Friday September 16

Stocks fell on Friday to cap the end to a volatile week. The S&P 500 fell 0.4% to 2,139 and the Dow Jones lost 0.5% to 18,123. Economic data today showed that headline CPI rose slightly more than expected in August. From the prior month CPI was up 0.2% compared to the expected 0.1%. The index was 1.1% higher from last year. The core level rose 0.3% in August and was indicative of 2.3% core inflation from last year. This reflects mild price pressure which gives back some ammunition to Fed hawks. Volatility this week was driven by monetary policy expectations and uncertainty. Over the course of the week the Dow rose 0.2% and the S&P rose 0.5%. Financials and energy names lagged indices today, with energy shares falling 0.9%. Brent crude oil fell 1.8% to $45.77 and WTI lost 1.6% to $43.20. Brent fell nearly 5% over the course of this week on concerns that the oversupply will last into next year which is longer than previously expected. Rates edged higher along with USD following the stronger than expected CPI reading. The two year Treasury yield rose 3bp to 0.77% and the ten year Treasury yield was unchanged at 1.69%. Accordingly the spread between 2s and 10s bear flattened to 92bp as investors anticipated higher rates potentially. On similar expectations the dollar strengthened against peers as the dollar index gained 0.8%. USD rose 0.8% against EUR to $1.1153 and rose 0.2% against JPY to Y102.33. The probability of a rate hike at next week’s Fed meeting stands at around 18%, and the Fed likely will not want to shock markets.

Real estate funds have been benefiting from low global yields. Investors who need yield and current income have been pushed into the sector since it pays high dividends. This week a record amount of funds flowed into such funds, and totaled $2.9bn. The prior record was just $1.68bn. This could be a function of increased attention from asset managers after S&P Dow Jones Indices gave real estate its own sector classification in indices. Another tailwind for the sector is low yields globally. An overwhelming majority of asset managers predict that yields will remain negative in the ECB and in Japan over the next year, and those investors need to turn somewhere to find returns for their investors. Such real estate funds are also valued attractively relative to historic standards, as opposed to bonds and the broader stock market which by some metrics is overvalued.
The Bank of Japan is in a tough spot regarding the future of its monetary policies. The amount of JGB’s held by the BoJ has skyrocketed from Y75tn at the start of 2012 to Y396.71tn currently. In spite of these unprecedented monetary easing policies the tools have not had the desired effects. The Japanese economy remains mired in a deflationary spiral where it has been for much of the last year. The most recent reading showed a 0.5% deflation from the prior year. Some investors anticipate that the BoJ may be at the end of its rope as far as monetary easing options. As a result yields have begun to creep up in Japan on the expectation that the widescale policies will not be continued. The yield on the 30 year JGB over the last few months has risen from around 0.05% to over 0.50% currently. Some members of the BoJ are doubtful that the central bank should continue these policies since they don’t appear to be working, while others want to stay the course. According to some reporters inside the BoJ there is dissent regarding the best way to proceed. Next week the BoJ will issue an assessment regarding the effectiveness of its easing strategies.
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Friday September 16

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