Previously on Kenny’s Commentary:
“Consider that the 10-year yield has dropped from 2.510% to 2.2320% in one month (-11.07%). Incredibly, the FOMC has raised the overnight rate twice since the November elections, December and March, and the 10-year yield is at its lowest point since the week after the ’16 elections. The Fed is raising and forecasting more of the same while investors are increasingly allocating funds to the security of US Treasuries – future interest rate hikes be damned. That is telling you something that the other gauges of risk are only hinting at.”
If interest rates are any indication of risk appetite, and I would argue that to a degree they are, last week’s performance on the part of US Treasuries did little to dispel the notion that investors are uncomfortable with the risk variables currently at play in the market. Treasuries posted a largely flat weekly performance after witnessing a month of sliding yields (-11.07%) in the face of Fed tightening. Bond bulls expect to see more of the same in coming days.
Now that the first round of the French election has delivered an outcome that investors appear comfortable with and with a relatively light US economic calendar ahead of us this week, the risk-off trade has lost momentum. Gold, crude and the US dollar have all slipped in overnight trading.
Investor focus will now shift to Q1 earnings and Washington D.C., specifically a potential government shutdown. In the case of the former, Q1 earnings results by S&P 500 composite companies have thus far been uneven though largely in-line. That said, corporate results have failed to provide a meaningful lift to equity prices as evidenced by last week’s and the past month’s equity market performance, as discussed in last week’s note. In the case of the latter, bond investors are expecting to see further yield compression this week as it appears at least plausible that the Federal Government may shut down on exactly the 100th day of President Trump’s. That shutdown would be the result of Congress being unable to agree to a stopgap spending bill. A Federal government shutdown would have both political implications and economic implications. Politically, it would be an embarrassment for the Republicans and President Trump. Economically, a shutdown would provide a drag to economic activity and as a result could potentially impact monetary policy.
Q1 results from Alphabet, Boeing, Caterpillar, Microsoft, Amazon and McDonald’s will dominate this week’s earnings parade. The economic calendar, though light, will be highlighted by the initial Q1 GDP (c.1.1%), the Employment Cost Index (c. 0.6%), Durable Goods (c.1.1%), New Home Sales (c.584k) and Consumer Confidence (123.6).
This week is all about the stopgap spending bill. If Washington can avoid a shut down, US equity markets may be in a position to resume their trade higher in coming weeks. Without it, US equity markets will likely languish after today’s French futures fueled rally, treasury yields will continue to compress and crude will likely find any move higher in coming weeks difficult. As always, investors will be keeping a close eye on the EIA Petroleum Status Report on Wednesday.