Thursday March 3

Stocks rise for the third straight day leading up to the February non-farm payrolls report that is to be released tomorrow. The S&P500 gained 0.4% to 1,993 and the Dow Jones rose 0.3% to 16,943. Tomorrows data is expected to show that the US economy added 200k jobs in February, and the report will be closely watched by the Fed in its decision to raise or not to raise interest rates this year. The VIX continued to fall in a sign that investors were more willing to take on risk. Oil prices were stable, with Brent rising 0.4% to $37.02 and WTI rising 0.1% to $34.68. Economic data today showed that the ISM service sector index came in slightly higher than expectations, as services in the US continue to show resilience to the global slowdown. The market for Fed funds futures is reflecting a 67% probability that the Fed will raise interest rates this year, compared to just 11% early in February. The two year Treasury yield fell 1 basis point to 0.85%. The ten year yield fell 1 basis point to 1.83%. The dollar index fell 0.7% while the euro gained 0.9% to $1.0959. The Japanese yen fell 0.1% against the dollar to Y113.60. Gold prices rose $21 to $1,261.

Market based measures of inflation are rising after some recent inflation indicators such as the CPI and the PCE have surprised to the upside. The 10 year break-even rate rose to 1.55% from 1.2% at the start of February. This increase is due to an increase in demand for TIPS bonds as inflation expectations have risen. While 1.55% remains below the Fed’s target of 2%, it coincides with a modestly stronger outlook for US growth. Members of the FOMC pay attention to market based inflation measures since expected inflation is related to actual inflation measures. The core-CPI in January rose 2.2% annually, and the core-PCE index which is closely watched by the Fed rose 1.7%. This comes as oil prices have stabilized.

South Africa is using the recent risk on attitude as a chance to issue debt. This comes after leading asset managers such as BlackRock and Pimco have recently said that the recent selloff has presented buying opportunities in emerging markets. Additionally Russia, Argentina, and Turkey have also made efforts to raise capital in the bond markets. Yields for emerging market debt in general have fallen from 6.8% to 6.2% as investors have been willing to take on risk.

Economic data out of Brazil shows that the country’s economy contracted 3.8% in 2015. The country once showed significant signs of promise as a growing emerging market, however last year the economy faced several headwinds that continue to plague growth. This was the worst GDP report for Brazil in the last 25 years. The country is plagued by a dangerous combination of factors that are impeding growth such as low commodity prices, decreased investment, falling government spending, and political corruption and uncertainty. This makes Dilma Rousseff’s job increasingly unstable, as she is already facing heavy criticism and a potential impeachment as a result of corruption allegations. Economic output is expected to contract another 3% this year. Fiscally the country is facing several problems. The fiscal hawk that was appointed to be finance minister at the start of last year Joqauim Levy, resigned after the administration appeared to not be willing to implement austerity measures. The country now faces falling tax revenue due to the recession, as well as rising government spending due to a generous social welfare system. From its recent peak the Brazilian economy has contracted 7.2%.

Thursday March 3

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