Archive for category: Investing

Gold futures have been very volatile to start the week thanks to multiple catalysts in the market. Futures initially fell yesterday as Swiss voters rejected a proposal to increase the central bank’s gold holdings. But then news broke that India, one of the world’s largest gold consumers, lifted trade restrictions on gold imports, causing futures to reverse morning losses. Then, yesterday’s rally extended as investors bought up the precious metal as a “safety asset” after the downgrade of Japanese debt by Moody’s.

A massive short squeeze then ensued that pushed gold through $1200, but as with most short squeezes, there was little conviction and this morning gold is back down through $1200/oz. Gold remains very volatile at these levels, and we maintain a general downward bias short term as the dollar remains strong.

The technicals confirmed that position on the charts early this week as the trend-line drawn from the August highs across the top of the highs of the last short squeeze (that occurred in late Sept.-early Oct.) halted this weeks rally. .

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Time to Buy XLE?

Fundamentally, the outlook for oil remains broadly the same: Waiting on OPEC. But, as we discussed earlier this week, most major energy companies are not aggressively shutting in aggregate production, as increases from profitable wells are offsetting shut-ins from high-cost wells.

From a macro standpoint, pressure is mounting on OPEC, the Iranian negotiations may be breaking down and miss the late November deadline, and calls for sub $70 oil are very loud. So, we have energy stocks that are sharply off the highs and some potential positive catalysts on the horizon (OPEC meeting next week). So, to a point, XLE now has some “ok” fundamentals and potentially positive-turning technicals. Obviously this is a high risk/high return prospect, but XLE is worth a look especially if it breaks through that 50-day MA, which it should do today.

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FOMC Minutes

The FOMC minutes didn’t contain many surprises, but on balance they did confirm that the FOMC is more committed to normalizing policy than the market thought before the October meeting.

Yesterday I focused on the difference between market-based and sentiment-based inflation expectations, and so too did the Fed in its minutes. The takeaway is that “most” Fed officials looked at the declines in market-based measures of inflation expectations as “noise” rather than a rising deflation threat.

The FOMC also cited that sentiment-based indicators of inflation expectations remain stable. While inflation likely would decline in the near term thanks to commodity prices, the committee remained confident they would reach their 2% goal sooner than later.

I know this is somewhat tedious, but it’s important, because the bottom line is that, as long as sentiment-based inflation expectations remain stable, the drop in market-based inflation expectations will not make the Fed more dovish.

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Atlanta Fed Business Inflation Expectations

• YOY Business Inflation Expectations increased to 2.0% from 1.9% in October

Takeaway

Around 10 AM yesterday, the Dollar Index rallied and bonds sold off (a typically “hawkish” reaction). The reason was a slight uptick in the little-followed Atlanta Fed Business Inflation Expectations Survey.

What made the report “hawkish” wasn’t the fact that expectations for year-over-year inflation rose to 2.0% (they were at 2.1% earlier this year). Instead it was that the percent of business executives who saw inflation as starting to trend higher over the next 12 months jumped from 54% in May (the last time the questions was asked) to 63% in November, which is a multi-year high.

Declining inflation expectations as measured by the bond market have been a big topic of discussion and are partially responsible for the “dis-inflation” talk here in the U.S. But actual expectations by business owners for inflation pressures over the coming 12 months are trending materially higher—not lower.

Combine that with the uptick in the Fed’s quarterly wage inflation data, and there are growing signs that wage inflation has bottomed and is finally trending upward. (This is anecdotally confirmed by the U-6 underemployment index dropping to multi year lows at 11.5% in last week’s jobs report.)

Bottom line, I’m pointing this out because there are very few people prepared for inflation. From a portfolio standpoint, while it isn’t something we need to position for today, it is something we need to watch for. That’s because there are signs emerging that inflation has bottomed, and is starting to (slowly) gain some upward momentum, led by wage gains.

This is something we will continue to watch over the coming months/quarter, because if we do see inflation, that’s a major trend change few people are properly positioned for at this time.

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Last Week

Global economic data were again mildly disappointing last week, but they didn’t turn negative. Against the backdrop of global central banks becoming “more” accommodative, the data were good enough not to change the current outlook that the global recovery is (barely) continuing—but that outlook is enough to hold stocks up at current levels.

From a stock standpoint, global data are more important than U.S. data in the near term because everyone is comfortable the U.S. economy is getting better. How much better can be debated, but there’s ample evidence to show it’s gaining momentum.

The same can’t be said for the global economy. Last week’s manufacturing and composite PMIs from China and Europe were slightly disappointing in that they missed expectations. No global readings were above 52 (keep in mind 50 means no growth; even 52 represents slow growth), so none of the numbers were “good.”

But, they did stay above 50 and the important distinction is that the global economy is still recovering (albeit slowly). The sell-off in late September/early October was partially predicated on the idea the global recovery was failing. Last week’s numbers further refuted this concern; that’s the important takeaway (stocks can hold these levels as long as the global recovery isn’t failing).

Here in the U.S., manufacturing data and jobs were in focus. The October PMIs were generally fine, in that they showed the manufacturing and service sector continuing to expand at a good pace (both were above 57).

Turning to the jobs report, it was also generally in-line, with 212K job adds. This missed expectations of 240K but closely tracked the rolling 12-month average of 222K. So, it was in the middle of our “just right” range.

But, I do want to point out that the jobs report was a bit more “hawkish” than the market reaction. Importantly, the unemployment rate fell to 5.8%, which is not very close to the 5.5% “normal” unemployment rate. Also, U-6, which considers underemployment, dropped to 11.5% from 11.8%—the lowest levels in several years.

The “dovish” reaction came from the wage data, as wages rose 2.0% yoy (above 2.2% is “hawkish.”) But, keep in mind wages always lag an improving jobs market. While this report won’t cause expectations of the first rate hike to be pulled forward, it does solidify June as a target date for the first hike, and I’m not sure the bond market accurately reflected that on Friday.

Finally, the Fed and BOJ were quiet last week while the BOE made no changes to rates or policies (as expected). The ECB was the highlight of the week, and while it didn’t change any policies, Draghi did as good a job as possible of “talking” dovish. He refuted various accounts of infighting at the ECB, explicitly saying economic risks were to the downside. He added that ECB staff are now researching alternative ways to stimulate the economy (which means corporate bond purchases and QE).

Bottom line, the ECB continues to slouch toward QE and more stimulus. While “euro bulls” wish they would hurry, the important thing is they are headed in the right direction. The ECB this week reinforced my bullish Europe thesis.

This Week

This week will be very quiet. First, keep in mind bonds and banks are closed Tuesday for Veterans Day. Second, there is really only one economic report of note this week domestically, and that’s Retail Sales (Friday). There is now a month-plus of lower oil prices in the economy, so it’ll be important to see retail sales (ex gasoline) increase if the U.S. consumer is really starting to come out of his/her shell.

Internationally, the latest round of Chinese economic data Thursday night (retail sales/industrial production) is obviously important from a global growth standpoint (these numbers need to continue to show incremental progress).

In Europe, the Bank of England’s inflation report Wednesday is the highlight, but that really will only affect the pound. And, given the precipitous decline in the pound the last few weeks (it hit new 52-week lows vs. the dollar last week) there is the chance for a “hawkish” surprise. But that won’t be a reason to be enthusiastically long the pound unless it’s a real shocker.

Finally, the flash estimates for Q3 European GDP come Friday morning, and like the Chinese data earlier this week, it’s important from a “Is the global recovery ongoing?” standpoint.

Bottom line, while there are numbers to watch this week (again, the Chinese data is the uncontested highlight) nothing this week should make anyone’s outlook on the global economy materially worse or better, even with some big surprises.

This was a look at the economic section of today’s Sevens Report. To continue reading today’s sevens report, simply sign up for a Free Trial on the right hand side of this page.