November 23, 2015
Prior Week Summary
The Treasury market traded with a flattening bias over the course of the week, led by weakness on the front-end of the curve. The 2-year note increased in yield by 8 basis points while the ten-year note was essentially unchanged for the week, which caused the 2s-10s curve to flatten by approximately 9 basis points, as traders have now priced in nearly even odds for the “second” rate hike to take place in the early part of the second quarter 2016. The strength of the dollar, and associated weakness in commodities continues to weigh on the price of Oil, which is currently trading below levels last seen during the height of the credit crisis (WTI Crude $41.52). Saudi Arabia has been flooding the market with an increasing supply of oil, leading the effort to defend OPEC market share, while smaller exporters try to maintain price adjusted revenues. Lackluster global growth, inflation, and the strength of the dollar (commodities are typically priced in USD) are all factors weighing on the energy complex.
The New York Federal Reserve reported that manufacturing activity in the region fell meaningfully last month, underpinning analysts concerns about the impact that the dollar will have on the manufacturing sector. The Empire Manufacturing Index remains in negative (contractionary) territory, and while the headline figure was less negative in November survey, the details paint a very difficult path forward for the sector in aggregate with most of the components remaining in contractionary territory – New Orders (–11.8), shipments (-4.1), unfilled orders (-18.2).
The minutes of the Fed October meeting showed that most members anticipated that economic conditions would be sufficient to justify a rate hike at the December meeting, as the downside risks posed by issues beyond our shores have diminished.
The Look Forward
Activity should be relatively muted this week as the US recognizes the Thanksgiving Holiday on Thursday and desks are very likely to be lightly staffed beginning on Wednesday. Notable data releases include the updated GDP estimate and PCE figures released on Tuesday and the personal income and spending figures on Wednesday. The government will be auctioning $26B in 2-year notes this morning, $35B in 5-year notes on Tuesday, and $29B in 7-year notes on Wednesday.