April 11, 2016

Stocks gapped up nicely at the open but quickly faded, a pattern we’re seeing more often lately. The Dow and SPX are currently up 70 pts & .34%, respectively. Tech and materials are leading the way, each up by about .7%. The Dow Transports are higher as well, and are outperforming the SPX by a wide margin year-to-date. Healthcare (especially biotech), telecom and utilities, on the other hand, are lower. The dollar is lower on the day (and in the year-to-date period); WTI crude oil is up 1.5% to trade at $40/barrel. That’s good news as we get ready for first quarter earnings season. Bonds are modestly lower today as yields ticker higher. The 5-year and 10-year Treasury yields are trading at 1.16% and 1.73%, respectively. So far in 2016 the 10-year has traded in a range from 1.66% to 1.98%. So you can see that we’re at the lower end of the range and any hint of inflation or another Fed interest rate hike will take us back up to the top end of the range.

We got some better economic data out of China over the weekend. China’s index of leading economic indicators rose to 99 in February from 98.1 in the prior month. Also, wholesale inflation in the country showed its first monthly increase since 2013, causing traders to wonder if economic growth might be turning around. We have seen signs of a pick-up in emerging markets. Citigroup’s economic surprise index for emerging markets has nearly rebounded from a huge dip in January & February. The result is higher commodity prices for copper, iron ore and oil.   

A CNBC survey finds that economists have reduced first quarter gross domestic product (GDP) growth expectations to just .6%. This is sort of puzzling, since job growth and the housing market have continued to improve this year. Of course, trade (imports & exports), manufacturing activity and business inventories have been on the weak side. Business inventories have been especially soft. Part of this could be seasonality rather than an actual slowing trend in the economy—as we saw last year. And CNBC points that whatever number is reported, it is likely to be materially revised within a month or two. In fact, they say the average error rate is about 1.3 percentage points. That’s massive when you consider that in both 2014 and 2015, GDP rose 2.4%. And the Federal Reserve currently expects 2.0% growth this year.

Bloomberg reports Puerto Rico is “almost certain” to default on some debt payments due July 1st. We have known for some time that the island is struggling under the weight of too much debt and probably won’t be able to satisfy all its obligations in the future. The island has more debt than any US state except California and New York. Last week, Puerto Rico’s governor signed a law giving him the authority to stop debt payments if he deems it necessary. He says Puerto Rico is “insolvent.” At the same time, the bonds are still trading, probably because most are insured by Ambac Financial, Assured Guaranty and MBIA. These insurance companies recently pledged to back the bonds, and it looks like they have the capital to do so. So a default would most likely be orderly.     

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