Archive for category: Investing

Last Week

Last week was a good one for the global economy and risk assets. May economic data confirmed that we are seeing the pace of growth stabilize in China, and accelerate in the U.S. Plus, the ECB basically met very high expectations with regard to stimulating the EU economy and combating dis-inflation.  From a stock market (and risk asset) standpoint, the macro-economic backdrop became more of a tailwind for stocks last week.

Starting with the ECB, by now you know the details of what they did, but more importantly, Mario Draghi and the ECB not only took steps to stimulate growth and inflation in the EU, but also left open the idea of doing more in the future (specifically ABS purchases and again hinted at potential outright QE).

Importantly, this came amid a mixed (at best) week of data for the EU, as manufacturing and composite PMIs missed, and May HICP declined further.  Importantly, though, the ECB appears committed to doing what’s necessary to support the EU recovery. That, over time, will remove the risk of “Japan style” deflation in Europe (assuming they follow through).

In the U.S., economic data were almost universally better than expected.  May ISM manufacturing PMIs were in-line at 55.4 vs. (E) 55.5 (remember this was the release last Monday with the three revisions), while ISM non-manufacturing PMIs were 56.3, and the monthly employment report beat estimates at 217K vs. (E) 213K.  Finally, the four-week moving average for jobless claims fell to its lowest level since June ‘07 at 310K.

So, the data were good, but not too good that they altered anyone’s expectation of Fed policy—so for now tapering of $10 billion per meeting will continue, with rate increases coming next year.

Finally, Chinese data provided more evidence that the pace of growth is stabilizing between 7.0% and 7.5% annual GDP growth, which is what the market expected.  And, while the housing market and “shadow banking system” are potential risks to monitor, for now the risk of a Chinese “hard landing” continues to recede.

Not that I’m a macroeconomic cheerleader, but last week was a good week, and certainly the improving macro outlook is helping stocks slowly rally, as last week:

1) Helped reduce the chances of European deflation, which is a big concern of markets (Tepper’s comments), and

2) Showed the economy in the U.S. and China are meeting current expectations (which is positive for risk assets).

This Week

After a busy week last week, things slow materially this week (which is normally the case).

Domestically it’s going to be quiet, with retail sales and jobless claims being the only notable releases.  It’s pretty much consensus that the economy rebounded strongly in March from the winter weather and then paused in April, so especially in consumer spending, markets will be looking for a resumption of gains.

Internationally, China will be in focus with CPI and PPI coming tonight (although these numbers aren’t as important right now because inflation isn’t an issue in China).  May industrial production and retail sales (out Thursday) will be watched to make sure they confirm the strength we saw in the May PMIs.  These are probably the biggest releases this week.

Finally in Europe, data are also pretty sparse this week, as the UK Labour Market Report (which could send the pound sharply higher if it’s strong) is released Wednesday and the EMU industrial production comes Thursday. Given the moves by the ECB last week to stimulate growth, EU economic data (unless horrid) won’t matter as much as they did previously, until we start to see the effects of the stimulus.

Last Week

Last week was a good one for economic data, as global flash PMIs confirmed current market expectations (Chinese growth stabilizing, EU recovering slowly, U.S. recovery accelerating), and we got some welcome good news on domestic housing.

The global flash PMIs were the highlight of the week, and although there was some disappointment in European manufacturing data, largely the reports were better than expected.  Importantly, they helped reinforce that the pace of Chinese economic growth is stabilizing, Europe is seeing a slow recovery and growth in the U.S. is slowly accelerating.

Chinese flash manufacturing PMIs hit a five-month high at 49.7, just below the important 50 mark, and a lot of the details of the report were strong.  U.S. flash PMIs came in at 56.2 vs. expectations of 55.9, again implying that we are seeing a continued recovery form now that we’re past the winter-weather-imposed economic dip.

The one “miss” in these numbers was in Europe, where French PMIs disappointed, while German and EU manufacturing PMIs declined from April (and missed estimates).

On the headline that looks bad, but it’s really not.  First, everyone’s focus is on what the ECB will do a week from Thursday. So, in some respects, the slightly disappointing data are putting more pressure on the ECB to act (so, mildly bad news is good).  Second, in aggregate the PMIs for Germany and the EMU were “OK” (still comfortably above the 50 level), so importantly these weak numbers aren’t going to result in anyone changing their growth estimates for the EMU (which means the numbers aren’t really that bad for European stocks).

China and Europe remain two major areas of concern in the global economy, but the data last week further confirmed that we’re seeing positive incremental progress in both regions, which is a positive for global equities.

The other important data released last week were the existing home sales Thursday and new home sales Friday.  As you know, housing remains an area of concern for analysts and the Fed, as it hasn’t “bounced” from the winter dip like the rest of the economy.

Well, data last week implied that we may finally be seeing some sort of a “bounce” in housing, as April existing home sales rose month-over-month for the first time this year, while new home sales increased as well.

Those positive surprises helped stocks rally late in the week, because if we can get the housing recovery to start moving forward again, that will be an unanticipated tailwind on the U.S. economy (and a positive for equities).

Two reports won’t remove concern about housing, especially in this generally pessimistic environment, but these reports did help sentiment last week.

Finally, there were a bunch of Fed speakers last week and the release of the Fed minutes last Wednesday, but the bottom line is the outlook for Fed policy didn’t change at all (tapering ending in October/December, and first rate increases mid-2015).

Perhaps the most important Fed-related item from last week was Vice Chair William Dudley’s commentary about a Fed exit strategy. But there will be plenty of time to dissect that, as we’re still a ways off from the Fed even starting to exit all these programs.  But, as tapering and eventual rate increases draw near, expect the focus of the Fed analysis to shift to the exit strategy. For now, though, everything remains status quo.

This Week

There are several notable economic releases this week, but the truth is that, barring any major surprises, the market will be looking ahead to next week (ECB decision and May jobs report).  So, nothing this week should materially change the market’s outlook for the U.S. or global economy, again unless there’s a big surprise.

Revised Q1 GDP Thursday will likely be the most-watched number this week, as it’s likely we’ll see growth for Q1 revised into negative territory.  But, while that will be a much-publicized headline, again remember the market is much more focused on the pace of growth now than it was eight weeks ago.

April durable goods are released later this morning, while we get jobless claims and pending home sales Thursday.  Claims ticked up a bit last week so the market will be looking for a resumption of that downtrend, while pending home sales will be closely watched (and that’s probably the most important number this week, given the housing data last week).

It’s the same story in Europe, as there are several releases, but everyone is looking ahead to the ECB on June 5.  Japan is the one expectation, as there are multiple releases Thursday night.

This could move markets, as everyone is still trying to figure out how much the Japanese economy has slowed now that the sales tax increase has been in place for over a month.  That, obviously, will have a impact on when (and if) the Bank of Japan eases further.

Fed Minutes

There weren’t many surprises in the minutes, and they certainly didn’t change anyone’s outlook for Fed policy going forward. 

Regarding the economy, the Fed remained cautiously optimistic. Apparently, though, the lack of a housing rebound is catching some Fed officials’ attention, so housing remains a key area to watch (reports coming out today and tomorrow are important).  But, overall there appears large agreement that the economy was rebounding from a weather-induced slowdown in Q1. 

The other focus of the meeting was on the Fed’s exit strategy from QE.  I think that reflects two things:  First, it’s going to take a big negative shock to the economy to derail tapering of QE, and the outlook for Fed policy (end of QE in October/December, first rate increases mid-2015) is about as set in stone as the Fed outlook can be. 

Second, with the Fed policy outlook relatively “known,” the market’s focus is going to shift more to the specifics of the Fed’s “Exit Strategy” from QE.  And, yesterday’s minutes implied that the Fed doesn’t really know how it’s going to “normalize” policy and its balance sheet (i.e., raise rates while they own so many Treasuries). 

I suppose every plan begins with a conversation, and it seems that the FOMC has started the conversation about normalizing policy – now they just need to come up with a plan.  Assuming the economy stays level through the coming months, Fed exit policy is going to become a more-important topic for the markets. 

Know Where the (Fed) Exits Are

Current (and about to be ex) Fed Vice Chair William Dudley made some comments Tuesday about the Fed exit strategy that were generally viewed as “dovish.”  But, that interpretation is incorrect, and Dudley’s comments may be one reason we saw some bond weakness Tuesday and Wednesday.

The media focused on the fact that Dudley said the “equilibrium” interest rate (a rate that isn’t accommodative or too tight) might be lower going forward than it had been in the past (so say well below 4%).  There are many reasons for that but basically his main thesis is that the economy simply doesn’t have the growth potential it used to (due to demographics and other things). 

That is a “dovish” statement, but it’s not something new. 

Instead, the important part of Dudley’s speech had to do with the Fed exit strategy.  Dudley said he believes the Fed should continue to reinvest principal payments from its QE purchases into other bonds, even after it begins to raise rates (presumably this will soften the blow).  If that opinion reflects the consensus of the FOMC (and Dudley usually does) then that’s a change, as the Fed previously stated it would halt re-investment of QE purchases prior to raising rates.

Now, before your eyes glaze over, this is important because this change in policy may put more upward pressure on rates.

Here’s why: If the Fed stopped re-investing principal payments, that would remove artificial demand from the bond market, and bonds would decline/interest rates would rise faster than if the Fed was reinvesting.  So, not reinvesting principal is a mild form of tightening. 

If the Fed is going to continue to reinvest, though, then any tightening of policy the Fed wants to achieve will have to come solely from interest rate increases, because the rate increases will have to counter the re-investment of principal payments. 

Again, I know this is pretty boring stuff, but understanding Fed policy is key, especially with regard to the expected direction of rates.

Last Week

The economic data last week became a bit of a Rorschach (ink blot) test. Depending what camp you’re in (bull or bear), you could see last week’s data as supporting your case.  But, that aside, the takeaway is that nothing last week changed anyone’s expectations for economic growth domestically or internationally.

For the bears, April industrial production and retail sales both missed estimates.  By themselves those data points weren’t that consequential, as they weren’t big misses.  But, they were disappointing because they imply that the strong gains we saw in the economy in February and March were just part of a “bounce back” effect from the weather-related drop in December/January. And, now that the “bounce back” is over, we’re returning to the recent norm — data that imply 2% GDP growth, not 3% (which is what everyone expects and the stock market needs).  So, the IP and retail sales data were taken to potentially mean we’re not seeing a sustained acceleration in economic activity. 

For the bulls, while the April data were disappointing, the May data released last week were strong, implying the economy is picking up speed again. The Empire State and Philly Fed manufacturing surveys (the first two May economic releases) both beat estimates, with Empire  State coming in at 19.01 vs. (E) 5.0, and Philly registering 15.4 vs. (E) 14.3.  Additionally, jobless claims fell below the 300K mark (297K) for the first time since September (and only the second time for the recovery).  So, the current data imply we are seeing re-acceleration in the economy.

On balance, I’d say last week went in the bears’ favor, as investors and analysts remain very, very skeptical regarding the U.S. economy’s ability to reach “escape velocity” and finally move toward 3%+ GDP growth.

That’s important because if the bears are right (and data last week does not make them right) and the economy does indeed return to the recent “new normal” of 2% GDP growth annually (and not the expected 3%), then the stock market is extended and will correct. 

So, this remains an economy that is short on confidence. Despite current data coming in strong, until we see a more-extended trend, the benefit of the doubt will remain with the bears (but again, that doesn’t mean they are right).

In Europe, the big surprise last week was the weak Q1 GDP report (they can’t blame the weather).  Q1 GDP was just 0.2% quarter-over-quarter vs. (E) 0.4%, and year-over-year was 0.9%. 

That’s a touch weaker than the market expected (the market is expecting a little over 1% this year from the EU, so this stoked some fears about a slower than expected EU economy).  But, the focus remains more on the ECB and what they’ll do next, so this one number didn’t really change the outlook. 

This Week

There’s not a lot of data this week, but Wednesday night and Thursday will be important, especially given the context of the economic confidence problem we seem to have. 

Wednesday/Thursday bring the May flash manufacturing PMIs, with China coming Wednesday night and the EU and U.S. Thursday morning.  Again, the confidence problem isn’t limited to the U.S.  There are ongoing concerns about EU growth given the soft Q1 GDP print, and obviously China remains (and will remain) an ongoing concern.  So, if these flash PMIs can meet expectations or even beat, that will provide a nice confidence boost for the global economy. 

Outside of the flash PMIs, the minutes from the April Fed meeting are released Wednesday, although I don’t think there will be too much revealed in those minutes (perhaps some discussion on inflation and how/when to continue to exit QE, but the policy outlook for the Fed shouldn’t change).  Staying with the Fed, Chair Janet Yellen speaks Wednesday. But it’s at the NYU commencement, so I doubt there will be any revelations about monetary policy.

Finally, housing will remain in focus.  The housing starts number last Friday looked a lot better than it actually was, so the market remains focused on seeing housing rebound from the winter dip like the other parts of the economy.  Existing home sales come Thursday morning, while new home sales come Friday. 

Bottom line: This week won’t definitively alter the outlook for the global economy, but given the continued strength in the bond market (and the potential signal it is sending), strong flash manufacturing PMIs will help give investors a badly needed boost of confidence.