Stocks rise to end the week ahead of tomorrow’s employment data. The S&P and the DJIA both add 0.4% to 2,066 and 17,763 respectively on a day that saw trading volumes 15% below the three month average. Treasury yields rise, with the U.S. 10 year gaining 5 bp to 1.92%. Markets had a mixed week leading up to tomorrow’s payrolls report, which will be closely watched by the Fed and investors. Data today showed that jobless claims fell more than forecast, and factory output topped estimates. In addition, the U.S. was able to reach a deal with Iran, hopefully ending conflict regarding their nuclear program. Both of these factors contributed to an optimistic tone in equities. For tomorrow, economists expect the unemployment rate to hold at 5.5%, and no notable change to wage growth. Investors are skeptical heading into nervous season, as the number of put options outstanding outnumbers call options by the widest margin since 2008. Put options become valuable to an investor when the value of the underlying security falls in price, and therefore they represent a bearish view on the market.
The market for Fed funds futures expects interest rates to rise in November, as investors have pushed back their expectations from two weeks ago when markets showed the highest probability for a rate hike in September. This is due to the fact that some analysts expect weaker than estimated data tomorrow due to the soft data that has come out in the recent weeks since the last FOMC meeting. If the report tomorrow comes in as expected, traders are likely to pull back these expectations to September or sooner.
The Australian dollar has depreciated 12% against the dollar in the last 6 months to $0.76. The slowdown in China is a significant factor in this movement, as less orders for industrial commodities have hurt Australia’s outlook. In particular, China has shown much smaller demand for Australia’s biggest export, iron ore. In addition, the possibility of an interest rate cut has further depreciated the currency. The 10 year Australian yield is currently 2.35%, only 40 bp higher than its U.S. counterpart as opposed to the 100 bp spread that was evident 6 months ago. This reflects that investors expect that Australia will become a less attractive place to put money due to lower yields, especially considering rates are likely to increase in the United States this year.
Unconfirmed reports show that the Department of Justice is pursuing a guilty plea from Citi with regards to their participation in price fixing in currency markets. Since 2008, banks have rarely been convicted of crimes in the U.S. and normally they simply pay a fine while admitting to no wrongdoing. In support of this tactic, banks argue that the negative ramifications and disruptions to their business could hurt the global economy. The rumors say that the fine for all banks allegedly involved in this scandal will be in the neighborhood of $1B. These banks include UBS, Barclay’s, RBS, and JP Morgan. A guilty plea would potentially limit Citi’s ability to operate in certain markets. The alleged wrongdoing occurred in currency markets, and it’s important to note that Citi has the largest presence in currency trading markets.