January 25, 2016
Prior Week Summary
It seems fitting that an unusually volatile week of trading in the markets during a holiday shortened week would be capped off by an unusually heavy winter storm in the Northeast that left much of the region blanketed by snow, with some areas getting over 2 feet. The commodities sector continues to be in the drivers seat, as a plunge and subsequent rebound of the oil price pushed stocks around in hectic trading. The price of oil has fallen to the lowest levels since 2003 amid concerns that ongoing turmoil related to China’s slowing growth rate would crimp fuel demand at the same time that the supply of the commodity has been increasing, partly due to oncoming Iranian supply among other factors. It appears as though, traders in the sector have drastically reduced their short positions in WTI, with many taking profits as the contract fell below $27 a barrel, which should help stabilize the price in the short-term.
Treasury yields and swap rates were highly correlated to changes in the oil price during the week as the 10-year note yield fell to 1.94% on Wednesday before ending the week at 2.05%, about 2 basis points higher than where it began. The front-end of the curve continues to flatten, with the spread between 2-year notes and 1-month bills narrowing by about 5 basis points during the week.
The meaningful increase in financial market volatility is likely to be an interesting topic of conversation at this week’s Fed meeting, given the Committee’s stated rate forecast. The market is placing effectively no chance for another rate hike at this meeting, which the next increase priced in for the 3rd quarter of this year. The Fed is likely to make mention of the financial market volatility and the turmoil in overseas economies and reaffirm their dependence on incoming data for the determination of the appropriate level of the policy rate.
The Look Forward
In addition to the Fed meeting and rate decision mid week, there is also a slew of top tier data being released this week as the Northeast shovels out. The market is looking forward to updated data on home prices, PMI, consumer confidence, manufacturing, and the labor market. The government is scheduled to auction $26b 2-year notes, $15b in 2-year FRNs, $35b 5-year notes, and $29b 7-year notes throughout the week.