Market Update

• Stocks surrendering Monday gains in early trading.U.S. indexes are retracing yesterday’s gains in early trading and following European markets lower as oil falls on profit taking, and global growth concerns heighten following subdued gross domestic product (GDP) and inflation forecasts in the European Commission’s annual spring report. Asia-Pacific indexes were mixed overnight, with Australia jumping nearly 2% after a surprise rate cut, while shares in Hong Kong fell 1.8% and China’s Shanghai Composite rose 1.8% despite a dip in manufacturing activity; Japanese markets were closed. Safe-haven buying is supporting COMEX gold prices and pushingTreasury yields lower, while the dollar is weakening.

Macro View

• Rate hike expectations drop post-Fed. Last week’s Federal Reserve Bank (Fed) meeting was taken as a dovishsignal by bond investors, and rate hike expectations declined. Fed fund futures forecast a 22% chance of a June hike the day before the latest Fed meeting, but expectations fell to 13% as of May 2 according to futures. For all of 2016, one 0.25% rate increase is priced with an 82% probability. Market expectations and Fed forecasts have narrowed but remain notably apart.

• Bond strength continued in April except for most government-related sectors. Corporate bond sectors and emerging markets debt led bond performance in April by a notable margin. Developed government bonds, including Treasuries, witnessed modest declines on the month. Still, year to date, the broad Barclays Aggregate Bond Index is up over 3%, and most sectors have registered similar, or higher, returns. Lower returns may be in store.

• High-yield still all about oil. The tight correlation betweenhigh-yield bonds and WTI crude oil prices continued over the past week. Oil strength has been the primary driver of additional high-yield gains, and yield spreads narrowed to 6.0%, a level that we believe borders on expensive given rising defaults. Fundamental factors have taken a backseat to oil. High-yield bond total returns year to date are at the upper end of our full-year 2016 return expectation. Read more in this week’s Bond Market Perspectives, due out later today.

• EMD bucks oil trend. Spreads for emerging markets debt (EMD) have also been tied to oil in recent months, with the asset class rallying as spreads declined from highs near 4.9% in February to 3.8% last week. For the past couple of weeks, spreads have been below the 4% threshold that has been an inflection point at which buying interest has tended to emerge in recent years. The average yield spread inched higher by 0.09% last week, in the face of a dovish Fed message and resultant weaker dollar. Wider yield spreads despite beneficial news for EMD may mean that the market is taking a break, and looking for an additional catalyst.

• Inflation expectations continue to rise. The 10-year inflation expectations implied by Treasury Inflation-Protected Securities (TIPS) yields moved higher to 1.71%, the highest level since August 2015. The dovish Fed meeting was the main driver of the increase and has been the main driver over the past month, along with higher oil prices. Though expectations have increased recently, the market still remains extremely pessimistic about future inflation, with the 30-year inflation rate implied by TIPS at just 1.9%.

• Third Puerto Rico issuer defaults, market impact limited. Puerto Rico Government Development Bank, one of the larger Puerto Rico issuers, missed a $470 million payment on Monday (May 2) as expected. The severity of Puerto Rico’s financial situation is widely known, has taken years to develop, and the market largely took the news in stride. Puerto Rico debt is largely held by traditional taxable, not tax-exempt, investors and spillover to the broader market is unlikely. This isn’t the first time a Puerto Rico issuer has defaulted, with the first occurring last summer, and the commonwealth continues to work with creditors and Washington to find relief ahead of a July 1, payment on general obligation debt.

Monitoring the Week Ahead

Tuesday:

• Vehicle Sales (Apr)
• Mester (Hawk)

Wednesday:

• ADP Employment (Apr)
• ISM Non-Mfg. (Apr)
• Productivity (Q1)

Thursday:

• Bullard (Hawk)

Friday:

• Employment Report (Apr)

Saturday

• Employment Report (Apr)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

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