Daily Market Commentary

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Weekly Relative Value

Published at the top of each week by Balance Sheet Solutions, Weekly Relative Value tracks market and economic trends, analyzes key releases and watches ongoing political developments.  

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, February 23, 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

Other Market Indicators

2s/5s Tsy Spread 0.39 -0.02
2s/10s Tsy Spread 0.65 -0.02
2s/30s Tsy Spread 0.93 -0.02

DJIA-30   24962.48 +164.70
NASDAQ 7210.09 -8.14
S&P-500 2703.96 +2.63

Dollar Idx 89.85 +0.11
CRB Idx 195.15 -0.11


Today's Market Commentary

Recap – The S&P 500 couldn’t hang onto its 1% gain for the second day, but managed to end just barely higher (+0.1%). It appears the initial gains were spurred by St. Louis Fed President James Bullard’s more dovish words on the rates outlook. The Volatility Index fell for the second day to 18.72 (-6.5%). In fixed income land, U.S. Treasury 10-year yields fell three basis points. Elsewhere, the U.S. Treasury sold $29 billion of seven-year notes at a yield of 2.839% with a bid-to-cover ratio of 2.49x (vs. 2.73x previous). In the foreign exchange space, the U.S. Dollar Index fell for the first time in five days (-0.28%), while the euro and sterling gained 0.37% and 0.27%, respectively. 

On the data front, the January Conference Board Leading Economic Index was above market at 1% (vs. 0.7% expected). Large positive contributions came from the firming of the Institute for Supply Management’s New Orders Index and building permits in the month. The Kansas City Fed Manufacturing Index was slightly below at 17 (vs. 18 expected). Elsewhere, the weekly continuing jobless claims (1,875 thousand vs. 1,935 thousand expected) and initial jobless claims (222 thousand vs. 230 thousand expected) were both below expectations. The latter neared a 44-year low, adding to the view that the labor market is tightening further.

The Fed’s Bulllard told CNBC that raising rates too quickly could restrict economic growth and that market expectations of four rate hikes this year would be “priced to perfection.” Further, he added, “A 100-basis-point [rate increase] in 2018 seems a lot to me.” He feels there is a “ways to go” in terms of sustainable upward moves on inflation. He also noted, “The Fed’s policy is accommodative, but the path to neutral may be flatter and not as far away as some think.” Finally, Fed Governor Randal Quarles noted, “With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized.”

On the inflation front, the U.S. Treasury Secretary Steve Mnuchin discussed prices overnight and believes rising U.S. wage gains may not cause broader inflation. He noted, “You can have wage inflation and not necessarily have inflation concerns in general.” Very strange, indeed!

Looking at the day ahead, the Fed's John Williams (San Francisco), Loretta Mester (Cleveland) and William Dudley (New York) are due to speak. There are no economic data releases today.

What will today bring? After a second consecutive disappointing close in the equity markets (in which futures spiked at the open only to close at the lows), we may be set for day three. S&P Index futures again point to a higher open after Asian stocks gained despite some mixed trading in Europe. Will they once again fade what is set to be a 150-point higher open in the Dow? And, if so, will we finally see selling next week? Currently U.S. equity futures are higher in pre-market trade. In fixed income, Treasuries are being bid higher. Currently, the long bond is priced at 3.17%. The key 10-year Treasury benchmark is yielding 2.89%. Further in on the curve, twos and fives are at 2.23% and 2.63%, respectively. Also worth noting is the maintained flattening trend in the yield curve. Since February 12, the 2s/10s spread has narrowed by 15 basis points to 64 basis points currently

Economic Calendar

February 19- 16, 2018: The Week Ahead

Economic Calendar

Future Fed Expectations
Sources: Bloomberg


Expected Fed Funds Path

Select Probabilities based on the Futures

Probability of Fed Funds rate increase on March 21, 2018 100%
Probability of Fed Funds rate increase on May 2, 2018 100%

**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.