Thursday January 19

Stocks fell back today ahead of the Trump inauguration. The S&P 500 and the Dow Jones each lost 0.4% to 2,263 and 19,732. The KBW Bank index lost 0.7% while the DJ Utility Average lost 0.9%. Economic data today showed that jobless claims came in at 234k which was far below consensus and a very low level. John Williams spoke and said that he doesn’t see a heightened state of uncertainty in the United States which is reassuring. The ECB met today and left policy unchanged as expected and did not appear to be too worried about signs of rising inflation. Draghi came across as dovish however yields still rose in the region. The 10 year bund yield rose 3bp to 0.38%. In the United States interest rates rose on the long end. The two year Treasury yield fell 1bp to 1.22%. The ten year Treasury yield rose 3bp to 2.46%. Accordingly 2yr vs 10yr bear steepened to 1.25%. The dollar was mixed on the day against peers. USD fell 0.3% against EUR to $1.0662. USD rose 0.2% against JPY to Y114.84. USD fell 0.6% against GBP to $1.2332. Oil prices rose slightly today even after bearish data came out showing that inventories rose more than expected. WTI rose 0.6% to $51.39. Brent rose 0.6% as well to $54.22. The VIX seems to be creeping up rising 3.5% to 12.92.

Some people are getting concerned about the size of loans outstanding in the FHA mortgage market. FHA insured mortgages are typically given to borrowers that are riskier than borrowers of conforming mortgages that are insured by Fannie and Freddie. Credit scores and delinquency rates are also lower and higher respectively for FHA loans that are guaranteed by Ginnie Mae. Banks have pulled out of lending to that market given increased scrutiny and regulation post-financial crisis. Nonbank lenders such as Quicken Loans, Freedom Mortgage, and Guild Mortgage have filled the void and increased loan volumes. The size of outstanding Ginnie Mae bonds backed by FHA mortgages has risen from $272bn in 2007 to $1.7tn currently. As a result Ginnie Mae may be on the hook for huge losses as defaults increase, and nonbank lenders may not have the wherewithal or the incentive to understand future potential risks in the mortgage market. The share of FHA loans as a percentage of the total mortgage market has risen from 5% before the crisis to 15% currently. The head of Ginnie Mae has tried convincing banks to get back into this market, however they have been reluctant to do so citing costs and potential risks in originating.

Nine companies are gearing up the IPO process this week which could be an early sign that this year will mark a rebound in IPO volume after a down year in 2016. AppDynamics is expected to raise $132mm in a small IPO. Snapchat is expected to get a far larger valuation between $20bn and $25bn. If these IPOs go well it could encourage other companies to step off the sidelines and come to market themselves. That would be a welcome development for banks, who have been experiencing a big drop off in IPO volume since last year was the slowest since 2003. However of the companies that did IPO last year they performed well on average, rising 25% through the end of the year which is higher than the 14% average. Investment banks will want some of the large private companies to start going public. Analysts estimate that there are 154 private companies that are valued at $1bn or higher, led by Uber and Airbnb as the most notable. Some have pointed out that companies like these may choose to delay the IPO process since they are able to achieve very attractive valuations in private markets.

The dollar has struggled to find ground this week following mixed signals from Trump and Janet Yellen. Trump in an interview decisively said that the dollar was too strong and that the strength hurts U.S. exporters. He similarly spoke against a tax reform that many believed would strengthen the dollar. Trump’s economic advisor Anthony Scaramucci similarly made comments referring to the dollar’s strength. Following those comments early in the week yields fell while the dollar weakened against peers. However yesterday Janet Yellen came across as slightly hawkish. She warned of the negative consequences of falling behind the curve on inflation, and she expects the Fed to raise rates a few times through 2019. That reversed movements made in the aftermath of Trump’s comments. The dollar strengthened and yields stood higher. It seems as if markets are giving emphasis to Yellen’s comments, possibly since she has a more defined course of action and more of an ability to change monetary policy quickly. That will get in the way of Trump’s attempts to talk down the dollar.

Thursday January 19

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