US stocks fall to end the week despite encouraging data. The S&P500 fell 1.1% to 1,921 and the Dow Jones fell 1% to 16,346. Economic data today showed that December non farm payrolls increased 292k and the previous two months were revised upward by a total of 50k. The payrolls number was far above expectations which called for a 200k increase. The unemployment rate held steady at 5.0%. Equities initially rose following the data however sold off as the weekend drew closer. In the absence of international market turmoil this data would be conducive to a second Fed rate hike, however the global financial landscape right now makes it a more difficult decision for the Fed. Stocks fell today in spite of calm market conditions in China. The dollar index increased modestly to 98.48. The US ten year yield fell 4 basis points to 2.12% reflecting that traders are not overly concerned of a second rate hike. The euro fell 0.2% to $1.0917, and the Japanese yen rose 0.1% to Y117.53. The yen gained 2% against the dollar this week as investors sought haven assets. Similarly gold rose 3.9% to start 2016. Brent oil fell 0.6% to $33.55 after hitting a low of $32.16 as prices for oil fell 10% this week. It is clear that developments in China drove markets this week, and this trend will likely continue in 2016.
China faces a tough predicament heading into 2016. The country has been successful in improving welfare of rural previously impoverished citizens by encouraging movement and employment in more urban industrialized areas. This has resulted in high levels of debt as well as oversized and unproductive state companies. Equity markets around the world have sold off as investors feel there is little possibility for reforming these structural issues. The country is trying to transition from a high growth model to a more stable sufficient economy. The threats of low growth, falling productivity, and flat household wealth loom over the country. Analysts fear of a “hard landing” in which growth drops off dramatically, debts go unpaid, consumer confidence falls, and unemployment rises. China instead may opt to prop up growth through funneling money to large state run companies, investing in unneeded infrastructure projects. Although these tactics may help growth, it would prevent the productive/ efficient channeling of resources and investments. The economy needs to shift towards consumers and small businesses, a reality which has been acknowledged by the government. However the administration has not been able to accomplish this due to conflicting goals. The leaders have committed to doubling income per capita by the year 2020, and in order for that to happen a growth rate of at least 6.5% will be required from now until then. The stimulus needed to reach that goal offsets any restructuring efforts. In addition high levels of pollution are also closely associated with economic growth. China is unable to achieve growth without high industrial pollution especially in urban areas, and constituents are not happy about that. Unprofitable oversized state run companies control the industrial sector and wield considerable political influence. It is therefore unlikely that the economy’s reliance on these firms will be changed, even though they are unprofitable and carry high levels of debt. Reliance on these companies shifts attention and economic focus away from entrepreneurs and innovators which the government is trying to foster.
Defending the franc from depreciation has been expensive for the Swiss National Bank. The central bank reported a SFr23bn ($23.05bn) loss in 2015, the largest on record since the the central bank was established. The SNB has been buying bonds and active in the foreign exchange markets in order to keep the franc from excessive appreciation. The SNB had maintained a peg of SFr1.20 against the euro at the start of the year, however this was abandoned early in 2015 and the franc appreciated dramatically as a result. As a result of the change in relative value the value of foreign reserves held at the SNB was lowered. The SNB is under pressure from Swiss companies who scrutinize the decision to abandon the peg, as it makes their products more expensive for foreigners. Appreciation of the franc has intensified these problems in recent weeks, as the franc is seen as a haven asset in times of market turbulence.