Daily Market Color

Markets React to PBoC Stimulus to Kick off Payrolls Week

US Stocks and Treasuries both started the week little changed as investors digested China’s latest attempt to boost its slowing economy.  The People’s Bank of China lowered its reserve requirement ratio, or the amount of cash that banks must hold as reserves, by 50 basis points to 17%.  This is the fifth time the PBoC has lowered the RRR since February 2015, and comes after recent signs of tightness in short-term money rates last week.  Despite the stimulus announcement, Chinese stocks plunged, with the benchmark Shanghai Composite approaching its lowest level since November 2014.  Investors were hoping that the G-20 summit held over the weekend would produce a more aggressive response to the slowdown after Chinese central bank governor Zhou Xiaochuan said the PBoC had room and tools to effectively manage its monetary policy.  The yuan slid 0.17% to its weakest level since February 3rd.

Oil prices rose, adding to last week’s strong performance, after Saudi Arabia said it would work with other producers to limit price volatility.  Iran remains a significant obstacle to a global output freeze, so it remains to be seen how the Saudis intend to improve price stability.  Financial data, however, suggests market sentiment may be shifting, as a report from the InterContinental Exchange showed that there are more futures and options contracts betting on rising prices than at any point since 2011.  US producers also cut the number of rigs drilling oil for the tenth week in a row, reducing the rig count to its lowest since December 2009, which should help improve the supply/demand imbalance.

The US data released this morning largely disappointed, as Chicago PMI, Dallas Fed Manufacturing index, and pending home sales all came in below expectations.  We get some more significant releases later this week, headlined by Friday’s nonfarm payrolls report.  New York Fed President Dudley is scheduled to speak after the close this evening in China.

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