The must-know economic trends in the capital market

The stock market

The FOMC meeting minutes were released on Wednesday, April 9. Participants commented on and discussed different sectors and the economic drivers including the stock and mortgage market, credit flows, etc.

Broad stock price indexes rose over the intermeeting period, apparently boosted by a solid finish to the corporate earnings season. Equity prices were also supported by a broad increase in investors’ willingness to take riskier positions, in part likely reflecting an easing of concerns about emerging market equities (or EMEs) early in the period.

The performance of foreign equity price indexes was mixed as stock prices rose in the EMEs, but they were flat in Europe and declined substantially in Japan.

Credit flows: Corporate, real estate, and municipal bonds

Credit flows to non-financial corporations remained robust.

Following a slowdown in January, non-financial corporate bond issuance rebounded in February, with the majority of proceeds going to investment-grade firms. The growth of commercial and industrial loans on banks’ balance sheets increased over the period. Institutional issuance of leveraged loans continued at a brisk pace.

Financing conditions in the commercial real estate sector continued to improve gradually. Issuance of commercial mortgage-backed securities was robust in February after a slow start in January.

Conditions in the municipal bond market remained favorable over the intermeeting period with the spread of municipal yields over yields on comparable-maturity Treasury securities changing little. Although Puerto Rico’s general obligation (GO) bonds were downgraded from investment grade to speculative grade, prices of these bonds held steady, albeit at depressed levels. Puerto Rico successfully brought to market a GO bond issue in early March, substantially easing its near-term liquidity pressures.

The PowerShares Insured New York Municipal Bond ETF (PZT), the PowerShares Insured California Municipal Bond ETF (PWZ), and the Van Eck’s VanEck Vectors Puerto Rico Municipal Index ETF (HYD) are popular ETFs with Puerto Rico holdings. Goldman Sachs Group, Inc. (GS) and Wells Fargo & Company (WFC) are among the top ten companies which hold Puerto Rico bonds in their investment portfolio.

You can read more on the financial condition of Puerto Rico, and its GO bond issuance in Will the GO bonds allow Puerto Rico to be free of its worries?

Mortgage market

House prices registered a further notable rise in January. Mortgage interest rates and their spreads over Treasury yields were little changed over the intermeeting period. Financing conditions in residential mortgage markets stayed tight with both mortgage applications for home purchases and refinancing applications remaining at low levels through early March.

Consumer credit

Conditions in consumer credit markets were still mixed. Auto loans and student loans continued to be broadly available and continued to expand briskly, while credit card limits for borrowers with subprime and prime credit scores remained at low levels in the fourth quarter. Issuance of auto and credit card asset-backed securities was robust again in January and February.

The FOMC meeting held on March 18-19, 2014, provided the Federal Reserve Boards’ economic outlook, covered in the next part of this series.