Archive for month: November, 2014

Last Week

Global economic data were again mildly disappointing last week, but they didn’t turn negative. Against the backdrop of global central banks becoming “more” accommodative, the data were good enough not to change the current outlook that the global recovery is (barely) continuing—but that outlook is enough to hold stocks up at current levels.

From a stock standpoint, global data are more important than U.S. data in the near term because everyone is comfortable the U.S. economy is getting better. How much better can be debated, but there’s ample evidence to show it’s gaining momentum.

The same can’t be said for the global economy. Last week’s manufacturing and composite PMIs from China and Europe were slightly disappointing in that they missed expectations. No global readings were above 52 (keep in mind 50 means no growth; even 52 represents slow growth), so none of the numbers were “good.”

But, they did stay above 50 and the important distinction is that the global economy is still recovering (albeit slowly). The sell-off in late September/early October was partially predicated on the idea the global recovery was failing. Last week’s numbers further refuted this concern; that’s the important takeaway (stocks can hold these levels as long as the global recovery isn’t failing).

Here in the U.S., manufacturing data and jobs were in focus. The October PMIs were generally fine, in that they showed the manufacturing and service sector continuing to expand at a good pace (both were above 57).

Turning to the jobs report, it was also generally in-line, with 212K job adds. This missed expectations of 240K but closely tracked the rolling 12-month average of 222K. So, it was in the middle of our “just right” range.

But, I do want to point out that the jobs report was a bit more “hawkish” than the market reaction. Importantly, the unemployment rate fell to 5.8%, which is not very close to the 5.5% “normal” unemployment rate. Also, U-6, which considers underemployment, dropped to 11.5% from 11.8%—the lowest levels in several years.

The “dovish” reaction came from the wage data, as wages rose 2.0% yoy (above 2.2% is “hawkish.”) But, keep in mind wages always lag an improving jobs market. While this report won’t cause expectations of the first rate hike to be pulled forward, it does solidify June as a target date for the first hike, and I’m not sure the bond market accurately reflected that on Friday.

Finally, the Fed and BOJ were quiet last week while the BOE made no changes to rates or policies (as expected). The ECB was the highlight of the week, and while it didn’t change any policies, Draghi did as good a job as possible of “talking” dovish. He refuted various accounts of infighting at the ECB, explicitly saying economic risks were to the downside. He added that ECB staff are now researching alternative ways to stimulate the economy (which means corporate bond purchases and QE).

Bottom line, the ECB continues to slouch toward QE and more stimulus. While “euro bulls” wish they would hurry, the important thing is they are headed in the right direction. The ECB this week reinforced my bullish Europe thesis.

This Week

This week will be very quiet. First, keep in mind bonds and banks are closed Tuesday for Veterans Day. Second, there is really only one economic report of note this week domestically, and that’s Retail Sales (Friday). There is now a month-plus of lower oil prices in the economy, so it’ll be important to see retail sales (ex gasoline) increase if the U.S. consumer is really starting to come out of his/her shell.

Internationally, the latest round of Chinese economic data Thursday night (retail sales/industrial production) is obviously important from a global growth standpoint (these numbers need to continue to show incremental progress).

In Europe, the Bank of England’s inflation report Wednesday is the highlight, but that really will only affect the pound. And, given the precipitous decline in the pound the last few weeks (it hit new 52-week lows vs. the dollar last week) there is the chance for a “hawkish” surprise. But that won’t be a reason to be enthusiastically long the pound unless it’s a real shocker.

Finally, the flash estimates for Q3 European GDP come Friday morning, and like the Chinese data earlier this week, it’s important from a “Is the global recovery ongoing?” standpoint.

Bottom line, while there are numbers to watch this week (again, the Chinese data is the uncontested highlight) nothing this week should make anyone’s outlook on the global economy materially worse or better, even with some big surprises.

This was a look at the economic section of today’s Sevens Report. To continue reading today’s sevens report, simply sign up for a Free Trial on the right hand side of this page.