Thursday January 14

Stocks rise following Wednesday’s selloff as oil prices rebound modestly. The S&P500 rose 1.7% 1,921 while the Dow Jones rose 1.4% to 16,379. Gains in equities today were driven in part by sources of cautious optimism in China as the PBoC moderately strengthened the daily fix of the renminbi. This encourages positive sentiment as it is a small sign that depreciation in the currency (and the adverse consequences) is not as bad as previously believed. The Shanghai Composite as a result rose 2%. Brent prices today rose 2.4% to $31.03 and WTI rose 2% to $31.09. The energy sector outperformed the broader market today as energy companies benefited from the rebound in prices. With companies reporting 4Q earnings over the next few weeks, that will likely provide markets with some direction and clarity in the months ahead. The dollar gained against the yen 0.35% to Y118.03 and gold fell as investors shifted out of haven assets. Similarly the 10 year Treasury yield rose 3 basis points to 2.09%.

In a speech at the Economic Club of Memphis FOMC member James Bullard of the St. Louis Fed expresses concerns over the inflation outlook. According to Bullard while low oil and energy prices may be a net positive for the US in the long run it may mean that the 2% inflation target may remain elusive. Bullard is a hawkish member of the Fed, which indicates that even he is concerned over the future of inflation as it relates to the path of interest rates. His concern comes after last week when the December Minutes reflected that FOMC members showed “significant concern” about inflation when ultimately deciding to raise interest rates. As a result of these concerns markets are interpreting that there will be less than four rate hikes this calendar year in spite of what has been shown in the Fed’s dot plot. The 10 year breakeven rate is currently at only 1.44% which reflects that investors expect inflation to average just 1.44% for the next 10 years.

The Bank of England votes to keep interest rates on hold at 0.5% as the country continues to struggle with low inflation and economic headwinds. Economic data showed that industrial production is falling while retailers are struggling as well. Similarly the BoE downgraded its growth forecast for 1Q, and predicted that inflation would stay lower for longer. Right now in the UK CPI inflation is running at just 0.1% from the previous year. This type of environment means that the central bank is in no hurry to raise rates, which is a change of tune for the BOE, which as recently as last year appeared to be on track to raise rates with the Fed. Also contributing to downward pressure on the pound is the upcoming referendum on EU membership, which increases uncertainty for the country and therefore may decrease investment and confidence.

In spite of the PBoC’s recent efforts to close the gap between the renminbi onshore and the offshore rate the spread between the two opened again today. While the daily fix remained firm, the currency weakened in the offshore market by about 0.7% to Rmb6.6128 at its weakest point. The rate in the offshore market was set to Rmb6.5616 to start the day. The offshore rate is an indication of investor expectations for where the renminbi may go in the future, and the current discrepancy between the two may be a sign that investors expect the renminbi to further weaken. The PBoC is likely to intervene in these markets so investors are skeptical to aggressively short the renminbi for fear of being quickly squeezed out of the trade when the PBoC intervenes.

Thursday January 14

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