Week of November 27, 2023
Capital markets weekly digest
Highlights and key takeaways
· Data insights limited: A shortened holiday trading week provided limited economic data releases for markets to digest. The lack of tradable events kept market participants lamenting over the thought that sustained softening in economic data may lead to a pivot in monetary policy sooner than current Fed guidance.
· Dovish unwinding of hedges: Stronger prints in Weekly Unemployment Benefits and The University of Michigan sentiment caused investors to liquidate dovish hedges ahead of the holiday weekend, signaling that market pundits see sustained strength in the U.S. economy in the near term with yields recently moderating.
· Muted Agency CMBS activity: The holiday-shortened trading week attributed to a limited slate of new issuance activity in the Agency CMBS marketplace.
Sparse data prompts speculation of a festive surprise:
Following recent cooler inflation prints, investors are cautiously optimistic about the possibility of near-term rate cuts, tentatively projecting the first cut to materialize in early summer 2024. However, the Federal Reserve's tone on the matter remains measured, leaving markets entangled in a complex web of anticipation and uncertainty. The meeting minutes from the November 1st FOMC Rate Decision highlighted the Fed’s continuously cautious monetary policy approach with the intent to remain nimble in the months ahead. Policymakers have remained committed to keeping interest rates sufficiently restrictive “for some time.”
After experiencing recent rises in Weekly Unemployment Benefit Claims, this past week’s Initial Jobless Claims fell by the most since June. Continuing Claims also experienced its first drop in two months, easing to 1.84 million. Preliminary October Durable Goods Orders, a measure of business investment, dwindled further as U.S. manufacturers are reporting weaker demand from consumers with higher borrowing costs impacting future investment from corporations. Overall consumer sentiment has recently improved given the rally in Treasury yields, though a convoluted picture exists with the November University of Michigan inflation expectations continuing to tick higher to a 7-month high for short-term inflation, while the long-term measure matched the highest monthly reading since late 2011. In a nutshell – the U.S. economy is cooling, though not collapsing.
Lackluster activity in Agency CMBS markets:
Despite the rally in Treasury yields since late October, traders report that trading activity hasn’t experienced an overwhelming preponderance of new supply in Agency CMBS markets. Traders reported that Fannie Mae DUS new issuance rate locks reached $530 million last week – the bulk occurring the first two trading days ahead of the Thanksgiving holiday. Appetite has started to re-emerge from end accounts, specifically banks and money managers recently. This has led to continued tightening of credit spreads. The CDX North American 5-Yr Investment Grade Index, perceived as the overall credit for corporations in the U.S., has tightened near its YTD lows while residential mortgages have also seen a recent tightening basis. These peer investment grade products paired with the increase in investor appetite have provided additional support to credit spreads in the Fannie Mae DUS sector.
Economic Events (Week of 11.27.2023 - 12.01.2023):
Coming out of an extended holiday break, markets will look to refocus on upcoming economic data releases as we move towards year-end. Key data and events for the coming week include:
· 11/27: October New Home Sales fell more than anticipated to -5.6%. This follows a revised 8.6% surprise surge in sales volumes in September. Additionally, the U.S. Treasury had $54 billion of 2-Year notes and $55 billion of 5-year notes auctioned into the market.
· 11/28: November Conference Board Consumer Confidence will report and $39 billion of 7-year notes to be auctioned off by the U.S. Treasury.
· 11/29: The Second reading of 3rd Quarter GDP and Personal Consumption are slated to be reported. The Federal Reserve will also release its Beige Book.
· 11/30: The bulk of keynote economic data for the week will be released on Thursday with the Fed’s preferred gauge on inflation, the October Personal Consumption Expenditures (PCE) Deflator, reporting along with October Personal Income & Spending and Weekly Unemployment Benefits.
· 12/1: The week will wrap with the final November reading of S&P Global US Manufacturing PMI and the November print of ISM Manufacturing.
The benchmark 10-Yr Treasury yield closed below 4.40% after experiencing 44 consecutive trading days above this threshold.
The recent release of this past month’s Fed Meeting Minutes demonstrated that policymakers remain in a holding pattern with officials monitoring both hard and soft, real-time data prints to shape upcoming monetary policy decisions.
Week in review
Capital markets team
Sr. Managing Director of Capital Markets
Capital Markets Trader
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