Market Update | April 24, 2018

Macro View

Daily Insights

  • China poised to loosen policy. Chinese shares rallied about 2% overnight on signs that the Chinese government may ease some of the policies that were put in place to help manage its debt problem. This week’s reduction in bank reserves may be followed by additional cuts. While trade policy remains a risk, our base case is still for a negotiated outcome rather than a full-blown trade war. China’s strong economic growth outlook and the country’s ability to respond to potential tariff-driven economic weakness support our positive view of emerging market equities.
  • What kind of flattening yield curve? In this week’s Bond Market Perspectives, due out later today, we look at two types of yield curve flattening to offer additional context to the flattening curve conversation. We have been undergoing a bear flattener, which happens when yields rise across the spectrum, just more so at the shorter maturities. That type of flattening has been much more supportive of equities than a bull flattener, in which yields are declining but more so in longer maturities. The yield curve flattened during equity market weakness in 2011 and 2015, but those were bull flatteners; another reason the current flattening of the curve is certainly worth monitoring, but isn’t overly concerning to us at this point.
  • 10-year Treasury yield nearing 3%. A host of factors drove rates meaningfully higher last week. Strong domestic and global data, a waning of geopolitical and trade tensions, and higher inflation expectations all helped to push long-term rates higher. The rising price of oil was certainly a factor in higher inflation expectations. Short-term rates rose as well, with the market now close to split between two and three rate hikes remaining in 2018. While we believe two additional hikes this year appears most likely, we could see three more if data remain not only strong, but consistent.

Monitoring the Week Ahead

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