Wednesday January 18

Stocks were mixed today as traders weighed comments made by Janet Yellen. The S&P 500 rose 0.2% to 2,271 while the Dow Jones fell 0.1% to 19,804. The KBW Bank index today rose 0.8% while utilities fell 0.1%. Economic data today showed that CPI rose 0.3% last month which was in line with consensus. That brings the year over year figures to 2.1%. Additionally industrial production rose 0.8% compared to the consensus 0.6%. Janet Yellen came across as slightly hawkish, and hinted at the risks of waiting too long to raise interest rates. On that backdrop rates sold off in the U.S.. The two year Treasury yield rose 8bp to 1.23%. The ten year Treasury yield rose 11bp to 2.43%. Accordingly 2yr vs 10yr bear steepened to 1.20%. USD rose 0.7% against EUR to $1.0639. USD rose 1.2% against GBP to $1.2268. USD rose 1.4% against JPY to Y114.25. In the euro area traders digested inflation numbers from Germany (1.7%) and the region as a whole (1.1%) ahead of the ECB’s policy meeting tomorrow. The German bund yield rose 4bp to 0.35%. Oil prices fell after the IEA projected an increase in U.S. production. WTI fell 2.1% to $51.39. Brent fell 2.2% to $54.27.

Any sign of tapering in the ECB’s quantitative easing program is set to have a negative affect on the European corporate bond market. Even already investors are weighing signs that the ECB is participating less in that market, since in December it purchased just EUR 4bn in corporate bonds which is the fewest of any month. Some analysts expect that given the scarcity in euro area government bonds, that the ECB will first taper government bond purchases before reducing corporate bond purchases. SocGen for example sees an EUR 10bn reduction coming in June with sovereign bonds taking the majority of that cut. Barclays sees the ECB bringing corporate bond purchases from EUR 8bn to 6bn as early as March. Disruptions to the European corporate bond market could inhibit the region’s capital market development. For example many issuers go to Europe to issue at maturities that are not available in the U.S., and given uncertainty associated with the ECB’s purchases they may be less willing to do that. When the ECB meets this Thursday analysts don’t expect any change in interest rates or QE policies. However they will be paying attention to forward guidance and commentary on inflation and growth outlooks. For example the German 10 year breakeven rate has risen from 0.70% last summer to 1.25% currently. German bunds may be exposed to a selloff if the ECB highlights higher inflationary pressures.

Citi and Goldman Sachs continue with the trend set by MS, JPM, BoA, and WF and come in with strong 4Q earnings. At Citi, 4Q profit rose 7% and revenue slipped slightly falling 8%. Michael Corbat emphasized that the restructuring period is over and that now the focus was on delivering results for investors, and he came across as optimistic. Citi was also the only bank last year to pass the living wills test. The bank’s trading division benefited from volatility after the election. trading revenue rose 31% from the prior year. Fixed income trading reported a 36% increase in revenue while equities trading rose 15%. The part of Citi’s business that is responsible for moving cash around for large international corporations and governments is put at risk by Trump’s talk of protectionism, however company executives still said they were bullish on their prospects. Goldman Sachs similarly reported strong earnings driven by improvements in trading. 4Q revenue at GS increased 12%. Goldman is one of the few banks to post a ROE higher than 10%, which finished at 11.4% in the fourth quarter. Trading revenue rose 25% which was driven primarily by fixed income revenue which was up 70%. Equity trading fell slightly. Commodities and currencies also were strong. Fixed income trading revenue street wide rose 16% last year compared to 2015.

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Wednesday January 18

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