It was another wild day for stocks as equities spent time on either side of the flat-line in a volatile day on Wall Street before closing, as we like to say, aggressively unchanged.
Crude oil prices, meanwhile, took a nosedive on Tuesday, falling more than 6% at one point as West Texas Intermediate crude oil — the US benchmark — fell below $28 a barrel.
First, the scoreboard:
- Dow: 16,020, -6, (-0.04%)
- S&P 500: 1,852, -1.5, (-0.1%)
- Nasdaq: 4,270, -13, (-0.3%)
- WTI crude oil: $28.50, -4%
Americans quit their jobs with enthusiasm in December, another sign that things are alive and well in the US labour market.
The latest Job Openings and Labour Turnover Survey report published Tuesday showed that in December about 5.6 million jobs were open, more than the 5.4 million that was expected, while the quits rate jumped to the highest level since the early days of the financial crisis.
The increase in the quits rate is a broad indicator of strength in the labour market as the thinking goes that people won’t be giving up their jobs unless they’re reasonably confident they can find another one. Or as Bricklin Dwyer at BNP Paribas said in a note to clients on Tuesday, “Overall, the JOLTS report highlights a clean bill of health for the US labour market while global financial markets continue to wobble.”
To Joe LaVorgna at Deutsche Bank the quits rate is a leading indicator of wage growth, and so Tuesday’s report likely bolsters the belief among many economists the higher wages for American workers are coming.
Elsewhere in economic data, wholesale inventories declined less than expected in December, an indication that inventories are likely to be a smaller-than-expected drag in the first quarter. This, in turn, led to an increase in the Atlanta Fed’s GDPNow tracker for the first quarter to forecast a growth rate of 2.5%.
Oil prices got crushed again on Tuesday, which is sort of newsworthy on its own but also sort of a thing that just happens now. There was a time, once, when a 4% drop in oil prices was exciting, but now it feels like an average day.
News out of the oil market on Tuesday came from the International Energy Agency which in its latest monthly report said OPEC production surged last month, outpacing declines in non-OPEC countries.
On Monday night we looked quickly at an idea that as much as anything else it is the way shale projects were financed that led to the market oversupply we’re currently seeing manifested in prices. Basically, the idea — which we saw advanced by Mark Dow at Behavioural Macro and also explored in a BIS report — is that since these projects were financed by debt companies have continued producing oil in the face of low prices to get whatever cash they can from their projects.
So unlike stockholders, bondholders have a more senior claim on a companies profits and assets, meaning that the company itself has less of a buffer to slow production and inflict any losses on investors during a slow period for the business. It’s an idea, at least.
Elsewhere in the oil market Andy Hall — once called the “god” of oil trading but now probably not — lost 36% last year and is down another 4% in 2016. Hall still thinks prices are going higher.
In company news, Anadarko Petroleum cut its dividend.
Deutsche Bank is “absolutely rock-solid,” according to co-CEO John Cryan.
In a memo to employees published on Tuesday, Cryan encouraged Deutsche Bank staff to tell clients the bank, “remains absolutely rock-solid, given our strong capital and risk position.” Cryan also addressed the firm’s announcement on Monday that it has enough money to pay a coupon on its CoCo bonds — more on those here — due in April, writing, “On Monday, we took advantage of this strength to reassure the market of our capacity and commitment to pay coupons to investors who hold our Additional Tier 1 capital.”
Which is certainly one way to say it!
As we wrote on Monday, the first rule of Additional Tier 1 capital is that you don’t talk about Additional Tier 1 capital. Moreover, in general you don’t want to be talking about how great your bank because the whole business of running a bank basically requires that people believe your bank is strong enough to stay open almost no matter what. But look, I’m not the one running a company that is not getting its preferred message across in public markets, so don’t take it from me.
German finance minster Wolfgang Schaeuble, for his part, is not worried.
A report from The Financial Times on Tuesday also said a rare bit of financial engineering could be coming to Deutsche Bank: a bond buyback. This is exciting.
As the FT outlines:
After European banks suffered a second consecutive day of sharp falls, Deutsche Bank is expected to focus its emergency buyback plan on senior bonds, of which it has about €50bn in issue, according to the bank. The move was unlikely to involve so-called contingent convertible bonds which, along with the bank’s shares, have been the butt of a brutal investor sell-off in recent days, people briefed on the plan said.
Banks can generate capital gains by buying back bonds at a discount to their face value.
Now, that last sentence seems to be the heart of the thing. You’ve got to pay taxes on a capital gain. But! Recall that the whole problem with the CoCo bonds is that they run into problems if the bank’s capital level falls below a certain level. The value can be written down or the bonds can become stocks. We’re not there yet.
It would seem, however, that a way to reassure investors or at least calm market waters with respect to the trading in some of these instruments would be to retire senior debt, which could not only improve the bank’s finances but also create a smaller pool of senior holders. Both of which are probably desirable right now.
Former Minneapolis Fed president Narayan Kocherlakota wrote on Tuesday that the only reason we’re even talking negative interest rates is because Congress didn’t do their job.
Kocherlakota’s argument is that while negative interest rates would be a “daring” monetary policy, it is simply on the table because there is a continued insatiable demand for US government debt that could be met by Congress simply using its authority to authorise more spending and, as a result, the issuance of more debt.
But since this dearth of US government debt continues the natural real interest rate — the semi-mythical r* — continues to remain depressed thus making it hard for the Fed to achieve its goals, specifically its 2% inflation target.
This all sounds roughly correct.
We’d note that Fed chair Janet Yellen is set to appear on Capitol Hill on Wednesday for the first of two days of testimony, though her prepared remarks will be the same both days and her commentary more market-moving tomorrow as it would be a surprise for any policy-related discussions to break new ground on day two. either way, we’ll be watching.
Viacom shares got smoked. Disney reports after the bell.
Albert Edwards’ employer doesn’t think he’s all that crazy.
The White House sent its $4.1 trillion budget to Congress.
High school graduation rates across the country.
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