Tuesday January 10

Stocks fell slightly today ahead of Trump’s press conference tomorrow. The S&P 500 was flat at 2,268 and the Dow Jones fell 0.2% to 19,855. Financials rose 0.7% today while utilities fell 0.3%. Also contributing to negative sentiment today was falling oil prices which dropped for the second consecutive day. Economic data today showed that job openings totaled 5.5 million for November. The data continue to show that employers are struggling to find the right people to fill positions. Additionally the NFIB Small Business Optimism Index came in significantly higher than expected. Data also showed that producer price inflation in China rose to 5.5% which suggests that China may now export inflation as opposed to deflation as before. The two year Treasury yield rose slightly to 1.20%. The ten year Treasury yield similarly rose marginally to 2.38%. The US dollar was mixed to flat against peers, and the Mexican peso continues to depreciate dramatically to record lows. USD rose 0.2% against EUR to $1.0556. USD fell 0.3% against JPY to Y115.76. USD fell 0.1% against GBP to $1.2176. USD rose 2% against MXN to MXN 21.7984. Oil prices fell as traders focus on increases in production in the US and non-restricted Opec countries. WTI fell 2.2% to $50.81. Brent fell 2.4% to $53.64.

PACE loans have increased in popularity over the last few years and some critics of the program are drawing parallels to some pre-crisis lending practices. PACE stands for Property Assessed Clean Energy, and the program was established by local governments for homeowners to finance solar panels, energy-efficient solar panels and air conditioning units. $3.4bn in credit has been extended under these programs and the debt is packaged into ABS and sold to investors. PACE loans are the fastest growing type of credit that is being extended in the United States. Typically the loans are recommended to homeowners by plumbers, repairmen, and other contractors who stand to benefit if the homeowners get the PACE loan. Lenders also supply those professionals with referral fees. The problem is that plumbers and repairmen have little to no training and oversight in recommending loans. The loans don’t require a down payment and loan servicing payments are added to property tax bills. One California borrower saw her property taxes increase from $1,215 to $6,500. Investors like PACE bonds since they typically offer attractive interest rates. Some analysts are concerned that ratings agencies don’t have sufficient data and information to accurately project defaults. Some local governments are looking into complaints and trying to resolve problems with borrowers who feel they were misled or misunderstood what the program was. The largest PACE lender is facing three class-action lawsuits stemming from allegedly double charging interest, administrative fees, and not immediately crediting payments to the balance. Thirty four states have PACE programs. On average PACE loans have initial balances ranging from $5,000 to $100,000, interest rates between 6% and 9%, and repayment periods between 5 and 25 years. Deutsche Bank is one of the largest issuers of securitized PACE bonds.

Libya has tripled its oil production in the last three months, which poses a challenge to Opec which is trying to limit its production. Libya was exempted from production cuts or caps due to instability and violence in the country that got in the way of production since 2011. Libya’s production recently rose to a three year high of 708,000 barrels a day, and analysts anticipate that it will reach 900,000. That rise cancels out the production cut by Russia. Nigeria, which was also exempted from production cuts, also has increased its output by 200,000 b/d since the deal was made. Libya’s oil production makes up 95% of Libya’s export revenue so the country is very much dependent on the oil company’s ability to increase production quickly. Rebel militias in Libya are in control of some of the oil fields there, and the government has considered making payments to those groups in exchange for them opening oil fields. Security officials from the United States have also reached out to rebels trying to convince them that it is in their best interests to reopen the fields.

Rising inflation expectations may push large corporations to invest in capital expenditures, which they have been reluctant to do over the last five or so years. The 10 year breakeven rate has reached 2% and surveys of consumers expectations for inflation have reached 2.8% for the next three years. While consumers tend to overestimate inflation the number is still significant since inflation expectations have a lot to do with what ends up becoming realized inflation. Rising prices could spur investment activity, which is key for benefits to productivity. RIsing inflation may make it attractive for companies to issue debt since the real value of what they owe in the future will decrease as prices rise. Companies may also choose to invest now before prices are expected to rise later. Many analysts believe that companies were reluctant to invest post-financial crisis due to a lack of pricing power.

Tuesday January 10

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