Thursday April 6 Daily Market Primer

•        Stocks fell
•          Fed may shrink (the balance sheet)
•          Trump hosts Xi

 Stocks fell late in the day after being up most of the session, after the March Fed minutes revealed a discussion about shrinking the balance sheet.  The dollar fell when the minutes came out, the thinking being that a smaller Fed balance sheet means lower liquidity in dollar denominated assets.  Stocks markets in Asia and Europe lower, led by Japan, down 1.4%, but in the US equity futures are positive this morning.

	LAST	CHANGE	% CHANGE
DJIA	20,648.15	-41.09	-0.20%
Nasdaq	5,864.48	-34.13	-0.58%
S&P 500	2,352.95	-7.21	-0.31%
Russell 2000	1,352.14	-16.03	-1.17%
Global Dow	2,679.63	-4.84	-0.18%
Stoxx Europe 600	381.75	0.61	0.16%
Nikkei 225	18,597.06	-264.21	-1.40%
UK: FTSE 100	7,307.26	-24.42	-0.33%
CBOE Volatility	12.65	0.86	7.29%
Australia: S&P/ASX 200	5,856.30	-19.90	-0.34%
China: Shanghai Composite	3,273.76	3.46	0.11%
Hong Kong: Hang Seng	24,255.26	-145.54	-0.60%
Europe Dow	1,652.01	-3.58	-0.16%
India: S&P BSE Sensex	29,927.34	-46.90	-0.22%
France: CAC 40	5,100.19	8.34	0.16%
Germany: DAX	12,190.36	-27.18	-0.22%
Italy: FTSE MIB	20,241.15	-12.22	-0.06%
Spain: IBEX 35	10,446.50	43.80	0.42%
U.S. 3 Month	0.803	0/32
U.S. 2 Year	1.234	0/32
U.S. 5 Year	1.867	-2/32
U.S. 10 Year	2.337	0/32
U.S. 30 Year	2.988	-0/32
Germany 2 Year	-0.797	0/32
Germany 10 Year	0.261	0/32
Crude Oil	51.42	0.27	0.53%
Brent Crude	54.71	0.35	0.64%
Natural Gas	3.266	0	0.00%
S&P GSCI	392.22	1.51	0.39%
E-mini S&P 500	2349	2.5	0.11%

The ADP payroll report was a very strong 263K, but it wasn’t enough to boost stocks.  All eyes are on the summit starting today between Chinese President Xi Jinping and President Trump.  This should give us insight into the important US-China relationship, trade policy, and cooperation on North Korea.  I’ll be watching my Twitter feed for the next two days.  Initial jobless claims were 234K last week, down 25K from the week before, and quite a bit better than the Bloomberg consensus of 250K.

Here’s the news:

Fed balance sheet

The minutes of the Federal Open Markets Committee March meeting show that most officials agree that they will begin reducing the size of the bank's $4.5 trillion balance sheet later this year. Traders are betting that the reduction in bond holdings will have a monetary effect, which may slow the pace of interest rate rises for the rest of 2017. The minutes also showed that some members are getting worried about stock valuations.

Cohn and banks, Trump and China

White House economic adviser Gary Cohn said he supports a policy that could radically reshape Wall Street by separating their consumer-lending businesses from investment banks in a throwback to Glass-Steagall, according to people with knowledge of the matter. Meanwhile, Donald Trump will meet with Chinese President Xi Jinping later today in a test of the U.S. president's pre-election promise to do better deals with China. On the agenda will be everything from trade to the threat posed by North Korea, with negotiating teams on both sides having plenty to work through.

Draghi restates

European Central Bank President Mario Draghi said that inflation in the euro area is not strong enough for a shift to tighter monetary policy. The euro dropped against the U.S. dollar following his dovish comments and was trading at $1.0668 by 5:32 a.m. Eastern Time. Bank of England policy-maker Gertjan Vlieghe said that faster U.K. inflation alone would not force a rate hike there.

Markets drop

Overnight, the MSCI Asia Pacific Index fell 0.8 percent, while Japan's Topix Index closed 1.6 percent lower, as automakers were hit. In Europe, the Stoxx 600 Index was down 0.4 percent by 5:50 a.m. with banks leading the losses. U.S. stock futures were unchanged.

Coming up...

The big data event of the week is tomorrow's U.S. payrolls number, where expectations are for 180,000 jobs to have been added in March. Today we get initial jobless claims data at 8:30 a.m., with analysts predicting 250,000 new claims, down from last week's 258,000. Trump hosts Xi. US President Donald Trump and Chinese President Xi Jinping are meeting at the "Winter White House" at Trump's Mar-a-Lago estate to discuss topics including trade and North Korea. The Fed wants to start shrinking its balance sheet. Minutes from the March Federal Reserve meeting released Wednesday show the Fed wants to start normalizing its $4.5 trillion balance sheet, which ballooned as a result of the financial crisis. Fed members also noted stock prices were "quite high." Tarullo leaves the Fed. Daniel Tarullo leaves the Fed's Board of Governors after more than eight years on the job. He served as chairman of the Board's Committee on Supervision and Regulation, which was responsible for regulating Wall Street banks. India's central bank holds its key rate. The Reserve Bank of India held its key interest rate at 6.25% at Thursday's meeting, but it raised its reverse repo rate by 25 basis points to 6.00%. "Overall, the MPC's considered judgement call to wait out the unravelling of the transitory effects of demonetisation has been broadly borne out," the bank's statement said. Trump's tweets caused Banxico to alter its strategy. "I'll say it like this, in simple terms: with two tweets from you know who, the effect (of that intervention) vanished," Agustin Carstens, the governor of Mexico's central bank, said on Wednesday. MBAs are heading west. New analysis from Poets and Quants shows that graduates from elite MBA programs are being heavily recruited by tech firms. For instance, over the past five years, Amazon has hired 445 MBA grads from Chicago, Northwestern, MIT, Columbia, Michigan, and Duke. Yum China soars on earnings. The China unit that was spun off from KFC owner Yum Brands reported adjusted earnings of $0.44 a share on revenue of $1.28 billion. Same-store sales climbed 1%, above the expected drop of 0.7%. Shares were up 10% in after-hours trade. Bed Bath & Beyond beats. The retailer earned $1.84 a share in the fourth quarter, easily topping the $1.77 that Wall Street was expecting. Bed Bath & Beyond raised its quarterly dividend by $0.03 to $0.15 a share. Stock markets around the world are lower. Japan's Nikkei (-1.4%) paced the decline in Asia, and Britain's FTSE (-0.5%) trails in Europe. The S&P 500 is set to open fractionally lower near 2,351. US economic data is light. Initial jobless claims will cross the wires at 8:30 a.m. ET. The US 10-year yield is higher by 2 basis points at 2.36%. A New Path President Trump signaled a more aggressive U.S. policy toward Syria on Wednesday, saying a suspected chemical attack by the Assad regime was “a terrible affront to humanity.” Mr. Trump didn’t elaborate on how his administration would respond to the latest attack, which killed at least 85 people, but said it made him re-evaluate his approach to Syrian President Bashar al-Assad. Deeper U.S. involvement or a military response could heighten tensions with Russia, a regime ally, and complicate the fight against Islamic State. Hours after Mr. Trump spoke, Secretary of State Rex Tillerson urged Russia to abandon its support for Mr. Assad. Last week, Mr. Tillerson and other administration officials indicated the U.S. expected the Syrian leader would remain in power. We report that a confluence of crises—the attack in Syria and the latest ballistic missile test by North Korea—is forcing Mr. Trump to re-evaluate his fledgling foreign policy. Lights Out The company that pioneered lightbulbs now wants to turn off the switch. General Electric is weighing a sale of its consumer-lighting business, which for decades defined the company that was co-founded by Thomas Edison 125 years ago. The Boston-based industrial giant has been interviewing investment banks to sell the unit, which could fetch around $500 million. An exit from the business would be the latest in a series of changes at the company. Once associated with refrigerators, microwaves and lightbulbs, GE is now focused on power turbines, aircraft engines, health-care equipment and locomotives, along with lucrative service contracts for those machines. The lighting unit GE is considering selling is now a small and shrinking business that consists of residential LED lighting and connected-home technology in North America. Tsipras: EU should call summit to break Greek bailout deadlock Tsipras (Michele Tantussi/Getty Images) Greek Prime Minister Alexis Tsipras said the EU should hold an emergency summit if its finance ministers and the Greek government doesn't soon reach an agreement that would clear the way for the release of bailout funds. "I think the initiative will have to be taken at the higher level to have positive outcome before Easter, in any case within April, even if this means calling a euro-area summit," he said.  Financial Times (tiered subscription model) (05 Apr.),  Details scarce in Fed plan to shrink portfolio Federal Reserve minutes from its March meeting show that a majority of its voting members expect two more interest-rate increases this year and favor a reduction in the central bank's $4.5 trillion portfolio of Treasury and mortgage securities by year-end. The method and pace of asset reductions and how they would affect the market remain unclear.  Bloomberg (05 Apr.),  The Wall Street Journal (tiered subscription model) (05 Apr.),

Trump expected to tone down stance on China

President Donald Trump is expected to not accuse China of currency manipulation, contrary to repeated campaign promises that he would do so, as he and President Xi Jinxing prepare to meet in the US. However, it is thought that the accusation could re-emerge if the US Treasury changes its definition of currency manipulation.

Reuters (05 Apr.),  Bloomberg (05 Apr.) 

Report: More banks monitor traders with cloud

Large banks are increasingly using cloud technology to surveil electronic and phone communication between traders and clients to weed out bad behavior, according to a Greenwich Associates report. "Cloud-based voice technology alongside analytics can be used to capture enhanced metadata around calls, transcribe every call and apply artificial intelligence to find patterns of behavior that warrant deeper examination," said research head Kevin McPartland.

The Trade (UK) (04 Apr.) 

PwC: Financial firms become more accepting of fintech

A PwC report says that 88% of financial institutions fear revenue loss to financial-technology companies and that 82% plan to partner with fintech firms during the next three to five years. "Mainstream financial institutions are rapidly embracing the disruptive nature of fintech and forging partnerships in efforts to sharpen operational efficiency and respond to customer demands for more innovative services," the report states.  Bloomberg (06 Apr.), 

Panera Bread to be acquired by Krispy Kreme owner

JAB Holdings, which owns Krispy Kreme Doughnuts and Caribou Coffee, said it will expand in the breakfast and coffee market with the acquisition of Panera Bread for $7.2 billion. JAB will assume roughly $340 million of Panera debt, bringing the total value of the deal to about $7.5 billion.

Reuters (05 Apr.) 

Regulation rollback stalled by open seats at CFTC, SEC

The Trump administration's move to ease Wall Street regulations has stalled because open seats at the Securities and Exchange Commission and the Commodity Futures Trading Commission have left them with two members each split across party lines. "Many are waking up now to the reality that two Democratic commissioners at two little regulators may stand in the way," said Tyler Gellasch, a former aide to SEC Commissioner Kara Stein, a Democrat. Bloomberg (05 Apr.) 

Trump might link infrastructure plan with taxes or health care

President Donald Trump said he is considering packaging his $1 trillion infrastructure spending plan with initiatives to overhaul the tax system or health care. Trump originally intended to make his infrastructure proposal public later this year, but he said in an interview that he is "thinking about accelerating it." Reuters (05 Apr.),  The New York Times (free-article access for SmartBrief readers) (05 Apr.) 

Fiduciary-rule delay not enough, industry says

The Department of Labor's 60-day fiduciary-rule delay fails to fully comply with President Donald Trump's executive order to review the entire rule, opponents say.

ThinkAdvisor (free registration) (05 Apr.),  InvestmentNews (tiered subscription model) (05 Apr.) 

Harvest Global launches fund focused on Chinese equities

Harvest Global Investments has rolled out a fund that buys Chinese equities and equity-related instruments, including American depositary receipts. The Harvest China Evolution Equity Fund is managed by Yannan Chenye, head of China research for Harvest Global. FINalternatives (05 Apr.), 

Unilever buys back $5.3 billion of stock, divest spread unit.

China's local debt nightmare is getting a rerun after rating cut.

German factory orders recover as economic momentum strong.

The world's top coffee exporter considers importing coffee.

Billions in pre-euro currencies remain unredeemed.

Citi Has an alternative 'Big Short' on U.S. retail.

Why regulators should focus on bankers' incentives. White House Takes Lead Role on Tax Plan Steve Bannon Removed From National Security Council With Trump’s Signoff U.S.-China Trade Tensions Loom Over Trump-Xi Summit Unilever Unveils Restructuring, Pledges to Raise Returns in Wake of Kraft Bid Megyn Kelly’s Exit From Fox News Is No Longer in Dispute Green-Energy PACE Home Loans Catch Congress’s Ire

Tomorrow is Jobs Day. Economists are expecting 180,000 new positions to have been created in March and for the unemployment rate to hold steady at 4.7 percent. Once again, the big question will be what -- if anything -- the report says about full employment, and whether we're at it or not. Yesterday ADP came out and said that a staggering 263,000 private sector jobs were created in March. While ADP isn't always a perfect predictor of the official report, if the number points in that direction at all, it certainly suggests that there may be a deeper pool of available labor than many people seem to think. Commenting on yesterday's Fed minutes, Neil Dutta of Renaissance Macro wrote: "Reading the paragraph on page 10 the extent to which the Fed's goals were met left me scratching my head. First, 'nearly all participants judged that the U.S. economy was operating at or near maximum employment.' I wonder how long they can hold onto this view with strong jobs growth, rising participation and hourly wage inflation below 3 percent." If the number tomorrow continues to show all of these things -- strong job growth, rising labor force participation, subdued wage inflation, etc. -- it will make it harder to argue that the economy is reaching the limits of available labor.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, FIN Alternatives, FT, Reuters