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Weekly global market focus
T-note yield remains stubbornly near 4-year high
FANG stocks post new record high
2-year T-note auction to yield near 2.22%

Weekly global market focus -- The U.S. markets this week will focus on (1) continued concern about inflation and the interest rate outlook as the 10-year T-note yield remains near a 4-year high, (2) whether the U.S. stock market can extend its week-long recovery from the early-February plunge, (3) this week's heavy Treasury supply with the sale of $107 billion in T-notes, (4) the tail end of Q4 earnings season with 53 of the S&P 500 companies scheduled to report, and (5) Fed policy with Wednesday's FOMC meeting minutes and comments by NY Fed President Dudley and Cleveland Fed President Mester on Friday.

The European markets during the remainder of this week will focus on today's German ZEW and PPI reports, Wednesday's PMI report, and Thursday's German IFO confidence reports. The minutes of the ECB's last meeting will be released on Thursday. BOE Governor Carney on Wednesday testifies on the BOE's inflation report and may provide some hints about whether the BOE will raise rates another notch later this year.

Germany's Social Democrats today begin a 2-week vote on whether to affirm the coalition with Chancellor Merkel's CDU party. The results of that vote are due to be released on March 4. The markets may also become a bit more concerned about the upcoming Italian election on March 4, which could result in a hung parliament.

In Asia, the focus is mainly on Friday's Japan Jan CPI report where the headline CPI is expected to strengthen to +1.3% y/y from Dec's +1.0%, but where the CPI ex-fresh food is expected to ease to +0.8% y/y from Dec's +0.9%. The Hong Kong markets reopen on Tuesday after the Lunar New Year holiday, while the Chinese mainland markets reopen on Thursday.

Trading on Monday was light with the U.S. and Chinese markets closed for holidays. The EuroStoxx 50 index on Monday fell by -0.55%, stalling after the rally seen in the latter part of last week. By contrast, the Nikkei index on Monday rallied sharply by +1.97% and posted a new 1-1/2 week high, catching up with the recent stock market recoveries seen in the U.S. and Europe. The dollar index on Monday closed slightly higher, extending the mild upward rebound seen from last Friday's 3-1/4 year low. April Brent crude oil prices on Monday rallied by +1.08% extending the upside recovery to a 1-1/2 week high.

T-note yield remains stubbornly near 4-year high -- The 10-year T-note yield last Friday fell back from last Thursday's 4-year high of 2.94% to close the day down -3.5 bp at 2.87%. T-note yields continue to trade near 4-year highs due to strong inflation expectations and the recent rise in expectations for Fed tightening in 2018-19. The market is expecting +66 bp of rate hikes in 2018 (2.6 rate hikes) and a further 37 bp of rate hikes in 2019 (1.5 rate hikes).

The 10-year breakeven inflation expectations rate last Friday closed the day at 2.10% where it was just -4 bp below the early-Feb 3-1/2 year high of 2.14%. The breakeven rate fell in early February due to the decline in stocks and crude oil prices but has since rebounded higher on the partial recovery in crude oil prices and on last week's strong Jan CPI report. On a 3-month annualized basis, the CPI in Nov-Jan rose sharply to a 5-1/4 year high of +4.4% and the core CPI rose to a 6-1/2 year high of +2.9%.

FANG stocks post new record high -- The S&P 500 index last week staged an impressive recovery after the free-fall seen in early February and closed the week up +4.30%. The market is still on edge about the extent to which negative fundamentals such as higher interest rates and stretched valuations were behind the sell-off, as opposed to more temporary factors such as algo-trading and the blow-up of short-vol strategies.

The bad news is that last week's recovery in stock prices helped push the forward P/E for the S&P 500 index up to 17.5 from the 2-year low of 16.6 posted in early Feb during the sharp downside correction in stock prices. The current forward P/E of 17.5 is below this year's peak of 18.8, but is still above the 5-year average of 17.1 and the 10-year average of 15.5. That suggests that valuations are still stretched and that further gains may be labored.

A positive factor for stocks is that FANG stocks have done well during the correction, thus providing some confidence about underlying market fundamentals. Indeed, the NYMEX FANG+ index last Friday edged to a new record high, although it faded later in the day to close -0.90%.

2-year T-note auction to yield near 2.22% -- The Treasury today will sell $28 billion of 2-year T-notes, kicking off this week's $107 billion T-note package. The Treasury will then sell $15 billion of 2-year floating-rate notes and $35 billion of 5-year T-notes on Wednesday, and $29 billion of 7-year T-notes on Thursday.

Today's 2-year T-note issue was trading at 2.22% in when-issued trading late last Friday afternoon. The 2-year T-note yield has moved sharply higher along with increase in expectations for Fed rate hikes. The benchmark 2-year T-note yield last Friday closed at a 9-1/2 year high of 2.19%.

The 12-auction averages for the 2-year are as follows: 2.86 bid cover ratio, $172 million in non-competitive bids to mostly retail investors, 4.3 bp tail to the median yield 19.9 bp tail to the low yield, and 54% taken at the high yield. The 2-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 51.1% of the last twelve 2-year T-note auctions, which is well below the average of 63.4% for all recent Treasury coupon auctions.

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