Archive for category: Investing

Midterm Election Takeaways

Ignoring the politics (I’ll leave that to others far more intelligent than I), there are a few potential market takeaways to monitor now that the Republicans will control the 114th Congress (undoubtedly some clients will call asking what the mid-terms mean for the market, and I want to provide some talking points).

First, all the major players meet tomorrow at the White House (Obama, McConnell, Reid, Boehner, Pelosi), but nothing is expected to come out of the meeting other than lip service. AS far as evidence the government may start actually functioning again now that the elections are over, the first major hurdle to watch is immigration. If President Obama uses an executive order to provide amnesty to illegal immigrants and go around Congress, then it’s likely the next two years will be as contentious and useless as the previous two from Washington.

And, while that won’t necessarily cause a market decline, the market would like to see some positive action on corporate tax reform, the Keystone Pipeline and a rollback of some parts of the “Affordable Care Act.” If Obama unilaterally moves on immigration, the chances of any of the above going forward will be materially reduced. Again, it won’t be a market headwind per se. But fixing the corporate tax, approving Keystone, removing the ban on oil exports and changing the ACA would be a positive for the market.

Outside of those policy issues, we also need to consider the impact of a Republican Congress on the Fed. Rand Paul already has legislation to audit the Fed in Congress, and there have been specific requests made by Republicans for a detailed plan on how the Fed plans to normalize interest rates. Bottom line, scrutiny of the Fed could increase materially under a Republican Congress, which could make the process of normalizing policy more difficult.

Bottom line, Washington remains on the back burner from a market standpoint and will remain so until the beginning of next year when the new Congress is seated, barring an executive order from Obama on immigration. But, I think it’s safe to say that this relative quiet we’ve seen from Washington throughout 2014 won’t be repeated in 2015. If the anticipated levels of foolishness from Washington were a chart, it just bottomed.

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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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