Market Update | April 19, 2018

Macro View

Daily Insights

  • Beige Book continues to show economic strength. The Federal Reserve (Fed)released its latest Beige Book yesterday, which provides information from the 12 Fed districts on current economic conditions. Respondents continued to report steady growth overall. Trade concerns were starting to pop up, including rising steel costs, but one district also noted that steel and aluminum manufacturers were starting to announce plans to reopen plants and rehire workers. Labor market tightness continued to be an issue, especially for highly skilled workers, but wage and price pressures remained limited.  We will discuss the Beige Book in more detail and will update our Beige Book Barometer in next week’s Weekly Economic Commentary.
  • China continued buying Treasuries in February. The U.S. Treasury released its latest Treasury International Capital System (TICS) data on April 16, revealing that China was a net buyer of Treasuries in February. Some investors had been worried that increased trade tensions with China could lead them to slow purchases of Treasuries, or even begin to sell holdings in retaliation. This hasn’t happened so far, but next month’s report (due on May 15) may give markets a better idea since it will include March data, when most of the recent tariff announcements were made. A more limited, but more current view of foreign holdings of Treasuries from the New York Fed shows that foreign holdings leveled off in March, though it doesn’t show indications of broad selling. We continue to believe adjustments to Treasury purchases are a good negotiating tool for China, but would likely be a last resort as this could cause problems for China as well.
  • The yield curve continues to flatten. The yield curve (as measured by the 2-10 year yield spread) has flattened to its lowest point in more than a decade at 0.41%. Multiple Fed speakers have been discussing the impacts of this of late, as the past nine recessions all were preceded by a yield curve inversion. Importantly, we are still a long way from an actual inversion. Another major difference between this flattening and other times it happened is rates are actually rising higher this time (it’s just that short-term rates are rising faster than long-term rates), which is historically a sign of an improving economy. The last time the yield curve was this flat amid higher rates was the mid-’90s, a period with multiple years of expansion left from that point. We will discuss this important concept in both our Weekly Market Commentary and Bond Market Perspectives next week.
  • More strength under the surface. One of our favorite technical indicators is market breadth. When many stocks are participating in a move, this bodes well that the overall market indices will also advance. Today on the LPL Research blog, we will take a closer look at how various measures of market breadth are breaking out to new all-time highs, which historically has meant that new highs in markets could follow.
  • Jobless claims ticked lower. The 232k weekly print was down versus last week’s 233k but slightly above consensus expectations and the four-week average (both 230k). Despite the modest uptick in claims, employment levels remain near historic highs, and the Fed’s Beige Book, released yesterday, indicates that businesses remain upbeat about the economy.

Monitoring the Week Ahead

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