Monday April 25

Stocks fall to start the week as oil prices drop. The S&P 500 fell 0.2% to 2,087 and the Dow Jones fell 0.15% to 17,977. Brent crude oil fell 1% to $44.59 and WTI fell 1.7% to $42.99. Rising oil prices lifted indices over the last few weeks however this week they start off on a tentative note. Energy stocks fell 1.4% on the day. In spite of the pullback in equities yields rose on the day. The two year yield gained two basis points to 0.84% and the ten year yield rose 3 basis points to 1.92%. The FOMC statement later this week should provide more color as to whether or not the Fed will raise rates in June. Currently the market for fed funds futures is suggesting that it is not likely, however in recent weeks some Fed officials have suggested the market is underpricing the possibility. The US dollar weakened against most peers as the dollar index fell 0.3%. The euro rose 0.4% to $1.1266 and the yen finished at Y111.23 which was slightly higher on the day. In the UK the pound rose 0.4% to $1.4481 after Obama encouraged citizens to vote to remain in the EU in June. The BoJ also meets later this week, and markets expect an expansion of stimulus.

Investors will look closely at the Fed statement in order to try to determine whether or not the Fed will hike rates for the second time in June. The last FOMC statement suggested that the risks to the outlook were not balanced, and as a result the Fed came across as hesitant to raise interest rates. Investors will be looking for a similar indication on Wednesday. The Fed is trying to identify whether or not the risks to a downturn in economic growth are less than, equal to, or greater than the chance of an unexpected upside. China’s slowdown, Europe’s slowdown, low commodity prices, and struggling emerging markets have led investors to believe that risks are skewed to the downside. Since December the dot plot has been downgraded to reflect only two interest rate hikes as opposed to four. Any further dovishness from the Fed will most likely be followed by a positive movement in markets. Concerns over the strength of the dollar have subsided, and the labor market continues to show signs of strength. Low inflation readings and slow growth stand in the way of higher rates. As recently as April 12 Jeffrey Lacker of the Richmond Fed suggested he supported four rate hikes this year. Similarly Eric Rosengren of the Boston Fed said that markets were downplaying the trajectory of interest rates this year.

Bond yields rose over the last week around the world. Investors look at bond yields as an indicator of growth and inflation expectations. Higher yields correspond with higher growth and inflation expectations, however investors are hesitant to view the recent change in yields as a drastic change in the outlook. In the US in particular, yields have fallen over the last years as geopolitical concerns, international demand, and low inflation readings have overpowered expectations that the Fed will raise interest rates. In recent weeks bets on Treasury futures went from bullish to bearish for the first time all years. Bearish positioning in Treasury futures indicates a bet on higher yields. Similarly outflows from Treasury mutual funds and ETFs have gone negative as well. Both of these indicators suggest that investors are expecting higher yields to set in. Yields have in part been driven higher by improving economic data out of China. Standing in the way of rising Treasury yields are low yields around the world. Buying from international investors looking for yield is sure to put a cap on how high yields will go over the coming year.

Monday April 25

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