Friday, April 20th, 2018
Contributors:
J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S.Obata

TODAY

Market Overview

Markets are looking at a tepid end to the week, with Europe’s Stoxx 50 trading just marginally higher this morning. While the US is done for the week, Canadian data will be in the spotlight including retail sales and Consumer Prices. These should provide a clue as to whether Bank of Canada governor Poloz’s view from earlier in the week is justified.

Rates

Watch yields closely. It appears that the rise across the curve in Treasuries and Canadas is breaking to the upside. Take the two most important (in our mind) US 10 year Treasury and Canada 5 year. The former is up 17 basis points since the start of April to 2.92%, while the latter is up an even greater magnitude: 20bps to 2.17% and now eclipsing the 2013 high yield point. Do not take this lightly. Billions in mortgages are priced off this level, and now virtually anyone renewing their 5 year fixed rate mortgage will face higher payments.

Bond yields, based on the U.S. 10-year, are nearing the peak of 2.95% reached on February 21. Now just for a refresher, markets marched higher in January as bond yields rose from 2.40% to 2.80%, then the pain came and the market corrected. We now have bond yields rising again, with the big question is there another pain point out there? Trading through 3.0% would be symbolic, a level not seen since the end of 2013, and very briefly. That level has proven resistance over the past few years (chart).   

U.S. Housing

After a pause in December, U.S. homes worth more than 750k have continued to see increasing sales. This settled early concerns surrounding recent tax changes capping tax deductibility at a 750k mortgage, and 10k in property taxes. Houses under the 750k price point have been on the decline for the past two years, suggesting the average American relies more on wages than stock market growth when purchasing a home. 

Podcast

It’s a bit dated now, but Jim Grant’s appearance on the MacroVoices podcast is worth listening to for long term interest rate strategy.
 
Diversion

“Fearless Girl” is moving to a home. We wouldn’t want to stand in front of a bull either.

COMPANY NEWS

U.S. regulators are going to fine Wells Fargo $1bb for years of selling unnecessary products to customers. President Trump has been vocal on Twitter about holding the bank accountable for its actions. General Electric reported operating profit of $3bb for the quarter, beating an extremely low bar. The company also reaffirmed earnings for the remainder of 2018. Fairfax Financial has agreed to buy the Canadian unit of Toys “R” Us for roughly $300mm. After the takeover, Fairfax could continue operating the stores under the same branding. Allied Properties is planning on spending roughly $1bb on offices for tech workers in Toronto over the next 10 years. The area which they are calling The Well will have 1.6mm square feet of office and retail space and is targeted for completion by 2021. JPMorgan and National Bank of Canada have tested a new blockchain platform for issuing financial instruments together with other large firms.
 

COMMODITIES

Oil is up 1.14% to $69.25. Prices are lower after Trump blasted OPEC for keeping oil prices “artificially very high”. It seems that rising oil is flowing through into the U.S. inflation numbers. Bloomberg’s Lisa Abramowicz notes that crude and breakevens have been “moving in near lockstep” over the past year.

Gold is down -0.28% to $1,349.70. Precious metals are mixed as the USD strengthens against the EUR and JPY. We are seeing a slightly divergence between gold and silver, with the former trading near the lows for the week while the latter holds on to gains from Wednesday’s session. Precious metals have been holding up quite well given that rates are basically at the highs for the week.

In other commodities news…

Saudi energy minister says world has ‘capacity’ to absorb oil price” – $FT

Russia hints producers could ease up on oil output curbs, countering Saudi view” – RTS

Asian oil demand to hit record, but industry can't take eyes off Middle East” – RTS

Trump's Latest Plan for Saving Coal Comes From the Cold War” – BBG

FIXED INCOME AND ECONOMICS

Bond markets are little changed this morning, as US markets have no data or events to set direction today. Domestically however we have Retail Sales data for February and CPI numbers for March. Retail Sales are expected to rise 0.4%, adding to the 0.3% gain in January, and suggest a still resilient consumer despite high debt loads and rising interest rates. CPI meanwhile is also expected to rise 0.4%, to put the year-over-year rate of inflation at 2.4%, while the Bank of Canada’s core inflation number is expected to post a 2.0% year-over-year rise. Although 2% is just the middle of the Bank of Canada’s inflation target, the continued increase in inflation versus the tepid price pressure we have seen for several years is key. At any rate, with the Bank of Canada stating they are in data watching mode and expect to tighten policy in the coming months, both numbers could be market movers.
 

CHART OF THE DAY

QUOTE OF THE DAY

“The safest way to double your money is to fold it over and put it in your pocket”
- Kin Hubbard
 

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Charts are sourced to Bloomberg unless otherwise noted.

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