Weekly Market Update

Monday, April 17, 2017

The Easter-holiday-shortened week was dominated by geopolitical events affecting fixed-income and equity markets. The United States continued deploying its arsenal in the Middle East Thursday when the U.S. military dropped its largest non-nuclear bomb on Afghanistan in an attack on the Islamic State’s position. In addition, there were growing concerns over U.S. diplomatic affairs following President Trump’s and Secretary of State Tillerson’s meetings with Chinese and Russian leaders regarding the countries’ relations with North Korea and Syria, respectively. In an about-face, President Trump offered a softer stance on U.S.-China trade policies in an effort to garner support from President Xi to help resolve simmering tensions with North Korea. Vice President Pence in his visit to the Korean Peninsula certainly sent strong signals to North Korea that U.S. resolve should not be tested.

Retail Sales and Consumer Sentiment data paint a mixed picture, but analysts expect spending to pick up after a weak first quarter. Consumer retail sales unexpectedly declined in March, largely resulting from fewer auto purchases. However, analysts expect a variety of market characteristics to support improved spending, namely a steady pace of hiring, improved household balance sheets, and more consumer optimism. Indeed, Thursday’s University of Michigan Consumer Survey Index showed a favorable buying climate for major household items. Some analysts expect the first-quarter weakness to be short-lived as the job market expands and that March weather and delayed tax refunds earlier in 2017 may be the main contributing factors in the retail sales decline. Lastly, the Labor Department released a report on Friday showing consumer prices fell 0.3% in March, the first decline in a year, and a potential signal that inflation is picking up only gradually, an important measure for the Fed to consider ahead of its next meeting.

OPEC members are beginning to call for further production cuts to boost and stabilize prices to $60 per barrel. Some members believe that $60/barrel for oil is a level that will bring in more revenue while limiting any competing boost to American shale production that would drive prices lower. Kuwait, Iraq, and Saudi Arabia are each in need of additional revenue from their oil industries. Kuwait needs higher prices to help stabilize its economy, and Iraq needs more revenue to help combat the Islamic State. Meanwhile, Saudi Arabia desires the higher and stable oil prices ahead of the IPO of its state-owned oil company. The sale of 5% of the company will finance economic diversification.

A flight to safety boosted Treasuries and municipals to near-term highs, while equities finished the week lower. Geopolitical concerns combined with growing market uncertainty and frustration over the Trump Administration’s ability to move forward with proposed economic and fiscal policies sustained the bond market’s recent momentum. Traders are still trying to reconcile President Trump’s economic and fiscal proposals with reality, especially following the president’s remarks this week that signaled a softening tone on trade relations with China and his desire for lower interest rates, causing many to wonder if he may appoint dovish candidates to the Federal Reserve this year and next, with Chair Yellen up for reappointment in early 2018. Treasuries were also boosted by public comments from Secretary Tillerson and Russian Foreign Minister Lavrov on Wednesday regarding deteriorating relations between the two nations. Further, investors showed some concern over recent polls from the first round of the French election to take place April 23as far-left candidate Jean-Luc Mélenchon is rising in the polls, now indicating a four-way race where two candidates are anti–European Union. Treasuries rallied for the fifth straight week, the longest stretch since July 2016. Municipals followed Treasuries higher, and yields fell to a five-month low.

The 10- and 30-year Treasuries closed the week at 2.24% and 2.89%, respectively, down from a respective 2.38% and 3.00% last Friday. The 10- and 30-year AAA MMD closed at 2.08% and 2.91%, respectively down from a respective 2.17% and 2.97% last Friday. SIFMA reset on Wednesday at 0.89%, up from 0.88% the prior week.

The Bond Buyer 30-day visible supply is at $14.4 billion, with a heavier supply of $7.5 billion ($5.7 billion negotiated) expected to come in the post-holiday week, led by a $1 billion State of California taxable sale. There are three Fed speakers during the week and the Fed will release the Beige Book. Data for the week include Empire Manufacturing, housing starts, building permits, weekly jobless claims, Philly Fed Business Outlook, PMI, and existing-home sales.

Reference Sources: The Bond Buyer, CNBC, Reuters, Bloomberg, The Wall Street Journal, SIFMA, Municipal Market Analytics, and Municipal Market Data.

  04/13/2017 Change*
SIFMA 0.89% 1
LIBOR 0.99% 0
AAA Municipal Market Data Rates 
5-Yr. 1.42% -7
10-Yr. 2.08% -9
20-Yr. 2.78% -8
30-Yr. 2.91% -6
U.S. Treasury Rates
10-Yr. 2.24% -14
30-Yr. 2.89% -11
Municipal to Treasury Yield Ratios 
10-Yr. 92.9% 1.7
30-Yr. 100.7% 1.7
Dow Jones 20,453 -203
S&P 2,329 -27

*Change since 4/7/2017
Sources: Bloomberg Information Systems and Thomson Financial

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The information in this material was prepared by non-research personnel of William Blair & Company, L.L.C. The material is not a research report and was not prepared by the research department of the firm. William Blair does not publish fixed income research. The views expressed are those of the Debt Capital Markets Group and may differ from the views of others at William Blair, including William Blair Research or William Blair Investment Management. William Blair's trading desk may deal as principal in or act as a market maker for issuers discussed herein. The accompanying information was obtained from sources which William Blair believes to be reliable but does not guarantee its accuracy or completeness. The material has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated.

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