Weekly Market Update

Monday, May 15, 2017

U.S. Treasuries posted the strongest one-day rally in three weeks, triggered by weaker than expected consumer inflation data. The ensuing bargain-hunter bid that backfilled the tepid reception of the $62 billion Treasury auction suggested a renewed market skepticism over the path of Fed policy for the remainder of 2017. The Consumer Price Index rose 2.2% in April from a year earlier, down for the second straight month from a 2.8% annual increase in February. Core CPI (which excludes food and energy) is now growing at its slowest pace since October 2015. Indeed, weakness in consumer and price inflation data abruptly overshadowed otherwise positive economic data in areas of retail consumer, consumer confidence, and labor market conditions.

April indicators in labor markets, retail sales and confidence indicators delivered on-target with the Fed’s expectations to tighten. Vehicle sales rose by 0.7%, reversing a consecutive three-month declining trend, and anchored overall the 0.4% rise in U.S. retail sales for the month of April. However, the continuing trend toward online shopping is becoming increasingly troublesome for traditional brick and mortar retailers. University of Michigan consumer confidence exceeded expectations with an early May indication of 97.7. With the index at its strongest since January when it reached its 13-year high, it signals an optimistic momentum for household financial conditions as well as consumers’ short and long-term economic outlooks. Jobless claims decreased more than expected to a seasonally adjusted 236,000. More notably, the four-week moving average of Jobless Claims reached its lowest level since February 1974 nodding to a persistently low level of layoffs, and signals that labor market tightening may have finally reached a level economists consider to be near maximum employment.

While a June Rate Hike Appears penciled in, uncertainty looms over further hikes in 2017. Philadelphia Fed President Patrick Harker hinted at two more rate hikes this year by stating that the “US economy is now normal and the labor market is nearly at full health.” European Central Bank (ECB) officials commented earlier in the week that the market should be prepared when the ECB can no longer be accommodative as inflation pressures rise as a result of positivity surrounding recent French elections, improving economic conditions in Europe, and possibly the recent FOMC action. However, with inflation indicators trending weaker than expected, market perceptions appeared to shift away from this view. By Friday, the markets began to show a less aggressive rate hike path and market participants’ viewing the Fed more willing to continue with a gradual pace of normalizing rates. Following Friday’s CPI Summary release, CME Fed Futures surveys adjusted moderately down to 79% from 81% the odds for a June rate hike, and to 46% from 54% for two additional rate hikes for the remainder of 2017. The Bloomberg survey holds at 94% and 52%, respectively. Chicago Fed President Charles Evans, a noted dove, indicated that the Fed may only need to increase the Fed Funds rate once more this year, while the dovish observation by St. Louis Fed President James Bullard that an increasing demand for safe assets may hold rates down also tends to overshadow an accelerated pace of hikes. Next week’s Fed speakers James Bullard (dove) and Loretta Mester (hawk) should provide additional perspective on the future of Fed’s monetary policy.

Investors easily absorbed new municipal issues this week signaling buyers have cash. Municipals fared better than Treasuries with the week’s significant new issue supply. The Investment Company Institute (ICI) reported the seventh week of municipal bond fund inflows for the week ended May 3. Lipper US Fund Flows also showed the week ending May 10 saw $606 million of municipal fund inflows, the most since April 12, despite the Puerto Rico bankruptcy filing on May 4. The Trump administration’s continued growing pains and political battles over the firing of FBI director James Comey and the investigation of Russian interference in the US elections could further delay if not arrest any near-term momentum behind Trump’s fiscal and economic agendas.

The 10- and 30-year Treasuries closed the week at 2.32% and 2.99%, respectively, down and unchanged from 2.36% and 2.99% last Friday. The 10- and 30-year AAA MMD closed at 2.11% and 2.98%, down from a respective 2.17% and 3.03% last Friday. SIFMA reset on Wednesday at 0.79%, down from 0.85% the prior week. Short-term ratios continue to show signs of normalizing, and participation on short-term instruments remains active.

The Bond Buyer 30-day visible supply is at $13.6 billion, with $11.1 billion ($9.1 billion negotiated) expected to come during the week. We have consistent elevated new issue supply over the last month leading market participants to speculate that the trend of Municipals outperforming Treasuries may subside some in coming weeks. If issuers are contemplating bringing transactions to market, the environment is favorable in the current climate. There are two Fed speakers during the week. Data for the week is largely second tier and includes mostly housing data. Coming weeks will see more “Fed Speak” and technical data releases leading up to the June FOMC meeting.

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

  5/12/2017 Change*
SIFMA 0.79% -6
LIBOR 0.99% 0
AAA Municipal Market Data Rates 
5-Yr. 1.38% -3
10-Yr. 2.11% -6
20-Yr. 2.84% -5
30-Yr. 2.98% -5
U.S. Treasury Rates
10-Yr. 2.33% -3
30-Yr. 2.98% -1
Municipal to Treasury Yield Ratios 
10-Yr. 90.6% -1.4
30-Yr. 100.0% -1.3
Dow Jones 20,897 -110
S&P 2,391 -8

*Change since 5/5/2017
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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