Friday December 2

Stocks were mixed today after the November non-farm payrolls report. The S&P 500 was unchanged at 2,191 and the Dow Jones fell 0.1% to 19,170. Over the course of the week the S&P 500 was 0.4% lower and the Dow was up 0.4% as it continues to outperform post-election. The KBW Bank index fell 1.1% while the DJ Utility Average rose 0.9%. Economic data showed that 178,000 jobs were added in November, which was higher than the consensus of 170,000. The unemployment rate dropped to 4.6% from 4.9%. Average hourly earnings slipped from the previous month, compared to estimates which called for a 0.2% gain. Wages rose 2.5% from the prior year which is down from November’s 2.8% gain. On that backdrop the 2 year Treasury yield fell 6bp to 1.10%. The 10 year Treasury yield fell 6bp to 2.39%. Over the course of the week the 2 year was unchanged and the 10 year rose 8bp. 2yr vs 10yr bull flattened to 1.28%. Even after the mixed NFP report the market for Fed funds futures continues to fully price in a rate hike in just a few weeks. In global markets the risk of the Italian referendum over the weekend is going to drive sentiment when markets open again on Monday. Leading into the weekend, Italy’s 10 year bond yield fell 13bp to 1.91%. In FX markets the dollar was broadly weaker. USD fell 0.1% against EUR to $1.0668. USD fell 0.5% against JPY to Y113.50. USD fell 1.1% against GBP to $1.2727. Oil prices continued to rise to the highest level since July of 2015. WTI rose 1.2% to $51.68. Brent rose 1% to $54.49.

The head of the OCC said that it would start issuing bank charters to Fintech firms, which is a sign of regulatory acknowledgement to the sector that has thus far benefited from regulatory requirements on banks. The new change would firms that offer loans made through online platforms and other fintech companies to be able to expand nationally without seeking permission in each state individually. In the past these firms would have had to either partner with an established bank in a particular state or be granted permission by each state. This will heighten the level of competition between Fintech and traditional banks. Thomas Curry, head of the OCC, said that the new move will allow these companies to enter the market and be marketed in a transparent and clear way to consumers. Financial institutions, and in particular small banks are not too happy about these new changes. It also will allow consumers easier access to credit which could present a whole set of problems. Companies that will benefit from this include firms such as Stripe, LendingClub, and Square. Curry said that in the US and the UK combined there are 4,000 companies operating under similar business models to these and that the sector has attracted a significant amount of capital that is on a strong upward trend rising from $1.8bn five years ago to $24bn today. Fintech startups in the past have argued that it is easier to set up business in the UK, where regulators have been quicker to respond. The next step would be to bring these companies into the federal banking system, however that would require imposing capital requirements, interest rate caps potentially, and other requirements that lenders may not want to abide by. The Fintech sector also received a vote of confidence from Lael Brainard today who said that the Fed is in the process of reviewing its view on how the traditional banks interact with Fintech as the two become more intertwined. She said that Fintech has the ability to expand access to credit, but warned against doing so at an exorbitantly high cost for consumers.

China is looking to curb excessive speculation in its financial markets by reducing liquidity in the system. It has risen short term interest rates to a 19 month high of 3.49%, which is up 57bp just since Monday. The PBoC has also withdrawn 130bn yuan (which amounts to $18.8bn) over the last two weeks. State owned banks have also been reducing credit to other large financial institutions. Investors in China have used cheap access to credit from these institutions to fuel speculation in a variety of markets, including bonds, equities, and commodities. It is trying to curb that speculation, along with reduce the country’s debt issue. Additionally by raising interest rates it could reduce some downward pressure on the yuan. China is trying to adjust its investors and institutions to a new normal that is more sustainable and less prone to dramatic selloffs and volatility.

Friday December 2

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