Friday January 6

Stocks rose after the December non-farm payrolls report. The S&P 500 rose 0.4% to 2,276 and the Dow Jones rose 0.3% to 19,963. In the first week of 2017 those indices rose 1.7% and 1% respectively. Both financials and utilities rose today roughly in line with the market. Economic data today showed that payrolls rose by 156,000 in December compared to the consensus of 175,000. However revisions from November were very strong rising from 178,000 to 204,000. The unemployment rate came in at 4.7%. Arguably most important, was average hourly earnings which rose 0.4% which was higher than the estimated 0.3%. That corresponds with an annualized pace of 2.9%. Factory orders fell 2.4% but that was slightly better than expected, and including transportation equipment orders rose. Investors took focus on the wage growth numbers, with the most important effects of that being what it means for inflation as well as corporate profits. The two year Treasury yield rose 4bp to 1.21% and the ten year rose 7bp to 2.42%. Over the course of the week the two year was flat and the ten year fell 3bp. Today 2yr vs 10yr bear steepened to 1.21%. The US dollar was stronger on the day. The PBoC took a break after strengthening the renminbi over the last few days, and the Turkish lira has been in depreciation given the security concerns there. USD rose 0.7% against EUR to $1.0532. USD rose 1.5% against JPY to Y117.03. USD rose 1.1% against GBP to $1.2283. Oil prices eased back slightly today. WTI and brent each fell 0.2% to $53.64 and $56.78 respectively.

Bank of Mexico is fighting a weakening peso and intervening in the open market to defend its currency. The peso depreciated 17% throughout 2016 against USD as a result of a widening trade deficit, high levels of public debt and a ratings outlook downgrade, low oil prices, and Trump’s election victory. Additionally, over the last few days the peso has experienced another round of selling after Ford announced it was cancelling a $1.6bn investment in a manufacturing plant in the country after pressure from Trump. That action has led to the belief that other companies may follow suit, and as a result Mexico’s government could lose a big source of income and investment. To combat the subsequent depreciation the Bank of Mexico has been selling USD and buying MXN to support the currency. The commission in charge for such interventions indicated that such actions were an ongoing possibility, reflecting that officials are willing and eager to actively intervene. This is the first time that officials in Mexico have intervened in the markets since February of last year. In spite of these actions and pressures on the currency foreign reserves were relatively unchanged at the end of 2016 compared to the end of 2015. Economists at Goldman Sachs say that the action of buying pesos was justified given that they believe Mexico’s currency is undervalued absent a major crisis in the country. The peso currently trades at MXN 21.4365 against USD.

Argentina is looking to once again tap international debt markets in order to raise capital. It is looking to raise as much as it can given demand, which some analysts believe could be as high as $10bn. The country wants to lock in borrowing costs in the current environment before Trump takes office, and interest rates and the US dollar have the possibility of increasing even further. Other emerging markets, including Brazil, Honduras, Nigeria, Egypt, Saudi Arabia, and the Philippines are all expected to take similar actions this month trying to get ahead of uncertainty in the coming months. Argentina’s debt to GDP is a relatively low 33.5% however its government is really looking to foreign creditors to raise a lot of capital in a short period of time, which may be politically unattractive given the country’s history with foreign debts. Argentina issued $34bn last year including the private sector and provinces. The economy also reported a 2% contraction.

Friday January 6

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