Stocks rise as FOMC minutes lead to ambiguity. The S&P 500 rises 0.27% to 2,081 while the Dow increases 0.15% to 17,902. The equity gains come in spite of increased pressure on energy stocks as Brent and WTI fall to $55.55 and $50.93 as inventories increase more than expected and Saudi Arabia announces record production. The dollar index increases 0.25% and the euro depreciates to $1.0785 as gold falls. The FOMC minutes showed that “several” Fed officials wanted June interest rate increases while “a couple” prefer to wait until 2016. Analysts at Barclay’s estimate that sever refers to three or four and a couple refers to two. Analysts also deduce that the remaining Fed officials favor a rate hike between September and December. Jerome Powell says that the Fed risks doing more damage to the economy by raising rates too early, as opposed to raising rates too late and having to control inflation. Powell is a voting member who typically has neutral views. Following the release of the minutes, the two year and ten year yields both rise 1 bp to 0.54 and 1.91%. The trending demand for high quality government bonds in Europe continues with the German bund falling to 0.16% along with a negative rate issuance from Switzerland.
The FOMC minutes show that officials noted strong labor market improvement in making their observations on March 17th and 18th. It’s possible that following recent developments in the labor report, officials may wait for data to pick up its pace again before raising rates. William Dudley expresses concern that if rates are raised too soon and subsequently need to be cut again, it could hurt the credibility of the Fed going forward. In the minutes, officials stated that inflation could hit the medium term target of 2% as a result of labor market improvements, energy prices stabilizing, and the dollar stabilizing. In the weeks since the minutes were recorded, labor market data has deteriorated and the dollar has resumed its appreciation. It’s possible that these two factors could convince the Fed to be extra cautious when raising rates. Appreciation of the dollar diminishes inflation as it keeps import costs cheap. It’s also important to note that estimates for full/ optimal employment were decreased to 5 – 5.2%. The unemployment rate currently stands at 5.5%.
Today’s bond issuances in Europe reflect the unprecented conditions that markets are facing. First, Switzerland issued a 10 year bond with a negative yield. So far short term government bond yields have reached negative levels in Germany, Austria, Finland and Spain however 10 years is the longest maturity to reach negative yields so far. It’s interesting that Spanish yields have entered negative territory, as Spain needed an international loan to support their banking industry less than three years ago. These negative levels reflect that investors have high demand for high quality sovereign bonds and are holding them with the expectation that prices may continue to rise. Also, Mexico issued a one hundred year bond in Europe at a 4.2% coupon rate. The emerging market country also has an outstanding dollar bond issued in 2010 that yields 5.3%. Today’s issuance is the first ever century bond issuance for an emerging market country in Europe. This issuance reflects that borrowers have an advantage in current market dynamics, as investors are willing to make concessions to terms in order to receive more yield. Analysts expect more emerging governments and corporations to issue euro denominated bonds going forward as a result of lower yields and as an alternative to the dollar, the strength of which makes it more expensive for emerging markets to make payments.