Stocks fell today to start the week on a hesitant note. The S&P 500 fell 0.3% to 2,375 and the Dow Jones fell 0.2% to 20,954. The KBW Bank index fell 0.7% and utilities lost 0.3%. Possibly contributing to the downward tone in markets today was Trump’s combative comments over the weekend, geopolitical conflict out of Asia, and the expectation that the Fed will raise interest rates next week barring a downward surprise in the NFP on number. Economic data showed that factory orders rose 1.2% last month which was slightly higher than consensus which called for a 1.1% gain. CME Group predicts that there is an 86.4% chance that the Fed will raise rates next week. The two year Treasury yield was flat at 1.31% and the ten year yield rose slightly to 2.49%. Accordingly 2yr vs 10yr finished at 1.18%. The currency was mixed on the day. USD rose 0.4% against EUR to $1.0583. USD fell 0.1% against JPY to Y113.90 after the yen rallied due to geopolitical concerns. Commodities were mixed and gold was for the most part flat. WTI dropped 0.2% to $53.20 and Brent rose 0.2% to $56.00.
Commonly held beliefs about what drives inflation in economies is shifting. Historically many economists, investors and central bankers believed that factors such as printing money from the central bank and changes in interest rates drove inflation. However data has showed that those beliefs aren’t turning out to be true. Central banks have been printing money significantly since the financial crisis and lowering interest rates to record lows. However in spite of these changes inflation hasn’t budged and as a result investors and economists are starting to consider what other factors may drive inflation. That is because inflation influences the prices of bonds, stocks, currencies, and a wide variety of asset classes. Data has shown that over the last 10 years inflation has been driven primarily by input costs that companies pay. Accordingly companies adjust their prices on to consumers in accordance with how their input prices change in line with the competitive environment. Therefore it seems as if inflation is best explained by fluctuations in prices of commodities such as oil and base commodities that go into food. Indeed over the last 4 years oil prices and long-term inflation expectations have moved in tandem with one another. Indeed according to UBS economists 84% of the changes in inflation over the last 15 years can be explained by changes in oil and food prices. Economists also used to take the view that consumer expectations for inflation also played a role but that doesn’t turn out to be true either. All of this research was presented by five top economists at a monetary-policy conference. It comes as central bankers have been struggling to revive inflation in the post-financial crisis world.
Standard Life is set to acquire Aberdeen Asset Management for EUR 3.8bn or $4.7bn This deal is reflective of consolidation in the investment management industry as a result of pressures facing asset managers right now. The subsequent company will will be one of the largest asset managers in the U.K. with a total of GBP 660bn in AUM and the purpose of the deal is to boost earnings and provide both asset managers with a broader set of institutional investors. They hope to achieve earnings growth by saving $110mm per year through cost synergies. Lloyd’s owns a 10% stake in Aberdeen and has committed to not withdrawing funds for the first six months after the deal closes. They are purchasing the shares at almost no premium. Standard Life will buy 66.7% of Aberdeen at a price of 265.5 pence per share compared to Friday’s closing price of 286.3. In spite of that Aberdeen shares rose 4.7% to 299.9 today after the deal was announced. Standard Life shares also rose 5.7% to 400.1. This comes a few months after a similar deal between Janus and Henderson Group. These types of active managers are looking to cut costs to compete with low cost providers such as BlackRock and Vanguard.