An early gift for the Yellen Fed; a Brexit breakthrough, barely; in 2017 mergers so far, cash beat stocks
“There is no better time to fix the roof than when the sun is shining.”
U.S. jobs: Stocking stuffer The jobs report for November was moderately positive, with the headline unemployment rate at 4.1%, the same as October and meeting expectations. Non-farm payroll growth beat expectations slightly at 228k and manufacturing payrolls grew by 31k, better than consensus. Other positive elements: unemployment for Americans over 25 with less than a high school diploma hit a record low of 5.2%, down from October’s 5.7%.
The number of job-seekers only finding part-time work fell to 1.543 million, but the overall underemployment rate rose slightly, to 8.0 % from October’s 7.9% and the labor force participation rate held steady at 62.7%. However, average hourly earnings growth disappointed at 0.2% for the month, bringing the year-on-year rise to 2.5%, below expectations.
Markets reacted positively on the news; the CBOE S&P500 Volatility Index (the VIX) fell to as low as 9.43,1 approaching the historic low of 8.56 (set on November 24). The U.S. Treasury yield curve also steepened somewhat, possibly in reaction to the strong economic news: the 30-year Treasury yield rose to 64.2 basis points (bps) above the 5-year, and the 10-year rose to 57.7 bps above the 2-year.
As for the upcoming Fed rate decision: steady odds on a rise, at 98.3%, according to the Fed Funds futures market.
Brexit: Breakthrough, mostly The agreement reached Friday settles enough issues for all parties to declare victory and move forward, but kicks the can down the road on others. Among the agreed items: the amount of the “divorce bill” to be paid by the UK to the European Union (€45 billion) and the rights of EU citizens in post-Brexit Britain. But the Northern Irish party in Theresa May’s ruling coalition, holding up the overall agreement until the last minute, hasn’t agreed on the final details of its main issue, keeping the border between Northern Ireland and the Republic of Ireland as open as it is at present. That leaves the overall Brexit agreement, whose stated deadline is in March 2019, vulnerable due to the current fragile state of UK politics.
U.S. mergers: Cash beats stocks As of December 1, a mere 10.6% of merger and acquisition (M&A) transactions, measured by dollar value, involved stock-for-stock deals. That’s the lowest percentage since tracker Dealogic started to keep records in 1995, well below the 22-year average of 18.5%, and a significant drop from 2016’s 23.9% level. Compare that to the late 1990s, when over half of all deals were all-share transactions.
Among the possible reasons: the rock-bottom price of money. With U.S. interest rates at record lows – although poised to rise as the Federal Reserve (Fed) follows through on its intention to raise rates – borrowing to finance all-cash deals looks attractive. And borrowing might not even be needed, given record high levels of cash on corporations’ balance sheets.