Archive for category: Investing

What’s Inside Today’s Report:

—  Post election spread trade.
—  Why an overlooked economic indicator from last Friday matters to you.

Futures are slightly weaker for the second straight day as a further collapse in oil prices overnight has temporarily halted the rally in stocks.

Oil fell below $76 overnight on news of Saudi price cuts to the US and word there may be a breakthrough in the Iranian nuclear negotiations (which will mean more supply).

Economically the European Commission cut its growth forecast for ‘14 and ‘15 EU economic growth, but that was expected and isn’t moving markets in Europe.

It’ll be a quiet day today and focus will be on 1) oil and 2) the elections as Trade Balance is the only economic release (E: -40.7B).

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Last Week

The actual economic data released last week were at best just “ok,” but that was overshadowed by the various statements, actions and expectations of the major global central banks. Markets were reminded that global central bank policy remains very easy (and will likely in aggregate get more accommodative in the future).

The biggest economic event last week was supposed to be a non-event, and that was the BOJ meeting. By now you know that the BOJ announced plans to increase its QE program by 30 trillion yen (to 80 trillion per year), triple the purchases of J-REITs and ETFs, and double its stock holdings. Additionally, the Japanese Government Pension Investment Fund made official expected major allocation changes, which will see domestic bond holding cut dramatically in favor of increased allocations to domestic and foreign equities and foreign bonds. This news, as you know, was the reason for the big rally Friday.

In an impressive feat, the BOJ shocker almost made markets forget that the Fed ended QE here in the U.S. (as expected). But, the Fed also provided some surprise through the statement, which reflected a slightly “hawkish” tone. The FOMC significantly upgraded their commentary toward the labor market and downplayed the recent drop in CPI as mostly a temporary, commodity-led phenomenon.

But, while the statement was more “hawkish” than expected, it’s important not to get lost in the details. Bottom line, on the margin we need to look at the FOMC as more committed to rate increases at some point in the future (which is good), but they remain very, very accommodative.

Finally, the ECB was quiet last week, but they did announce they will start buying Asset-Backed Securities in November. Meanwhile, the economic data in Europe added more pressure for the ECB to do “more” via buying corporate bonds or outright QE.

Specifically, the October “flash” HICP (the EU CPI) was again subdued, rising 0.4% month-over-month but more importantly the “core” reading declined to a 0.7% increase year-over-year from 0.8% in September. Bottom line, deflation remains a major threat in the EU, and data are continuing to increase the chances of the ECB doing “more” to achieve its balance sheet expansion targets.

Turning to the actual data, in the U.S. it was lackluster, as mentioned. September Durable Goods was a bad number, as was New Orders of Non-Defense Capital Goods Excluding Aircraft (NDCGXA), which is the sub-index to watch in this release, fell 1.7%. This suggests some softening of the manufacturing sector in September, likely due to reduced exports courtesy of the stronger dollar.

Finally, the first look at Q3 GDP was better than expected at 3.5% vs. (E) 3.0%. It was a good number but the headline was deceiving. A big uptick in government spending (thanks to the ISIS campaign) and a reduction in imports (which normally subtract from GDP) were responsible for much of the “beat.”

This Week

Global growth and inflation remain the two areas to watch from a macro standpoint. Last week we got a lot of data on inflation (which seems ok everywhere except Europe) while this week we get a lot of data on growth.

The most important number this week, as usual, is the October jobs report. And, it’s also “jobs week” so we should expect ADP Wednesday, claims Thursday and the government number Friday. Again, unless this is a materially bad number, don’t expect it to change anyone’s outlook on stocks or the economy.

We already got the official global manufacturing PMIs (the Chinese data slightly missed at 50.8 vs. 51.2 and will keep alive concerns about the pace of growth), while German and EMU PMIs also slightly missed, but stayed above 50 (reflecting a still fragile economy). U.S. manufacturing PMIs come later this morning.

Later this week we get the global composite PMIs (both manufacturing and services), with China releasing data Tuesday night, Europe Wednesday morning and the U.S. “Non-Manufacturing” or services PMI later Wednesday morning.

Domestically other than the aforementioned numbers it’s pretty quiet. The same can’t be said for Europe, though, as there is an ECB meeting Thursday. Although no changes to policy are expected, as the BOJ showed last week, anything is possible.

Bottom line this week is it’s important to keep the data in the context of the last three weeks. Remember concerns about global growth were at the heart of the recent sell-off, but that stopped two weeks ago when flash PMIs were better than expected. At this point, global growth being “better than feared” is priced into stocks, so the risk this week is for a negative disappointment from the data.

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FOMC Preview

Despite the official end of QE, this meeting should go generally according to plan, although there are 4 key areas where potential surprises are lurking. From a market standpoint, the FOMC is expected to be “dovish,” so most of the surprise risk is on the “hawkish” side (although it’s admittedly remote).

There are four keys to watch for in today’s FOMC announcement:

1. End of QE: Despite Fed President Bullard’s comments last week about potentially halting the tapering of QE due to global economic weakness, it is universally expected (and priced in) that the FOMC will end QE at this meeting. To say it would be a dovish shock if they did halt the taper would be an understatement.
2. Potential Removal of “Considerable Time”: This phrase and its potential removal was in focus at the September meeting. Basically, “considerable time” is thought to mean 6 months. So, if/when this phrase is removed from the statement, it’s anticipated that rate hikes will begin 6 months later. Given that it’s October, 6 months from now is March, which is earlier than current market expectations for rate “lift-off.” Expectation: “Considerable Time” will remain in the statement. Surprise Potential: Hawkish. If the phrase were removed, it would be a “hawkish” surprise with stocks, bonds and gold falling while the dollar rises.
3. Potential Removal of “Significant Underutilization of Labor Resources”: This is the other key phrase to watch. This refers to the slack in the labor market, and a removal of this phrase would imply a material upgrade to the jobs market. This would be “hawkish.” Expectation: The phrase stays or may be slightly modified—but not removed totally. Surprise Potential: Hawkish. If “significant underutilization of labor resources” is removed entirely, it’ll be a hawkish surprise with stocks, bonds and gold falling while the dollar rises.
4. Downgrade of Inflation: Starting in July, the FOMC basically upgraded its outlook on inflation, saying that it was moving toward its 2% goal and that downside risks to inflation had been diminished. But, given the recent drop in CPI, it’s possible the FOMC may re-insert some cautious language on inflation. It could say something like “inflation consistently below 2% poses a risk to economic performance, and the Committee will carefully monitor inflation going forward.” Expectation: It seems like the FOMC could re-insert cautious language about inflation. Surprise Potential: Dovish. This shouldn’t elicit too much of a market response, as we’ve already largely priced in a dovish meeting, but expect the dollar to sell off and bonds to rally (and stocks to rally modestly also) if the Fed again sounds cautious on the inflation front).

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Copper is rallying for the fourth session in a row after near term trend resistance was broken yesterday. Sign up for a Free Trial on the right hand side of this page to read our analysis of the copper market, and where futures are going next.

Last Week

The market needed economic data last week to show that the global economy wasn’t as bad as markets had come to believe over the past month, and the data delivered.

On the growth and inflation fronts (the two main areas of concern for risk assets), data last week were solid if unspectacular (but helped correct sentiment, which had been getting almost exponentially worse each day).

The data started good last week as Chinese Q3 GDP was 7.3%, slightly under the 7.5% “target” but better than expected. And, importantly, it was comfortably above the 7% GDP “Maginot Line” that determines when concerns about Chinese growth become a significant headwind on risk assets.

But, the October flash manufacturing PMIs really helped calm nerves about the global recovery. Again, while not spectacular, they were definitely better than feared. At a 10K-foot level, the data last week showed the global economy is still recovering, and not contracting again, as expectations for German and Chinese PMIs were for both numbers to fall below 50 (signaling contraction) but both surprised to the upside.

The highlight was the German data (remember Germany is now “Ground Zero” for European economic worries. German manufacturing PMI rose 51.8 vs. (E) 49.5, while the Chinese data hung on, rising to 50.2 vs. (E) 49.9.

The broader EMU PMI was also a beat at 50.7 vs. 50.0 (but again showing expansion) while the U.S. number was a slight miss at 56.2 vs (E) 57.0—but the important thing is that, at an absolute level, activity in the manufacturing sector is still brisk.

Turning to inflation (and specifically worries about dis-inflation/deflation), the September CPI was also steady. Month-over-month CPI rose +0.1% vs. (E) 0.0%, and the year-over-year change in “core” CPI (which is the most important metric to watch) was unchanged from August at 1.7%. Again, while unspectacular, the data implied the dis-inflation threat in the U.S. isn’t increasing, which is a positive.

This Week

We get more important data on growth and inflation this week, but the most important event of the week will be the FOMC meeting Wednesday.

I’ll preview it as we get closer, but the almost universal expectation is for the FOMC to end QE (as expected). Where expectations differ, though, is what the statement will look like. Specifically, the big question is whether the Fed will remove the “significant time” statement or the “significant underutilization of resources,” thereby making the statement slightly more “hawkish.”

Given recent events with inflation and the global economy, the market is very interested to see if this has made the core of the FOMC more “dovish” or if they appear intent to stay the course. Given the rally in stocks, a slightly “dovish” statement has been priced in already.

After the Fed, the focus this week will be on inflation. The second most important event this week will be the October flash EU HICP, which comes Friday. Europe remains the major source of risk to global equities, and we need positive news on that front.

In the U.S. we also get an important inflation indicator Friday, via the “Core PCE Price Index” contained in the Personal Income and Outlays Report. The Core PCE Price Index is the Fed’s preferred measure of inflation, and for dis-inflation worries to recede further, we need to see the year-over-year number hold firm like in CPI.

Also, we get the quarterly Employment Cost Index Friday, which provided a big surprise to markets back in June when wage costs jumped higher. Remember, wage inflation begets broad inflation, so this will be watched to see if wage increases continued in Q3.

If those numbers are good, that will go a long way toward easing deflation worries in the EU and dis-inflation worries in the U.S.

From a growth standpoint, the first look at Q3 GDP comes Thursday, with expectations currently sitting just under 3.0%. Other than that we Durable Goods tomorrow and some more housing data (Pending Home Sales today, Case-Shiller tomorrow) and weekly jobless claims, which continue to hover at a near-15-year low.

Bottom line this week will be important from a Fed expectation and deflation/dis-inflation standpoint. If the Fed is dovish and the inflation numbers are steady, it will support a further rally in equities.

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