Thursday September 1

Indices were quiet today ahead of the August NFP report tomorrow. The S&P 500 was unchanged at 2,170 and the Dow Jones rose 0.1% to 18,419. Utility and financial shares were both down marginally. Economic data today showed that the PMI manufacturing index came in at 52.0 which was received negatively. Additionally new orders came in lower than last week which is a bad leading indicator. Additionally the ISM manufacturing index came in significantly below consensus at 49.4 which indicates contraction versus 52.2. New orders component was also weak in this indicator as well. Ahead of the NFP report yields fell slightly. The 2 year fell 2bp to 0.79% and the 10 year fell 1bp to 1.57%. The 2yr – 10yr bull steepened to 0.78%. The probability for a Fed rate hike in September is now 32% which is down from 38% before the weak data today were released. The USD fell 0.4% against EUR to $1.1199 and JPY rose 0.2% to Y103.17. GBP rose 1% against USD to $1.3263 and the gilt yield shot up after PMI in the UK beat expectations significantly. Analysts note that monetary easing from the BoE and a smooth leadership transition have eased some of the short term pain following Brexit. Oil prices continued to drop. Brent fell 3.1% to $45.45 and WTI finished at $43.66.

US companies have benefitted from the ECB’s corporate bond buying. Even though the ECB isn’t buying US corporate bonds, the spillover effects are significant in the same way that is driving high yield and emerging market assets of late. Yields are so low in Europe that international investors are turning to the US in search of yield. This demand drives down yields in the US, which lowers borrowing costs for companies. Throughout the first months of the ECB’s corporate bond buying program credit spreads in Europe outperformed (tightened more) than credit spreads in the US. However that dynamic shifted in August, possibly as investors pulled money out of European corporate bonds and into US bonds. Since early June net inflows into US corporate bonds have exceeded inflows into European funds by $2bn. Similarly EU bonds ineligible for ECB purchase have outperformed eligible bonds in recent weeks. Another reason for the shift out of Europe and into the US is that when there is extensive monetary easing going on, corporate bond prices are artificially low and as a result investors may not be receiving enough yield to compensate them for the risks they are taking. Currently 84% of investment grade European corporate bonds have a yield of less than 1%. On average that yield is 0.6% in the EU compared to 2.8% in the US. In response to this US companies have been issuing debt, and the $63bn issued in the US in August is the highest total for August on record.

Thursday September 1

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