November 30, 2015
Prior Week Summary
November has come and nearly gone as investors mark time on the calendar until the ‘critical’ December FOMC meeting. As of this writing, the Fed Funds futures markets imply a 76% probability for lift-off to occur at the December 16th meeting, with the second hike expected towards the end of the second quarter of 2016, an increase from the beginning of the month of 26% and 8%, respectively. Over the course of the month, duration underperformed led by weakness at the 2 to 3-year maturity point. The 2 and 3-year Treasury notes increased in yield by nearly 22 basis points, while longer tenors faced smaller losses, causing the curve to flatten in anticipation of the first rate hike in a decade.
While there remain only a few perceived barriers on the data front prior to the upcoming Fed meeting that have the potential to cause a non-action from the committee, markets remain appropriately focused on the longer-term global factors that are likely to color the debate on the timing of a second hike and beyond. The ongoing strength of the dollar, relative to our trading partners is hard to ignore and has the real possibility of limiting the Fed’s need to tighten the policy rate, all other things being equal. For perspective, The EUR/USD cross is trading at the lowest levels in a decade (1.057) while USD/JPY has reached the highest levels in a decade (123.09). At the same time, weakness in the commodity complex has resumed of late, with WTI Crude again flirting with the $40 level, and gold at the lowest level in 5-years. The Chinese market bears watching, as the controlled economy works with the IMF to include the Yuan in the special drawing rights basket, a move which has support of the US government. On the trading day prior to the IMF decision in Washington, the Shanghai composite stock index fell 5.5%, highlighting the volatility inherent in transitioning the behemoth market that China represents to a more market driven economy.
Swap spreads have settled slightly above recent lows, as the corporate issuance calendar eased up for the holiday shortened week. Wall St. credit strategists are broadly anticipating a resumption of heightened issuance prior to year-end which would likely cause the tightness in spreads to persist. For a detailed write-up on the drivers of swap spreads, and the associated implications for risk management and hedging strategies in the current environment, please see Chatham’s November 19th FI Bulletin, Swap Spreads: Negative Spread Analysis. We would be happy to send you a copy if you haven’t received it.
The Look Forward
Very active data calendar this week, with a large number of top tier data releases in the US, culminating with Chairwoman Yellen’s speech before the Joint Economic Committee on Thursday and the results of the November employment report coming on Friday. The IMF meets today in Washington to discuss the Yuan’s inclusion in the SDR basket and the ECB’s Mario Draghi will hold a press conference following the bank’s policy announcement on Thursday. Also, OPEC will meet in Vienna on Friday to discuss the group’s output targets. There are no Treasury note/bond auctions scheduled for this week.