U.S. equities fall on soft economic data. The S&P 500 loses 0.4% to 2,059 while the Dow loses 0.44% to 17,698. Downward moves in stocks push bond yields down, with the 10 year falling 7 bp to 1.86%. Only 189,000 jobs were added versus the estimated 225,000 in the month of March. In addition, the ISM manufacturing index fell for the fifth straight month, reflecting that slow overseas growth and cutbacks in the oil industry are adversely affecting industry in the United States. The dollar depreciates slightly, as gold and oil both rise. In the eurozone, the March PMI was stronger than expected, which appreciates the euro 0.3% against the dollar to $1.076. The ECB’s quantitative easing further depresses German bund yields to 0.15%.
Investors show faith in the Fed’s attempts to spur inflation, reflected by high demand for Treasury Inflation Protected Securities, or TIPS bonds. These bonds are not actively traded, so movements are best shown in funds that track the product. Last quarter, ETFs that follow TIPS bonds experienced the highest quarterly inflows in three years. The price support in oil markets leads to the idea that inflation will pick up again, especially considering all the monetary stimulus in the global economy. In the most recent auction on March 19, TIPS bonds sold at the lowest yield in two years. In addition, the bid/cover of 2.43 and a dealer takedown of only 23% reflect high demand for securities that protect investors in the event of higher inflation.
The Greek government submits new reform measures to eurozone officials, as Greek officials have optimism that they can strike a deal as early as next week. However the contents of the submission show persistent gaps between their wants and creditor demands. The proposed plan relies on prevention of tax evasion and fraud to raise revenues. In particular, they hope to gain 875M euros from auditing offshore bank accounts, and 600M euros from cracking down on a lottery scheme. In this way, the proposed plan does not address, and in some ways reverses, the key concerns of Greece’s creditors. Creditors, such as Germany, have stated that they expect Greece to reform its pension system and labor market in order to cut government spending. In contrast, the plan Greece submitted today includes 1.1B euros of extra spending to give low income public employees covered by the pension an extra month’s payment. In addition, it plans to suspend cuts to state pensions that were made in previous reform proposals. Finally, the plan included an increase to the minimum wage, which directly contradicts the demands of Germany and other creditors.
Ukraine faces a potential financial crisis as it aims to restructure debt with creditors. Blackstone is leading an advisory effort to a committee of international holders of Ukranian bonds. Various state-owned banks in the Ukraine have already accepted a three month maturity extension. Ukraine’s issuances are subject to international law, and there is no collective agreement clause. The Russia National Reserve Fund owns one issuance in its entirety, and can call for early repayment if Ukraine’s debt exceeds 60% of GDP. Russia has not exercised this option, and analysts expect them to wait until maturity when Ukraine cannot pay. When Ukraine is not able to meet principal payments, this will suspend assistance from the IMF, who is not allowed to lend to countries who miss debt payments. In this situation, Russia has economic leverage over Ukraine that may affect its political and military objectives.