A little better start this morning in the bond market, with US stock indexes in pre-open trading slightly lower after a huge increase in indexes last week (DJIA +577, NASDAQ +234, S&P +69). Trade in global markets were better following the US markets. The outlook for US stock markets extremely bullish, with tax cuts and wage growth expected to grow the economy this year. With increased growth, the bond market is now leaning more toward concerns that inflation will begin to increase. The 10-year inflation break-even rate, which reflects the yield premium on the 10-year U.S. Treasury note over the comparable Treasury inflation-protected security, topped 2% on Tuesday for the first time in more than nine months, according to Thomson Reuters. It settled Friday at 2.027%, its highest level since March 16. 2.0% is an important level for the break-even rate because it matches the Federal Reserve’s annual target for inflation. The general belief floating now is growth in 2018 will increase to 3.0% GDP growth.
The only data on the schedule today: November consumer credit at 3:00 this afternoon; expected $18B from $20.5B in October. As you know, we don’t take much from the overall; the important part is the increase in credit card use (revolving credit) in October, the use of credit cards increased. The use of credit suggests consumers’ increase in optimism but has a drag on consumer savings. Markets generally don’t give the data as much interest as we do.
Most of the key economic data this week doesn’t hit until Thursday and Friday with PPI, CPI, retail sales. Wednesday, December import and export prices will get attention with inflation concerns heating up a little now.
There is supply this week ($56B) of 3s, 10s and 30-year auctions. The 10 and 30 will be closely watched for demand, with increasing concerns that inflation may finally increase. The Fed and the other two major central banks wanting inflation at 2.0% or higher; so far, for four years, inflation has not moved even with 4.1% unemployment and job growth widely anticipated. Thursday and Friday markets will get PPI and CPI, current estimates not yet increasing; the forecast for core PPI +0.2% and core CPI +0.2%.
Increased economic growth is leading stocks higher but will it actually occur? Always debatable; some don’t believe growth will meet the lofty forecasts of 3+% growth in 2018, however. The Atlanta Fed calling for 2018 growth at 2.7% and forecasters at Macroeconomic Advisers project a 2.3% pace. Recent data from the Commerce Dept. reported Q2 and Q3 at 3.1% and 3.2% respectively. Markets will get the advance Q4 GDP at the end of January (26th). Still, a strong debate whether the tax cuts will add to growth; most believe it will, but many remain uneasy about more growth. Most believe corporations and small business will increase wages in order to attract employees with unemployment low. One point made by those who are less optimistic: weaker labor force and lower worker productivity. Productivity has been declining along with the labor force; the labor force according to the CBO has been declining since 1981, productivity weakening since 1990.
Besides the economic data this week and the Treasury auctions of 10s and 30s, this week has numerous Fed officials speaking. Today Boston’s Eric Rosengren, Atlanta’s Raphael Bostic, and SF's John Williams. Williams and Rosengren to participate in the last panel of the day on "Next Steps: Learning from the Bank of Canada" at the "Should the Fed Stick With the 2 Percent Inflation Target or Rethink It?" Forum in Washington.
We haven’t changed: still bearish for the bond and mortgage markets. The 10 yr. is where the focus should be; our work will not turn bullish unless the 10 yr. yield declines below 2.40% and for that to occur only two fundamental reasons. A correction in equity markets or Black Swan event (something that shocks and not expected).
This Week’s Calendar:
- 3:00 PM November consumer credit (+$18.0B)
- 6:00 am December NFIB Small Business Optimism Index (107.09 from 107.50)
- 10:00 am November JOLTS job openings (6.038 mil up from 5.996 mil in October)
- 1:00 pm $24B 3 yr. note auction
- 7:00 am weekly MBA mortgage applications
- 8:30 am (December import and export prices (imports +0.4%, exports +0.3%)
- 10:00 am November wholesale inventories (+0.7%, up from -0.5% in October)
- 1:00 pm $20B 10 yr. note auction (9 yrs., 10 months)
- 8:30 am weekly jobless claims (245K -5 K)
December PPI (+0.2%, ex food and energy +0.2%)
- 1:00 pm $12B 30 yr. bond auction (29 yr., 10 months)
- 2:00 PM December Treasury Budget (-$32B)
- 8:30 am December CPI (+0.1%, ex food and energy +0.2%)
December retail sales (+0.5%, ex auto sales +0.4%)
- 10:00 am November business inventories (+0.3%)
PRICES @ 10:00 AM
10 yr note: +4/32 (12 bp) 2.465% -1.5 bp
5 yr note: +2/32 (6 bp) 2.27% -2 bp
2 Yr note: +1/32 (3 bp) 1.95% -1 bp
30 yr bond: +10/32 (31 bp) 2.79% -2 bp
Libor Rates: 1 mo 1.552%; 3 mo 1.703%; 6 mo 1.865%; 1 yr 2.145%
30 yr FNMA 3.5 Jan: @9:30 102.53 +5 bp (-9 bp from 9:30 Friday)
15 yr FNMA 3.0: @9:30 101.69 +1 bp (-6 bp from 9:30 Friday)
30 yr GNMA 3.5: @9:30 103.19 +5 bp (-12 bp from 9:30 Friday)
Dollar/Yen: 112.98 -0.06 yen
Dollar/Euro: $1.1972 -$0.0059
Dollar Index: 92.32 +0.33
Gold: $1321.00 -$13.0
Crude Oil: $61.49 +$0.05
DJIA: 25,262.64 -33.23
NASDAQ: 7134.70 -1.86
S&P 500: 2741.20 -1.95