of Cathie Wood’s forecast 😊). Spot gold is little changed.

As for Evergrande, it is not a “Lehman moment.”  However, even if the debt repayment challenges are resolved, the real estate sector, almost a 30% share of the Chinese economy, is set for a prolonged contraction with no other offset. Evergrande accounts for 4% of the property market and avoiding default means fire sale asset liquidation, which fuels deflation across the entire sector. This means growth downgrades, at a minimum, in the world’s second largest economy and largest buyer of industrial commodities. Fade the reflation trade at every opportunity because there is no commodity bull market without Chinese demand. For further reading, see “Beijing’s Policies Heighten Risks for Economy” on the front page of the Wall Street Journal.

U.S. mortgage lenders initiated 69% more foreclosures in August (compared with July) now that the federal measures that prevented these expired last month. Likewise, rental evictions now need to be considered. This is currently a back-page story with negative macro implications. Keep an eye on the delinquency rate, now at 4.3%.

On the inflation front, after stripping out the automotive area, the core inflation rate in the U.S. is around 2%. Does that sound like the 1970s? Unless Powell learns how to build cars with no semiconductors, this is not a Fed issue to resolve. The bond market understands this.

The Democrats have rolled the dice on the debt ceiling since the Senate is going to need 60 votes to prevent any filibuster of the stopgap spending bill that includes a suspension of the debt limit until mid-December of 2022 along with funding needed to keep the government open. The House passed the resolution, but the Senate likely will not. The infrastructure package hangs in the balance and the prospects of it being passed are going down. I should add that the virus isn’t an issue that is going away that quickly either. Most pundits just a few months back thought we would be at “herd immunity” by now, and yet just 54.6% of the adult U.S. population has been vaccinated. Hospitals have been seeing another COVID-19 surge of inbound patients, including children.

The Fed concludes its two-day meeting today. Their statement, which includes updated projections for interest rates (dot plot) is released at 2:00 pm ET and will be followed by a press conference with Powell 30 minutes later. His task of convincing investors that the time might be coming to start withdrawing stimulus is made more difficult by the myriad risks facing the global economy. Re the “dots.” I cannot believe how many market pundits are focused so much on whether and how much the “dot plots” from the Fed will move today, and if the dots will “validate” the consensus view of higher rates sooner rather than later. But based on previous dot projections, the Fed’s dots are not important (actually useless).

Economic Calendar
September 20 - 24, 2021: The Week Ahead

Economic Calendar - 09/20-24/2021

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations as of 09/20/2021

Expected Fed Funds Path as of 09/20/2021

Select Probabilities based on the Futures 
Probability of Fed Funds rate CUT on September 22, 20211%
Probability of Fed Funds rate HIKE on November 3, 20212%

**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.