Archive for category: Investing

Last Week

The focus of the global economy shifted entirely to Europe last week, and the continued lackluster economic numbers were among the main reasons we saw such massive volatility and selling in risk assets. At the moment, U.S. and Chinese data are firmly in the backseat (barring any major disappointments).

Specifically within Europe, focus was on Germany last week and the data simply weren’t good: Monday it was August manufacturers’ orders, which slumped —declining -5.7% vs. (E) -2.5%. Tuesday it was August industrial production, which fell -4% vs. (E) -1.1%). And then Thursday exports dropped -5.8% in August—completing a trifecta of negative data from Germany.

Now, to be fair, August is typically a bad data month in Europe, and especially the export numbers were hurt by the timing of a holiday. But at this point the No. 1 concern for the market is global growth and, specifically, whether Europe is backsliding into a recession. And as Germany goes, so goes Europe. So, the bad data elevated fears about global economy growth.

While the European data were the most important last week, the most followed/anticipated release was the FOMC minutes, which surprised markets by being exceptionally dovish. The main takeaway was the “core” of the Committee appears much more concerned about growth in Europe, global growth and the stronger dollar than most people thought. As a result, they seem to be putting a lot of weight behind these risks, implying they may be more dovish than the market thinks.

Oddly, these “dovish” minutes were somewhat contradicted by FOMC officials’ comments later in the week, as multiple Fed presidents—including former Vice Chair Dudley and current Vice Chair Fischer—implied “lift off” for interest rates remains mid-2015. That muddled message added to the volatility in stocks last week.

Muddled message aside, the market took the Fed is dovish last week, and Fed Fund futures are now pricing in a rate hike sometime in Q4 2015.

Turning to actual data in the U.S., it was sparse but what we got was good: the 4-week moving average for jobless claims fell to an 8-year low, while both the Kansas City Fed Labor Market Index and the new “Labor Market Conditions Index” both showed further improvement in the jobs market (some tried to spin the LMCI as dovish, but it wasn’t).

Finally, Chinese composite PMI slightly missed expectations but remained solidly above 50, and the market largely ignored the release.

Bottom line is the main concern of the market is the health of the global economy, and last week’s data were not reassuring.

This Week

It’s going to be a busy week, as there are multiple reports from all regions of the globe (U.S., Europe and Asia), although as mentioned, the European data will be the most important.

Starting with that, then, we get multiple readings on inflation and growth from Europe.

First, the growth numbers to watch (in order of importance): EMU industrial production comes Thursday (it’s going to be bad—just a question of how bad). The German ZEW Business Survey is released Tuesday night (look at the expectations component), while Italian GDP is released Wednesday (there are fears that Italy is already in a recession).

Turning to inflation, we get final inflation readings for September (we got the “flash” readings two weeks ago). There shouldn’t be any major surprises, but given the concern about deflation, if the flashes are revised down even by just -0.1%, look for that to pressure the market.

Italian CPI comes Tuesday, Germany CPI is released Wednesday, EMU HICP comes Thursday, and French CPI comes Friday.

Again, this is all about Europe at the moment, so any good news on the growth or inflation front will be welcomed by risk assets.

Turning to the U.S., it’s also a busy week. By all accounts, U.S. growth remains “fine,” but this market is unsettled and it needs a confidence boost. Good data this week, especially from Empire State manufacturing and the Philly Fed (Wed/Thurs), could help sentiment. That’s because they are the first look at October data and will remind everyone growth here is still good.

Also on the calendar are retail sales (Wednesday) and industrial production (Thursday), as well as weekly claims and housing starts (Friday). Again, while none of these numbers will change anyone’s outlook on growth for the U.S., they will affect confidence, so good numbers are needed.

Finally turning to China, its trade balance was better than expected, while CPI and PPI are tomorrow. Again, not to be repetitive, but the No. 1 concern is about global growth—if the trade numbers are a disappointment, that’s going to be a headwind.

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FOMC Minutes

The minutes were obviously dovish, given the stock market surge, dollar decline and bond rally. They were taken as dovish for three primary reasons:

• First, the FOMC voiced considerable concern about the state of the global economy and the potential negative impact on our economy.
• Second, the strengthening dollar was expressly cited as a potential headwind to growth and to the Fed meeting its inflation target of 2.0% (so the dis-inflation we’ve been talking about).
• Finally, with regard to the FOMC statement, the removal of the “considerable time” phrase (and more broadly, any material alteration of the language of forward guidance) was seen as potentially being interpreted as “hawkish.”

Given the minutes, it was no surprise then that “Considerable Time” and “Significant Underutilization” stayed in the September statement – and it’s clear from the minutes that the FOMC is still much more concerned about the various risks to the recovery. And this is totally trumping any urgency to begin to normalize policy.

The bottom line here is that is would appear the majority of the FOMC is more dovish than we previously believed, and their confidence in the economy remains low. This was a dovish event, and while it doesn’t necessarily mean we’re going to see expectations for the first rate hike pushed out from June 2015, it’s certainly a step in that direction.

From an investment takeaway standpoint, although I don’t think we’re going to see stocks immediately move to new highs, I think we will see money move back into more risky/higher yielding instruments, so as a result if you own SJB I would take at least some profits, and I’m closing out our EUM hedge this morning, as the Fed’s dovish will send money back into lower quality, higher yielding assets in the near term.

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Tom Essaye discusses the outlook for Europe on CNBC’s Closing Bell.

http://video.cnbc.com/gallery/?video=3000317632 

Last Week

The were multiple and varied important economic data points released last week, but the general takeaway is this:  While the global economic recovery is clearly losing steam, data in the U.S. consistently show the recovery is not only solid but also gaining momentum. This dichotomy between the direction of the U.S. economy and other major global economies (Japan, Europe and China) is accelerating and will continue to have implications across asset classes (and it’s the main reason the greenback continues to surge).

Looking then to the specific data from last week, focus was on last Friday’s jobs report (which was almost perfectly “Goldilocks”), but the most important numbers last week were the global September PMIs.

By now you know they were universally disappointing, led by a surprise drop in the German reading to 49.9.  The broader EMU number wasn’t much better and is teetering above 50 (50.3, to be exact), while the official government number from China also barely stayed above 50.  Even the U.S. PMI missed at 56.6, but on an absolute basis that’s still pretty strong, so it isn’t really that much of a negative.

Bottom line with the September PMIs (ex-U.S.) was that they were weak. They imply the EU economy is further decelerating and that it’s inching closer to a triple-dip recession. Meanwhile both Japan and China are seeing the rate of growth slow—raising fears of a potential “hard landing,” although that’s a bit premature.  Regardless, though, the data last week demonstrated that global growth is diminishing, and that’s a risk for global stock prices if it continues.

Staying global for a moment, the second most important thing that happened last week was the ECB meeting, which was initially taken as “disappointing” mainly because ECB President Mario Draghi didn’t further (and more forcefully) allude to “QE.”  Also, Bloomberg reported over the weekend there were three dissents to the measures announced—so while they were passed, that’s not going to help alleviate concerns the ECB isn’t truly committed to doing what’s necessary in Europe (i.e., QE).

But, to focus for a moment on what the plans they actually implemented (which is more important than the soft analysis), the ECB did include “retained” covered bonds in its “private market” QE program, which begins later this month.

This means the “private market” QE program, which is the ECB buying Asset-Backed Securities and covered bonds, is going to be bigger than initially thought.  That’s important because size matters here — the bigger the  private-market QE program, the larger the expansion of  the ECB balance sheet.  And, the larger the balance sheet expansion, the more help should be provided to the economy … and the greater the upward pressure on Europe.  So, although the reaction was one of disappointment, the news from the ECB was bullish for European stocks beyond the very near term.

Finally, turning to the jobs report, it was almost perfectly “Goldilocks.”  The headline number was a strong beat (248K) and we also encouragingly saw positive revisions to August (from 142K to 180K).  So, clearly this number reflects that the jobs market continues to improve.  But, what made the number “Goldilocks” was the fact that year-over-year wages increased only 2.0%, which implies the pop in wage inflation we saw earlier this year hasn’t stuck. As such, the jobs number won’t result in more pressure on the Fed (because the jobs gains are resulting in wage inflation).  Also, the unemployment rate fell to 5.9% but that’s because of the participation rate—not substantial job gains.

So, bottom line is the jobs number was a good report and came at the right time (we needed a reminder that the U.S. recovery is doing fine). But there is enough weakness in the details that this report (wages and the participation rate) that it’s not going to cause the Fed to become incrementally more “hawkish.”

This Week

It’s a very quiet week, economically speaking.  The most important event this week will be the minutes release from the September FOMC meeting (Wednesday).  As usual, the market is going to be looking for any clues as to just how “hawkish” the discussion about policy was at the meeting.  In particular, any sort of commentary on the anticipated pace of interest rate increases will be especially important (remember the “dot” projection for ’15, ’16 and ’17 all increased at this meeting).  So, it’ll be important for stocks that the minutes reflect a “not too hawkish” Fed.

Outside of the FOMC minutes it’s very quiet domestically, as weekly claims is the only other notable number.  Internationally, composite Chinese PMIs are the highlight (Tuesday), while we also get a Bank of England meeting Thursday (there will be no change to policy) and some sporadic second-tier international economic data.  But, nothing released this week should materially alter the economic outlook for Europe, China or Japan, even if there are positive/negative surprises.

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