Updated: 08-24-2016

The stock market spent the past week inside a narrow range as limited participation kept the key indices just below record levels. The S&P 500 settled flat while the Nasdaq (+0.1%) outperformed slightly. Investor participation was well below average for the second week in a row. Accordingly, fewer than 760 million shares changed hands at the NYSE floor, which was in line with the previous week's tally. 

Last week's economic calendar was fairly light, but participants did receive some inflation and housing data for July. The Consumer Price Index was unchanged in July, which matched the Briefing.com consensus. Core CPI; however, ticked up 0.1% month-over-month, which was just shy of expectations (Briefing.com consensus +0.2%). Separately, July Housing Starts (1,211,000; Briefing.com consensus 1,167,000) beat expectations while Building Permits (1,152,000) were essentially in line with estimates (Briefing.com consensus 1,153,000). Also of note, July Industrial Production (+0.7%; Briefing.com consensus 0.3%) surprised to the upside thanks to rising activity in all major industry groups.

The past few weeks saw a significant shift in rate hike expectations. A string of weak data and dovish commentary from Federal Reserve officials had the fed funds futures market predicting a May rate hike as recently as two weeks ago; however, the market is once again showing a 50.0%+ probability of a hike in December 2016 after July FOMC minutes and last week's remarks from Fed officials took aim at complacency exhibited by the market.

08/19/2016 08/12/2016 Change
Fed Fund Futures Rate Prediction Dec. 2016 (51.0%) May 2017 (51.9%) ---
10yr Treasury - 2yr Treasury 82 bps 80 bps 2 bps
High Yield - 10yr Treasury 520 bps 537 bps -17 bps
Corp A - 10 yr Treasury 118 bps 123 bps  -5 bp
10 yr Bund - 10 yr Treasury -174 bps -168 bps -6 bps
5yr, 5yr Forward Inflation Breakeven 1.62% 1.59% 3 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury note rose two basis points to 82. This spread has bounced between 76 and 91 basis points for the past five weeks and it remains in the lower half of that range. Persistent growth concerns have kept the spread well below last year's level of 145.

High-yield spreads saw their third significant drop after experiencing a 23-basis point jump four weeks ago. The high-yield-10yr spread fell 17 basis points to 520. This followed a 25-basis point decline during the previous two weeks. The decline pressured the spread to a new low for the year and below last year's level of 535. Keep in mind that last year's level corresponds with the early stages of a sharp decline in the price of crude oil.

Investment grade spreads saw a six-basis point decline to 118 after holding little changed for two weeks. One year ago, this spread was at 136.


The spread between the German Bund and the 10-yr Note decreased six basis points to -174, erasing the bulk of a seven-basis point increase from the previous week. The spread has maintained a narrow range in recent weeks, sitting well below last year's level of -149.

Inflation expectations, as measured by the five-year, five-year forward breakeven rate, saw a slight increase after retreating from a three-month high. The 5y5y forward rate increased three basis points to 1.62% after falling eight basis points one week ago. The rate is well below last year's level of 1.96%, hovering 22 basis points above this year's low.

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