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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, December 8, 2017 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
|2s/5s Tsy Spread||0.34||+0.00|
|2s/10s Tsy Spread||0.57||0.00|
|2s/30s Tsy Spread||0.9||-0.01|
Today's Market Commentary
Recap – Yesterday, all U.S. equities were higher. Tech stocks and improved sentiment for the tax bill supported the gains. The S&P was up (+0.29%) for the first time in four days, while the Dow (+0.29%) and Nasdaq (+0.54%) also advanced. The Volatility Index dropped 7.8% to 10.16. Government bonds were also mixed with the U.S. Treasury 10-year yield rising two basis points. This was partially due to news that President Trump will release his infrastructure plans in early January. Turning to currencies, the U.S. Dollar Index firmed (0.2%) for the fifth consecutive day. In commodities, West Texas Intermediate oil was up 1.30%, while gold fell 1.28% to the lowest in four months. Elsewhere, other base metals continued to soften (copper -0.02%; zinc -0.22%; aluminum -0.21%).
U.S. Household Net Wealth Grew – The Fed has reported that U.S. household net wealth grew to $1.74 trillion in the third quarter. This lifted the ratio of wealth to disposable income to a new high of 6.73 times. Furthermore, firms are now sitting on liquid assets of $2.4 trillion – another fresh high. Elsewhere, October consumer credit was above expectations at $20.5 billion (vs. $17 billion expected). Weekly initial jobless claims came in broadly in line at 236 thousand (vs. 240 thousand expected) along with continuing claims at 1,908 thousand (vs. 1,919 thousand expected).
Partial Government Shutdown Averted (For Now) – Both the House and the Senate have voted in favor of extending government funding for two weeks until December 22. Senate Majority Leader Mitch McConnell noted, “We want to resolve all of these issues [i.e. spending limits] in the next couple of weeks.”
Quote of the Day Goes to Donald Trump – At a cabinet meeting Wednesday, President Trump said to reporters, “I see no reason why we don’t go to four, five and even six percent [GDP].” I missed this statement yesterday, but it’s still entertaining. Last time we saw growth with a six-handle was 1984!
Away from the market and onto banks and capital levels, the Basel Committee on Banking Supervision has announced a package of reforms, known as Basel III. The Committee also confirmed a floor limit of 72.5%, (which will limit the reduction in capital requirements available to banks using their own capital models, relative to those using the standardized approach). The European Banking Authority noted, “The reforms have a limited aggregate impact on regulatory capital ratios,” with the agreement to reduce the weighted average core tier one ratio of European Union banks by 0.6 points relative to the status quo.
Early Morning Market Update – In Asia, the final reading of Japan’s third quarter gross domestic product was above market at 0.6% quarter-over-quarter (vs. 0.4% expected) and 2.5% year-over-year (vs. 1.5% expected). Equity markets traded higher with the Nikkei (+1.39%) as the star performer. The positive energy has spread throughout Europe, and pre-market trade U.S. futures are pointing higher. In fixed income, yields are modestly higher with the 10-year Treasury priced at 2.38%.
Looking at the day ahead, the recent trend in the labor market has continued. The Bureau of Labor Statistics reported November payrolls rose by a seasonally adjusted 228 thousand, beating expectations of 200 thousand. However, as usual, wage growth was disappointing, rising less than expected as previous data was revised lower. Average hourly earnings rose 0.2% month-over-month, below the consensus estimate of 0.3%, and the October number was revised lower to -0.1%.
Also of note, the labor force participation rate was flat at 62.7%, near a 30+ year low, while the unemployment rate also remained unchanged at 4.1% – the lowest since December 2000. Also due out today: U.S. wholesale inventories for October and the preliminary University of Michigan Consumer Sentiment Reading for December.
December 4 - 8, 2017: The Week Ahead
Future Fed Expectations
|Probability of Fed Funds rate increase on December 13, 2017||98%|
|Probability of Fed Funds rate increase on January 31, 2018||98%|
**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.