Wednesday January 4

Stocks rose today as the dollar fell after the FOMC minutes. The S&P 500 rose 0.6% to 2,270 and the Dow Jones rose 0.3% to 19,942. The KBW Bank index rose 1.1% while utilties gained 0.3%. Consumer stocks led indices today. The FOMC minutes were released today, and they showed that at the December 14 meeting officials discussed uncertainty under Trump and what that means for interest rates. They noted the possibility of growth exceeding their forecast as a result of expansionary fiscal policy and said that tax cuts could facilitate higher interest rates. Importantly they said it was too soon to determine what policies they would need to respond to. Stocks were unchanged for the most part after the minutes were released. On that backdrop the two year Treasury yield rose slightly to 1.22% and the 10 year Treasury yield fell 1bp to 2.44%. 2yr vs 10yr flattened to 1.22%. The US dollar was weaker after the announcement, but the US dollar continues to gain significantly against the mexican peso. USD fell 0.8% against EUR to $1.0492. USD fell 0.4% against JPY to Y117.25. USD fell 0.7% against GBP to $1.232. Oil prices rebounded, with WTI and Brent both rising 1.7% to $53.24 and $56.42 respectively.

Banks and other companies started the year off with debt issuance in record amounts. Yesterday alone $19.9bn of debt was issued which is the biggest start of the year on record. This is indicative of companies trying to lock in rates ahead of Trump’s inauguration. If fiscal policies begin to take shape soon after he takes office, then borrowing costs for these companies could shoot up quickly. Towards the end of the year traders appeared to temper their expectations somewhat with the 10 year Treasury yield falling from around 2.6% to 2.45% in the last days of 2016. Yesterday’s issuances included $5bn from Barclays, $3bn from Daimler’s financing division, $1.2bn from FedEx, and $1bn from John Deere. Santander, Credit Agricole, Rabobank, and BNP Paribas also issued debt. High activity in the first few days of the year is unusual as both bankers and investors get their new year’s plans into motion. Over the last four years, there have been no debt issuances on the first day of trading.

The French government is looking to issue a 50 year bond tomorrow. The sale is encouraging investors to look past short term uncertainty in the country, including a high stakes presidential election this year. After the Brexit vote, the US presidential election, and the Italian referendum analysts are considering the effects and likelihood of a Marine Le Pen victory in those elections. Polls are now currently showing that Francois Fillon will prevail, who is a center-right candidate but polls have continuously been wrong over the last year. Some investors are taking a cautious view on French assets right now given the political uncertainty and therefore would be unlikely to participate in the 50 year deal. Long term debt issuance has been on the rise over the last year. In 2016 eurozone countries issued EUR 19bn in debt that matured in 40 years or longer which compares to EUR 1.3bn in 2015. Belgium and Ireland issued century bonds in private placements. French officials say they considered a 100 year issuance however sufficient demand didn’t look to be there. The spread between French bonds and German bonds has risen significantly on political risks. Throughout the first half of last year the spread between French and German 10 year debt traded around 0.3% however that rose to higher than 0.5% at the end of the year on political uncertainty. French finance officials say that Japanese investors continue to show demand for long term French debt.

Signs of inflationary pressures are building across the world, particularly in Europe. Data showed that consumer prices in Europe rose 1.1% last month which is the biggest annual increase since September of 2013. The core inflation rate hit 0.9% in December. The ECB, similar to the Fed, is looking for inflation to move towards the 2% target before deciding the next best steps with its easing program. As inflation in the region picks up it may scale back its quantitative easing program. Yields in the eurozone may rise dramatically as investors price in higher inflation coupled with QE tapering. Additionally forward looking indicators suggest that those pressures may persist in the months ahead. Forward looking market based inflation expectations, the 5y5y forward rate are 1.77% currently which is a 0.50% increase in expectations compared to just this past summer. The ECB will meet in January and March and investors will be paying attention to its forward guidance as it relates to the recent increase in inflation. In some countries, such as Germany, consumer inflation is even higher. This highlights some of the challenges the ECB faces. While inflation is approaching the 2% target in Germany, in other countries prices are just getting out of deflation. A reduction of the ECB’s monetary easing policies could also reduce some of the downward pressure on the euro. However as inflation rises and the ECB is slow to respond by raising interest rates, that could put further downward pressure on the euro.

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Wednesday January 4

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