Updated: 05-31-2016

The stock market registered its second consecutive weekly advance, which placed the S&P 500 back in the neighborhood of this year's high that was notched in the middle of April. 

The trading week was highlighted by below-average volume as some participants took time off ahead of the Memorial Day holiday. The limited participation made for a pretty quiet week, but economic data that was received reinforced the growing rate hike expectations. 

April New Home Sales (619K, Briefing.com consensus 521K), April Pending Home Sales (+5.1%; Briefing.com consensus 0.6%), and April Durable Orders (+3.4%; Briefing.com consensus 0.6%) beat expectations while the second estimate of first-quarter GDP (+0.8%; Briefing.com consensus 0.9%) and the final reading of the Michigan Sentiment Index for May (94.7; Briefing.com consensus 95.5) were close to expectations, but missed.

Altogether, the economic data released during the past week kept the possibility of a summer rate hike alive. As a result, Fed officials--including Chair Janet Yellen--that spoke throughout the week reminded investors that the FOMC is ready to raise rates if economic data does not take a turn for the worse. This message was consistent with remarks from two weeks ago that boosted the probability of a June hike from 8.0% to 30.0%.

Rate hike expectations, as indicated by the fed funds futures market, saw little change with the market pointing to a 61.4% chance of a rate hike in July after assigning a 53.6% probability of a July hike last week. 

05/27/2016 05/20/2016 Change
Fed Fund Futures Rate Prediction Jul. 2016 (61.4%) Jul. 2016 (53.6%) ---
10yr Treasury - 2yr Treasury 95 bps 96 bps -1 bp
High Yield - 10yr Treasury 590 bps 604 bps -14 bps
Corp A - 10 yr Treasury 123 bps 127 bps -4 bps
10 yr Bund - 10 yr Treasury -173 bps -169 bps -4 bps
5yr, 5yr Forward Inflation Breakeven 1.64% 1.60% 4 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury note ticked down one basis point to 95 basis points, which leaves the spread in a tight range that has held since the start of May. This leaves the spread near levels from late 2007 and it implies the presence of growth concerns among bond traders. This spread remains well below last year's level of 150.

High-yield spreads contracted for the second week in a row with the high yield-10yr spread decreasing 14 basis points to 590. This spread marked a fresh year-to-date low during the past week and is now back to levels from late 2015. However, the high yield-10yr spread remains above last year's level of 429. 

Investment grade spreads ticked down four basis points to 123 after holding steady last week. This spread is at levels from early May, but above last year's mark of 107.

 

The spread between the German Bund and the 10-yr Note saw its fifth decline in the past six weeks, falling four basis points to -173. This spread was at -158 basis points last year.

Inflation expectations climbed for the first week in the past month as the five-year, five-year forward breakeven rate increased four basis points to 1.64%. The rate remains below this year's high of 1.83% and below last year's level of 2.05%.


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