FOMC Meeting Preview

The Expected Scenario:

- No tapering of QE in December, but a strong signal by the Committee that tapering of QE will happen in January or March.

- Tapering Logistics:  If asked about how tapering will work, the market expects to see an initial tapering of $10 billion-$15 billion, and the process to be linear (tapering the same amount each month or quarter, whichever they decide).  And, markets expect the first taper to be weighted toward Treasuries, while mortgage-backed securities are left alone (to help soften the blow on the mortgage market, although I’m not sure it’ll make much of a difference).

If this is what we get Thursday, don’t expect any significant, volatile reactions from the various asset classes, as again this is what’s priced in.  As far as how markets will trade beyond the immediate reaction, that’s a tough one to call.  We could either see a “sell the taper rumor/buy the taper news” reaction. Or we could see markets drop on the news, due as much to the calendar and the skittishness of money managers I’ve been talking about, given the gains so far this year. Read More

The Economy: A Look Back and What’s Ahead (12.16.13)

Last Week

There was very little economic data released last week, and economically the focus was on trying to “game” the chances of the Federal Open Market Committee announcing a plan to taper QE after their meeting this week.

The two major pieces of data (retail sales and jobless claims) we received last week generated mixed signals.  Positively, retail sales beat expectations, and the important “control” group—which excludes automobile, gasoline and building-material purchases—continued to advance, rising 0.53% in November.

This uptick in retail sales came at a good time, as concerns about the consumer linger, especially given many retailers’ unenthusiastic commentary on the holiday shopping season.  In fact, the resilient consumer (and stronger retail sales) resulted in many analysts and strategists upping their Q4 GDP estimates, as Personal Consumption Expenditures (i.e., consumer spending) are now expected to be stronger than originally thought.

The retail sales beat was the economic “highlight” of the week, and from a WWFD (What Will the Fed Do) standpoint, it very slightly upped the chances of a taper this week. However, it certainly won’t be the deciding factor.

On the flipside, jobless claims saw a jump of 68K, to 368K, as statistical errors thanks to Thanksgiving and other factors were worked out.  That number was obviously a disappointment vs. expectations, but weekly claims have been so volatile lately that many people are discounting the adjustment.  And, most (including me) expect claims to move south toward the lower-300K range, where it’s been since August.

However, the most-important economic news of last week (both for the economy and with regard to WWFD) came from Washington, where a two-year budget deal was struck and passed by the House.

From a market standpoint, the budget agreement provides some much-needed clarity for the market, and helps remove another potential macroeconomic risk from the horizon (there won’t be another budget battle or threat of shutdown).

Finally, the agreement is being viewed (correctly) as incrementally increasing the chances of a December taper—although like retail sales, it won’t be the deciding factor.

Bottom line, last week’s retail sales data was positive and confirms the overall feeling that the economy is improving.  From a WWFD standpoint, the odds of a “Santa taper” this week did increase, although it remains somewhat of a long shot.

This Week

The FOMC announcement Wednesday is the most-important event this week and, for the next few days, Wall Street will be focused squarely on its outcome.  I’ll preview what to expect in Wednesday’s Report, but as of right now the “consensus” expectation is for no tapering at this meeting, although it is certainly possible.  Keep in mind this meeting also brings the FOMC’s forecasts for growth, inflation and interest rate policy expectations (so it’ll be an opportunity for the FOMC to further emphasize its zero-interest-rate policy). We also have the Chairman’s press conference, which will be the last with Ben Bernanke at the podium.

Away from the FOMC, there is also a lot of data coming out this week about the real economy.  While the FOMC will dominate the conversation all week, keep this in mind:  The only reason the market isn’t throwing a “taper tantrum” is because the economy looks to be improving.  If that changes and the data turns south, the market won’t be as receptive to tapering as it currently is.  Point being—the Fed is watching the data and everyone else, in turn, is watching the Fed for clues about where the numbers are heading next.

Later this morning we’ll get the “flash” manufacturing PMI for December, which will be closely watched.  We also get Empire State Manufacturing (today) and the Philly Fed Manufacturing Index Thursday (they are usually the first economic data from the current month), although those two indices will have their thunder stolen this week given the “flash” PMI comes out before them.

This week also brings a bevy of housing data (Housing Market Index tomorrow, Housing Starts Wednesday and Existing Home Sales Thursday).  The housing recovery remains the key lynchpin in the broader economic recovery.  We saw over the summer that the housing market is sensitive to rising interest rates, so how the housing market is reacting to this recent uptick in rates will be important to see, both from a “real” economy and FOMC perspective.  As I’ve been saying, the housing recovery can lose some momentum, but it needs to keep going so the economy can continue to accelerate.

Finally, jobless claims will reveal whether that big jump from last week starts to get reversed, and on Friday we get our last look at Q3 GDP. (Don’t expect any big revisions; they usually happen between the first and second revisions.)

Bottom line is it’s a big week from a policy and real economy perspective.

Still Keep an Eye on SHY


SHY:  The last few days have seen the short end of the curve sell of moderately as a December taper becomes a possibility.  As long as the decline doesn’t accelerate materially, though, tapering won’t kill the rally in stocks.


Is the S&P 500 forming a double top?


Term Structure in Natural Gas Has Turned Bullish

Any real commodity trader or analyst knows that watching the “term structure” of commodities can offer substantial insight into whether the trend in that commodity is turning bullish, or bearish. The term structure of natural gas has become significantly “backward-dated” in that the current month’s prices (for January delivery) are trading higher than February’s price. Prices for February delivery are trading at a higher price than March delivery, and this lasts all the way out until June 2014. Term structures can be an important indicator of physical demand for a commodity, and as the backwardation in natural gas implies, we are seeing a systemic increase in demand for natural gas—not just a temporary uptick in demand due to cold weather to start the winter. And, that is potentially bullish not just for natural gas, but for natural gas producers. Read More

The Economy: A Look Back And What’s Ahead This Week 12.9.13

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.

Watch How SHY Trades After the Jobs Report

I want to again point out that, although I’ve heard the opposite lately, both stocks and interest rates can rise together going forward.  As I pointed out about two weeks ago, the key difference between this recent rise in yields and the May-August rise in yields is that this time, the “short end” of the yield curve hasn’t sold off (it has actually risen).  And, that implies the market is more comfortable with the idea of higher interest rates, and that this recent rise in rates, and subsequent steepening of the yield curve, isn’t a “rally killer” for stocks.  Read More

Jobs Report Preview

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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Why IOER Matters to You

IOER, or “Interest On Excess Reserves,” refers to the interest the Fed and other central banks pay banks on their excess money (reserves) they keep in those central banks.  So, if I’m a large bank, and I deposit more money than is required at any Fed bank, I get paid 25 basis points on that money.  As of the latest Fed release, in October there was more than $2 trillion in “excess reserves” on the Fed’s balance sheet, earning 0.25% annual interest.

One of the big problems the Fed, and other central banks, has is getting money off the banks’ balance sheets and into the “real economy” via lending.  Well, one of the theoretical ways to “force” banks to lend money would be for the Fed to push the IOER negative.  So, instead of the banks earning 0.25% annually on the $2 trillion at the Fed, they would have to start paying interest on those balances, which theoretically should compel them to lend the money out.

This is important because a negative IOER is one of the few remaining “bullets” the Fed has in its arsenal to help stimulate the economy.  And, while it becoming reality is likely still a long shot here in the U.S. or in Europe, a negative IOER would be, theoretically, an economically stimulating move by the Fed or ECB (so, dovish and likely equity-positive). I wanted to make sure everyone knew exactly what it was, because it’s a topic I think will come up a lot more in the coming weeks/months, and it will be a focus of markets at tomorrow’s ECB meeting and Fed meeting later this month.

The Economy: A Look Back and What’s Ahead (12.2.13)

Last Week

Economic data was pretty light last week, even despite the holiday, but there were a few takeaways worth noting.

Generally speaking, the data was mixed.  In particular, one of the main takeaways from last week was that the slowdown in the housing recovery is still ongoing.  Both Pending Home Sales and permits contained in the housing starts number missed expectations.  Technically, permits beat the headline expectation, although that was due to an increase in permits for multi-family structures.  The more-important single-family permits continued to be soft.

The key here isn’t so much that we need to be worried about the housing market (prices are still holding up, which is the most-important part). But clearly the higher mortgage rates are biting, and I think collectively the market will breathe a sigh of relief when the housing data stabilizes.

The other main takeaway from economic data last week was the continued improvement in jobless claims.  Weekly claims dropped to a multi-week low at 316K (vs. estimates of 330K), and the four-week moving average also dropped to a multi-week low.  This is important because if this drop in claims is accurate (there’s some concern the Columbus Day holiday may be positively skewing the data), then claims will “confirm” the improvement we’ve seen in the monthly Employment Situation Report. This would in turn strongly imply we’re seeing positive momentum again in the jobs market, which obviously is important because it further solidifies the Fed will taper.

Finally, Durable Goods was a bit of a disappointment.  New Orders of Non-Defense Capital Goods ex-Aircraft (NDCGXA) fell for the third-straight month, and it’s now at its lowest level since March.  Part of this could be seasonal, but it does raise some concern we’re seeing business pull back on investment (buying machinery, etc.) and that could be a drag on GDP in Q4.  But, we’re not seeing a dip in the manufacturing PMIs, so until we do, the market will largely shrug off the drop in NDCGXA, although it is something to watch.

Bottom line: Nothing materially changed last week.  The housing recovery is still ongoing but momentum is slowing, and that’s something we need to continue to watch. The drop in claims will make people cautiously optimistic that the good October jobs report is legitimate, and if it is, expectations for Fed tapering will be further solidified.  But, nothing last week changed the market’s expectation on the economy (still slow growth) or toward the Fed (a Q1 taper remains the expectation, with March slightly ahead of January as the consensus month, although expectations have been shifting to January).

This Week

This is a busy week, and it is especially important because it’s basically the last big week of data for 2013.

First, it’s “jobs week.”  So, we will get the ADP Employment Report Wednesday, jobless claims Thursday and the Employment Situation Report (the big jobs report) Friday.

This report is probably a bit more important than normal because if it’s very strong, then the prospects of a December taper of QE will rise substantially. (As mentioned, that is not priced into the equity or bond market.)  And, I’m not sure anyone knows exactly how the stock market would react to a December taper announcement (it could rally because of the good data or sell off because tapering may be too “early,” in what would be a “taper tantrum”).

In addition to jobs week, it’s also Purchasing Managers’ Indexes week.  We’ve already gotten the final look at Chinese and EU manufacturing PMIs, and will see the U.S. number at 10 this morning.  But, Tuesday night/Wednesday morning we also get Composite PMIs for China and Europe, respectively, and the Institute for Supply Management’s Non-Manufacturing PMI for the U.S.

These numbers are obviously important because the pace of the global economic recovery appears to have slowed a bit, and if we see a soft number in China or Europe, that could present a new headwind on risk assets.

In addition to the global PMIs, we also get rate decisions from the Reserve Bank of Australia (tonight) and the Bank of England and European Central Bank Thursday.  None of the banks are expected to change policy, but the ECB press conference will be scrutinized to see what, if anything, Mario Draghi says about what “more” the ECB is prepared to do to help combat dis-inflation. (If he disappoints and doesn’t imply they are ready to do anything, European stocks could get hit.)

Finally, domestically we also get the second look at Q3 GDP, as well as September and October New Home Sales. (Like Housing Starts, the data was delayed because of the government shutdown.)

Bottom line is this is an important week because:

1) It should definitively tell us whether a December taper of QE is possible, and

We get the latest look at the pace of the global economic recovery, and specifically whether the ECB remains committed to “doing more” to help the EU economy gather steam.