Friday March 4

Stocks gain after the February non-farm payrolls report brings positive sentiment. The S&P500 rose 0.3% to 1,999 and the Dow Jones rose 0.4% to 17,006. Each index broke above notable benchmarks of 2,000 for the S&P and 17,000 for the Dow. Additionally the S&P500 also broke its 100 day moving average which is a strong technical indicator. The S&P500 rose 2.7% for the second consecutive week of gains. Economic data showed that payrolls rose by 242,000 in February which was significantly higher than expectations, and the unemployment rate remained at 4.9%. One negative aspect of the report was that average hourly earnings fell 0.1% over the month and brought the yearly change to 2.2% from a 2.5% increase last month. The headline jobs number was strong enough to incite optimism, and the less than stellar average hourly earnings was enough to convince investors that the Fed will remain in no rush to raise interest rates. Following the report the US two year yield rose 3 basis points to 0.87%, and the ten year yield gained 5 basis points to 1.88%. The US dollar fell 0.3% on the day. The euro gained 0.4% against the dollar to $1.10. Emerging market currencies such as the Brazilian real, South African rand, and Russian ruble all benefited from the risk on atmosphere. Oil prices also rose with brent gaining 4.5% to $38.72.

Economic data today showed that more jobs were added in February than were expected, with payrolls rising 242k compared to the estimated 200k. The unemployment rate remained at 4.9% as participation increased which is a good sign. Average hourly earnings fell 0.1% further complicates matters for the Fed. The Fed has been expecting and communicating that as the unemployment rate tightens, wages will start to rise, which in turn will spur inflation requiring higher interest rates. So far wages have not reflected this trend which puts the Fed in a difficult spot. However the headline jobs number shows that the economy continues to add jobs at a healthy rate in spite of global uncertainty.

With risk aversion easing somewhat in recent weeks, investors have once again found value in emerging markets. In recent weeks emerging market currencies have gained against the US dollar, even as the dollar index has rallied against developed market peers.

Similarly, as investors increase their risk tolerance high yield junk bonds have received inflows. In the seven days leading up to March 2, high yield bond funds received $5bn in inflows which is the biggest amount since the data was recorded in 1992. This is a sign of investors stepping in and finding value in the asset class after it was beaten down in the start of the year. Upbeat economic data out of the US has contributed to the vote of confidence in the riskiest borrowers. Similarly short dated Treasury funds received heavy outflows. This indicates investors shifting out of risk off assets. To reflect the higher demand for high yield, yields have fallen significantly since mid-February. In the middle of February high yields on average were 10.1%. On Thursday yields on speculative grade debt hit 8.73%. Gains in high yield in particular have been made higher on the credit spectrum, with spreads for BB rated bonds tightening 25% to 434 basis points. At the same time spreads on CCC debt has tightened just 8% and still remain elevated at 1,901 basis points.

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Friday March 4

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