Archive for month: July, 2013
FOMC Minutes/Bernanke Preview
/in Investing/by Tom 2The Fed remains critical to the market, so today’s Fed events today will be front-and-center like they always are. But, whatever the immediate “reaction” to the FOMC minutes and Bernanke, keep in mind that the very broad consensus is that the Fed will begin “tapering” at the September meeting. That is the baseline expectation.
With regard to the minutes, they have the potential to be a touch hawkish, as there will probably be a Fed official or two who says tapering should start in July. But, unless there are “many” Fed officials who espouse that view, it won’t change September as the consensus date.
Bernanke’s speech, if he touches on monetary policy at all, will likely be dovish. No doubt he will re-iterate the “tapering is not tightening” refrain.
He’s right, of course, but saying that doesn’t change the fact that tapering will likely start in September. Unless he says that tapering might not start until ’14, the comments won’t really alter the baseline expectations.
Bottom Line
For all the incremental headlines over the past few days (and this morning) the rally this week is bout investors becoming more comfortable with the “tapering” narrative and the reality of higher interest rates in the future.
The fact that higher stock prices and higher rates no longer appear to be mutually exclusive is bullish for the market, and as long as that continues, expect the path of least resistance to be higher in equities.
Was Friday’s Rally A Game changer for the Market?
/in Investing/by Tom 2Economics
Last Week
Friday’s jobs report capped what was a good week for domestic economic data, and the main takeaway was that Fed “tapering” expectations in September were further cemented by the data.
Looking at the jobs report, it was a pretty “Goldilocks” number. The June report was a bit better than expectations (195K vs. 161K) but, almost more importantly, we saw a net 70K increase in the May and June figures. The unemployment rate held steady at 7.6%, but that came with a welcomed increase in the participation rate and employment-to-population ratio. Overall, this was a very solid report.
As mentioned, the rest of the data from last week was also pretty solid. The final reading on both manufacturing PMIs and the non-manufacturing PMIs were in-line or better than expectations. Plus, evidence continues to build that manufacturing is seeing a bit of an uptick in activity.
So, in the context of “WWFD” (What Will the Fed Do?), the good economic data last week—which generally shows there is no loss of economic momentum from Q1, as many expected there would be—further cements the likelihood that the Fed will taper QE in September.
While the domestic data was good and it implies “less-accommodative” monetary policy going forward, the same cannot be said for the rest of the world. Outside of the jobs report Friday, the surprisingly dovish European Central Bank and Bank of England meetings Thursday were the biggest events of the week.
Mario Draghi and new BOE Governor Marc Carney both implemented “forward guidance” to emphasize the different directions of monetary policy between the Fed and the ECB and BOE, respectively. While the Fed looks to taper, both the ECB and BOE remain firmly in easing mode, with a bias toward more accommodation in the future.
Looking at the actual data in Europe, the takeaway from last week is that we are seeing signs of stabilization in the European Union’s economy (small signs, but at least it’s a step in the right direction). Manufacturing PMIs and EU retail sales both showed improvement, and of particular note were the UK numbers, which continue to get better and better.
Finally, China remains the area of greatest concern, economically speaking. Manufacturing and composite PMIs both were in-line with pretty low expectations, and it is clear from the data that the Chinese economy is losing momentum. And, the People’s Bank of China’s recent actions to burst the credit bubble in the property market will only slow growth further.
Seven-percent growth is now the number to watch—if you see expected 2013 GDP growth dip below 7% for China in the coming months (or if a lot of sell-side firms downgrade their growth expectations below 7%) then look for more weakness in China.
Bottom line with data last week was that it 1)Cemented the expectation that the Fed will begin to “taper” QE in September, and 2) Reinforced the monetary-policy divergence between the U.S. and the rest of the world.
So, we can expect recent trends of the higher dollar/lower “everything else” and higher yields to continue until the domestic data becomes soft, or international data improves.
This Week
Focus turns from the “macro” to the “micro” as the economic calendar is very slow this week, and the market’s focus will turn toward earnings.
With little actual data domestically (jobless claims Thursday is the highlight, and PPI Friday is the only other number), the Fed will remain a focal point.
FOMC minutes will be released Wednesday but, given the large amount of communication from Fed presidents over the past two weeks, I’m not sure there’s going to be a lot of additional insight to glean from the minutes. The market expects “tapering” in September, and I doubt anything in the minutes will alter that expectation. (The risk, if anything, is that they are slightly hawkish.)
There are also multiple Fed speakers this week: Bernanke Wednesday, Daniel Tarullo Thursday, and James Bullard and John Williams Friday). Their comments bear watching, as I imagine the Fed will continue trying to “talk down” interest rates and reinforce the “tapering is not tightening” PR campaign. So, expect them to be on balance dovish, but again I doubt any of it will change current market expectations.
It’s a Holiday Shortened Week, but the Economic Data Will be Market Moving
/in Investing/by Tom 2Economics
Last Week
Last week was a mixed week of generally “second tier” economic data. Positively, housing data continues to confirm the recovery in the housing market is still accelerating. New home sales, Case-Shiller and pending home sales all beat expectations, although again the strong data is being taken with a small grain of salt as this doesn’t reflect higher mortgage rates, and next month’s housing data will be very closely watched for any negative effect of these higher rates.
Also last week, manufacturing data continued to imply we may finally be seeing a stabilization of activity in manufacturing, after a several month bleed lower. Durable goods beat expectations and new orders for non-defense capital goods excluding aircraft rose 1.1% in May. That data comes on the heels of decent Empire and Philly Fed manufacturing surveys for June, so there are some signs that manufacturing activity may finally be picking up.
The data wasn’t all good, though, as consumption and personal spending disappointed. First, the big headline of the week was the surprise drop in Q1 GDP to 1.8% from the previous estimate of 2.4%. The drop was due to a reduction in PCE (personal spending). But, that decline was based almost entirely on a reduction in the purchase of healthcare and “other” services (so it wasn’t because retail sales declined sharply). But, it’s still not a revision that is welcomed by the market.
Then, on Thursday of last week the personal spending numbers for May were in line with expectations, but there was disappointment in the revision of the April data, which went from a positive 0.1% increase from March to a –0.1% decrease.
The takeaway is that while the consumer has been resilient, whether or not consumer spending can stay at current levels remains a worry for the market, given the headwinds of rising healthcare costs and taxes.
This Week
As mentioned, despite there being only 3 1/2 trading days this week, there’s a lot of important economic data packed in.
First, it’s jobs week. So, we’ll get the ADP and Challenger reports Wednesday, and then the government number Friday. Obviously, given the changing perceptions of Fed policy over the past few weeks, and resulting market turmoil, the jobs report will be very closely watched.
Second, we get a final look at June PMIs (both manufacturing and services). Chinese and European manufacturing PMIs for June were released this morning. The Chinese numbers were weaker than expected, although the focus there is more on liquidity than manufacturing activity at the moment, while the European numbers were little changed from the “flash” estimates of two weeks ago, which implied some stabilization in the EU economy.
Domestically, manufacturing PMIs are released this morning, and then global “composite” PMIs, which combine manufacturing and the service sector, will be released Tuesday night (China) and Wednesday morning (EU & US).
Finally, there are European Central Bank and Bank of England rate decisions Thursday. There is no change expected from either bank with regards to rates or their QE programs. But, given turmoil in debt markets recently, comments from Draghi in particular will be closely watched. At the moment, though, both of these meeting look to be relatively run of the mill.
The important thing to remember this week is that with regards to the economic data, “good is good.” The Fed seems determined to begin tapering “QE” this fall and based on the rhetoric, it’ll take a steep drop in the economic data to alter that present course. So, for the rally to survive “tapering” the economic data needs to steadily improve between now and this fall, when accommodation begins to be removed. 1.8% GDP isn’t going to get it done for an equity market up nearly 13% in 6 months. So, the economic data needs to get decidedly stronger, starting now.
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