Equity markets again moved sideways last week while interest rates softened a touch with yields falling approximately 0.02% in a parallel shift. An emerging quandary in risk assets seems to be growth and inflation versus growth or inflation. Bond markets, particularly real yields, have begun to fade the optimistic view of growth drivers in Trump’s policy indications, elevating the importance of Q4 earnings results and forward guidance.

Your Weekly Anecdotes:

  • Bespoke noted that the S&P 500 is in the midst of a pretty impressive streak of 65 consecutive trading days without a 1% decline, the second longest such streak in current bull market (66 days is the record from 2014).
  • Strong inflows and improved fundamentals (lower default risk) among low rated companies have driven high yield spreads below 4%. Merrill Lynch reported low rated company earnings grew 14% and 72% yoy in the second and third quarters respectively.
  • Low rated stocks have also been leading markets thus far in January. Within the S&P 500, below investment grade stocks are up 2.53% while AA rated stocks are up 1.18%. Non-rated companies are up nearly double any investment grade or higher rated names.
  • The sterling fell back to October 2016 lows last week on an announcement from UK Prime Minister, Theresa May, that the UK will not seek to keep ‘bits’ of the EU membership in place, meaning ‘out’ means ‘out’.
  • Among eight separate Fed speaking engagements last week, hawkish comments from Boston Fed President, Eric Rosengren, challenged Fed members to consider downsizing the $4t Fed balance sheet – contributing to softening equity markets and declining yields.
  • A recent Commitment of Traders report shows the degree of trades against safe assets (Treasuries) and in favor of risk assets (equities) by large block traders, such as hedge funds, has reached a level not seen since 1995. In other words, a one sided bet on rising interest rates and rising stock markets is firmly in place across the speculator community.
  • In defending their currency from falling further, China’s foreign exchange reserves fell to their lowest level in six years, at $3.011 trillion. China’s reserves had reached $4.0 trillion in 2014.
  • Fed funds futures markets are not pricing in more than a 50% chance of a rate hike until June of 2017 despite the FOMC narrative of three or more hikes coming in 2017.
  • Crude oil fell 3% last week on news that Saudi Arabia cut their oil output to its lowest level in almost two years to below 10 million barrels per day – more than it had promised as part of a global output cut deal between OPEC and non-OPEC producers in November.

Your Weekly Economic Updates:

  • The Citigroup Economic Surprise Index for the Eurozone rose to its highest level since February of 2013 indicating actual economic results are exceeding consensus estimates.
  • National Federation of Independent Businesses (NFIB) Index of small business optimism surged in December more so than any month since 1980 to its highest mark since 2004 on more upbeat views for sales and the economy.
  • December holiday retail sales were disappointing. Essentially 0% growth, excluding autos and gasoline, from the November mark, while 0.3% growth was expected.