The Market Today

5-Year Treasury Hits New Cycle High


by Craig Dismuke, Dudley Carter

Philly Fed Index Bounced Back, Offsets Softer New York Survey: The Philadelphia Fed Business Outlook index beat expectations in September, rising from 11.9 to 22.9. The new orders sub-index snapped back after tumbling to a two-year low in August.  The number of employees sub-index also rebounded and the length of the workweek recovered.  The indices measuring shipments and the backlog of orders also both bounced back. The inflation indications, indices on prices paid and prices received, both pulled back notably to add to the recent metrics showing some moderation in recent inflation pressures. Despite the monthly recovery, the readings still remain below peaks from earlier in the year.

 

Labor Data Stays Hot: Initial jobless claims for the week ending September 15 fell from 204k to 201k, now reaching a new 48-year low – the lowest since November 1969.

 

Existing Home Sales: At 9:00 a.m., CT, the August Existing Home Sales report is expected to show a fractional rebound of 0.5% in sales.  Existing home sales have suffered recently as affordability has been challenged by rising prices and higher mortgage rates.

 

Household Net Worth: At 11:00 a.m. CT, the Fed’s 2Q Household Net Worth report is expected to show another increase in net worth thanks to another positive quarter for stock prices and continued home price gains.

 

TRADING ACTIVITY

Yesterday – Stocks Closed Mix as Treasury Curve Ended Slightly Steeper: U.S. stocks and yields closed mixed on Wednesday as investors continued to digest the recent U.S.-China trade developments. The Dow rallied another 0.6% and has gained in six of the last seven sessions. That positive trend has placed the index within 0.8% of its all-time high from early January. Of the index’s 159-point gain, 79 points came from financials (~15% weight) while 53 points came from industrials (heaviest weighted at ~22%). Industrials, which are considered to be heavily impacted by trade actions, joined a global relief rally post-tariffs announcements which some say avoided a worst-case scenario. Banks benefited from the Treasury curve inching mostly upward, in some cases setting new cyclical highs. The 2-year yield edged down 0.8 bps to 2.79% while the 5-year yield added a modest 0.4 bps to 2.95%, a new cyclical high. The 10-year yield rose 0.7 bps to 3.06%, within 4.8 bps of a 3.11% close from May that was the highest since July 2011. Higher rates hurt equity bond proxies such at utilities, telecoms, and real estate, which served as a larger drag on the S&P 500 and led to the index improving a more modest 0.1%. The S&P 500 finished within a razor-thin 0.2% of a new record. The Nasdaq slipped 0.1%.

 

Overnight – Treasury Yields Push Higher as Stocks Add to Gains: Global investors’ appetite towards equities remained tilted positively overnight as U.S. futures and European indexes firmed up following a mixed session in Asia. After the U.S. and China slapped tariffs on one another earlier in the week, headlines on the subject have dwindled which has allowed sentiment to recover. There was one headline overnight that indicated China was planning to cut average import taxes for certain trading partners, possibly to absorb potential negative shocks from its trade conflict with the U.S. The Stoxx Europe 600 rose 0.5% and was trading near its highs of the day. As was the case yesterday in the U.S., European banks were sitting atop the sector chart. Materials held the second slot, possibly tied to the positive implications of the China report, and six of the remaining nine sectors improved. Energy companies rose as crude prices rebounded to trade at (WTI) or near (Brent) their highest levels since 2014. U.S. futures are up between 0.3% and 0.5% and near their daily peaks. While comparable yields have drifted higher, Treasury yields have moved up the most. The 10-year yield was 2.6 bps higher at 3.09% with the 2-year yield up 2.1 bps to 2.81%. Despite those higher yields, and expectations for the Fed to hike at next week’s meeting, the Dollar has drifted to its weakest level in more than two months as fears around trade and emerging markets have lessened. The Euro was the strongest against the Dollar since mid-June.

 

NOTEWORTHY NEWS

White House Said President Trump Will Nominate Former Fed Official to Fill Final Fed Vacancy: Reports on Wednesday indicated President Trump will soon announce Nellie Liang as his appointee to fill the final vacant seat on the Federal Reserve’s Board of Governors. Liang, who earned her Ph.D. in economics from the University of Maryland, is currently a senior fellow in economic studies at the Brookings Institution. Prior to her current position, she completed a more-than-30-year career at the Fed that was capped by her appointment by former Fed Chair Bernanke to start and lead the office of financial stability. If Liang is officially appointed, she will join Marvin Goodfriend and Michelle Bowman as Fed appointments pending Senate confirmation. According to Politico, she would also be the first female minority to serve on the Board of Governors.  Also according to Politico, “One of the more below radar stories of the Trump administration is just how normal and competent nominees for key posts in the monetary policy and financial regulatory arena have been.”

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