Investor sentiment dampened further last week, with market participants pointing to escalating trade tensions, signs of a looming slowdown in US retail growth, and cracks in the credit market as reasons for the decline. Equities turned negative again for the year and all indexes dropped more than 3%, largely led by disappointing earnings from retail giant Target and a significant drop in shares of trade-sensitive tech companies. Oil prices also weighed on equities, with Brent tumbling 12% last week and WTI crude sliding towards $50 a barrel. The sharp volatility drove investors towards safe havens in US Treasuries, pushing the 10 year Treasury yield as low as 3.04% last week, and caused the market to reprice in less than two interest rate hikes from the Fed in 2019.

Credit Spreads

• The credit market continued to add to investor concern last week, exacerbating the worries about GE’s downgraded debt from the week prior. Investment grade bond spreads widened the most in nearly two years, US junk bond premiums rose to a 30-month high, and the index that measures default protection on investment grade bonds rose to its highest since November 2016. With total corporate debt nearly doubling to $9.1 trillion in the last ten years, widening credit spreads, coupled with the global concern of rising interest rates, have spooked investors to reassess the impact on corporate profit margins and overall future growth.

Economic Data

• Last week's economic data showed that durable goods orders slumped in October, a sign that investment is likely cooling despite above-trend growth in consumer demand and indications that the economy is hitting capacity constraints. The University of Michigan sentiment November survey revealed that Americans’ feelings about the economy have cooled slightly, led by a measure of buying conditions for long-lasting goods (cars, homes, etc) declining to a three-month low. The Markit Manufacturing PMI fell to its lowest level in three months during November, with a number of firms citing capacity constraints and stretched supply chains as main headwinds to output growth.

CMBS

• Two conduit CMBS deals priced last week, with both benchmark classes pricing slightly inside of early guidance.The $736MM deal from Citigroup and Cantor (CGCMT C6) priced early in the week with its AAA class pricing at S+95 and the $770MM from Credit Suisse and Natixis (CSAIL C14) priced shortly thereafter in line with Citi/Cantor’s deal. Another $650MM deal from UBS, Societe Generale, CCRE, Rialto, and Natixis (UBSCM C14) is expected to price this week.

Agency CMBS

• Last week was quiet in the agency CMBS deal space, but mortgage spreads leaked out even further given the macro market volatility and shortened holiday week. Coming up, Freddie Mac is expected to launch two deals this week, including a standard $1.5B 10 year fixed (K85) and a $725MM 7 year floating SASB deal.

The Week Ahead

Fed

• Given the recent shift in tone from various Fed officials, investors will be focused on any further hints from Fedspeak throughout the week. On Tuesday, Fed Vice Chairman Clarida delivers a keynote at the Clearing House Conference, while Fed Chair Powell addresses the Economic Club of New York the day after and may be expected to comment on recent chatter about a possible pause in the Fed’s hiking cycle. Minutes of the November FOMC meeting are released on Thursday, which may reveal the breadth of any differing policy opinions and expectations for monetary policy in 2019.

G-20 Summit

• Trade will also dominate headlines this week in the lead up to the start of the G-20 summit in Argentina on Friday, with a special focus on the meeting between President Trump and President Xi. While each side has said that the other wants to reach an agreement on trade, recent hard line rhetoric has rattled global markets and fostered a dimmer outlook on global growth. Another meeting that is expected to make headlines will be the potential meeting between Turkey’s Erdogan and Saudi Crown Prince Mohammed bin Salman.

Economic Data

• On the data front, the Fed’s favored inflation gauges are released today, where the PCE index is expected to edge up to 2.1% month over month, while personal spending and income are estimated to remain flat to prior month. The second reading of third quarter GDP growth is also released on Wednesday, which is expected to edge up slightly to 3.6% annualized. Outside of economic releases, the Treasury Department is expected to sell over $200B in auctions this week, concentrated in $40B of 5 year notes.