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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.
Wednesday, September 19, 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
|2s/5s Tsy Spread||0.13||-0.01|
|2s/10s Tsy Spread||0.25||-0.01|
|2s/30s Tsy Spread||0.39||-0.01|
Today's Market Commentary
Recap – In the last 36 hours we have seen the U.S. announce tariffs on $200 billion of Chinese exports to the U.S. (with the potential for more) and China retaliate with the announcement of tariffs in the range of 5-10% on $60 billion of U.S. imports. Because tariffs are taxes, prices are likely to go up as the trade war escalates. Thus far, however, markets have shrugged their shoulders and decided to rally. Yesterday, the S&P 500 and Dow finished with gains of +0.54% and +0.71%, respectively, while the Volatility Index edged back below 13 once again. Despite a bad day for Tesla (-3.35%) – which is apparently under investigation by the Justice Department for CEO Elon Musk’s recent tweet about taking the company private – the Nasdaq advanced +0.76%.
While the rising tariffs between the U.S. and China threaten to disrupt supply chains and undermine the world economy, markets were cheery that China levied only a 10% duty on $60 billion of U.S. imports while China’s Premier Li Keqiang promised that China would not stoop to competitive devaluation of its currency. Meanwhile, the U.S. suggested that the tariff rate won’t be lifted to 25% until next year. Thus, there is some hope that negotiations could resume between the two governments and, therefore, some sort of agreement could be reached to walk back the tariffs.
On the other side of the equity move was a sell-off for bonds. Treasuries finished last night seven basis points higher and finally closed above 3% (3.05%) for the first time since August 1 – the highest level since May. In conjunction with the risk-on tone, a busy day for U.S. investment-grade issuance was blamed for the Treasury move, along with slight fear over China’s response on Treasuries.
The Chinese “nuclear option” would be to sell U.S. Treasuries and, on that note, data released overnight show that China’s holdings of U.S. Treasuries in July fell to the lowest in six months ($1.17 trillion from $1.18 trillion in June). This was just as the trade war was ramping up. So, although the data is somewhat stale, and the actual size of the reduction is small, it’s still noteworthy. This will be a data point to watch in the future.
Yesterday’s only notable data release was the U.S. National Association of Home Builders’ Housing Market Index for September, which printed at 67 versus expectations for 66. That’s slightly stronger than expected, but still down from its peak at the end of the last year, and consistent with a moderate slowdown in housing sector activity. A reading above 50 indicates expansion, and the index has been above that threshold since 2014.
Elsewhere, headlines from the Korean summit are trickling through. The most noteworthy headline is that both North and South Korea have agreed on specific steps towards denuclearizing, albeit with still plenty of vague and missing details. Additionally, the two countries are supposedly considering a joint bid for the 2032 Summer Olympics.
In early trade, global equities have rallied for a second day following a strong session in Asia. Overnight, the Nikkei was higher by 1.08%. European shares are mixed, while U.S. futures point to a modestly lower open. Treasuries have stabilized overnight with the 10-year Treasury benchmark yield at 3.04%. The long bond is at 3.19%.
Today, housing starts and building permits data highlight a quiet U.S. calendar. After small rebounds in July (in the wake of three ugly months prior), August was expected to see those gains consolidate but the picture was extremely mixed. Housing starts spiked 9.2% month-over-month and build permits (a proxy for future construction) plunged 5.7% month-over-month.
September 17- 21, 2018: The Week Ahead
Future Fed Expectations
|Probability of Fed Funds rate increase on September 26, 2018||98%|
|Probability of Fed Funds rate increase on November 8, 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.