Archive for category: Investing

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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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.