Archive for category: Investing

Last Week

There was a lot of economic data last week despite the holiday, and the general takeaway is that the data reinforced the expectation that the Fed was on track to hike rates in December.

Durable Goods was the positive surprise last week as not only did the headline beat, but the key “Non Defense Capital Goods ex-Aircraft” sub-index rose 1.3%, it’s best uptick in months. That’s important because the revised Q3 GDP Report out last week showed better-than-expected business spending (called Non-Residential Fixed Investment) and if business spending can continue to accelerate that will be a unanticipated tailwind on the US economy.

Other than Durable Goods, most of last week’s numbers actually mildly disappointed, but as we stated last week none of them were bad enough to dissuade any Fed member who is in favor of a rate hike.

November flash manufacturing PMI declined more than expected to 52.6 vs. (E ) 54.5, the lowest reading in well over a year. But, that just brings the flash reading in line with most other manufacturing indices, so it’s not an incremental negative (the flash reading had stayed stubbornly high).

It wasn’t the best week for the consumer either as October Consumer Spending slightly missed estimates (up 0.1% vs. (E ) 0.3%) and Q3 consumer spending was reduced in last week’s revised Q3 GDP report (Personal Consumption Expenditures was revised to 3% from the initial 3.2%). But, both numbers remain overall healthy, and while slight disappointments, they aren’t materially shifting anyone’s outlook on the US consumer.

Finally, the housing numbers also missed as both October Existing Home Sales and New Home Sales printed below estimates, but that was mostly due to low supply (low inventory reducing sales as opposed to low demand). The housing data from Sept./Oct. hasn’t been great, but again, it’s not nearly bad enough to make anyone think the housing recovery is about to stall.

Finally, looking at inflation, the Core PCE Price Index contained in last week’s Personal Income and Outlays report was slightly weaker than estimates (flat vs. an expected increase of 0.2%) and the year-over-year measure was unchanged at 1.3%, well below the Fed’s 2.0% target. But, the wage data contained in the report was strong as wages and salaries grew 0.6%, a very strong reading. That confirms what we’ve seen in the recent jobs reports, and since wage inflation often leads broad inflation that prevents this report from being dovish.

Bottom line, last week reinforced that US economic growth isn’t great (we remain stuck in 2.5% – 3.5% annual growth) but that’s still enough to get the Fed to likely move off 0% rates in December.

This Week

This week will likely determine not only whether the Fed hikes rates in December, but also how the remainder of the year will play out for markets (meaning it could remove the chances of a late, end-of-year pullback if the data is positive).

The calendar is very busy but there are five key market moving economic releases/events to focus on (in order of importance): November Jobs Report (out Friday), Dual Yellen Speeches (Wed/Thurs), ECB Meeting (Thurs), Global November Manufacturing PMIs (tonight/tomorrow) and Global November Composite PMIs (Thursday).

First, it’s “jobs week” so we get ADP Wednesday, claims Thursday and the government report Friday. We will do our “Goldilocks” preview later this week, but bottom line is this number will have to be pretty bad to delay a rate hike in December. And importantly, if it’s strong it could make a rate hike in December go from “expected” to “certain,” and how the market will react to that is an unknown.

Second, Yellen makes two speeches Wednesday/Thursday that could further cement the expectation for a rate hike. Fed officials have been coy about being too committal to a hike, but the FOMC also doesn’t want to surprise markets, so now would be the time to drop more hints.

Third, the ECB meeting Thursday is the most anticipated since the bank announced QE back in January, and expectations for how the ECB will increase QE are all over the place (we will do a preview later in the week). This is important because if the ECB dovishly surprises, then the euro could plunge and the dollar could rally, and that may weigh on stocks and the Fed should the gains be too much, too soon (the Fed is afraid of a “too strong” dollar).

Finally, global growth remains very much in focus, especially in China. The PMIs out tonight are important because they need to show further stabilization, and if the Chinese government manufacturing PMI can move towards 50 and above, that will be a positive. In the US and Europe there shouldn’t be any major surprises contained in the PMIs, but there’s a chance the US ISM Manufacturing PMI could fall below 50 (remember it was 50.1 in October) and if it does, that will negatively surprise markets. Global Composite PMIs Thursday will also be important to reinforce the fledgling notion that global economic growth has stabilized and is starting to turn very slightly higher.

Last Week

The major takeaway from the data last week was that a rate hike from December remains expected, but not certain. Internationally, European data was again lackluster, but with more QE on the way the data is being generally ignored. The October economic reports from China reinforced that growth there is stable, and China as a macro risk has been moved to the back burner near term.

The big report of the week in the US was Friday’s October Retail Sales report. It missed the headline expectation (0.1% vs. (E) 0.3%) but the details were a bit better than the headline implied. We watch the “control” retail sales, which is retail sales less autos, gasoline and building materials, and that metric rose 0.2%. Importantly, the September control retail sales was revised from –0.1% to 0.1%. Bottom line, the “spin” on retail sales last week between the horrid M and JWN earnings and the “miss” on retail sales was negative, but that’s a bit misleading. Consumer spending appears to be holding up well (the retail earnings issues are corporate issues, not macro issues) and nothing in those reports will make the Fed more dovish.

Staying in the US, jobless claims ticked a bit higher but still remain comfortably below 300k (276k) while November preliminary Consumer Confidence rose more than expected, jumping to 93.1, better than 92.0. That jump in confidence will be noted by the hawks at the December meeting, assuming it isn’t undone between now and the end of the month.

The bottom line with US data last week was that despite the negative tone, Fed Fund futures probability for a December rate hike remained at 70%, and nothing in last week’s data implies the US economy is slowing.

Turning to the international landscape, data from China was mixed. October imports and exports missed expectations, as did industrial production (down –5.8% vs. (E) -5.6%), but retail sales beat estimates (up 11% vs. (E) 10.8) and overall the data didn’t contain any major surprises. As we said Thursday, China is now on the back burner as a macro threat given the prospects of a hard landing economically have been reduced, and between now and the end of the year another surprise yuan devaluation is the only wild card to watch for.

This Week

This week will be another relatively quiet one, although the undisputed highlight will be the FOMC minutes on Wednesday afternoon.

We’ll do a more in-depth preview in tomorrow’s issue, but really what markets will be looking for is how much conviction the FOMC showed to hiking in 2015. A rate hike in December likely won’t be explicitly discussed in the minutes, but instead the important thing will be the length of discussion about a rate hike in 2015 and how many members voiced their support for a hike. Keep in mind this meeting came before the blow out jobs report, so if the minutes are a touch hawkish that will move markets.

Outside of the minutes, markets will get their first look at November manufacturing data via the Empire State Manufacturing Index (today) and the Philly Fed Manufacturing Index. Both of these indices were solidly negative in October but showed signs of stabilization (they weren’t as bad as September), so any continuation of that trend will be a mild positive.

Beyond that November data, Housing Starts come Wednesday, and they will be watched a bit more closely than the last few months (remember the housing numbers from September were a bit disappointing, and an ongoing housing recovery is an important tailwind on the US economy).

Finally, October Industrial Production (tomorrow) and Weekly Jobless Claims (Thursday) will also be important indicators to watch (every major economic indicator is important now given the possibility of a December hike).

Bottom line, the minutes are the key release this week and unless the November data (Empire and Philly) is horrid, it shouldn’t move markets too much.

Last Week

Last week the key event was the FOMC being more hawkish than expected and putting a December rate hike back on the table. That hawkish statement coincided with a Q3 GDP that was stronger than expected, but other than that the September data was almost universally disappointing, so despite the optimism from the Fed the outlook for the US economy remains muddled.

The FOMC statement was more hawkish than expected as it 1) Explicitly pointed to the December meeting as the date of a potential hike, 2) Upgraded the commentary on economic growth, and 3) Downplayed international concerns, less than two months after citing international concerns as the reason not to hike in September.

Bottom line, the surprising statement was likely the result of the bond market pricing in a more dovish Fed than reality, and the October statement was the Fed’s effort to correct that, and get yields closer to a level that at least respects the possibility of a December hike.

Following the statement the 2-year yield rose and Fed Fund futures increased the chance of a rate hike to just over 50% (although the consensus of analysts is still March). Looking at the actual data last week, initial Q3 GDP was a bright spot. Despite the headline miss, the report implied the economy remains resilient as consumer spending and core economic activity didn’t fall back much from the strong pace of Q2.

The best measure of true GDP, Final Sales of Domestic Product (GDP less inventories) rose 3.0% vs. 3.9% in Q2 while two key measures of consumer spending, PCE and Final Sales to Domestic Purchasers, also held up well compared to Q2. Overall, the first look at Q3 data was a positive surprise and specifically was anecdotally positive for the US consumer and US consumer sectors. Unfortunately, initial Q3 GDP was about the only good report last week.

October Service Sector PMI; September Durable Goods; September Consumer Spending, and University of Michigan Consumer Confidence were all slightly disappointing. Also, housing data cooled off last week with both New Home Sales and Pending Home Sales missing expectations.

Finally, shifting to inflation, there were two key numbers out last Friday but neither offered any surprises. The Core PCE Price Index stayed steady at 1.3% yoy, and generally met expectations. Additionally, the quarterly Employment Cost Index rose 0.6% in Q3, meeting expectations. Neither number made a December hike any more likely.

Bottom line, the soft data last week reinforced that some momentum has been lost in the US economy. The jobs report and PMIs this week will give us a better picture of just how much, and that’s key to future stock gains and whether a December rate hike becomes likely.

This Week

This week is an important one for US and global economic growth, and the numbers this week need to meet or exceed expectations if the recent global rally in stocks is going to hold.

First and foremost, though, it’s “Jobs Week” with the ADP report kicking things off on Wednesday, Jobless Claims on Thursday and the all-important October government jobs number on Friday.

We will do our “Goldilocks” preview later this week, but with a rate hike clearly on the table for December this jobs report now is much more important than it was this time last week. After the jobs report, the focus will be on the global manufacturing and composite PMIs.

The global PMIs were “fine” this morning as the soft official Chinese data was offset by decent details (New Orders rose) while Europe’s data was good. The US data comes later this morning, and then global composite PMIs and US service sector PMIs come Wednesday. Again, the key here is that these numbers further imply the US and global economy is not being materially negatively effected by the August/September market turmoil and slowdown in emerging markets.

Looking at the Fed, Wednesday will be an important day, as the three key leadership members will speak: Yellen, Dudley and Fischer.

Fed Chair Yellen is testifying before the Senate Banking Committee, and while the topic is bank reforms there could easily be a discussion on policy. Dudley and Fischer (who speak on Wednesday afternoon, and evening, respectively) will make remarks on the economy.

Obviously with the hawkish Fed statement last week, any clues as to how close the Fed is to a December rate hike will potentially move markets.

Last Week

Economic data last week generally confirmed what we already knew: There appears to be some loss of positive momentum in the US economy; global growth remains sluggish, and the Fed is dovish. Nothing last week materially changed anyone’s outlook for US or global economic growth.

The FOMC minutes were the highlight of last week, and they largely met dovish expectations. During the September meeting the Fed had lengthy discussions about risks from China and emerging markets, and between that and recent stock market turmoil it was clear there wasn’t even a real debate about hiking rates last month.

If there was one dovish surprise from the minutes it was that some FOMC members expressed doubts about being able to achieve their stated 2% inflation target. If those doubts grow to the rest of the FOMC, that will be a incremental dovish factor on the Fed, and likely delay any expected rate hike well into 2016.

The media said markets rallied on the dovish comments, but we know that isn’t true. March 2016 is the consensus expectation for a rate hike, the minutes only further confirmed that point.

Turning to economic data, ISM Non-Manufacturing (or service sector) PMI (out last Monday) was slightly underwhelming at 56.9 vs. (E ) 58.0. But looking past the dip, the PMI remains at a very healthy absolute level and the service sector of the economy still remains very strong.

Perhaps the best number of the week was the weekly jobless claims, which dropped back to 263k vs. (E ) 271k. This is important because claims are not confirming the soft monthly jobs report. It’s very strange to see the monthly jobs reports come off without some uptick in weekly jobless claims. And, that means we’ll likely see either 1) Claims trend higher over the coming weeks or 2) The monthly jobs reports revised higher (history says it’ll be the latter). Point being, other data on jobs remains healthy and the labor market remains as strong as it’s been in years.

Finally, looking internationally there were some notable developments. First, we got another good number from China last week as currency reserves declined less than expected, which implies that sentiment towards that country’s economy is stabilizing. And, that’s positive because concerns about Chinese growth remain a major headwind on stocks.

This Week

This is a critical week for the markets because we will get significantly more color as to the whether 1) The Chinese economy is stabilizing, and 2) Whether the US economy is being pulled lower by sluggish global growth and market turmoil. With stocks at multi-week highs, this week could very well determine whether markets break out, or break down.

The most important economic data this week will come from China, with Trade Balance out tomorrow morning, CPI & PPI coming Wednesday, and most importantly, Industrial Production, Retail Sales, Fixed Asset Investment and GDP out one week from today.

With the Fed clearly on hold till at least December, and earnings just ramping up, China remains the #1 influence on stocks. If the data over the next six days can reinforce the “green shoots” of stabilization we’ve seen lately, that could be a material positive on stock prices. Conversely, if the data does not stabilize then this market remains vulnerable to a China-inspired decline.

Turning to the US, September Retail Sales (out Wednesday) is the highlight of the week. Recently, evidence has appeared that the turmoil in markets and overseas has hit consumer confidence and further weighed on manufacturing. If we see that retail sales dipped as well in September that will further imply that the international drag is pulling the US economy down with it, and that will not be positive for markets.

Beyond retail sales, Thursday will be a busy day as we get the first look at October data via Philly Fed and Empire Manufacturing Surveys. Both dropped sharply in September, and another weak reading will only further concerns about the manufacturing sector.

Also Thursday September CPI and the latest jobless claims data are released. CPI will almost certainly show continued subdued inflation while jobless claims will be watched to see if they move higher and confirm the week monthly jobs reports.

Best Way to Short Bonds

Adding to Shorter Term Positions to Our Long Term Treasury Bond Short:

Due to these shifting fundamentals, we are once again dipping our toe in the “short bond” pool and are buying a basket of TBT, SJB and KRE (Long Bank ETF). TBF is the unleveraged version of TBT and for those who can’t/won’t do leveraged ETFs, that’s a decent option.

There are many other “short bond” ETFs that I think are good products, including DTUS (iPath US Treasury 2-Year Bear ETN), STPP (iPath US Treasury Steepener ETN), and PST (ProShares UltraShort 7-10 year Treasury) but the first two trade with very low volume (which is a shame because the 2 year will get hit as the FOMC hikes rates and the curve will steepen materially), while the third has volume but in a rising rate environment, given the unnatural flattening of the curve over the past six months, the “back end” of the curve will play catch up more than the “belly” (so being short 30 years will produce better returns than being short 7-10 years bonds).

I mention these because if you can take the volume risk, they are good products that will profit as bonds decline—but given they are “trade by appointment,” I’m not going to materially feature them in the Report, because they won’t be appropriate for most clients.

We are indeed “once bitten, twice shy” on this trade so we will start out allocating just 1/3 of our target to it—with a stop at the respective recent lows. And, I am acutely aware that a “Grexit” could create another wave of money into Treasuries that will again overwhelm negative domestic bond fundamentals.

As a result, we will be cautious at first, and look to add to this strategy once we have a profit.