Wednesday April 6

Stocks rise as oil prices continue to rise and market draw confidence from the FOMC minutes. The S&P500 rose 1.05% to 2,066 and the Dow Jones rose 0.6% to 17,716. The FOMC minutes show that the Fed is divided regarded the best path for interest rates as well as the inflation outlook. Markets are ruling out a rate hike in April however June is still in play. The dollar was mixed after the minutes. The dollar rose 0.02% against the euro to $1.1397 and the yen rose 0.06% to Y109.73. Yields rose with the two year yield gaining two basis points to 0.74% and the ten year gaining 3 basis points to 1.76%. Also contributing to optimism was ISM non-manufacturing data out of China which came in better than expected. China’s economy is attempting to shift from a manufacturing model to more of a services and consumption based model and today’s data suggests that the shift isn’t going as bad as previously was expected. Brent prices rose 5.2% to $39.84 and WTI gained 5.1% to $37.72 as talks of an output freeze were put back on the table.

The FOMC minutes show that Fed officials were reluctant to signal a rate rise for April. The Fed wants to leave plenty of time for the risks and pressures facing the economy to ease before signaling a rate increase. While some Fed officials remained in favor of raising rates in April if economic data met expectations, many supported the cautious take. The Fed next meets on April 26-27 and investors largely expect rates to stay in the 25-50 basis point range. In the aftermath of the release of the minutes the dollar index retreated slightly and stocks experienced a late day surge. Members of the Fed are determining whether or not the risks are balanced, meaning whether or not the risks to downside shocks are equivalent to risks to the upside. Eight of the seventeen members of the FOMC say risks are skewed to downside. The remaining nine see risks as equal, while none see risks as balanced to the upside. Eleven see risks to inflation coming in lower than expected and none see the potential that inflation may come in higher. These figures in and of themselves indicate that by consensus the Fed sees risks as skewed to the downside. The only voting member of the FOMC who voted on raising rates in March was Esther George of the Kansas City Fed.

Over the last week economic data out of China has suggested that the economy there may not be as bad as previously expected. Both manufacturing and non-manufacturing indexes have come in better than expected and indicative of growth. This data reduces the concerns over the potential hard landing to economic growth in China that has plagued market sentiment since the devaluation in August. The data reduces pressure on the renminbi and the PBoC. The strength of the data is indicative of stimulus being used by the PBoC to keep economic indicators positive. However some analysts fear that the stimulus may worsen China’s dependence on fixed asset investment for growth. The economy is trying to change from a manufacturing based model to an economy that is led by consumption and services. The additional use of stimulus by the PBoC may be a hindrance to that shift and may just postpone the negative effects of a hard landing. The real estate sector is ticking upwards as prices and sales volumes have improved in the last few months, which will boost constructing spending.

The governor of Puerto Rico passed a bill that essentially lets the island stop making debt repayments while waiting for additional help from the US Congress. This constitutes a default, as the country is choosing to prioritize obligations to its citizens over obligations to its creditors. The moratorium on debt repayments will allow the governor to allow repayments on a “entity-by-entity basis” and any missed payments will be due upon the end of the moratorium sometime in the first quarter of next year. Puerto Rico bond prices fell as a result. A 20 year issuance reached a record low of 62.98 cents on the dollar. The island currently has around $70bn outstanding. A stagnating economy and declining population are two large obstacles that stand in the way debt repayments. This moratorium could serve to pressure US Congress into acting fast in deciding what to do with the situation. Various options have been presented in Congress regarding potential outcomes. Republicans most recently proposed debt restructuring with the supervision of an advisory board. Resources are dwindling in Puerto Rico and it leaves the island with little options on how to make upcoming payments.

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Wednesday April 6

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