Daily Market Color

Rate Hike Expectations Jump, Pushing Treasurys Lower Prior to Trump Speech

Ahead of Donald Trump’s speech to Congress tomorrow, which investors will be watching closely for hints about the administration’s fiscal stimulus/budget plans, Treasurys sold off with yields/swap rates increasing 3 – 7 bps across the curve.  As implied by fed funds futures contracts, the probability of a March rate hike has now increased to 50% after trading between 25% and 35% for most of the year.  Fueling today’s bond selloff was hawkish rhetoric from Dallas Fed President Robert Kaplan (voter) who confirmed his preference for increases in rates “sooner rather than later,” without naming a specific policy meeting.  Today domestic economic growth expectations were boosted by statements made today by the Trump administration, where they outlined a $54 billion budget increase for defense, offset by cuts in nondefense agencies such as foreign-aid funding.  The US dollar moved higher with the implications for a near-term rate hike, rising 0.2% against major peers after declining earlier in the session.  All three major US stock indices increased 0.08%-0.28% on the day as the DJIA extended its streak of record highs to 12 days, the longest such streak since 1987.  Oil traded relatively flat throughout the session, with WTI crude remaining near $54/barrel and Brent crude finishing just below $56/barrel.             

Core Goods Orders, Pending Home Sales Miss Expectations
After two consecutive months of declining durable goods orders, the preliminary report for January displayed a 1.8% gain, boosted largely by surges in orders for civilian (+70%) and defense (+60%) aircrafts/parts.  The headline figure exceeded median forecasts of a 1.6% rise on its way to a seasonally adjusted $230.35 billion.  The Core capital goods orders index however, which excludes the volatile categories of defense and aircrafts, declined 0.4% for the month where a 0.5% increase was expected, indicating the business investment jump signaled by recent business confidence readings may not come to fruition.

In a separate report, the National Association of Realtors released its pending home sales index for the month of January, which came in substantially below expectations with a 2.8% drop-off to 106.4 level.  Rising mortgage rates, limited supply, and inflated existing prices were pointed to as sources for the lowest reading since May 2016.  The number of contracts signed for homes last month were noticeably lower in the West (-9.8%) and Midwest (-5%) regions, while the North (+2.3%) and South (+0.4%) posted moderate gains.    
Political Uncertainties Influence European Markets
The French presidential race continues to grab headlines abroad, as updated polls on Sunday revealed independent candidate Emmanuel Macron narrowing the gap with first-round favorite Marine Le Pen.  Macron has recently been able to improve his standing after receiving four crucial endorsements from members who withdrew from the race in order to amass a stronger bid against the far-right Le Pen.  The first round election polls currently forecast Macron receiving 25% of the vote, two points behind Le Pen, while surveys for the second round predict a 61% – 39% Macron victory.  The first round of France’s presidential election is set for April 23, 2017.  Yields on 10-year French bonds fell 4 bps to 0.89% during today’s session.  A separate report on Sunday detailed the expectation by British Prime Minister Theresa May that Scotland would invoke a second independence referendum following the triggering of Article 50 in March.  After initially stating that a second vote would not occur until after 2030, the Scottish National Party has circled back to its stance from last May in which it had promised that “the Scottish Parliament should have the right to hold another referendum… if there is a significant and material change in the circumstances that prevailed in 2014, such as Scotland being taken out of the EU against our will.”  The British pound tumbled as much as 0.6% following the news, despite the report being disputed by Theresa May’s spokesperson.                   

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