Wednesday February 1

Stocks rose slightly today after the Fed statement and corporate earnings. The S&P 500 rose marginally to 2,279 and the Dow Jones rose 0.1% to 19,890. The KBW Bank index rose 0.3% while utilities fell 1.9%. The ADP employment report showed that 246,000 private payrolls were added in January compared to the consensus 168,000 which bodes very favorably for the January NFP that is to be released on Friday. The PMI manufacturing index came in strong at 55.0 with new orders hitting a two year high. The ISM manufacturing index came in at 56.0 compared to the consensus of 55.0. New orders are also at the highest level here since late 2014. Construction spending fell 0.2% in the month compared to estimates which called for a 0.2% gain. The Fed left interest rates unchanged and didn’t make any material changes to its forward guidance. The Fed stuck to a “wait and see” stance regarding how fiscal developments unfold over the next couple of months and how that will affect the economy.

After decades of stability the Fed is facing pressure on the political front. Since the 1980s and the Volcker era the Fed has operated independently without criticism from political parties with regards to its decisions or monetary policies. However that is shifting currently and there is uncertainty on the topic with the new administration gathering steam. The Senate prepared a bill last year to audit the Fed’s interest rate decisions. Yellen met with lawmakers to reiterate the importance of central bank independence before they went to vote on the bill, however that didn’t really work as only one out of 54 Republicans voted against the bill. She has been trying to make a case to lawmakers that the central bank’s independence is of the utmost importance to the economy however she seems to be fighting a losing battle. Since the financial crisis however the Fed has drawn criticism with the way it handled the situation. Some suggestions include a prescribed formula to how to make interest rate decisions, limiting emergency lending authority and repaying funds that banks pay into the Fed system. Around the world as well central banks in Japan and England are facing questions to their policies. Historically countries that lack central bank independence have higher inflation rates because the government has a higher incentive to run up inflation. Yellen and many others fear that could hurt economic stability. President Trump criticized Janet Yellen on the campaign trail and said she kept interest rates too low to favor Democrats. It is also important to note that during Trump’s presidency he will have the opportunity to name a new chairman of the Fed as well as two new members of the Board of Governors. Earnings from Apple and Facebook were well received. On that backdrop the two year Treasury yield rose 1bp to 1.22%. The ten year Treasury yield rose 2bp to 2.48%. Accordingly 2yr vs 10yr bear steepened to 1.26%. The dollar was mixed on the day against peers. USD rose 0.3% against EUR to $1.0771. USD rose 0.4% against JPY to Y113.19. USD fell 0.6% against GBP to $1.2659. Oil prices rose in spite of bearish data. WTI rose 1.2% to $53.43. Brent rose 1.5% to $56.43.

The Fed unanimously voted to keep interest rates unchanged in today’s policy announcement. The Fed said it is still on track to raise interest rates throughout the year however didn’t offer a specific timetable as to when that might come. She didn’t come across as in any particular rush to raise interest rates with the Fed funds rate currently between 0.5% and 0.75%. According to the Fed’s dot plot that was last released in December the central bank expects three 25bp increases throughout this year. Some analysts argue that given how Yellen did not make any firm commitments in her statement today that gives her flexibility in case inflation does pick up. The market may be underestimating the Fed’s intentions with investors pricing in just a 13% chance that the Fed raises rates in March. Janet Yellen has said previously how the dramatic changes in fiscal and trade policies can potentially affect the course of monetary policy. That being said she may be wanting to wait and see what policies get passed before committing to rate increases. All in all the market interpreted the Fed’s statement as dovish. The probability of at least three rate hikes in 2017 fell from 42% to 36% after the statement was released. Today’s statement didn’t offer any references to a reduction in the balance sheet which some central bankers have mentioned recently.

Invitation Homes traded up in its market debut. The company raised $1.54bn at $20 a share which was the largest IPO in more than a year after a very slow last year. That was in the high end of the $18 to $21 range. Blackstone bought 48,431 homes after the financial crisis in 13 markets at rock bottom prices in foreclosure. Invitation Homes now rents out and manages those properties and collects income as rental fees. Companies such as American Homes 4 Rent and Colony Starwood Homes also have similar business model. These companies have benefitted from home ownership levels dropping to the lowest level in more than fifty years. However their business model is reliant on buying more properties at low prices which is difficult given the market right now. Strict lending standards at banks, high levels of student debt, and households whose savings were depleted during the crisis are also renting instead of buying. Fannie Mae also guaranteed bonds issued by Invitation Homes which is an important vote of legitimacy from the GSE. This is a portfolio company of Blackstone which still retains its majority position in the firm that had an all in valuation of $6bn.

Wednesday February 1

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