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Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending April 29, 2016

A weekly newsletter providing a synopsis of the latest market and economic news and releases and a recap of the securities markets. Find commentary for a wide range of sectors: US equities, US Treasury, corporate, mortgage, municipal and high-yield bonds, global bonds and currencies, and emerging-market bonds.

  Friday* Last Week Dec. 31
1 Yr Ago
Dow Jones Ind. Avg. 17,774 18,004 17,425 17,841
S&P 500 2,065 2,092 2,044 2,086
Nasdaq 100 4,787 4,906 5,007 4,941
The Russell 2000 1,135 1,147 1,136 1,220
DJ STOXX Europe 342 348 366 396
Nikkei Index 16,666 17,572 19,034 19,520
MSCI EM Index 425 428 411 484
Fed Funds Target 0.25-0.50% 0.25-0.50% 0.25-0.50% 0-0.25%
2-Year US Treasury Yield 0.80% 0.82% 1.05% 0.57%
10-Year US Treasury Yield 1.86% 1.89% 2.27% 2.03%
US$ / Euro 1.14 1.12 1.09 1.12
US$ / British Pound 1.46 1.44 1.47 1.54
Yen / US$ 107.26 111.79 120.22 119.38
Gold ($/oz) $1,287.86 $1,232.53 $1,061.42 $1,184.37
Oil $46.36 $42.68 $37.04 $59.63
*Levels as of 7:14 a.m. PDT

Year to Date (12/31/15 -4/29/16)

Dow Jones Industrial Avg 2.83%  
S&P 500 1.72%  
NASDAQ -4.01%  
Russell 2000 0.37%%  
MSCI World Index 0.88%%  
DJ STOXX Europe 600 (euro) -5.01%  
MSCI EM Index 3.30%  
Year to Date (12/31/15 -4/28/16)
90 Day T-Bill 0.10%  
2-Year Treasury 0.78%  
10-Year Treasury 4.41%  
ML High Yield Index 7.36%  
JP Morgan EMBI Global Diversified 6.85%  
JP Morgan Global Hedged 3.70%  


Date Report Survey Actual Prior Details
4/28 (US) GDP Annualized QoQ 0.70% 0.50% 1.40% US GDP growth slowed to 1.9% year-over-year, its slowest pace since Q1 2014.
4/29 (EC) GDP SA YoY 1.40% 1.60% 1.60% Eurozone continued to grow at 1.6% year-over-year in Q1 2016, finally bringing eurozone GDP back to pre-crisis levels.
  (US) PCE Core YoY 1.60% 1.60% 1.70% After hitting its highest level since December 2012 in February, US core PCE inflation dropped down to 1.6%.


Investors fixated on a mystery indicator this week. This mystery indicator does not display a clear trend, often accelerates one quarter and then decelerates the next (since it is usually quoted as a quarter-to-quarter annualized rate of percent change), and is subject to hefty revisions. Frankly, we do not find it to be very useful as a tool to assess the US economy's relative strength (or weakness) in real-time. Yet people wait at the edge of their Bloomberg terminals for it to be released and speak of its reading with the certitude of a car's odometer. We are speaking of GDP, and we believe there are plenty of other indicators that do a much better job than the mystery indicator in real-time. In recent years, Q1 GDP prints have given little insight into the full years GDP. In fact, in 2014, Q1 GDP was -0.9%, suggesting that the economy was contracting. However, the very next quarter it jumped to a whopping 4.6%. In the end, the year-over-year growth rate of GDP was a reasonable 2.5%. Since 2010, the quarterly annualized growth rate of GDP printed at 0.9% in Q1 but 2.2% in subsequent quarters.

Treasury Bonds

The path of least resistance last week was to slightly higher yields and the market effectively did just that though sellers were unable to move the needle above resistant levels. This week was no different, as Treasuries traded heavy to start the week following German Bunds to lower prices. It seemed to be a positioning story with the market long and a lack of buying ahead of the FOMC Wednesday afternoon. Both the 2 and 5-year auctioned tailed as it proved the market needed to build in a larger concession both on the curve and outright given the proximity to the Fed.

Aside from removing the global development line from one part of the statement, the FOMC really didn't change much. The Fed's statement resulted in the implied probabilities of rate increases to fall across the meeting dates. The statement proved very carry friendly for investors and the curve steepened in response. Investment managers used the 7-year auction to gain month end extension exposure though the market gave most of the gains back to end the week as crude oil moved high. Volatility again moved lower post a Fed meeting and the market remains in a very tight range.

Large-Cap Equities

The U.S. equity market fell for the week in a busy week of trading. The market focus was squarely on corporate quarterly results and central bank meetings, which kept investors cautiously positioned. Big misses in company earnings were met with big beats, which minimized any market impact. The FOMC meeting provided very little incremental news, while the Bank of Japan's lack of action drove global equities to a late week sell-off.

The S&P 500 and Dow Jones Industrial Average indices both closed the week down approximately -1.3%, while tech-focused NASDAQ slid -2.6%. Small-cap stocks outperformed large-cap stocks. In terms of style, large-cap value stocks outperformed large-cap growth stocks. The best performing sectors were utilities and energy, while the worst performing sectors were info tech and health care.

It was a big week of earnings this week with a third of the S&P 500 companies reporting quarterly results. So far, this earnings season has been better-than-expected with 77% of the companies beating earnings estimates and 57% beating sales estimates. Apple and Amazon appeared to be heading in opposite directions as Apple missed both earnings and sales quarterly estimates, while Amazon blew away estimates. As a result, shares of AAPL fell by more than -8% on the weaker quarter, while shares of AMZN jumped +10%.

In fund flow news, domestic equity mutual funds continued to face redemptions as Lipper reported investors redeemed $3.4 billion for the week, the twelfth consecutive week of redemptions. International equity mutual funds also saw redemptions as Lipper reported investors sold $1.0 billion for the week.

Corporate Bonds

Issuance was in line with expectations for the month of April at $85 billion as of Friday. The last week of the month was especially quiet, with no issuance on Wednesday when the FOMC announced that they would not be hiking rates (as the market accurately anticipated), and $11.5 billion for the week. Financials tend to have outsized representation in issuance coming out of earnings, and that was certainly true for this week: Monday and Tuesday issuers were exclusively in the financial sector. The largest deal of the week was just $2 billion, issued on Monday by Bank of New York. The two-tranche deal priced 20 basis points inside of initial price talk and tightened a few basis points on the break.

In corporate news, Apple stumbled in the stock market on decreased iPhone sales and an announcement to increase their capital return program by $50 billion sent bonds wider. Another recent noteworthy incident in earnings news was energy company BP, which outperformed earnings expectations but is still plagued by its Gulf of Mexico spill from 2010. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +146, eight tighter. Overall metals/mining were 19 tighter; energy was 17 tighter as oil rallied. Senior financials were seven tighter and subordinated were 12 tighter. Industrials were nine tighter and utilities were tighter by five.

Mortgage-Backed Securities

Mortgages kept pace with US Treasuries as yields oscillated in a narrow range. Implied volatility declined after the Federal Reserve left the overnight lending rate unchanged and signaled no change in their view on monetary policy and the global economic landscape.

Pass-throughs posted mixed results as lower coupons widened by one-to-three basis points but higher coupons tightened by a similar amount. Within the programs, Ginnie Mae bested Fannie Mae mortgages from steady buying by foreign accounts. Mortgage application volume dipped for the second straight week as refinance burnout develops as primary mortgage rates fail to drop below a key threshold, 3.625%.

Asset-Backed Securities

ABS returns have been trailing IG corporates of similar maturity year to date. Historically, ABS and IG corporates have yielded similar returns, so we are expecting ABS to catch up soon. In particular the subprime auto segment has lagged, especially the subordinated classes. While media coverage is correct in isolated instances, it is largely misleading for the rest of the sector. We view this as an opportunity.

The unintended consequences of Dodd-Frank regulations are becoming apparent in the new issue process. One of the intents was to give investors more time to review and research deal documents, so the sprint and print mentality of the subprime residential era would not happen again. We got our first look at the upcoming Santander subprime auto deal at 5:23 am Thursday. The subordinated classes went subject at 6 am Friday, even before official price talk. The Toyota deal is in a similar situation.

Municipal Bonds

Municipals were slightly weaker on the long end this week as the week was overshadowed by anticipation of treasuries' reaction to Wednesday's Fed meeting. Though the risk of a rate hike was priced in at virtually 0%, treasuries still rallied slightly in the intermediate and longer maturities over the day.

Ratios stayed roughly the same after a day-long dislocation. This was helped by the consistent stability munis have exhibited over the month due to supportive technicals. This week's heavier new issue calendar, over $9 billion, was larger than the weekly average year to date and included several lower rated, higher yielding deals such as the California Statewide Communities' Loma Linda University and the Texas Transportation Public Private Partnership deal with Blueridge Group. These deals accompanied a jumbo Ascension Health Alliance deal of over $1 billion. The investor base was able to absorb the volume of paper in the primary, as was evidenced by yet another week of mutual fund inflows. Unsurprisingly, municipals remained rich relative to their taxable peers given the un-abatement of interest and yield compression.

High-Yield Bonds

The firm tone in high yield continued this week as the Merrill Lynch BB/B index returned another 60 basis points week-over-week and is now up 3.45% month-to-date. Leading the rally has been the commodity sensitive sectors such as energy, metals/mining and commodities, which continue to surge. Energy is up 12% month-to-date and metals/mining are up 10.6%. The BB/B index has rallied more than 11% since the February 11th lows and is now up 6.7% year-to-date.

With continued strong demand for high yield paper, new issuance has been robust. Nearly $5 billion of paper has priced week-over-week, with another $3 billion due to price on Friday. The new issuance has been very well received and has traded well on the break. April will see more than $30 billion worth of paper price, the most since May of 2015.

We saw more positive inflows this week with $300 million coming into high yield mutual funds and ETFs. With relatively dovish Federal Reserve language in Wednesday's statement, we would expect inflows into risk assets to continue.

Most high yield companies have yet to report, but based on the earlier reporters earnings seem to be better than feared with the majority of companies beating expectations so far and adding fundamental fuel to the technical fire.

Global Bonds and Currencies

Global markets started the week on a cautious note as investors awaited several key central bank meetings. First, on Wednesday, the Federal Reserve kept interest rates unchanged, in line with market expectations. However, the tone of the statement delivered by Chair Yellen was slightly less dovish than in previous months, which some interpreted as a possible sign than the next rate hike might take place before the end of the summer. The impact on the markets, however, was rather muted.

The outcome of the Bank of Japan meeting on Thursday, on the other hand, surprised most investors as the central bank decided to keep its monetary policy unchanged, contrary to expectations. Rather counter-intuitively, Japanese government bonds rose on the day of the announcement, but pared most of the losses by the end of the week. In Europe, German bunds remained largely unchanged on the week, while Gilts in the UK saw a modest gain after the Q1 GDP figures released on Wednesday showed lackluster growth.

In the currency markets, the US dollar lost further ground as corporate earnings continued to disappoint. Sterling benefitted from the US dollar's recent weakness and strengthened against the greenback. The Japanese yen rose sharply in the aftermath of the Bank of Japan's decision to leave rates unchanged, while the Australian dollar plunged after the CPI fell to 0.2%, suggesting an increased probability of a rate cut by the Reserve Bank of Australia at the next meeting.

Emerging-Market Bonds

Emerging market (EM) dollar-pay spreads widened 10 basis points (bps) to 388 bps over US Treasuries, while local debt yields increased 3 bps to 6.36%. EM currencies were mixed against the US dollar; the Russian ruble (+3.3%) and Colombian peso (+2.3%) strengthened, while the Polish zloty (-1.3%) and Philippine peso (-0.7%) declined.

Serbia's parliamentary elections resulted in the Serbian Progressive Party maintaining its majority. The Progressives, led by Prime Minister Aleksander Vucic, will attempt to use the victory as a mandate to stay on a reform-oriented path, in collaboration with the IMF, which includes consolidating budget deficits and streamlining state-owned enterprises.

Mexico's first quarter 2016 GDP growth registered 2.7% year-over-year (y/y), ahead of consensus estimates and up from 2.5% y/y in the prior quarter. Banco Central do Brasil held the Selic rate at 14.25%, stating that high headline inflation and inflation expectations do not allow room for easing, though noting progress on containing second-order price effects.

The Central Bank of Russia left its key rate flat at 11% and noted that elevated inflation may be showing signs of moderation, which could create room for monetary easing in coming months. Hungary's central bank continued its easing cycle, lowering the policy rate 15 bps to 1.05%. Officials are focused on persistent below-target inflation as well as a possible growth slowdown to start 2016.

In Malaysia, investors welcomed the appointment of Muhammad Ibrahim to replace Zeti Aziz as governor of Bank Negara Malaysia. Ibrahim has been with the bank since 1984 and had recently been serving as deputy governor. With Aziz's term set to end at the end of April, there had been concerns that Prime Minister Najib Razak would name a less independent successor.

Date Report Consensus Last
5/2 (US) Markit US Manufacturing PMI 50.8 50.8
  (US) ISM Manufacturing 51.5 51.8
5/3 (EC) PPI YoY -4.30% -4.20%
  (US) Wards Total Vehicle Sales 17.30m 16.46m
5/4 (EC) Retail Sales YoY 2.60% 2.40%
  (US) ADP Employment Change 198k 200k
  (US) Nonfarm Productivity -1.40k -2.20%
  (US) ISM Non-Manf. Composite 54.7 54.5
  (US) Factory Orders Ex Trans -- -0.80%
  (US) Durable Goods Orders -- 0.80%
5/5 (UK) Halifax House Prices MoM -0.30% 2.60%
  (UK) Halifax House Price 3Mths/Year 9.60% 10.10%
5/6 (US) Change in Nonfarm Payrolls 203k 215k
  (CA) Unemployment Rate 7.20% 7.10%
  (US) Unemployment Rate 5.00% 5.00%
  (US) Average Hourly Earnings YoY 2.40% 2.30%
  (US) Average Weekly Hours All Employees 34.5 34.4
  (US) Labor Force Participation Rate -- 63.00%
  (US) Underemployment Rate -- 9.80%
  (RU) CPI YoY 7.40% 7.30%
5/8 (JN) Real Cash Earnings YoY -- 0.40%

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