It was another quiet overnight session from a news perspective, which has been positive for global equity markets (i.e., no bad news is good news). China’s Shanghai Composite closed nearly 3% higher following four consecutive daily declines, and European indices are up approximately 1%. The S&P 500 continues to inch closer to a new all-time high, with futures up 6 points currently. Yesterday we noted a Reuters article suggesting a more hawkish shift at the Bank of Japan, and today it was reported that Japanese real wages rose in June at the fastest pace since 1997. The Treasury department will issue $34 billion 3-year notes later today, and 10-year and 30-year auctions will be held tomorrow and Thursday, respectively. The 2-year/10-year spread has been holding steady near 30 bps for the last two weeks, and corporate debt spreads have tightened another basis point so far in August in the wake of the larger 10-12 bps tightening in July.
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ALM First Daily Market Commentary: August 3, 2018
Treasury prices were modestly higher ahead of the July jobs report and are little changed immediately following the release of the numbers. Overnight, China announced that it plans to counter any new tariffs from the United States with $60 billion of new tariffs on U.S. imports. Additionally, the Chinese central bank is reinstating 20% reserve requirements on currency trading after the U.S. dollar hit a 10-year high versus the yuan in offshore trading. The move suggests Chinese officials are concerned with the tenacity of the recent yuan depreciation, particularly the risk of capital flight from the country if volatility increases further.
Nonfarm payrolls added 157,000 jobs in July, 37,000 less than expected, but at the same time, the prior two months were revised higher by a total of 59,000 jobs. The establishment survey also showed average hourly earnings rising 0.3% m/m in July (as expected), and the year-over-year rate remained at 2.7%. In the household survey, the headline unemployment rate fell to 3.9% (18 bps decline if rounded to three decimals). A 389,000 increase in household employment outpaced a 105,000 increase in the official labor pool, and the labor participation rate remained unchanged at 62.9%. Overall, this was another solid jobs report. Weaker than expected job growth was offset by decent wage growth and the near-20 bps decline in the headline unemployment rate. Also, the U-6 underemployment rate fell 30 bps to a new 17-year low of 7.5%.
ALM First Daily Market Commentary: August 2, 2018
The Treasury curve bull flattened overnight with global equity markets weaker (Nikkei -1.03%, Hang Seng -2.21%, Euro Stoxx -1.08%). The popular reasoning for todays market tone is trade jitters after the White House confirmed late yesterday that it may increase the tariff percentage on $200 billion of Chinese goods from 10% to 25%, and a top Bloomberg headline this morning highlights Chinas readiness to retaliate. S&P 500 futures are down 14 points, and the 10-year Treasury yield is back below 3%. Yesterdays FOMC meeting was uneventful (as expected). There were no policy actions and no dissenting votes, and only a few minor changes were made to the language in the official statement. The description of recent economic activity was changed to strong from solid in the prior statement. If there was any more meaningful discussion of balance sheet reduction and other matters, it will show up in the minutes of the meeting (released in three weeks).
ALM First Daily Market Commentary: August 1, 2018
The Treasury curve bear-steepened in the overnight session following the selloff in Japanese bonds as investors reacted to the Bank of Japan’s new wider target yield range. Equity markets were mixed, with futures on both the S&P 500 and Nasdaq pointing to higher opens, while the Dow is poised to open lower in addition to selloffs experienced by European and Asian markets. The FOMC meets today and will release its rate decision later this afternoon, the market expects the central bank to keep rates unchanged.
In terms of data releases, the ADP National Employment report showed that US companies added 219,000 new employees in July coming in 33,000 higher than expected. On the housing front, the MBA Mortgage Market index showed a decline in mortgage applications of 2.6%, declining for the third consecutive week, as the impact of higher interest rates appears to have taken out some of the wind of the housing market’s sails.
ALM First Daily Market Commentary: July 31, 2018
Long-end Treasury prices are higher and the curve flatter following the Bank of Japan’s (BOJ) decision to keep its policy for future asset purchases unchanged. There had been some speculation that the central bank might increase its target yield for government debt, which would be expected to impact long-end European and U.S. government yields as well. This speculation contributed to the recent curve steepening in the U.S., but the BOJ chose to maintain its ultra-dovish policy for the foreseeable future. However, in the press conference that followed, the BOJ Governor Kuroda did provide a slightly hawkish twist, saying that the range of allowable yield deviation from the target level will double from 10 bps to 20 bps. Major global equity markets are mostly higher on the day, and S&P 500 futures are currently up 4 points.
June personal income and spending was largely in line with expectations, and the inflation data (PCE) was relatively tame (also close to expectations). The Employment Cost Index rose 0.6% in Q2, which was 10 bps below expectations and a 20 bps decline from Q1. On a year-over-year basis, ECI was up 2.8% in Q2, the highest since Q3 2008. Today’s data shows that wages and inflation continue to rise, but at a stable and more gradual pace than what was experienced in the first quarter.
ALM First Daily Market Commentary: July 30, 2018
Treasury prices are lower and the curve modestly steeper to start the week. Today’s move is attributable to European supply, as well as expectations for the Bank of Japan to allow long-term yields to move higher when it’s meeting concludes tomorrow. The latter would involve less purchases by the central bank, which should pressure long-end European and U.S. yields higher (all else equal). Global equity markets are mostly lower today, and S&P 500 futures are essentially unchanged. Friday’s Q2 GDP report was largely in line with expectations from a top-line growth perspective (4.1%), but the details of the report were constructive for the current quarter as well. Personal consumption and business investment were both robust, and declining business inventories actually shed 1 percentage point from the oval growth figure (positive for future productivity). This week’s economic calendar is headlined by the July jobs report (Friday), July income/spending and PCE (tomorrow), and the August FOMC meeting (Wednesday).
ALM First Daily Market Commentary: July 27, 2018
Treasuries are rallying modestly this morning in response to the Bank of Japan coming in with a second bond purchase operation this week as well as a Core PCE reading that showed inflation coming in lower than expected. Equity markets are mixed this morning as investors continue to digest disappointing earnings from the likes of Twitter and Exxon Mobil.
As was mentioned above, second quarter GDP came in slightly lower than expected at 4.1% vs 4.2% on an annualized basis. However, this reading was the fastest pace of expansion since 2014 and the growth was boosted by an uptick in consumer spending, which hit 4.0%. Delving deeper into the numbers reveals that net exports contributed 1.06% as soybean shipments increased in an effort to get ahead of the retaliatory tariffs placed on the crop. As a result of this spike in trade, most economists expect this growth rate to be an exception rather than the rule going forward, with GDP growth expected to settle back in to its long-run rate.
ALM First Daily Market Commentary: July 26, 2018
The Treasury curve is lower and flatter this morning due to weak European data combined with disappointing earnings releases from the tech sector. In his briefing, ECB President Draghi reiterated that the central bank will continue the pace of asset purchases that it had previously outlined and the ECB plans to keep interest rates unchanged through the summer of 2019. Draghi also noted that the Governing Council did not discus the reinvestment strategy for maturing debt.
Initial jobless claims increased by 10,000 from the prior week with 217,000 Americans filing for unemployment benefits; this number was 2,000 higher than expected. All in all, the jobs market appears to still be on solid footing as the claims number continues to come in under 300,000, the level that economists use a threshold for a healthy labor market.
ALM First Daily Market Commentary: July 25, 2018
Treasury prices are modestly higher (and curve flatter) ahead of President Trump’s trade discussion with Jean-Claude Juncker today. While no definitive resolutions are expected from the meeting, the European Union leader is expected to offer some trade concessions in an effort to dissuade the White House from moving forward with 25% tariffs on auto imports. European equity markets and U.S. futures are weaker this morning, with trade concerns and mixed earnings reports from yesterday weighing on sentiment.
A Bloomberg article released last night reports that some of the Fed regional bank presidents are urging Fed Chair Powell to avoid inverting the yield curve. According to one source in the article, Powell has “acknowledged but not embraced” those concerns to this point. As we have highlighted several times recently, curve flattening is the rule, not the exception, during Fed tightening cycles, but some leaders, such as the typically-dovish James Bullard (St. Louis Fed), are arguing that “tame inflation expectations” do not warrant further policy tightening at the risk of a curve inversion. An inverted yield curve has preceded each of the last five recessions going back to 1980, but the time between the initial inversion and the beginning of the subsequent recession has ranged from 10-22 months, with the longest lag the most recent episode in 2006-2007. The article also notes that long-end rates are currently “very low” by historical standards, which is a reference to the fact that term premiums for 10-year bonds are currently negative. This is most attributable to central bank asset purchases, and a reduction in central bank holdings could relieve some of the downward pressure on long-end yields by allowing term premiums to normalize.
ALM First Daily Market Commentary: July 24, 2018
Long-end Treasury prices continue to drift lower this morning, pushing the 10-year yield to the highest level since early June (2.97%), and the 2-year/10-year spread has steepened 9 bps in the previous two trading sessions. There isn’t really a single factor driving the recent bear steepening. Some suggest that the recent flattening was overdone (likely), and investors are preparing for a very strong Q2 GDP print (4%+) on Friday, which makes reasonable sense. Additionally, expectations for higher Japanese yields could shift demand from Japanese demand away from U.S. and European debt to domestic securities, and there is also some speculation that the Chinese central bank may intervene to support the yuan (currently at 1-year low versus the dollar) by selling Treasuries. All these factors are likely contributing to a more bearish tone for long-end rates. The tone in risk markets is improved today as well, with all major global equity indices higher today (S&P 500 futures +12 points). Improved economic data in Europe, solid Q2 earnings reports, and rumors of potential fiscal and monetary stimulus from China are all bolstering sentiment in equities today.