Friday February 3

Stocks rose today after financial deregulation measures were passed and the January NFP report. The S&P 500 rose 0.7% to 2,297 and the Dow Jones rose 0.9% to 20,071. Over the course of the week indices were mixed with the S&P 500 rising 0.1% and the Dow falling 0.1%. Today the KBW Bank index rose 2.2% after President Trump signed an executive order designed to reign in Dodd-Frank. Economic data today showed that nonfarm payrolls rose 227k in January compared to estimates which called for a 175k gain. The unemployment rate rose from 4.7% to 4.8% as the labor force participation rate improved 0.2%. Average hourly earnings however rose 0.1% compared to estimates which called for a 0.3% gain. The NFP report was interpreted as mixed, and it’s expected that the report won’t force the Fed’s hand in either direction. The PMI Services index rose to 55.6 which shows strength in the services sector. Similarly the ISM non-manufacturing index rose to 56.5 which was slightly below estimates however new orders and business activity were both strong. Lastly factory orders also rose 1.3% last month versus estimates for a 0.9% gain. On that backdrop the two year Treasury was unchanged at 1.20%. The ten year Treasury yield was also unchanged at 2.47%. 2yr vs 10yr finished the week at 1.27%. Over the course of the week the 2 year and 10 year Treasury yields were each 1bp lower. USD fell 0.2% against EUR to $1.0786. USD fell 0.2% also against JPY to Y112.59. USD gained 0.4% against GBP to $1.2486 after the BoE came across as dovish yesterday. WTI and Brent rose 0.6% and 0.3% to $53.85 and $56.72 respectively. Oil prices benefited from new sanctions against Iran since that would reduce global supply. The VIX finished the week at the very low level of 10.97. Macy’s share price additionally rose 6.4% after Hudson’s Bay approached the retailer for a takeover.

Apple caps off a strong week for corporate bond issuance with a $10bn debt sale. So far this year investment grade companies have issued $185bn. This week alone there was a $17bn issuance from Microsoft, a $10bn issuance from AT&T. Apple saw that those issuances were well received and followed suit with a $10bn issuance of their own. This comes as demand for investment grade bonds has increased, according to Lipper research investment grade corporate bond funds have experienced $12.4bn in inflows year to date and $2.7bn this week alone. One indication of high demand is the fact that spreads on Microsoft’s issuance have tightened from +85 to +78 just days after it was issued. This ranks as Apple’s fourth largest bond issuance. Deutsche Bank, Goldman Sachs, and JP Morgan led the deal. The deal was more than 3x oversubscribed with orders coming in for $36bn. Apple also bumped up the size of issuance from $6-8bn from the actual 10. Corporate bond trading volume in secondary markets have also been elevated indicating a lot of activity and demand for those products. Trading volumes over the last three weeks have been more than 20% higher than last year’s daily average. Apple since 2012 has been issuing massive amounts of debt to finance share buybacks and dividends. Additionally Apple currently holds nearly $250bn in cash with the majority of that being held offshore. If they repatriate some of those assets that could also be used to finance buybacks and dividends. The use of proceeds of today’s issuance is for share buybacks, dividends, and general corporate purposes. The issuance includes nine tranches broken up into floating and fixed rate bonds in varying maturities. The 10 year bonds priced at +88 compared to the initial +110 at which they were marketing.

Donald Trump announced that he would sign executive orders to reign in Dodd-Frank and the fiduciary responsibility rule that affects wealth and asset managers. Gary Cohn said that the changes would benefit our financial system since banks wouldn’t be burdened down with hundreds of billions of dollars in legal and regulatory costs. That enables them to facilitate the flow of capital in a more efficient manner. The executive order will direct lawmakers to come up with a plan to revise and/ or undo Dodd-Frank. The changes are expected to benefit large non-bank entities that were labeled as systemically important financial institutions such as large insurance companies and asset managers. These policies will face opposition from Democrats who argue that regulations put in place after the financial crisis make the system safer, will prevent another bailout, and make the system more fair for consumers. Some people are also criticizing Trump since these policies contradict the anti-Wall Street stance he took on the campaign. Cohn believes it is important that the United States does not regulate itself away from an opportunity to be a dominant player in global capital markets. He also targeted the CFPB suggesting that he believes strict lending requirements for credit cards and mortgages could be harming the economy.

Late in the session Hudson’s Bay made a takeover offer for Macy’s. Hudson’s Bay owns Sak’s Fifth Avenue and Lord & Taylor retail stores and branding so it makes sense that it’s trying to acquire one of its rivals. There is no official offering price yet however Macy’s shares rose 6.4% after the potential deal was announced to $32.69. Hudson’s Bay has a significantly smaller market cap than Macy’s however they could raise capital in order to finance the acquisition. Macy’s has a market cap of $10bn whereas Hudson’s Bay’s market cap is just $1.4bn. Macy’s also is heavily levered with $7.5bn in debt which would complicate any acquisition. Both entities are struggling in the face of e-commerce and decreased foot traffic in retail locations given that younger locations are looking more and more to make purchases online. It’s third quarter earnings showed that revenues fell 4.2% from the prior year. Traditional retailers have also suffered as a result of the increase in prominence from companies from Zara. Additionally apparently there has been a shift towards the highest and lowest end retailers which is not good for Macy’s which markets towards mid range consumers. Many activist investors have been making the case that Macy’s is undervalued just relative to the value of its real estate.

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Friday February 3

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