Fixed income markets relatively quiet
Government bond yields and the yield curve were mostly flat last week. The 2-Year and 30-Year U.S. Treasury bond each fell by ~1 basis point (bps) for the week, and the 10-Year fell by 2 bps. As government yields remain range-bound, our expectations for the future are unchanged. The Fed is likely to keep yield curve control as an unused policy in their toolbox for now.
Spreads for investment-grade (IG) credit and high-yield (HY) credit spreads fell again, tighter by 2 bps and 40 bps, respectively.
Fed balance sheet expands by $39 billion
The Federal Reserve’s balance sheet expanded over the past week, the first such expansion in a month, by around $39 billion (+0.5%). Main street lending facility was unchanged, while the Corporate Credit Facility expanded by ~$8 billion (+3.5%).
The New York Fed received no bids on their overnight repo facility on July 17, 2020, meaning that inter-bank lending is functioning well or that most banks are meeting reserve ratio requirements without resorting to the Fed. This should come as no surprise, as the banks that have already reported earnings disclosed massive capital reserves.
Dallas Federal Reserve President Kaplan said that he is open to overshooting the inflation target, stating that “we should keep rates lower for longer.”
What to watch next
Earnings season continues
Bank earnings were largely positive last week as firms posted record trading and investment banking revenues. Earnings continue this week with tech companies starting to report. Microsoft (MSFT), which makes up 6% of the S&P 500, reports on Wednesday.
Year-to-date strong performers like MSFT and other tech and growth-oriented names tend to have higher earnings expectations than the broader market. This week, we’ll begin to see if they can deliver on those expectations. If they don’t, due to their weight in passive indices, it may have implications on value vs. growth performance going forward.
This week’s initial jobless claims out on Thursday are expected to remain steady at approximately 1.3 million. While weekly initial claims are significantly down from their peak in late March, the still-historically-high weekly figure points to a somewhat tentative recovery. That said, overall jobs and economic trends should remain more important than week-to-week figures.
Eurozone consumer confidence
The European Commission is expected to release its consumer confidence survey for July on Thursday. Confidence climbed sharply in June and consensus is for a further increase over last month, as the number of COVID-19 cases continues to decline across Europe.
On Friday, Markit Manufacturing and Services PMIs are expected to come in over 50%, indicating improving sentiment on recovery.