William Blair mpany : Weekly Market Update

Easy does it in 2016. Managing causes and effects without overreacting will be the key for global and domestic economies as they adapt to the inevitable rollback of accommodative monetary policy. Seeking the new normal in 2016 include dynamics such as preemptive cooling of inflated asset classes in the United States, growing inflation in the eurozone with limited permanent impact from (and capacity for) debt buying, unpegging central government attempts to control market equilibria in China, or OPEC member nations reorganizing to sustain oil prices well below $80. Major economies and emerging markets are responding to significant changes, and in doing so, creating side effects for the economies around them. Each central bank is concerned with its ability to intervene when destabilizing volatility or geopolitical events arise. Fostering growth and demand remain the goals of 2016, from which wage and price inflation, full employment, capital investment, and stability follow.

Reports and events that bear on growth and demand can move markets. This week was no exception when energy took center stage following statements at the World Economic Forum in Davos. ECB President Mario Draghi warned that downside risks are increasing in the current market, going further to say 'it will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in March.' Anticipating a return to stimulus buying, the 'risk-on' trade ensued in equity markets. Earlier in the week, the combination of oil having earlier fallen to a five-year low of $26 from reports of slowed manufacturing in China (demand down) with Iran's aggressive production to regain its market share after sanctions were lifted on Monday (supply up) had lined up a run of speculative short selling. Draghi's statements (though not directed at the energy sector) resulted in short covering that drove oil back up to $32, the fastest price increase (20% in one day) since 2009. The Dow Jones and Shanghai indices rebounded to 16,093 and 2,916, respectively, each finishing its first week in 2016 on higher ground than where it opened, but remaining down year-to-date by 6.2% and 11.5%, respectively.

The FOMC will meet for two days this week, with its next meeting to occur in March. Consensus indicates a zero probability of a January increase and a 26% probability of a March increase-the first of what many expect will be four increases in 2016. Also of interest will be the Fed's assessment of the December 2015 increase. While December non-farm payroll (NFP) reported (on January 8) at a much higher 292,000 than the 202,000 expected, there was no corresponding wage pressure-the component being watched for progress toward its 2% inflation target. While the Beige Book confirms weakness in the manufacturing sector, the Fed acknowledges that durable production is now less than 10% of what has become an increasingly service-based economy. Most of the domestic GDP growth came from auto sales, new multifamily housing construction, and technology. Actual wage growth must occur before more of the sidelined workforce engages, which the Fed believes will occur when unemployment improves to 4.5%. The flattening of the yield curve in response to the December hike has not adversely affected long-term rates and therefore mortgage affordability. Single family housing construction may rise as rent inflation (currently a driver in the strong multifamily sector) advances the economics of homeownership as a relatively more affordable alternative.

Absolute yield stability in the municipal market over the last two weeks (including the $8 billion high-supply week ending January 15) has been supported by high January redemption cash, the January yield curve roll-effect, and flight to safety. Widening corporate spreads (related to generally weaker equity markets responding to slow growth in China and deeper consolidation in the U.S. energy sector) have been attracting attention away from the municipal sector with higher yields. Following the recent run of low municipal ratios, municipal yields have been unable to mirror the early January advances in the Treasury market (nearly 20 basis points at five years and longer). Rising yield ratios (the 30-year at 97.5% versus 91.8% at the start of January) supported buyer retention and distance from volatility in oil and equities, until this recent Friday, when the municipal market adjusted upward by roughly 5 basis points. The 10- and 30-year AAA MMD closed at 1.75% and 2.76%, respectively, unchanged and up from a respective 1.75% and 2.70% last week.

Economic data confirms slower-than-expected inflation, but with continued strength in the housing sector. The Consumer Price Index (CPI) for December fell 0.1% month-over-month, just below estimates for the measure to be unchanged. Year-over-year, the CPI posted a 0.7% increase. Core CPI for December rose 0.1% month-over-month, just below expectations for an increase of 0.2%. Core CPI rose 2.1% year-over-year, which is line with the Federal Reserve's inflation target. Housing data was mixed with starts at 1.149 million (below expectations) and permits at 1.232 million (above expectations). Weekly jobless claims rose sharply to 293,000, well above the consensus estimate of 275,000 but still below the key 300,000 level. The four-week moving average of jobless claims rose to 285,000 and has been trending steadily up since November 2015.

The Bond Buyer 30-day visible supply is at $8.5 billion, with $5.4 billion ($4 billion negotiated) expected to come this week. Data releases include PMI, consumer confidence, new home sales, mortgage applications, weekly jobless claims, durable goods orders, GDP, personal consumption, and University of Michigan consumer sentiment. In addition, the Federal Open Market Committee has a two-day meeting starting Tuesday, with a policy statement and rate decision to be announced on Wednesday.

Reference Sources: The Bond Buyer, CNBC, Reuters, Bloomberg, The Wall Street Journal, SIFMA, Municipal Market Analytics, and Municipal Market Data.

	1/22/2016	Change*
SIFMA	0.01%	0
LIBOR	0.43%	0
AAA Municipal Market Data Rates
5-Yr.	1.05%	-2
10-Yr.	1.75%	0
20-Yr.	2.47%	1
30-Yr.	2.76%	6
U.S. Treasury Rates
10-Yr.	2.07%	4
30-Yr.	2.83%	2
Municipal to Treasury Yield Ratios
10-Yr.	84.5%	-1.7
30-Yr.	97.5%	1.4
Dow Jones	16,094	105
S&P	1,907	27

*Change since 1/15/2016
Sources: Bloomberg Information Systems and Thomson Financial

View historical data

The information in this material was prepared by non-research personnel of William Blair & Company, L.L.C. The material is not a research report and was not prepared by the research department of the firm. William Blair does not publish fixed income research. The views expressed are those of the Debt Capital Markets Group and may differ from the views of others at William Blair, including William Blair Research or William Blair Investment Management. William Blair's trading desk may deal as principal in or act as a market maker for issuers discussed herein. The accompanying information was obtained from sources which William Blair believes to be reliable but does not guarantee its accuracy or completeness. The material has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated.