Thursday August 25

Stocks continued to ease back ahead of the Fed’s meeting tomorrow in Jackson Hole. The S&P 500 fell 0.1% to 2,172 and the Dow Jones lost 0.2% to 18,448. Economic data today showed that durable goods new orders rose by 4.4% last month which was higher than consensus. The core numbers also beat expectations as well. Additionally jobless claims remained low. Rates sold off ahead of the Fed meeting. The two year yield rose 3bp to 0.80% and the ten year yield rose 2bp to 1.58%. The spread between 10 year and 2 year bear flattened to 0.78% which could be indicative of investors expecting the Fed to come across hawkish tomorrow. Oil prices rallied as expectations rise that Iran will join the Opec meeting to come up with a coordinated production response to low oil prices. Brent rose 1.3% to $49.67 and WTI rose 1.1% to $47.29. The US dollar rose 0.1% against JPY to Y100.54. The dollar fell 0.1% against EUR to $1.1277. Analysts expect that in spite of the more upbeat economic data of late, Yellen will not try and surprise markets at the meeting.

Banks have been actively reducing exposure to the energy sector throughout the year, even as oil prices have rallied since reaching a low in February. Volatility in oil prices is unattractive for banks, and even though prices have stabilized somewhat they are still unwilling to step in. According to Barclays loans to energy companies fell 3% in the second quarter and that figure was higher among the largest banks. Banks have been paying attention to any signs of deterioration in their energy portfolios and many have increase loan loss reserves against those assets. At JPM, WFC, and BAC 42% of the energy loans on the balance sheet are considered “criticized” which is a risky designation. US Bancorp and Comerica have both elected to sell their exposure altogether rather than keep it on the balance sheet.

One of the many problems facing Puerto Rico is unfunded pension liabilities. Puerto Rico’s pension fund has just $2bn in assets along with $45bn in liabilities. This figure is not included in the $70bn in debt it owes to creditors, some of which is currently in default. Puerto Rican GO bonds are more senior to pension liabilities according to the Puerto Rico constitution, however the oversight board authorized by President Obama will make sure that pensions are funded. The oversight board faces a tough challenge. By prioritizing pensioners, creditors will be neglected. However if the oversight board prioritizes creditors that could worsen the problems of immigration that Puerto Rico is facing. Creditors have already filed legal complaints about the possibility of that happening. In order to fulfill its pension obligations Puerto Rico would have to spend $700mm each year which amounts to 8% of revenue. At this rate it pension funds will exhaust assets by 2019. Also by not paying pensioners that could further damage Puerto Rico’s economy since residents will not have enough money to spend which boosts the economy.

Online consumer lenders are facing more struggles as volumes in the second quarter fell by more than 33%. The appeal to using these online lenders is that they provide credit to a wider spectrum of borrowers in an easier to access platform and as a result of less regulation are able to provide credit quicker and easier. However delinquencies have been on the rise which has caused some lenders to scale back. This follows instances such as the Lending Club scandal earlier in the year when the platform got in trouble for mismarketing loans to investors. This has reduced demand for loans made through these platforms, which inhibits growth. To respond to these concerns Lending Club has reduced approval rates, however its net loss has increased dramatically as a result.

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Thursday August 25

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