Member Services Desk: WEEKLY MARKET UPDATE
Economy and Markets
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The COVID -19, otherwise known as the Coronavirus has continued to overshadow the markets. Equity markets worldwide are continuing to sell off with no bottom in sight. Treasury securities continue to rally to all-time low yields as investors leave the equity market and seek safe haven investments. The countries that have a large amount of cases are still finding ways to both efficiently test citizens and contain it. Upcoming data releases should provide a better view how the virus is impacting supply chains and the U.S economy. This week we have various data points measuring prices, international trade, consumer/business sentiment, and the labor market.
NFIB Small Business Optimism: The virus scare is unlikely to impact small business optimism in a major way until March, given the majority of business and consumer sentiment indicators fared relatively well in February. As the situation worsens, many service-sector industries, particularly in leisure and hospitality, where a lot of small companies are concentrated, will be affected.
CPI MoM: The Falling energy prices will weigh on headline CPI in February, pushing it below core. Growth in CPI ex. food and energy will likely hold steady before it starts showing an impact from increased demand and supply shortages of certain products as a result of coronavirus disruptions.
Initial Jobless Claims: Layoffs will likely remain low in the near term, but risks are rising. The pace of hiring could deteriorate sharply in the coming months.
Household Change in Net Worth: The Flow of Funds Accounts for the fourth quarter will reflect the sharp increase in equities. The year-end market rally likely resulted in a $4.0 trillion increase in net worth. The market rout on the back of the coronavirus scare will erase this gain in the first quarter of this year.
Import Price Index MoM: The weaker dollar at the end of last year should continue to filter into a modest increase in ex-petroleum import prices. Dollar moves aside, the global spread of the coronavirus is a simultaneous supply and demand shock that will ultimately weigh on pricing.
U. of Mich. Sentiment: Consumer sentiment is likely to post a steep drop as the stock market selloff will significantly weigh on survey respondents’ assessment of their financial situation.
FED Speaking Events: There are no scheduled FED speaking engagements scheduled for the upcoming week.
Key Market Trends
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CHART 1 UPPER LEFT
Source: Bloomberg. The Fed Funds futures curve, as of noon Friday, prices for rates near 20 bp (RHS) at year-end! The Fed responded to the C-virus threat with a 50bp surprise (or not) cut this past week. The market has priced for even more cuts ahead.
CHART 2 UPPER RIGHT
Source: Bloomberg. The full UST curve “flight-to-quality bull-steepened” even further this week. The 5-year and longer sector reached all-time record low yields. For those considering term funding, levels have clearly become more appealing. There is ongoing global investor demand for U.S. fixed income product. Moreover, recent technical hedging flows from insurance, pension, and mortgage companies have continued to push rates lower in an almost virtuous circle dynamic. Flows out of equity and corporate bond funds have sought refuge in UST’s.
CHART 3 LOWER LEFT
Source: Bloomberg. The Bloomberg U.S. Financial Conditions Index has undergone a pummeling in the past two weeks and resides at -2 (RHS) as of midday Friday. This index tracks the overall level of stress in the availability and cost of credit; a negative value indicates tightening conditions. The index is comprised of market measures of credit spreads and volatility, all of which deteriorated on the week. Credit spreads and volatility notably widened/rose this past week. For perspective, however, conditions are nowhere near the financial crisis period of 2008.
CHART 4 LOWER RIGHT
Source: Bloomberg. Money Market Fund AUM has spiked in the past week, as funds leaving stocks and/corporate bonds are getting parked in short-term assets.
FHLBNY Advance Rates
Front- End Rates
Short-end Advance rates dropped markedly lower week-over-week, with a decrease of 50-75 bp. The C-virus theme and the Fed cut worked its way into the short- end, and further Fed cuts have been aggressively priced into the curve, per color on the previous slide. Investor demand remained strong for short paper, as evidenced by further money market fund asset growth this past week. A seasonal decline in T-bill supply also bodes well for demand for short paper and helped T- bills stage a huge rally the past week. Our advance rates, in turn, declined on the these dynamics.
Medium and longer-term Advance rates were, as of mid-Friday, 30 to 50 bps lower week-over-week. The 1-year led the move, as that portion of the curve benefited from even more aggressive market pricing of future Fed cuts. 5-year and longer trades at or near all-time record lows. It may be opportune timing for those in need of liability extension or whom possess CLP capacity. Indeed, the desk saw brisk and sizable activity in the 3 to 10-year zone the past week. Note that our charts below reflect Thursday close levels.
Our Advance curve remains relatively flat but prior inversion is gone, at least for the moment. As of mid-Friday, the 1-year/3-year slope was ~+7bp. The 1-year/5- year was ~+8 bps. The 1 to 2-year space currently resides as the “sweet spot” on the term curve.
The upcoming week brings 3/10/30y UST supply. The supply might prove a test to how much flight-to-quality demand remains in the market. As of Friday afternoon, rates had backed up from the day’s earlier and lower levels, as profit-taking appeared to set in. Attention in the week ahead will continue to be paid to the Coronavirus and the question of whether or not it has been brought under control.
**FSA Feature: You can forward start an advance out to 1-year, and the yield curve premium for starts in the next month or so is, if any, negligible or even negative at the moment. Please call the desk to discuss the uses of a forward start advance.
**Member Idea Alert: If rates again approach multi-year lows, it can be an opportune time to consider extension trades and/or unwinds of higher coupon borrowings to enter into new lower coupon advances and improve headline NIM numbers. Please call the desk to review your positions.
If you are a member and have any questions on the MSD Weekly, we are here to help.
Please contact a Relationship Manager at (212) 441-6700 or a Member Services Representative at
MSD Weekly Questions
If you are a member and have any questions on MSD Weekly, we are here to help.
Please contact a Relationship Manager at (212) 441-6700 or a Member Services Representative at 1-800-546-5101, option 1.
Note: It is not the role of the FHLBNY to provide advice on which advances, if any, should be submitted for modification. Therefore, entire portfolios cannot be submitted for analysis, and each modification request must be identified individually by an advance number.
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