Archive for month: November, 2013
The Economy: A Look Back and What’s Ahead
Last Week
It was a relatively quiet week economically speaking, and the “highlight” was the Yellen testimony before the Senate Banking Committee. She was more “dovish” on the margin than generally was expected, although it’s safe to say nothing really new came from the testimony.
Perhaps most importantly, if you only read the transcript or her prepared remarks and the Q-and-A, you might have thought it was Bernanke giving the testimony.
That’s important (and an underappreciated positive) because, from a policy-continuity standpoint, we know what we’re getting with Yellen (Bernanke part two). We’re in uncharted waters with how the Fed is going to unwind all this stimulus, and it was comforting to the markets last week that Yellen sounded so “Bernanke-like.”
Turing to actual data, we didn’t get much, and what we got was mixed. The Empire State Manufacturing Survey was a big miss Friday and caused a bit of a “dovish” response in the markets (bonds up, dollar down), although I think that was more trading noise than anything. The Empire State survey did turn negative for the first time since May, and new orders also fell into negative territory. But, while that is a bit disconcerting, we need to keep in mind that Empire State has been one of the softer regional surveys and hasn’t been very correlated to national manufacturing activity. So, it really isn’t going to shift any “tapering” expectations.
Also softening the blow of the big Empire State miss was the October industrial production report, which missed on the headline number because of a reduction in utility output, but the more-important manufacturing component met expectations, rising 0.3%. So, it confirms the good manufacturing PMIs from October, and implies the economy really didn’t take much of a hit from the government shutdown.
Finally, jobless claims missed expectations, and continue to send a “non-confirmation” signal with regard to the labor market. (Claims aren’t falling the way they should be, given the improvement in the monthly jobs report.)
Bottom line is the economic data last week didn’t change the outlook for Fed tapering (January-March) or alter people’s perception of the economy (still slow growth). But, importantly, it didn’t give any reason to think the recovery is stalling, either. So, bottom line is the data and Yellen were a tailwind for stocks last week.
This Week
This week will be much-busier than the past few weeks from an economic-data standpoint. The date that the Fed starts to taper QE remains the dominant question for the markets, and we should get some further insight this week.
First, Bernanke speaks Tuesday night. He will comment on the economy, so there’s the potential for him to be “dovish” or “hawkish.” Additionally, we get the Fed minutes from the October meeting. Remember, this was the meeting that first caused the tapering expectations to shift back from June to the January-March ‘14 time frame—and that was mostly due to the fact that the FOMC didn’t really downgrade its assessment of the economy (which was taken as “hawkish”). Obviously, the Fed’s outlook for the economy is critical to when they taper QE, so the minutes will be important to getting more insight into the committee’s opinion of the economy.
There’s a lot of important hard data, too. The global “flash” manufacturing PMIs for November come Wednesday night (China) and Thursday morning (EU and U.S.). There’s been some concern the global recovery has been stalling lately, so these PMIs will offer more insight into the state of the world economy.
Domestically, we also get retail sales (Wednesday), and they’ll be watched to gauge the state of the consumer heading into the holiday shopping season. (Keep in mind the retailers are at all-time highs, and M earnings last week resulted in an uptick of expectations for holiday spending.)
It’s fair to say that over the past few weeks domestic data has implied the economy may be a bit better than we think, and international data has implied the global economy may not be as healthy as first thought. Data this week will go a long way toward confirming or rejecting that sentiment.
The Economy: A Look Back and What’s Ahead
Last Week
Economic data last week were stronger than their relatively low expectations, as concerns about the negative effects of the government shutdown had resulted in pretty low expectations for most of October’s economic releases.
And, it would appear that those concerns have been misplaced, because we’re not seeing the drop in economic activity you would think we would have. At the same time though, while the data is better than depressed expectations, it’s not clear we’re seeing an acceleration of activity, either.
Certainly the highlight last week was the jobs report Friday, which was a solid “beat” vs. pretty depressed expectations. October payrolls grew by 204K, much more than the 120K expectation, and the revisions to September and August were a positive 60K. (The direction of revisions to prior months can often be a good signal of the overall trend in hiring.)
But, the jobs report was just the highlight of consistently “good” data last week. Third-quarter GDP was 2.8%, higher than the 2.0% expectation, although that number was a bit deceiving as inventories added 0.8% to the report. (So, in reality, real economic growth in Q3 met expectations.) October Non-Manufacturing (or service sector) PMI rose to 55.4, beating expectations, although the new orders component (the leading indicator of the report) declined. Finally jobless claims declined marginally to the 330K level, which is pretty much where they were in August.
Internationally, last week was also busy. The highlight overseas was the “surprise” 25-basis-point cut in interest rates by the European Central Bank, which led to a plunge in the euro and a rally in the Dollar Index. The cut was in response to currently very low inflation across the European Union, which some are fearing might turn into “dis-inflation” if allowed to persist.
Somewhat lost in the ECB and jobs report hysteria was strong economic data from China. October composite PMIs beat estimates early last week and exports rose more than forecast Friday morning. (Strong exports to Europe are an encouraging sign of a continued economic recovery, not only in Europe but also globally).
The economic data remains very important mainly because of WWFD (What Will the Fed Do?). In an absolute sense, while last week’s data beat low expectations, it’s still a long way from achieving “escape velocity” for the economy, where we no longer need QE or very, very low interest rates.
But, from a WWFD standpoint, last week’s better-than-expected data furthered the shifting expectations for when the Fed will taper QE, which seems to be the dominant theme in markets these days and the single-biggest influence on the bond market. Although I don’t think the Fed will taper QE in December, the strong jobs report from Friday did result in January now becoming a strong contender for the first tapering. But, at this point we need to see follow-through on this stronger-than-expected economic data in November before the consensus shifts from the current March expectation of the first tapering.
This Week
This should be a relatively quiet week on the economic front, especially compared to last week. The most important event of the week will be the confirmation hearings for presumptive Fed Chair Janet Yellen, which begin Thursday. There will be plenty of grandstanding and some tough questions and obstacles (in particular from Rand Paul). Despite this, she is widely expected to be confirmed (it would be a shock to the market if she wasn’t).
Looking at the actual hard data coming this week, we get our first look at November data with the Empire State Manufacturing Index on Friday. (Although it’s just one region, markets will be looking for any signs of follow-through from October’s surprisingly strong data.)
Jobless claims and October industrial production will also be watched. In particular, markets would like to see the weekly claims start to decline and confirm the surprisingly good October jobs report. (Right now it’s a bit of a contradiction, in that claims are at the same level as in August while the monthly jobs report has improved.)
It’s actually a busier week in Europe from a data perspective, and given the ECB’s rate cut last week and growing concerns about dis-inflation, data there will be watched closely to see if the fledgling economic recovery is still intact. HICP (the EU equivalent to our CPI) will be released Friday, and markets will be looking to see if there is any uptick in this final reading from the “flash” reading of two weeks ago. It was the very low “flash” HICP reading that was really the big catalyst behind the ECB cutting rates, as it’s starting to flash a “deflation” warning sign.
Three Reasons the Fed Won’t Taper QE in December (Despite Today’s Jobs Report)
This morning’s jobs report was certainly a positive surprise, but despite the fact that the bond market is getting hit hard, I’m not entirely sure that this report pulls forward any Fed tapering from the current March expectations.
First, despite the strong October print, the rolling six month average of the jobs report (which gives a better picture of the labor market) is still just 176k, which is below where the average was in June and well below the 200k+ that most think is necessary for the Fed to start tapering QE.
Second, although it was largely ignored with all the jobs report hysteria this morning, there was another important economic report released at 8:30 AM – Personal Income and Spending. Contained in that report is something called the Core Price Index, which is the Fed’s preferred measure of inflation. And, it didn’t change much – the September Core PCE Price Index rose just 0.1% in September, and year over year is up just 1.2%,which is the same level as August, well below the Fed 2.0% target. Earlier this week Fed President Bullard said they were in no rush to taper QE because inflation is low – and clearly that trend hasn’t changed.
Finally, one of the reasons that the Fed chose not to taper QE in September was because of the rise in interest rates ahead of that meeting.. The Fed saw those increases in interest rates as a threat to the economic recovery. Well, since the FOMC meeting last week, in just over 7 days the yield on the 10 year Treasury has risen from 2.47% to 2.74%, a one month high. If rates keep rising into December, that will deter the Fed from tapering QE once again.
Instead of playing the guessing game of “taper vs. no taper,” I think one best ways to play the current environment is to revisit a trade I’ve been on top of since last December – long Japanese stocks/Short the Yen. To me, the clear takeaway from today’s Report is we won’t see a material decline in the dollar any time soon, and I believe one of the best ways to play that is by getting long Japanese stocks via DXJ or short the yen via YCS.
Regardless of whether the Fed tapers or not, we likely won’t see any material US Dollar weakness over the coming months, and that should mean a resumption of the downtrend in the yen, and a rise in Japanese stocks.
As I’ve been saying in recent editions of The 7:00’s Report, the yen has been held up by various “one offs” over the past few months: The government shutdown, the spike in SHIBOR rates, and the plunge in the dollar after the “no taper” surprise. But, with those events removed, I believe the yen decline will resume, as a yen below 100/dollar simply won’t result in the kind of economic growth PM Abe and the BOJ are striving for. They want the yen lower, and generally speaking you always want to be on the same side of the trade as a countries central bank.