I See Bond Yields Arisin, I see Trouble on the Way

Looks like we’re in for nasty weather. Hopefully, the Fed will save the day.

 

Investors will watch the latest on Treasury yields climbing above 3% and see how much higher they could climb, especially with the Federal Reserve statement this week. Traders will also be watching the latest out of earnings season. On the economic front, we have Crude Inventories, Manufacturing PMI, the Unemployment Rate, Non-Farm Payrolls and Average Hourly Earnings.

 

Treasury Yields: Last week saw 10 year Treasury yields climb above 3% for the first time in 4 years, which help to send the markets down over 1% over potential increases in borrowing. Investors will watch to see if yields continue to rise which would be a headwind for potential growth, sending markets lower. But since corporations used the tax cuts to repatriate money to go pay down debt and haven’t been issuing any bonds anymore, it’s sort of a surprise that the headlines would cause the drop.

Federal Reserve: On Wednesday (5/2), the Fed will release a statement where everybody will be waiting to see if the Federal Reserve decides to raise interest rates again. Right now, the odds are very low for the Fed to raise rates as we have already seen 1 interest rate raise this year. They are also expecting 3 rate hikes for the year. If the Fed does raise rates for the second time in 2018, we can expect to see significant volatility following the statement release. Some of the results of an interest rate increase include a strengthening in the US Dollar, a spike in Utilities & Financial companies, a weakening of foreign currencies, oil and metals. We would also see mortgage rates go up as Treasury yields will increase.  If the Fed announces that there could be a 4th rate hike this year instead of 3, while not raising rates at this meeting, the points just mentioned could also happen. This statement will not be followed by a press conference.

May Day May Day: Banks across Europe (but not including the UK) will be closed on Tuesday (5/1) for Labor Day or May Day as it is also known. Banks in China will also be close for Labor Day. Japanese banks will be closed on Thursday (5/3) for Constitution Day and on Friday (5/4) for Greenery Day. Since it’s in the middle of the week, markets will likely not see outsized moves the day before or after the holiday in their respective countries, and the rest of Europe.

Oil: With oil in the forefront as it trades at 4 year highs. Traders will be watching the latest Crude oil Inventories release on Wednesday (5/2). Should inventories increase in the latest reading, we can expect to see the price of oil go down. Should we see inventories draw down more than anticipated, we can expect to see the cost of oil to go up. Energy companies will trade in line with the move in oil while transportation companies will trade inversely with the move. So if the price of oil goes up, transportation companies move lower. Markets will also watch the latest rhetoric out of the White House on the Irn agreement. If the deal disappeared and sanctions went back on, oil would be taken off the market pushing the price of black gold higher.

Non-Farm Payrolls & Unemployment Rate: Non-Farm Payrolls, the Unemployment Rate and Average Hourly Earnings for April are scheduled to be released this Friday (5/3). Should the figure show that the economy created more jobs than expected, or if average hourly earnings jumped higher, we will likely see the markets go higher, the US Dollar go higher and oil go lower. Should these numbers disappoint, the markets will likely go lower along with the US Dollar. Economists will also be looking for any signs that last year’s tax cuts have increased wage growth, or if the savings all just went into dividends and share buy  backs. Like in previous months, the Unemployment Rate may drop but average hourly earnings will continue to stagnate as additional part time workers at Amazon will only be paid minimum wage until a robot can do it for cheaper.

Earnings: Earnings continues with 143 S&P 500 companies and 5 Dow components scheduled to announce earnings this week. So far, 267 S&P 500 companies have announced earnings. Traders will continue to see individual stocks have huge price swings if a company’s earnings outpaces or fall short of what the street expected. According to Thomson Reuters I/B/E/S, we have now seen 53% of S&P 500 companies report 1st quarter earnings so far. Of them, 74% reported revenue above expectations while 79% have reported earnings above expectations. This week has some heavy hitters including McDonalds, and Apple.

 

One comment

  1. Good insight Adam!

Leave a Reply

%d bloggers like this: