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Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending December 19, 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. 17,808 17,281 16,577 16,179
S&P 500 2,069 2,002 1,848 1,810
Nasdaq 100 4,757 4,654 4,177 4,058
The Russell 2000 1,192 1,152 1,164 1,125
DJ STOXX Europe 340 331 328 319
Nikkei Index 17,621 17,372 16,291 15,859
MSCI EM Index 425 426 415 409
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 0-0.25%
2-Year US Treasury Yield 0.63% 0.54% 0.38% 0.37%
10-Year US Treasury Yield 2.19% 2.08% 3.03% 2.93%
US$ / Euro 1.23 1.25 1.37 1.37
US$ / British Pound 1.56 1.57 1.66 1.64
Yen / US$ 119.40 118.75 105.31 104.25
Gold ($/oz) $1,198.26 $1,222.50 $1,205.65 $1,188.68
Oil $55.59 $57.81 $98.42 $98.77
*Levels as of 7:30 a.m. PDT

Year to Date (12/31/13 -12/19/14)
Dow Jones Industrial Avg 7.43%  
S&P 500 11.96%  
NASDAQ 13.90%  
Russell 2000 2.47%  
MSCI World Index 2.73%  
DJ STOXX Europe 600 (euro) 3.48%  
MSCI EM Index 2.52%  
Year to Date (12/31/13 -12/18/14)
90 Day T-Bill 0.05%  
2-Year Treasury 0.63%  
10-Year Treasury 10.36%  
ML High Yield Index 1.53%  
JP Morgan EMBI Global Diversified 6.43%  
JP Morgan Global Hedged 8.01%  


Date Report Survey Actual Prior Details
12/15 (US) Industrial Production +1.3% +1.3% -0.1% Industrial production surprised the consensus and jumped 1.3% in November, a clear sign of ongoing US economic strength to close out the year.
  (US) Housing Starts +1040K +1028K +1009K Housing starts continue to disappoint through November and building permits (less driven by weather conditions) also dropped during the month. Bottom line: US residential investment has fallen short of forecasts at the start of the year, slowing down the pace of overall economic growth.
12/17 (US) Core Consumer Price Index +1.8% +1.7% 1.8% The core consumer price index, which excludes food and energy, grew just 1.7% compared to a year ago. This metric, which tends to run +0.4% higher than the Fed's preferred inflation gauge, the core PCE index, is also below the Fed's 2% target and has been for some time. Bottom line: inflation is NOT a problem in the US.
12/19 Retail sales 0.6% 0.6% 0.0% US retail sales rose 0.6% for the month of August after turning in a flat reading in July. Excluding autos and gasoline sales, retail sales rose 0.5% for the month. The retail sales data bodes well for consumer spending in Q3.


The biggest risk to our view before this week's December FOMC meeting (the last of the year) was that the Fed would not worry as much about persistently low inflation as we do. After the meeting and Janet Yellen's press conference, it's clear that, with employment and economic growth looking good, the FOMC is NOT too concerned with low inflation. Most of the members of the Committee still expect a rate hike sometime during calendar 2015 (of course, two members do not see this happening until 2016). Policymakers still think that the low inflation we've experienced is "transitory" and, as Chair Yellen expressed in the post-meeting press conference, the Committee would be comfortable raising rates if they are "reasonably confident" inflation is headed back toward 2% and inflation expectations remained stable. In the meantime, patience would prevail. While we expect to see softer headline and core inflation data over the next few months, policymakers appear less concerned about low inflation than we had anticipated. As a result, if the inflation data stabilizes over the next few months, there is a greater risk that rate hikes come sooner than we had anticipated ("mid to late 2015").

Treasury Bonds

Treasuries traded in a volatile session over the week as global risk assets came under pressure on crude weakness and a falling Russian ruble before pivoting on the release of the FOMC statement. Risk assets benefited from the Fed leaving in the "considerable time" phrase (though it was moved down and partially offset by patients) but the interesting part was Chair Yellen's hawkish press conference that put pressure on rates. Moves in the market were exacerbated on thin liquidity as dealers have difficulty hedging balance sheets are being wound down into year end. The Treasury auctioned $16 billion re-open 5-year TIPS this week and despite the massive headwinds (volatile oil prices, just after a CPI miss, lack of dealer risk appetite) the auction saw the highest even indirect bidder takedowns. The 5-year TIPS breakeven appeared historically cheap and was off 100 basis points since July provided the backdrop for a decent auction given the pain in the sector recently.

Large-Cap Equities

The US equity market rallied for the week on the back of the Fed's commitment to maintain its current accommodative policy. Equities swiftly rebounded from last week's oil led sell-off which was helped by the stabilization in oil prices and dissipating fears of a global systemic meltdown. This latest "v" shape recovery has been all too common as the S&P 500 index has bounced back from pull-backs of at least 4% for the fifth time this calendar year. This week, trading volumes spiked higher on increased intra-day volatility and the expiration of futures and options on stocks and stock indices. The S&P 500 and Dow Jones Industrial Average indices surged approximately 3% higher, while the NASDAQ Composite climbed 2.3%. The higher beta small-cap stocks modestly outperformed large-cap stocks. In terms of style, large-cap value stocks outperformed large-cap growth stocks. The best performing sectors were energy and materials, while the worst performing sectors were consumer discretionary and consumer staples.

In fund flow news, Lipper reported that US-based equity mutual funds saw their fourth consecutive week of redemptions after investors redeemed $13.3 billion for the week, which was the largest weekly redemption year-to-date.

Corporate Bonds

Coming into the final stretch before the holidays, there has been no new issue this week. This is on target with the $0-2 billion anticipated. Next week should also be slow with desks half staffed and most reading 2015 forecast reports. January issuance is estimated to be roughly $100 million, slightly above the five year running average.

Early this week, spreads gapped wider as the market focus remained on oil prices. Oil led an equity and treasury rollercoaster that ended where it started, with large price swings every day of the week. Trading in the corporate market was noticeably down as desks slid into an end-of-year lull and were only partially staffed. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +132, two wider on the week. Overall, Senior Financials were seven tighter, Sub Financials tightened by two. Metals/Mining tightened by 10 and Energy tightened by five, sharp reversal the latter half of the week. Market thinness another cause of spreads gaping wider or tighter as the dealer community being told to stay light. Industrials tightened by one and Utilities tightened by five.

Mortgage-Backed Securities

The agency mortgage market did quite well this past week. Mortgage spreads tightened relative to Treasuries by 5 to 7 basis points. The outperformance was primarily due to light supply as we enter into a slower mortgage origination period at the onset of winter and the holiday season. Good demand for mortgages with higher coupons was seen from money managers and banks as higher coupons outperformed lower coupons. GNMA securities rebounded this week. The backup in rates relieved concerns of more supply in lower coupon GNMA's which provided a catalyst to higher prices relative to FNMA/FHLMC. Non-agency mortgages held their ground in what was a very volatile week for financial markets. Prices were softer earlier in the week but firmed as oil prices, high yield and emerging markets sectors improved toward the end of the week.

Asset-Backed Securities

There was no new issuance for the week, but plenty of secondary activity. Due to its depth and liquidity, the ABS market is often immune to outside market volatility. That has not been the case this time with oil, Russia, volatility and a whole slew of other factors combined with dealers reducing balance sheets going into the end of the year. Spreads on the normally stable credit card and auto sectors are easily 10 basis point wider, and represent the best relative value of the year.

On the fundamental side, non-mortgage consumer credit balances grew to $3.1 trillion, the highest in over 5 years according to Equifax. At the same time, the S&P/Experian default index continues to hover near its lowest point in its 10 years of history. As a share of disposable income, credit card debt is down to 5.2%, a 15 year low according to the American Bankers Association. This is happening as those with balances (41%) are declining and dormant accounts (30%) and convenience users (29%) are increasing.

Municipal Bonds

As Treasury yields continue to drop as investors seek haven from international turmoil, munis are reluctant company. The10-year muni-treasury ratio has risen significantly over the third quarter from 85% to 93%, positioning munis cheaper relative to Treasuries, but primarily due to a 35 basis point rally in Treasuries vs. 13 basis point rally in munis. Though the relationship is where it has been for most of the year, munis are more attractive due to the still supportive market technicals and less volatility compared to treasuries despite overall underperformance. Moreover, though gains have slowed, munis continue to show positive performance having earned 0.5 percent through December 15 according to BAML indices. The outlook on year-end performance remains strong as the bulk of the supply bulge has passed, and the remainder of the year will see holiday-light issuance. Issuers have scheduled roughly $6.3 billion of bond sales against $26 billion of redemptions and maturities.

In credit related news, the Census Bureau released a report stating that state and local debt grew 22% between 2007-2012 recessionary period, which is only remarkable because it grew by more than expenditures over the same period, which increased by only 18%, meaning that much of the additional borrowing was opportunistic of a low rate environment. Tax and investment based revenues rose by only 8.2%, as governments struggled to raise tax rates to counter significant base erosion. In the post-recessionary fiscal years, States are seeing a recovery in revenues and are cutting taxes and fees to reflect broader positive economic trends. Expenditures are anticipated to surpass pre-recessionary levels in FY2015.

High-Yield Bonds

The high-yield market traded lower for most of the week as the price of WTI crude slid to $56 a barrel and concerns over the collapse of the Russian ruble led to a flight to quality and away from risk. The Merrill Lynch BB/B cash pay constrained high-yield index recovered by the end of the week and was up 0.19% for the week as spreads tightened by nine basis points to an option-adjusted-spread of 434 basis points.

The direction and sentiment turned dramatically on Wednesday as "real money" came in to add risk and hedge funds attempted to cover shorts. The price of oil stabilized and the stocks and bonds of energy companies surged higher. Accommodative comments from the FOMC lent further fuel to the rally and high-yield bonds had the strongest one-day move higher since mid-October. High-yield ETF's reversed their continuous flow of BWIC's that had persisted for most of the month of December and instead flooded the market with offer-wanted requests as investors rushed back into the asset class.

Despite the strong rebound in high-yield to finish the week, AMG reported an outflow of $3.1 billion for the asset class. The bulk of the outflow was seen in the early part of the week during the market turmoil. The pace of outflows slowed as the week progressed and turned positive as high-yield ETF's saw an inflow of $829 million on Wednesday and Thursday, the largest two-day inflow since mid-October.

Global Bonds and Currencies

The major non-US sovereign bond markets had a mixed week as there was a divergence in performance between core European and UK sovereign bond markets. Risk appetite was low following some recovery in oil prices and financial turmoil in Russia. However, sentiment improved as the week progressed and the markets digested the latest policy statement from the US Federal Reserve. Yields across the Euro-area were lower on the week, supported by expectations that the European Central Bank (ECB) will begin sovereign debt purchases early in 2015. Ten-year German Bund yields finished the week about 3 basis points lower, despite the positive ZEW report.

Peripheral European sovereign bond yields also declined on the week and the Italian and Spanish 10-year spreads over German Bunds tightened. The peripheral bond markets were little affected by the failure of the Greek government's candidate to secure sufficient votes to win the first round of the country's presidential election.

In the UK, Gilt yields rose by about 5 basis points, in line with US Treasuries, following better than expected UK wage growth and retail sales data.

In currency markets, the US dollar gained against most of the other major currencies, as investors continued to forecast higher US rates next. The Euro came under pressure as investors remained cautious about persistent Euro-zone deflationary pressures. Sterling ended almost unchanged, as did the yen, despite some temporary decline after the Bank of Japan maintained their current ultra-easy monetary settings. The Australian Dollar weakened against the US dollar on the back of falling commodity prices, a hostage crisis in Sydney and some weakening in Chinese demand for resources.

Emerging-Market Bonds

Emerging market dollar-pay spreads widened by nearly 50 basis points to 416 in a volatile week, before recovering to 361 over US Treasuries. This marks a 4 basis point widening from last week. Meanwhile, local yields increased 12 basis points to 6.65%. Emerging market currencies broadly depreciated versus the US dollar, led by the Russian ruble (-9.6%), the Hungarian forint (-3.1%) and the Polish zloty (-2.8%).

In an emergency session, the Central Bank of Russia (CBR) raised rates by 650 basis points to 17.0% to arrest the depreciation of the ruble. The rate hike, plus constructive comments from key officials, appeared to offer the currency a temporary reprieve following weeks of steep declines. Based on the fundamentals of the economy, the CBR estimates that the fair value of the ruble is closer to the 54-56 range.

Fitch Ratings downgraded Venezuela by three notches to CCC. Fitch indicated that the 48% decline in crude prices since June has significantly eroded the sovereign's reserves position. Consequently, a balance of payments crisis looms large in light of reduced external financing capacity and rising macroeconomic vulnerability. Venezuela's dependence on oil is high, accounting for 50% of the government's revenue source.

Elsewhere in Latin America, Colombia released third quarter GDP, which showed the economy grew 4.3% year-over-year (y/y) driven by the construction sector. Manufacturing, meanwhile, contracted on sharply lower oil prices. Going forward, the external sector is expected to remain weak due to the significant deterioration in the terms of trade in the final quarter of 2014.

The Bank of Thailand (BoT) left rates unchanged at 2.0% but the decision was not unanimous, with two members voting in favor of a cut. In the accompanying statement, the BoT struck a dovish tone, noting the scope for easing if fiscal policy disappoints next year.

Emerging market bonds experienced outflows of $1.9 billion, skewed toward hard currency funds.

Date Report Consensus Last
12/23 (US) Existing Home Sales 5.20M 5.26M
  (US) Core Durable Goods (Ex Air, Ex Def) +1.0% -1.3%
  (US) GDP Q3 FINAL 4.3% QAAR +3.9% QAAR
  (US) New Home Sales 460K 458K
  (US) Core PCE Measure (YoY) 1.5% 1.6%

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