Daily Market Color

Rates Reverse Course After Yesterday’s Sharp Bond Selloff

Treasury yields retrace a portion of yesterday’s dramatic bond selloff
Inflation concerns, vaccine developments, and fiscal aid updates remain the central themes within financial markets. Today’s rally in Treasurys pulled yields/swap rates 4-15 bps lower across the curve in a bull flattening pattern.  The 10-year UST yield closed 11 bps lower at 1.40% while the 2y10y spread narrowed to 128 bps.  Major US equity indices were mixed on the day – the S&P 500 and DJIA fell 0.5% and 1.5%, respectively, while the Nasdaq concluded its worst week of the past four months with a 0.5% increase.
Personal income rose 10% in January after rising only 0.6% in January
January’s jump was the largest monthly gain since last April, driven mainly by the distribution of $600 stimulus payments.  Consumer spending subsequently rose 2.4% while the personal savings rate rose to 20.5%, the highest level since last May.  The personal consumption expenditures index, the Fed’s preferred measure of inflation, was up 0.3% last month and 1.5% for the year.
International goods trade deficit widens to $83.7 billion in January from $83.2 billion the month before
According to the report, “Exports of goods for January were $135.2 billion, $1.9 billion more than December export,” while the “Imports of goods for January were $218.9 billion, $2.5 billion more than December imports.”
$15-an-hour minimum wage removed from stimulus bill as House prepares to vote later today
The $1.9 trillion bill includes $350 billion for state and local government, $1,400 for direct stimulus checks, and additional funding for the COVID-19 vaccine rollout.  The minimum wage measure was removed from the bill after the Senate parliamentarian ruled that it did not comply with the reconciliation rules.

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Daily Market Color

Treasury Yields and Swap Rates Rocket Higher

10-year Treasury yield breaches 1.6% for the first time in a year
After opening at 1.38% this morning, the 10-year Treasury yield rose dramatically, crossing the 1.5% threshold and hitting an intraday high of 1.6% for the first time since January of 2020. The 5-year rate also shot higher and rose 21 basis points to 0.82%- one of the biggest intraday jumps in the last decade. The violent sell-off in Treasurys comes despite Fed Chair Powell’s dovish comments before Congress earlier in the week where he stated that he was unconcerned about inflation. The 10-year Treasury yield, which fell an astonishing 1.50% in 2020, has climbed higher by 0.50% in the last week alone.
730,000 jobless claims were filed last week
The figure fell sharply from the 841,000 recorded the week prior, the largest drop in weekly claims since last summer.  The four-week moving average fell to 807,750.
Q4 2020 GDP is revised upward from 4% to 4.1%
The second quarterly estimate of Q4 2020 GDP shifted higher due to a combination of greater state and local government spending in addition to a 25.7% annualized rise in business and home investment.
Orders for durable goods increased by 3.4% in January vs. 1.2% last month
The rise in January orders, driven mainly by rising equipment demand, was the largest jump in six months and has pushed total factory production to near pre-pandemic levels.
USDCAD price falls below 1.2510, its lowest level in three years
A significant drop from ~1.4600 level just a year ago, USD is now sitting on a significant support range – an important level to watch for banks and companies with Canadian dollar exposure.  A break lower could test levels not seen for 5 years.

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Daily Market Color

Stocks Rally, Yields Climb (What’s New?)

Stocks rally, yields climb after Powell testifies 
U.S. equities turned higher after Chairman Powell testified before Congress. Powell reiterated that the U.S. economy is still far off from its employment and inflation targets, and that Fed policy will remain accommodative toward those goals. Yields increased across a steepening curve with the 10yr up 4bps to 1.38%, the highest since last February.
Small banks see signs of loan growth
The Fed’s latest H8 data release showed small banks (banks not within the T25 in total assets) with week over week loan growth in total loans, C&I, and CRE. YTD growth rates have turned positive on an annualized basis for small banks for total loans, C&I, and CRE at 2.50%, 5.29%, and 1.71%, respectively. Both large and small banks continue to see large inflows of deposits six weeks into 2021.
J&J single-shot vaccine found to be safe and effective
During its clinical trials, the FDA found the J&J single-shot COVID vaccine to be 72% effective, with no Covid-related deaths within the vaccinated group. The FDA will have a meeting this Friday with external advisors who will make an authorization recommendation. The expectation of the increasing vaccine supply has been a catalyst in the steepening yield curve.
New U.S. home sales beat expectations
The purchase of new single-family homes increased 4.23% in January to an annualized pace of 923,000. The median expectation was for an annualized rate of 856,000. The sales price also increased 5.3% YoY, the highest recorded number for January.

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Daily Market Color

Rates Turn Lower After Fed Chair Powell’s Monetary Policy Update

Rates fall after Fed Chair Jerome Powell’s monetary policy update
Treasury yields turned lower after Powell commented that inflation is still “soft.”  Treasury yields and swap rates fell 1-3 bps across the curve – the 10-year UST yield closing ~2 bps lower at 1.34%.  Major equity indices closed moderately higher – the S&P 500 and DJIA rising 0.1% and 0.05%, respectively.
Fed Chair Powell does not anticipate any changes to monetary policy in the short term
In his speech before the Senate Banking Committee, Powell confirmed the Fed will allow inflation to run above the 2% threshold before tightening policy.  He added, “Following large declines in the spring, consumer prices partially rebounded over the rest of last year. However, for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft.”  He expects price pressures to remain muted for some time, as the economic outlook remains “highly uncertain.”
Short-term Treasury yields remain historically low
Longer-term Treasury yields have climbed significantly in the past month, but short-term rates have remained near zero.  The spread between short-term and long-term yields have risen to new highs as the US Treasury works to reduce its $1.6 trillion cash balance in the coming months while the Fed leaves its accommodative policy in place.  Today’s Treasury auction highlighted this issue, after two-year notes were sold at a premium above 100 cents on the dollar for the first time.
Consumer confidence index rose to 91.3 this month from 88.9 in January
Sentiment has risen over the past weeks due to the incoming stimulus bill and falling COVID-19 cases. 

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Daily Market Color

Markets Preparing for Inflation

Inflation front and center for investors 
Equities continued their losing streak as rising rates weighed on stocks, the S&P 500 falling 0.77% – marking its fifth straight day of declines. Tech stocks were the laggards, the Nasdaq 100 hitting a three-week low following a 2.63% decline. Swap rates and Treasury yields continued their relentless march higher- the 10-year Treasury yield rising 3 basis points on the day to 1.37%. The spread between the 5yr and 30yr Treasury yields touched its highest level in more than five years.
Traders prepare for earlier Fed rate hikes
Swap and futures markets are now pricing in the first 25bps Fed rate hike in mid-2023, a full year earlier than they did coming into 2021. The United States isn’t the only country that has seen a rebound in long-term government yields- 10-year government bond yields have risen on average 25 basis points in Europe and in AsiaPac 10-year yields have risen a remarkable 80 basis points in New Zealand and Australia.
Economic activity increased in January
The Chicago Fed National Activity Index increased to 0.66 in January, up from 0.41 in December. The January increase beat economists’ expectations of 0.15. The index was primarily driven by increases in personal consumption and housing, which rose 0.35 points compared to minus 0.06 in December.

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Daily Market Color

Rates Rise (Again) to Closeout Week

Yield curve continues to steepen, 10yr UST yield nears 12-month high
 
The 10yr yield continued its rise, increasing 5bps on Friday to 1.34% — it is now up 43bps since the start of 2021. In equity markets, major indices held near flat on the day as the rotation out of tech shares and into cyclical names continued.   
U.S. existing home sales rise to three-month high
Previously owned U.S. home sales unexpectedly rose in January to a three-month high. Low borrowing costs coupled with increasing interest in single-family homes has fueled demand since the onset of the pandemic. Contract closings increased 0.6% from December to an annualized 6.69mm, above the median forecast of 6.6mm.
February U.S. business prices increase to highest levels since 2015
 
IHS Markit data revealed higher raw materials and supply-chain costs, while also showing strengthening demand at service providers and manufacturers. The composite index of business activity increased to 58.8, up from 58.7 in January. A reading above 50 indicated growth.
Bitcoin market value hits $1 trillion for first time
 
Bitcoin has added more than $450 billion of value in 2021 reaching $1 trillion in total market value. Partly fueling the increase in Bitcoin’s value has been Tesla’s $1.5 billion investment into the cryptocurrency and MicroStrategy Inc increasing its sale of convertible debt to $900 million to buy more of the digital asset.

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Daily Market Color

Swap Rates and Treasury Yields Rebound Once Again

Treasury yields resume their climb as inflation expectations rise
While optimism around the stimulus package and vaccine rollout continues, rising jobless claims weighed on markets.  Major US equity indices closed lower – the S&P 500 and DJIA both falling 0.4%.  Treasury yields and swap rates rose 1-5 bps across the curve – the 10-year UST yield closed 2 bps higher at 1.29%.
861,000 jobless claims were filed last week vs 848,000 the week prior
The figure was higher than expected, as economists had forecasted claims to continue their downward trend.  The four-week moving average is now 833,250.
Housing starts drop 12% from December while permits jumped 9.6%
Housing demand continued to stay elevated in January due to the current low mortgage-rate environment, but the recent spike in lumber costs delayed home building.  Lumber prices rose above $1,000 today, more than double the price from three months ago.  Demand is expected to continue in the short-term, as permit growth remains strong (~28% higher than last year).
Treasury Secretary Janet Yellen dismisses potential inflation risks caused by impending stimulus package
She commented, “Inflation has been very low for over a decade, and you know it’s a risk, but it’s a risk that the Federal Reserve and others have tools to address.”  Though size of the $1.9 trillion bill remains a concern for markets, Yellen still thinks “it’s very important to have a big package [that] addresses the pain this has caused.”

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Daily Market Color

Rates Turn Lower Despite Surprising Retail Sales Figure

Rates/yields take a breather from the recent selloff
While January’s retail sales figure rose past expectations, rising inflation expectations continue to weigh on market sentiment.  Major US equity indices were mixed on the day – the DJIA rising 0.3% to its ninth record close of the year, while the tech-heavy Nasdaq declined 0.6%.  Treasury yields and swap rates fell 1-6 bps across the curve – the 10-year UST yield closed 4 bps lower at 1.27%
January PPI index rose 1.3% from 0.3% the month prior, the largest increase since 2009
Over the past 12 months, PPI has increased by 1.7%, nearing pre-pandemic levels (~2%).  Much of the increase was driven by rising health care and energy prices.  Core PPI – which excludes food, energy, and trade services – rose 1.3% last month, while the Y/Y rate hit 2%, almost doubling December’s 1.1%.
Retail sales rose 5.3% last month after falling 1% in December
The figure was well above the 1.2% expectation as stimulus check spending drove sales significantly higher.  Gains were distributed across all major sectors, with electronics and appliances clocking in the largest monthly increase at 14.7%.
FOMC minutes reveal Fed officials have a stronger economic outlook for this year relative to December’s forecast
The minutes for the January FOMC meeting detail that officials are projecting inflation to cross the 2% threshold in the second half of 2021 and remaining there till 2023.  The impending fiscal stimulus package is expected to be the main driver of economic growth, but officials believe COVID-19 could still “pose considerable risks to the economic outlook, including risks associated with new virus strains, potential public resistance to vaccination, and potential difficulties in the production and distribution of vaccines.”

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10-Year Treasury Yield Rises to One-Year High

Treasury yields, swap rates rise to highest levels since the onset of the pandemic
Expectations for rising inflation and rebounding economic growth continue to drive markets, with Congress’s anticipated vote on President Biden’s $1.9 trillion stimulus package coming later this week.  The DJIA climbed 0.2% to close at a record high for the second straight day, while the S&P 500 was little changed.  Treasury yields and swap rates rose dramatically across the curve – the 10-year UST yield climbing 10 bps to close at 1.31%, the highest level since February 2020.
Bank deposit growth continues into new year
The Fed’s latest data showed that both large and small banks have continued to grow their deposits in the first five weeks of 2021 as deposits rose 0.71% and 1.81%, respectively.  Asset growth on the other hand, remains challenged as both small and large banks have yet to see a pronounced increase in CRE lending.
Lumber prices rise to all-time highs amid construction boom
Pandemic-related shutdowns slowed construction last March, but the industry has since recovered, with housing starts and building permits reaching their highest levels since 2006 in December.  Over the past few weeks lumber futures have risen around 47%, driven higher by an increase in housing affordability in the current low mortgage-rate environment.

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10yr Rate Hits 11-Month High

10yr Treasury yield rises to highest level in 11-months
 
As stocks fluctuated around all-time highs, UST’s yields increased across a steepening curve with the 10yr reaching its highest rate in 11-months at 1.20% and the 30yr increasing 6bps to finish the week above 2.0%.
Oil rallies to highest price in two years
 
As major oil producers continue to slash output and the expectations of an economically stronger second half to 2021 rise, West Texas Intermediate crude increased 2.3% to $59.59 a barrel, the highest price in over two years.
Stimulus expectations increase U.S. growth forecasts
 
In Bloomberg’s latest survey of economists, expectations for GDP growth have increased for the current three-month period and every following period through mid-2022. GDP is projected to rise an annualized 5.6% in 2Q and 6.2% in 3Q, leading to the most substantial economic growth since 1984.
 
U.S. consumer sentiment falls to six-month low
 
U.S. consumer sentiment declined to a six-month low with data from University of Michigan’s preliminary sentiment index falling to 76.2 on Friday, down from 79 in January. The decline was attributed to a deteriorated outlook for personal income and the anticipation for rising inflation over the next year.

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