Thursday September 3

Stocks rise marginally ahead of tomorrow’s important jobs report. The S&P500 and the Dow Jones both added 0.1% to 1,951 and 16,374 respectively. Economic data today showed that the ISM manufacturing index remained at elevated levels, beating expectations with a reading of 59.0. Investors will pay close attention to the jobs report tomorrow, as it is a major piece of the puzzle that the Fed will look at when deciding what to do with interest rates later this month. It is expected that 220,000 jobs were added in August and the unemployment rate is expected to decline to 5.2%. With markets in China closed today and tomorrow investors are focusing on monetary policy as opposed to declines in China’s stock market. In Europe Mario Draghi appears open to the idea of further easing, and he decided to keep interest rates unchanged at the current low level. According to Draghi ECB economists lowered projections for growth and inflation in the region. Stocks rise as bond yields and the euro fall. The bund yield fell 7 basis points to 0.73%. The euro lost 1% against the dollar to $1.1133. The 10 year yield fell 2 basis points to 2.16% as investors await tomorrow’s report.

Traders and investors prepare for tomorrow’s August jobs report. Janet Yellen is paying close attention to the labor market when deciding whether or not to raise interest rates. If the unemployment rate continues to trend downwards and enough jobs were added to meet or exceed expectations, hawkish members of the Fed may want to raise interest rates as soon as this month. Harm Bandholz of UniCredit believes that the risk of a downside surprise is far greater than the risk of an upside surprise. Without a relatively strong jobs number, analysts expect that is unlikely for the Fed to raise rates this month.
The Swedish krona appreciates after the Riksbank holds interest rates and has a positive economic outlook for the country. The appreciation against the euro was driven by monetary policy factors on both sides of the equation. The euro experienced downward pressure after dovish comments by Mario Draghi, and the krona experienced upward pressure after the Riksbank’s announcements when investors may have been pricing in further interest rate cuts. As a result, the krona rose 0.6% against the euro to SKr9.3981 (krona per euro). According to the Riksbank, the economy “is strengthening and inflation is showing a clear upward trend.” The statement was not entirely hawkish as it left the door open for further easing if needed and it downgraded the inflation forecast. In addition the interest rate forecast was not changed. This makes it seem as if the market was pricing in further easing or a worse economic outlook.
The Bank for International Settlements publishes a report that suggests that some foreign companies are engaging in a carry trade, borrowing for financial as opposed to commercial purposes. The report states that companies such as manufacturers have been borrowing in dollars at low rates, and investing at higher rates within the domestic economy. This is a form of shadow banking, as non-financial firms are channeling capital into the country. The total value of emerging market bonds denominated in US dollars is $1.7tn, which is larger than the US high yield market.
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Thursday September 3

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