Tuesday April 28: Stocks Rise Ahead of Fed

Stocks rise ahead of Fed meetings and GDP data on Wednesday. The S&P adds 0.3% to 2,114 and the Dow gains 0.4% to 18,110. Contributing to the positive tone, Merck improved its outlook for profits, IBM increased the dividend, and Apple posts results from a very strong 1Q. In recent days market movements have been largely driven by earnings results ahead of the Fed and GDP data on Wednesday. A poll taken by Bloomberg shows that 73% of the surveyed economists expect rates will rise in September. At the last FOMC meeting the Fed wanted to see improvement in the labor market and more confidence that inflation was moving toward its 2% target. Data today showed that consumer confidence missed expectations, and this could further manifest itself in 2Q retail sales which many analysts had expected to rebound after a weak 1Q. As a result the dollar falls 0.6% as gold gains. The euro rises to $1.0974. Treasury yields rise ahead of tomorrow’s FOMC meeting, with the 10 year rising 7bp to 1.99%. In Europe, Greek stocks and bonds continue momentum from yesterday when Yanis Varoufakis was removed from negotiation talks.

Alexis Tsipras plans to hold a referendum of talks with creditors don’t go well. If creditors demand strict austerity measures at all costs, he is willing to let his constituents decide. A referendum would mean weeks of uncertainty, and as a result some eurozone officials don’t consider this to be a realistic option. The country is currently struggling to pay pensions due by the end of this month, however Tsipras says that the country will not default on its €750M payment to the IMF in May. Greece will submit new compromises and structural reforms later this week.

The PBoC is planning a program that intends to target and stimulate local government debt. Issuance among local governments in the country has increased 2008, however these regions have seen low growth and are now struggling. The central bank wants to push yields down in order for these regions to continue infrastructure spending in support of the economy. This month, two Chinese provinces hae had to postpone bond auctions due to a lack of investor demand. PBoC wants to increase this demand, and they plan to do this by allowing banks and other commercial borrwers to use local government bonds as collateral for central bank loans. This would make holding local government debt more attractive. This form of stimulus is aimed to bring down pressure on local governments and reduce risks in the country’s economy.

Financial markets are underestimating the Fed. The market for Fed funds futures reflects that traders expect interest rates to be half of what the Fed projects in the dot plot. Fed funds futures for December with a price of 99.665 show that traders expect rates to be 0.335% at the end of the year versus the dot plot expectation of 0.625%. Similarly, the market for Eurodollar futures show that many traders are positioned to profit if expected yields fall after tomorrow’s meeting going into next week after the labor report. Investors are currently in the largest net long position in eurodollars since the Taper tantrum in 2013. These positions will appreciate in value if the implied yield falls.

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Tuesday April 28: Stocks Rise Ahead of Fed

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