Thursday February 2

Stocks were mixed today ahead of the January non-farm payrolls report. The S&P 500 rose less than 0.1% to 2,280 and the Dow Jones fell less than 0.1% to 19,884. Economic data today showed that jobless claims were 246k which was slightly lower than consensus. Nonfarm productivity also rose more than expected by a slight margin. The KBW Bank index fell 0.7% while utilities rose 0.9% possibly in anticipation of a weak NFP report tomorrow. Investors today also continued to price in information from the Fed’s statement yesterday. The two year Treasury yield fell 2bp to 1.20%. The ten year Treasury yield fell 1bp to 2.47%. Accordingly 2yr vs 10yr bull steepened to 1.28%. The dollar was mixed on the day against peers. USD rose less than 0.1% against EUR to $1.0761. USD fell 0.4% against JPY to Y112.85. USD rose 1% against GBP to $1.2533 after the Bank of England said that inflation wasn’t too big of a concern and came across as still dovish. The 10 year gilt rate fell 7bp to 1.38%.  Oil prices eased back slightly. WTI fell 0.3% to $53.70 and Brent fell less than 0.1% to $56.75.

Investors are paying close attention to what the Fed is doing with its balance sheet. While the Fed is still reinvesting bonds that are maturing in its portfolio it is reinvesting into Treasuries that have lower durations. In 2012 the duration of the Fed’s portfolio excluding MBS reached a peak of nearly 8 years and now it has fallen to as low as 6 years. In spite of the fact that they are still reinvesting this leads to tighter monetary conditions on the longer end of the curve. Additionally some members of the Fed have spoken about the possibility about unwinding the Fed’s balance sheet by means of selling assets which would definitely tighten financial conditions and at this point may cause some panic in the markets. As the Fed reduces its presence from the market that excess supply will need to be absorbed by some new type of demand. As such some research analysts expect that if the Fed starts unwinding the balance sheet rates could rise between 50 and 75bp on the 10 year. The Fed currently holds $2.5tn in Treasuries and $1.7tn in agency MBS. Investors believe MBS will be the first part of the portfolio to be unwound since the Fed has in the past indicated a desire to be at an all-Treasuries balance sheet. Nevertheless given the attitudes of FOMC officials currently in place it is likely they will continue their dovish stance.

Greek bonds have been under pressure again after the IMF warned of further credit issues in the county. The IMF last week warned that Greece’s debt is unsustainably high and that it will be unable to repay back all of its debt even if it receives bailouts and debt relief. Given the “unsustainably high” designation that suggests that the IMF will be unable to participate in future bailouts given its own guidelines. That does not bode well for investors in an EUR 6bn bond that matures in July. Before the IMF report that bond yielded below 6% however the bond’s yield this week spiked to as high as 15%. Analysts anticipate that the country will be able to make payments on the upcoming bond without further aid but over the medium-long term a solution is necessary. Eurozone creditors will be unlikely to participate in future bailouts and debt relief without the participation of the IMF. Greece is resisting austerity measures as well. This renews talk of a possible Grexit from the eurozone. The IMF expects that by 2060 Greece’s debt will reach 160% of GDP by 2030 and spiral from there to 275% of GDP by 2060%. The IMF’s somber warnings comes under the assumption that Greece will implement bailout reforms which itself seems optimistic. Greece’s current bailout program is worth EUR 86bn and expires in 2018. Germany so far has been unwilling to discuss longer term solutions.

The California State Teachers’ Retirement System lowered its investment target from 7.5% to 7% following in the footsteps of Calpers who lowered their target from 7.5% in December. Calstrs said that there was a less than 50% chance that it would hit its targets set at the old number. Pension funds around the country are going to follow in these footsteps as returns go to zero. As a result pensioners may have to increase their contributions into the fund. Calpers in 2015 set a plan that would decrease their expected annual return at 0.25% each year but now are revisiting that plan since it may not be enough. The fund only has 68% of the assets it needs to pay out future liabilities. Pension bills of towns, counties, and school districts increase as these rates fall which ultimately could come back to bite pensioners and taxpayers. Analysts estimate that public costs would total $15bn over the next 20 years as a result of the change. Calpers manages $300bn for pensioners and is the largest pension fund in the world. Calstrs is the second largest.

Snap officially filed for IPO today and the valuation is expected to be between $20bn and $25bn. Healthy earnings from Facebook yesterday could lead investors to believe that the tech platform that Snapchat is pitching has room to grow and expand. This is the first unicorn among Uber, Airbnb and other closely watched startups to test the IPO market. If all goes well others may follow suit. Snapchat sells adds in order to gain revenue. It is trying to break into hardwear such as the Spectacles it unveiled in September. Morgan Stanley and Goldman Sachs are leading the IPO.

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Thursday February 2

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