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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.
Thursday, May 24, 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||0.31||+0.01|
|2s/10s Tsy Spread||0.47||+0.01|
|2s/30s Tsy Spread||0.63||+0.01|
Today's Market Commentary
Recap – Markets remain erratic – especially in Europe – as the recent European Manufacturing Purchasing Managers’ Indexes (PMIs) disappointed, North Korea and Italy continue to be on everyone’s minds, and the Turkish lira continues toward its worst day since October 2008 (dropping to -5.5% intraday, its lowest level on record). For background, the Turkish Lira has fallen -20.5% this year and -12.7% in May alone, as Turkish President Recep Tayyip Erdogan has threatened to take more control of monetary policy if he wins the upcoming election. Year-to-date, the lira is only behind the Argentinian peso, which is down -31.5% in 2018.
The slightly dovish Fed minutes seemed to help U.S. equity markets reverse earlier losses to close in positive territory (S&P +0.32%; Dow +0.21%; Nasdaq +0.64%). U.S. government bonds rallied following the dovish Federal Open Market Committee (FOMC) minutes and softer-than-expected PMIs. The yield on the 10-year Treasury benchmark fell below 3% (-7 basis point to 2.99%). In the details, the minutes noted that most participants felt it would likely be appropriate to take another step toward removing policy accommodation soon. On balance, the minutes didn’t reveal major concerns about an overheating economy and inflation over shooting. The minutes showed that a temporary period of inflation “modestly above 2% would be consistent with the committee’s symmetric inflation objective,” and, “it was premature to conclude that inflation would remain at levels around 2%.” On the labor market, the minutes noted the Employment Cost Index for the first quarter indicated the strength in the labor market was “showing through to a gradual pickup in wage increases, although the signal from other wage measures was less clear.” Meanwhile, many participants commented that overall wage pressures were still moderate or were strong only in industries and occupations. Overall, the market continues to expect three more interest rate hikes this year.
Trump’s Trade War Continues – President Trump has ordered the Commerce Department to investigate whether car and truck imports threaten national security. Back in early May, Trump told U.S. auto manufacturers that he was planning to impose tariffs of 20-25% on some imported vehicles.
Elsewhere, Secretary of State Mike Pompeo seemed to be easing his demands on North Korea, now calling for the regime to take “credible steps” towards denuclearization rather than give up its weapons program immediately.
The End of the Big Easy – Every Fed tightening cycle creates a meaningful crisis somewhere. Going back in history, the Fed’s 2004-2006 tightening caused the U.S. housing collapse and catalyzed the global financial crisis. In the late 1990s, the Fed’s stop/start tightening cycle included the Asian crisis, Long-Term Capital Management and the Russian collapse. When tightening resumed, it resulted in the pop of the equity bubble. The early 1993-1994 tightening phase included the bond market turmoil and the Mexican crisis. The tightening in the late 1980s ushered along the S&L (savings and loan) crisis. Former Fed Chair Alan Greenspan’s first tightening in 1987 helped trigger Black Monday before the Fed eased and the “Greenspan put” took off in earnest. The early 1980s included the Latin American debt crisis and Continental Illinois collapse. During the stagflation tightening of the 1970s, the Fed was behind “the curve” and inflation masked a prolonged decline in real asset prices. As for the next crisis, the catalyst could be the “great unwind” of ultra-loose monetary policy/quantitative easing around the world at a time of record debt levels. For more on this, see this week’s edition of the Weekly Relative Value, End of the Big Easy.
Looking at the day ahead, weekly initial jobless claims, the first quarter House Price Purchase Index, the Federal Housing Finance Agency’s House Price Index for March, April existing home sales and the May Kansas City Fed PMI are all due. Over at the Fed, New York Fed President William Dudley will speak.
May 21 - 25, 2018: The Week Ahead
Future Fed Expectations
|Probability of Fed Funds rate increase on June 13, 2018||100%|
|Probability of Fed Funds rate increase on August 1, 2018||100%|
**All quoted rates are indications and are subject to change without notice.
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