Volatility Hits Markets
Prior Week Summary
The markets went for a ride last week as investors had to square their optimism around the prospect for an end to the escalating trade war between the U.S. and China, and the reality that the positive characterization of the talks provided by administration officials may have been premature. The equity markets struggled to find a clearing level and erased all of the gains earned year-to-date, again. It also probably did not help that the fixed income markets seem to be sending out distress signals as well. The curve inversion that began in recent days appears to be accelerating somewhat as the spread between the 2-year and 10-year swap rates briefly went negative mid-week. While that spread has since reverted to a modestly positive spread, shorter tenors of the Treasury and Swap curve remain inverted. Market strategists frequently point to the ability of curve inversions in U.S. markets in the recent past to “predict” future recessions.
The repricing in short-term interest rates has eroded the market-implied probability of the number of Fed rate hikes priced in during 2019. The implied probability of a hike in December remains close to 70%, but following that meeting, there are now no additional hikes priced into derivative markets.
In economic news, the November non-farm payrolls report disappointed expectations, as the labor markets added just 155,000 jobs during the month. The headline unemployment rate remained constant at 3.7%, while the underemployment rate actually increased by 0.2% to 7.6%.
The Look Forward
There is an active data calendar this week, with updated statistics on producer and consumer inflation, as well as retail sales.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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