Archive for month: December, 2013

Last Week

Last week’s economic data continued the trend of surprising to the upside, highlighted by the jobs report on Friday. The takeaways from last week’s data were threefold: First, from an economic perspective, the data further implied we’re seeing a mild uptick in economic activity, although nothing huge. Second, from a WWFD (What Will the Fed Do) standpoint, the economic data now solidifies January as the consensus expectation for the first tapering of QE (December remains a remote chance). Finally, looking a bit beyond the immediate term for Fed policy, last week showed inflation remains very, very low, and that will help traders continue to believe the Fed’s ZIRP pledge, which should continue to steepen the yield curve (good for banks).

Starting with the jobs report, it was just about perfect, from a market standpoint. Job additions printed above 200K for the second-straight month, and revisions (remember, the direction of the revisions often reflects the general momentum in the labor market) were mildly positive (net revisions to September/October were positive, with 8K jobs added).

One detail that wasn’t widely reported but is important was the drop in the “U-6” unemployment rate, which is a more-accurate picture of the actual labor market than the more-publicized unemployment rate because it factors in the underemployed and detached workers. It fell to 13.2%, the lowest level since November 2008. Undoubtedly, there is some positive seasonality in the jobs data that likely will be reversed in Q1 ‘14 (most of it having to do with holiday hiring), but broadly we can say we’re seeing improvement in the labor market.

The second-most-watched number last week (and usually the second-most-important monthly economic number behind the jobs report), ISM Manufacturing PMI, also was strong. It printed its highest reading of 2013 at 57.3, and New Orders, the leading indicator in the report, rose to 63.3.

New Home Sales saw a big jump in October and a steep drop in September, and that mostly reflected the relative level of interest rates (remember they dropped sharply back in October). Bottom line with the housing market is the recovery is ongoing, inventory is low and prices are flat to higher.

But, going forward, the data since May has shown the recovery is sensitive to the rise in interest rates (as you’d expect). So, as rates continue to rise, housing numbers will need to be monitored, as an ongoing recovery in housing is essential to economic growth accelerating from current levels.

Finally, it was overlooked in all the focus of the jobs data Friday, but the “Core PCE Price Index”—which is contained in the Personal Income and Outlays Report, and is the Fed’s preferred measure of inflation—showed inflation increased just 1.1% year-over-year in November, down from 1.2% in October. That remains well below the 2% goal for the Fed. Although it won’t delay tapering, it does imply that the Fed does have substantial room to remain accommodative, even if the economy starts to accelerate (which would be good for stocks and hard assets).

This Week

It’s a very quiet week, economically speaking. The only two domestic reports to monitor are weekly jobless claims and retail sales (both Thursday). In particular, retail sales will be watched because last week’s commentary on the holiday shopping season turned pretty negative from a bunch of retailers. American Eagle Outfitters (AEO) and Big Lots (BIG) both joined a growing chorus of retailers saying the holiday season isn’t going well. So, retail sales, although its November data, will be watched closely.

It’s equally quiet in Europe this week, as EMU Industrial Production (also Thursday) is really the only material economic release. The one region where there is some action, however, is China. We already got China’s latest trade balance and CPI numbers over the weekend, and Tuesday brings the release of November Industrial Production and retail sales. China remains important because a material economic slowdown there (of which there are fears) remains one of the macroeconomic risks to the global rally in stocks. So, the outlook for China remains important.

The “consensus” expectation is for 185K jobs added in November, although given yesterday’s ADP report, the “whisper number” is somewhere closer to 200K.  I’m going to give the “Goldilocks” scenarios, but first keep these couple things in mind …  First, the current “consensus” for Fed tapering of QE is Q1 2014.  March is the favored month, although many think it’ll be January.  So, markets will trade off those expectations.  Second, bonds, the dollar and gold are much more reactive to tapering expectations than stocks, so expect more volatility from those asset classes.  Finally, and perhaps the most-important thing to realize about this jobs report, is there isn’t really a “too hot” reading, at least with regard to stocks. 

Good data is good for the market, so if the jobs number is a blowout, expect cyclical stocks to rally, even if there is an initial dip on the headline. 

The “Too Cold” Scenario:  < 140K.  Given ADP, this would be a very disappointing print and likely push QE tapering expectations beyond Q1 2014.  If the number is below 140K, expect a “dovish” response, in that gold and bonds will rally very hard, the dollar will fall, and stocks likely will fall too. (Again, good news is good news.) 

The “Just Right” Scenario:  170K – 200K.  This is the “sweet spot” and if the jobs number is in this range, don’t expect too much of a reaction.  Bonds may get hit the hardest on a number in this range, but really this is currently priced into stocks, bonds, gold and the dollar. 

The “Too Hot” Scenario:  > 225K.  A number above 225K would probably significantly increase the odds of a December taper to better than 50/50,  and we would see a “hawkish” response from markets in that bonds and gold would sell off, and the dollar would rally.  The wildcard is stocks – but I think that in this scenario, stocks would also rally. If there is a knee-jerk decline off a strong headline print, I’d be a buyer of cyclicals on that dip. 

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