Treasurys Slide, Stocks Rise Despite Weak Data as Government Avoids Shutdown

US financial markets opened this week with the update that a federal funding agreement had been reached between members of Congress on Sunday.  The deal, as signed off on by President Trump yesterday morning, features a $1.16 trillion budget which would keep the government running through the end of September 2017.  Included in the spending agreement was a $12.5 billion increase in defense expenditures, with the option for $2.5 billion more if a definitive plan for defeating ISIS materializes (President Trump had initially requested $30 billion).  Also a point of contention, funding for a wall along the US southern border was absent from the plan, with Democratic representatives labeling the expense a non-starter.  As a replacement, $1.5 billion more for border security was included.  The next step for the pact, which has bipartisan support, is approval by the full House of Representatives and Senate.             

The welcomed budget agreement news largely offset a bevy of weaker-than-expected economic data released today, beginning with personal spending, which remained flat for the second consecutive month in March.  Advance surveys had called for a 0.2% increase, but a decrease in prices for consumer goods weighed on the headline figure, despite personal income rising by 0.2%.  The price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, fell 0.2% MoM as overall consumer prices rose 1.8% from the year earlier (annual Fed target is 2%).  Other data on the day included the Institute for Supply Management’s (ISM) manufacturing index, which dropped to a four-month low of 54.8 in April, missing median forecasts by 1.7 points and falling 2.4 points from March’s activity.  On the positive side, the figure represents the eighth straight month of readings above 50, a level associated with expansion in the sector.  Overall, today’s data is expected to have little effect on this week’s FOMC decision, with the current probability for hike as implied by fed fund futures hovering near 13%. 

Demand for US Treasurys declined throughout the session as yields/swap rates increased 1-6 bps across the curve in a bear steepening pattern.  The yield on the 10-year note traded up to 2.32%, also being influenced by comments from Treasury Secretary Steven Mnuchin surrounding the government’s evaluation of new debt offerings that exceed a 30-year tenor.  All three major US stock indices are up 0.1%-0.8% on the day as last week’s general risk on sentiment remains in place and corporate earnings released were generally positive.  Crude oil prices shed 1% on the day, bringing the price for a barrel of WTI crude below $49/barrel as rising US and Libyan production concerns weigh on the commodity.