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Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending July 18, 2014

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. 17,021 6,944 16,577 15,549
S&P 500 1,964 1,968 1,848 1,689
Nasdaq 100 4,392 4,415 4,177 3,611
The Russell 2000 1,137 1,160 1,164 1,050
DJ STOXX Europe 339 337 328 300
Nikkei Index 15,216 15,164 16,291 14,809
MSCI EM Index 443 439 415 387
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 0-0.25%
2-Year US Treasury Yield 0.47% 0.45% 0.38% 0.31%
10-Year US Treasury Yield 2.47% 2.52% 3.03% 2.53%
US$ / Euro 1.35 1.36 1.37 1.31
US$ / British Pound 1.71 1.71 1.66 1.52
Yen / US$ 101.40 101.30 105.31 100.43
Gold ($/oz) $1,307.61 $1,338.62 $1,205.65 $1,284.24
Oil $102.80 $100.83 $98.42 $108.04
*Levels as of 7:00 a.m. PDT

Year to Date (12/31/13 -7/18/14)
Dow Jones Industrial Avg 2.68%  
S&P 500 6.25%  
NASDAQ 5.16%  
Russell 2000 -2.32  
MSCI World Index 4.46%  
DJ STOXX Europe 600 (euro) 3.19%  
MSCI EM Index 6.79%  
Year to Date (12/31/13 -7/17/14)
90 Day T-Bill 0.05%  
2-Year Treasury 0.45%  
10-Year Treasury 6.64%  
ML High Yield Index 5.07%  
JP Morgan EMBI Global Diversified 8.91%  
JP Morgan Global Hedged 4.33%  


Date Report Survey Actual Prior Details
7/15 (UK) CPI YoY 1.60% 1.90% 1.50% Inflation beat consensus expectations, on the back of base effects and a jump in clothing prices. Core CPI rose 2% since last year
  (US) Retail Sales Advance MoM 0.60% 0.20% 0.30% Headline retail sales missed expectations, due mostly to a drop in auto sales on the month (-0.3%). Core retail sales performed better, rising 0.4% on the month
7/16 (UK) ILO Unemployment Rate 3Mths 6.50% 6.50% 6.60% Falling unemployment met market expectations, but wage growth disappointed, rising only 0.7% on average over the past three months since last year
  (US) PPI Final Demand YoY 1.90% 1.90% 2.00% Producer prices rose 0.4% since the last month, as energy prices rose 2.1% MoM. Core PPI registered at 1.8% YoY
  (US) Industrial Production MoM 0.30% 0.20% 0.60% Industrial production fell short of expectations, but remains on an upward trend. Continued oil and gas activity, combined with moderate growth in manufacturing have prevailed to keep the index strong
7/17 (US) Housing Starts 1020K 893K 1001K Housing starts came in wildly short of expectations, falling -9.3% MoM, and posting the weakest reading since September 2013. Most of the hit came in the South, where starts fell by -29.6%
7/18 (US) Univ. of Michigan Confidence 83 81.3 82.5 A large drop in the expectations component accounted for most of the decline in consumer sentiment. With gas prices falling, consumer sentiment should lift in the coming months
  (US) Leading Index 0.50% 0.30% 0.50% See below


A historically weak first quarter gross domestic product reading of -2.9% quarter-over-quarter annualized has some talking heads nervous about the health of the US economy. However, the Conference Board released their leading economic index this week and there are no indications of an imminent, broad-based slowdown in US growth.

Every month the Conference Board publishes a composite group of economic statistics that tend to lead the direction of economic activity. Historically, the index has done a good job forecasting recessions. Despite the disappointing read on first quarter growth, Friday's report was positive, with the leading indicator index up 6.3% since last year.

So, despite a slow first quarter, the prospects for an acceleration in US economic activity in the second half of 2014 are intact. What is more, historical revisions to GDP data (due at the end of July) may paint a slightly different portrait of US economic activity. While we may not get the high 3% quarterly rate the FOMC currently expects, more quarters of negative growth don't appear likely.

Treasury Bonds

The Treasury market is better over the past week after investors made risk-off moves on increased geopolitical tensions. The 10-year Treasury yield is currently at 2.48% and the flattening momentum continued after the front-end came under pressure on Fed Chair Yellen Congressional testimony. The market perceived a more hawkish tone from Yellen's statement on increases in the fed funds rate sooner and more rapidly if the labor market improves more quickly than expected.

Large-Cap Equities

The U.S. Equity Market climbed modestly higher for the week as better than expected corporate earnings reports and increased M&A activity offset the downing of Malaysian Airlines flight MH17 near the eastern Ukrainian border. The tragic event that killed 298 civilians and increased tension in the Middle East sent investors seeking to reduce risk-assets in a flight to safety. By Thursday's market close, intraday volatility had spiked the most in six months, while the S&P 500 index fell the most in two months. The lack of depth in trading due to the summer season has exacerbated investors' sensitivity to global headlines. However, the S&P 500 index managed to close the week up approximately 0.3%, while the Dow Jones Industrial Average climbed 0.8%. The NASDAQ Composite was largely unchanged for the week. The higher beta small-cap stocks were out of favor this week after underperforming large-cap stocks. In terms of style, large-cap value stocks outperformed large-cap growth stocks. The best performing sectors were info tech and financials, while the worst performing sectors were health care and utilities.

A busy week of earnings this week with 56 companies from the S&P 500 index, headlined by mega-cap financial institutions and tech companies, having reported quarterly results. Overall, earnings were better than expected with 76% of the companies that have reported topping street estimates. Some notable beats this week include JPMorgan, Goldman Sachs, Intel, and Google.

In fund flow news, Lipper reported that U.S. based equity mutual funds suffered their second weekly outflow in the last three weeks after $70 million was withdrawn for the week.

Corporate Bonds

Anticipated investment grade primary issuance this week was $15-20 billion, and as of Thursday just over $15 billion has been issued, with the only self-led deal coming from Morgan Stanley. One notable deal this week was issued by Bed Bath and Beyond Inc. (BBBY), who came with 10, 20 and 30 year tranches which totaled $1.5 billion. The deal was nine times oversubscribed and priced 20 basis points tighter than initial price talk. The deal is trading flat to where it came in the secondary market.

Partially staffed trading desks due to summer vacations, second quarter earnings announcements and geopolitical uncertainties weighed on secondary trading volumes throughout the week. So far, 66 companies have reported earnings, generally surprising to the upside. Corporate Index Option-Adjusted Spread (OAS) finished the week at +98, unchanged on the week. Financials remained unchanged (banks -0, insurance -1); industrials were unchanged (basic materials -1, capital goods +1, telecom -0, consumer cyclical +1, consumer non-cyclical -0, energy +1); and utilities remained unchanged.

Mortgage-Backed Securities

The mortgage market lagged Treasuries as yields declined as a result of dovish commentary from Fed Chairman Yellen and a flight-to-quality bid from an escalation in the Ukraine and Israel-Palestine crises. The market's reaction to the bull flattener was wider pass-through spreads (5-7 basis points) across the coupon stack. Although mortgage rates, at 4.0%, are at year-to-date lows, investors remain indifferent to a material pickup in refinance activity. Still, the Federal Reserve's goal to end their asset purchase program by October should balance the supply/demand equation if we stay at current, low yield levels.

Within the sector, 30-year mortgages and Ginnie Mae bested 15-year and conventional MBS. Other markets that have limited convexity (call/extension) risk performed reasonably well in the return to safety. Both agency and commercial MBS achieved their tightest spreads to swaps for the year. The latest conduit CMBS 10-year AAA-rated class priced at 3.28% or swaps plus 71 basis points.

In the non-agency mortgage market, a $3.7 billion bid list of legacy subprime bonds traded at prices above expectations. Another $4 billion list of non-agency MBS, from the same sellers, is on the docket for next week.

Asset-Backed Securities

What a week!?! ABS issuance was as diverse as I can remember, then throw in Malaysian airlines and the Gaza border. Sheesh! New issuance started with first time issuers Dell equipment and TCF bank auto loans and ranged to a whole business securitization from Hooters. The collateral types included bank, retail and UK credit cards, utility revenues, rental cars, dealer floorplan, private student loan, and structured settlements. Despite all of the noise from the perimeter, core ABS spreads remained steady.

GE just announced their intention to IPO their retail credit card division, which represents 15% of their consumer lending business. This includes Wal-Mart, the Gap, Sam's Club, JC Penney and Lowe's to name a few. Along those lines, the S&P/Experian consumer credit default composite index registered a historical low this week. This composite includes credit cards, auto loans and mortgages.

Municipal Bonds

This week's new issue municipal calendar came in around $5.5 billion which is very close to the weekly average year-to-date. Year-to-date issuance remains about 15% lower than last year. This week's calendar was dominated by a $675 million New York Transitional Finance Authority deal and a $1.4 billion Bay Area Toll Authority deal. Both deals were priced attractively and were re-priced to lower yields due to strong demand. Some BATA maturities re-priced as much as 40 basis points (BATA) lower and are trading up another 15 basis points in the secondary markets. We continue to be in the heavy coupon payment and redemption season of June and July which has proven constructive for the municipal yields.

The municipal market has outperformed over the past week as Treasury yields have softened, primarily in the belly of the curve. Municipal bond funds saw $790 million in net outflows for the week ending 07/09/14 in what appears to be an outlier thus far in 2014. The net outflows were highly concentrated with $690mm coming from high-yield funds as recent Puerto Rico headlines and downgrades have caused some forced selling.

High-Yield Bonds

The high-yield market was lower this week as the asset class began to experience some outflows. The Merrill Lynch BB/B cash pay constrained high-yield index was down 0.24% for the week as spreads widened by 12 basis points. Outflows have totaled $1.2 billion over the past four trading sessions with the majority of the negative flows coming from high-yield ETFs. A $400 million outflow reported early in the week was especially of note as it came out of shorter-dated ETFs. This represents 8% of the AUM for this ETF sector and is in contrast to the $8.1 billion increase in assets under management seen since early 2013. The outflows tapered off later in the week as accommodative comments from the FOMC and better than expected earnings reports and economic data helped increase the demand for risk assets. Other factors cited supporting the bid for high-yield debt was the diminishing concerns over Portugal stress and the increasing activity in mergers and acquisitions. Secondary volumes in high-yield have been above average, especially when compared to the same period of 2013. New issue volumes have also been running at elevated volumes with expectations of a possible record month for issuance for July on the heels of the record $29 billion in June with a total of $121.2 billion being issued in the second quarter of 2014.

Leveraged loans inched higher by 0.07% for the week despite a very active new issue calendar. The bulk of this new business has been new money transactions as opposed to the preponderance of refinancing activity seen earlier in the year. Outflows from loan mutual funds have moderated after seeing an average weekly outflow of $485 million since mid–April. The total outflow for that period was just 9% of the $70 billion in inflows during the prior 15 months however, and the recent outflows have been more than offset recent torrid pace of CLO issuance. Leveraged loans have returned 0.16% for the month and 2.93% year-to-date.

Global Bonds and Currencies

Major non-US sovereign bond markets continued to gain in the past week, broadly in line with US Treasuries. An upbeat tone early in the week was fuelled by generally dovish comments from Federal Reserve chairwoman Janet Yellen and a series of strong US corporate earnings data. But the mood shifted due to escalating geopolitical tensions in Middle East and between Russia and the West. The resultant flight to quality was encouraged when a passenger jet was shot down over Eastern Ukraine on Thursday. Bund yields ended about 7 basis points lower, assisted by a disappointing German sentiment reading. In the UK, 10-year Gilt yields were down about 5 basis points, as an unexpected jump in inflation in June was perceived as strengthening the case for a rate rise before year-end. Peripheral sovereign government bond spreads over Bunds were stable to tighter on the week.

In currency markets, the US dollar was mixed against the major crosses. It was firmer against the Euro, supported by the flight to quality, but almost flat against sterling, which received relative support from the higher than expected inflation figures. The dollar was also almost unchanged against the yen despite the BoJ's decision to trim its GDP growth forecast and against the Australian dollar.

Emerging-Market Bonds

Emerging market dollar-pay spreads weakened to 271 basis points over US Treasuries amid geopolitical tensions. However, local yields were flat at 6.50%. Currencies broadly depreciated against the US dollar, led by the Russian Ruble (-3.4%) and the Chilean Peso (-2.0%).

In Asia, investors focused on China's Q2 GDP, which surprised on the upside at 7.5% y/y, against consensus expectations of a 7.4% pickup. Growth was boosted by infrastructure investment, indicating that the government's effort at propelling growth is bearing fruit.

In Latin America, the central bank of Chile lowered the policy rate by 25 basis points to 3.75%, in line with market expectations. The central bank noted that inflation is likely to stay above the upper band of the 2-4% target. That said, with growth still sub-par, the board maintained a dovish tone, indicating that further easing cannot be ruled out. Meanwhile, Brazil held the Selic basic interest rate steady at 11%. The policy statement suggests that future rate action will depend on growth and inflation dynamics.

The central bank of Turkey lowered the one week repo rate by 50 bps to 8.25% and the overnight borrowing rate by 50 bps to 7.5%. The lending rate was left unchanged at 12.0%. Looking ahead, the central bank expects inflation to remain benign, while attributing the 9.2% print in June to food prices. The policy statement indicates further rate cuts in the coming months are likely. The South African Reserve Bank by contrast hiked the repo rate by 25 bps to 5.75% to anchor inflation expectations despite revising down its growth forecasts.

The US Department of Treasury announced an expanded list of sanctions against individuals and entities in Russia for failing to de-escalate the conflict in Ukraine. The list now includes four entities with tradable Eurobonds: Gazprombank, VEB, Rosneft, and Novatek. While the inclusion of the first two banks had been widely discussed, the addition of oil & gas companies was surprising. The sanctions prohibit dealing in new debt of longer than 90 days, indicating that transactions in existing bonds will not be blocked.

Emerging market debt funds received $0.9 billion of inflows for the week.

Date Report Consensus Last
7/22 (US) CPI YoY 2.10% 2.10%
  (US) Existing Home Sales 4.99% 4.89%
7/23 (CA) Retail Sales Ex Auto MoM 0.30% 0.70%
  (EC) Consumer Confidence -7.5 -7.5
7/24 (UK) Retail Sales Ex Auto YoY 4.60% 4.70%
  (US) Markit US Manufacturing PMI 57.5 57.3
  (US) New Home Sales 480K 504K
  (US) New Home Sales MoM -4.80% 18.60%
  (JN) Natl CPI YoY 3.50% 3.70%
7/25 (EC) M3 Money Supply YoY 1.20% 1.00%
  (EC) M3 3-month average 1.00% 0.90%
  (UK) GDP QoQ 0.80% 0.80%
  (UK) GDP YoY 3.10% 3.00%
  (US) Durable Goods Orders 0.50% -1.00%

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