“Death” Cross in the Russell 2000
That’s not good – the Russell 2000 50 day MA just crossed the 200 to the downside.
Weekly Economic Cheat Sheet
Last Week
There were plenty of economic reports last week (and they were in aggregate slightly weaker than expected) but the real focus was on the FOMC. While the Fed’s “hawks” seem to be gaining strength, the takeaway is that the expectations for policy remain unchanged.
Starting with the Fed, you know by now that they kept the “considerable time” phrase in the statement. Generally speaking the statement was considered slightly “dovish” when compared to expectations (which got a touch too “hawkish” going into the meeting).
But, the “dots” were increased, implying Fed officials now expect interest rates to rise faster than they envisioned back in June, and that was taken as “hawkish” by both the bond and currency markets. So, depending on which camp you’re in (equities vs. all other assets), the Fed was both “hawkish” and “dovish.”
Stocks rallied after the meeting because, while the Fed was on balance slightly more “hawkish” in an absolute sense, they certainly aren’t going to pull forward tightening at this point. So, the Fed will remain a tailwind on stocks.
But, from a risk standpoint, I took this Fed meeting to show that it’s just a question of “when” the Fed gets more hawkish. The risk of a “hawkish” surprise in the coming months is rising, while the risk of a “dovish” one has diminished almost to zero. So, incrementally the risk of a “hawkish” surprise is rising, and that makes me less bullish on U.S. stocks generally. The risk of a “hawkish” Fed surprise that rattles markets is rising, while the risk of a “dovish” surprise is virtually nil at this point.
Turing to the actual data, it was a bit soft last week. August industrial production missed and, even stripping out a big negative for a drop in auto production, the number was still underwhelming.
Housing starts also missed estimates, while the first look at September regional manufacturing activity was mixed, with Empire State manufacturing beating while Philly slightly missing. (But both remain strong on an absolute sense.)
The biggest surprise of the week came from CPI, which dropped -0.2% in August, while “core” CPI was flat month-over-month for the first time since January. It was a surprise, and I saw some analysts try and spin it as a “dovish” influence on the Fed. But I don’t think any moderation in inflation would make the FOMC more dovish at this point, as deflation simply isn’t a threat. The FOMC knows they have to start removing liquidity before something bad (like a bubble) starts to form (or pop) depending on your opinion of the Fed.
This Week
The biggest release to watch this week is the global flash manufacturing PMI. The most important number is China’s, which comes tonight. Recent data show the Chinese economy is losing some steam, but we’re still a long way from any renewed fears of a “hard landing.” So, even if this number is a miss, it likely won’t be too much of a negative influence. But, that said, if it drops below the 50 level, that could weigh on markets tomorrow morning (so, more of a short-term thing than a negative macro event).
Europe comes Tuesday morning and markets will want to see some incremental improvement over August (the absolute level will be very low, but at this point it’ll be encouraging if Europe is at least seeing some incremental acceleration of activity). And, here in the U.S., everyone expects the number to be strong. But if it’s very hot, that may push levels of Fed angst a touch higher, so the stocks bulls need a “Goldilocks” to slightly weaker number. Outside of the global PMIs, it’s quiet internationally.
Domestically, we get more housing data (Existing Home Sales today, New Home Sales Wednesday). Again, the market is looking for constant reinforcement that the housing recovery remains in gear and is gaining momentum.
Bottom line is the global flash PMIs are the most important release this week, and as long as they meet general market expectations (slow but positive growth in China and Europe; strong growth in the U.S.), they shouldn’t elicit too much of a response).
Bad Is Good in Europe
Bad is Good in Europe
This morning the ECB released it’s first tranche of TLTRO funding, and it flopped, badly. Takedown by banks of the offer was just 82.6 billion euro, a little over half of the 150 billion that was expected.
But, this low figure is seen as only further increasing the likelihood that the ECB will have to eventually launch a large scale QE program – and European markets are all sharply higher on the news.
How I Know Scotland Isn’t Leaving the UK
Scotland: The Only Poll We Need to Watch
There are all sorts of conflicting polls regarding whether the Scots will vote “yes” for independence or “no.” But, I’ve learned over the years that the best way to get a gauge on these types of geo-political events is to follow the money. InTrade used to be the preferred prediction market to watch, but that got shut down, so now I watch Paddy Power, Irish book makers who make odds on just about anything.
To that end, I went on PaddyPower.com yesterday to check the odds. “Against Independence” was the prohibitive favorite, at 2/7 (so wager 7 to get 2). “For Independence” was a distant 11/4 (wager 4 to get 11). Point being, according to the “market,” Scotland isn’t going anywhere.
The Fed’s Perception Problem (and why it’s Hawkish)
The Fed’s Perception Problem (and why it’s Hawkish)
If the FOMC does indeed become incrementally more “hawkish” today, it’ll likely be because of the growing fear among Fed officials that the market views the Fed as simply being too “dovish.”
We’ve heard several Fed presidents reference this, and last week there was a San Francisco Fed paper citing this potential problem.
And, the worry that the market doesn’t “believe” the Fed isn’t some general “feeling” – it’s actually backed up by hard data.
Fed Funds futures, which trade on the CME and can be accessed via this link, reflect the market consensus of where the Fed Funds rate will be at the end of each month. And, simply put, the market is reflecting a much more dovish Fed than what FOMC members are stating.
The Fed Funds futures prices shows a much slower and more gradual increase in interest rates than the official Fed projections – plain and simple. And, frankly, this type of discrepancy is significant.
And, it’s a problem for the Fed.
If the Fed isn’t being taken seriously (as a hawk) then that poses a potentially serious problem. While the Fed wants to start to restrain the risk-taking and the unbridled “chase for yield” it’s manufactured over the past several years, if the market doesn’t believe the Fed will actually raise rates, then the excessive risk-taking will continue—potentially resulting in bubbles.
Point being – there is some room here for the Fed to give the markets a bit of a “hawkish” dose of reality today – if not via the removal of “considerable time,” then via other means, including the “dots” as we described yesterday, or via Yellen’s press conference.
Point being, the propensity for the Fed to give us a “hawkish” surprise is rising. While that won’t guarantee the bond declines will continue in the near term, the simple fact is that the setup is for the Fed to, finally, be slightly more hawkish. That is, until the market, as reflected by Fed Fund futures, starts to believe rates will rise sooner than is currently the consensus.
Finally, I’ve mentioned frequently that the pace of the increase in rates is more important than the date rates start to rise. You can monitor both via Fed Fund futures (or you can just let us do it … we’re watching it either way). The way it works is you subtract Fed Fund futures from 100 to get the implied Fed Funds rate. So, right now the market anticipates the first rate increase to occur in June 2015 – and if that changes tomorrow, one way or the other, Fed Funds futures will let us know.
North American Drilling Ltd. (NADL), Buying Opportunity?
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Tom Essaye Discussing The Bond Decline in CNBC Closing Bell 9.15.14
Click the link below to see Tom Essaye discussing the decline in bonds with hosts Bill Griffeth and Kelly Evans.
Weekly Economic Cheat-Sheet
Last Week
There were just two notable U.S. economic releases last week. Although neither was enough to force a change in the outlook for Fed policy, August retail sales were strong and incrementally viewed as increasing the chances for a hawkish statement change this week. Outside of that, the most important thing that happened last week from a data standpoint was some soft Chinese data renewed some concerns about the pace of growth.
Starting with the U.S., though, the most important number last week was Friday’s retail sales report. The headline met expectations (up +0.6% m/m) but it was a better report than that.
The key indicator of retail sales is the “control” group that excludes car purchases, gasoline purchases, building material purchases and food service. As such it gives the best read on true consumer spending.
The “control” group rose +0.4% in August, but more importantly the July number was revised higher from 0.1% to 0.4%, dismissing the concern that consumer spending had suddenly dropped off during the summer.
Does this number, by itself, mean the Fed will get more “hawkish” this week? No, it doesn’t—but consumer spending was one of the more sluggish sectors of the economy, and incrementally it bolsters the argument for the “hawks” to remove “considerable time” from the statement. So, bottom line, the retail sales report doesn’t mean any expectations of actual Fed policy will change. But for this week’s statement, it was viewed as slightly more “hawkish.” (Silly as it is, these are the things we need to worry about in the age of ZIRP and QE.)
Internationally, European data was almost all second tier last week, although it was better than recent reports. But, nothing last week changed the outlook for Europe (i.e., the continuation of a slow recovery).
There was a lot of Chinese data out last week, though, and generally it was disappointing. CPI and PPI were both below expectations (which is usually seen as a positive). But taken in the context of the soft import numbers two weeks ago, the lower inflation numbers furthered the concern that domestic demand in China is slowing.
Over the weekend, industrial production missed estimates (6.9% yoy vs. (E) 8.7%) while retail sales met. There are some concerns re-emerging about the pace of growth in China, but it’ll take more disappointing data (specifically, a lot more disappointing data) before legitimate concerns about a potential “hard landing” take shape.
China is transforming its economy, and that’s going to produce periods of slower growth. But the Chinese central bank and administration remain committed to around 7%-7.5% annual GDP growth. As long as that’s the case, China shouldn’t be a major macro headwind (although it will weigh on emerging markets, which is a positive for EUM).
This Week
Obviously the FOMC meeting is the highlight this week, and the entire focus seems to be on whether the wording “considerable time” will be removed from the statement released at 2 p.m. Wednesday. Keep in mind, though, this is one of the meetings where we’ll get the Fed forecasts (the “dots”) and the Fed chair press conference.
I’ll preview it in Wednesday’s Report, but the bottom line is “considerable time” is the focus of the meeting. There is a definite fear the Fed will get very, very slightly more hawkish in tone (and given this Fed’s propensity to stay “dovish,” I’m worried the market may be a touch ahead of itself and we could see a “sell the rumor, buy the news” reaction).
Part of the reason the market expects this shift is because of the Chair’s press conference—the FOMC can remove “considerable time” from the statement and then she can refute that the Fed is getting more “hawkish” at the press conference. If they don’t do it here, the next press conference isn’t until December.
Outside of the Fed, we get our first look at September economic data via the Empire State manufacturing survey (this morning) and Philly Fed (Thursday), and in all likelihood they’ll both show that manufacturing activity in their respective regions continues to grow at a good pace. (However, activity in those regions has gotten pretty hot, so don’t be surprised by a dip in the numbers –but on an absolute level, activity should stay brisk.)
The other notable domestic release is the August housing data, with housing starts Thursday. The market will be looking for confirmation that the acceleration in the rebound we saw in the July data is continuing.
Internationally it is a very quiet week in both Europe and Asia. The German ZEW survey (out tomorrow) is probably the highlight. If the survey can surprise to the upside, this could help investor sentiment toward Europe as we approach the implementation of the ECB’s Targeted Long-Term Refinancing Operation (TLTRO) and private-market QE program (which starts in October).
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A Falling Bond Playbook
A Falling Bond Playbook
Yesterday I talked about how both stocks and bonds could decline if we see a material pullback in the market. Given most of us are “long” both, that’s a little concerning, seeing as they historically tend to hedge each other. Bonds are bouncing today, but I wanted to provide a bit of a “playbook” so people can have a plan in place, if we start to see bonds/stocks sell off materially.
1. The “Right” Way to Short Bonds
2. Active Sector Selection
3. Long Japan and Europe, Short Emerging Markets
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