This Week in Corporate Finance (11/08/13)

The one-week delayed Employment report was the bit of icing on the birthday cake of economic good news we received this week. The Payroll report was substantially stronger than expected (+204k versus +120k consensus), and both the August and September reports were revised up (by +45k and +15k, respectively). The GDP report for the third quarter came in stronger than expected (+2.8% versus +2.0% consensus) and the Initial Claims report ticked lower to 336k.

 

The stock market responded to this burst of good news by reaching new highs or near-highs. The Dow peaked at 15,797.68 (up +22.24% over the past year), the S&P 500 continues to hover near its all-time high, currently at 1,770.54 (up +28.34% over the past twelve months), and the NASDAQ is at 3,919.23 (up +35.17% over the past 365 days) and near its 13-year high.

 

With the market now contemplating whether the Fed might accelerate the start of its “tapering” program, it wasn’t surprising to see US Treasuries take one on the chin. For the week, the 2-year note yield was unchanged at 31bps (after dropping to a low of 28bps); the 5-year note yield was up +4bps to 1.41% (after being as low as 1.30%): the 10-year note yield was up +12bps to 2.74%; and the 30-year bond yield was up +16bps to 3.85%. Mortgage rates reversed their downward trend. The average 30-year fixed-rate mortgage rose from its four-month low to 4.16% and the average 15-year fixed-rate mortgage rose to 3.27%.

 

All eyes will be on the final FOMC meeting that occurs on Tuesday December 17^th and Wednesday December 18^th, to see if the Fed hints at what its future actions may be.

 

Commodities definitely took a hit, losing a bit of their shine as safe havens for investors. Gold fell to a recent low of $1,280.50/oz, dropping -26.30% over the past year. Silver is now down -34.31% over the past twelve months. Oil touched a five-month low of $93.37/barrel for WTI. A glut of supply is trumping the increased economic activity in the US and driving prices lower. A gallon of gas in the US is near its lowest level in almost two years at an average price of $3.211/gallon.

 

Corporate CFOs are locking in funding costs before yields rise even higher as the window for debt issuance is closing as we approach the end of 2013, and the beginning of the holiday season. Philip Morris issued $2 billion via a three-tranche deal comprised of $750 million of a 5-year note, $500 million of a 10-year mote, and $750 million of a 30-year bond. Mosaic did its own three-tiered $2 billion transaction. It consisted of $900 million of a 10-year note, $500 million of a 20-year note, and $600 million of a 30-year bond.

 

Over in Europe, we received two bits of interesting news. First, in a bit of a surprise, the European Central Bank (ECB) lowered its refinancing rate by -25bps to a record low of +25bps. Only 3 out of 70 economists in one survey saw this action coming. The argument given for this reduction in yields was simply the fear of deflation in the euro-zone.

 

The other piece of news was that S&P lowered the sovereign credit rating of France from “AA+” to “AA”. France was a “AAA” credit as recently as January 2012.