Posts

Economic Cheat Sheet: February 13, 2017

/in /by

Last Week:

There was very little incremental economic data last week, and what reports did come met expectations and importantly did nothing to change the perception that economic activity is legitimately accelerating—a perception that continues to support stocks broadly.

From a domestic data viewpoint, there isn’t a lot to talk about. Jobless claims continued to fall and hit another multi-decade low (a 43-year low), and that’s even more impressive when you consider how much the population has grown since then. Internationally, there was mixed data from China as their foreign exchange reserves dropped below the psychologically important $3 trillion level. While that was ignored by markets this week, China continues to bubble as a potential macro surprise in Q1/early Q2. These foreign currency reserves are a story we need to continue to watch.

But, January Trade Balance was much stronger than expected (exports up 7.9% vs. (E) 3.1%), and that data point early Friday helped alleviate some concern. Still, China’s currency reserves are declining, and authorities are actively trying to pull leverage from their economy and cool growth. More often than not, that leads to some sort of macro-economic growth scare—so just a heads up for the coming months.

Bottom line, economic growth remains an important pillar of this rally, and nothing last week changed that set up, which again was why at worst stocks were flat before the political headlines caused the late-week rally.

This Week:

As we’ve said, two of the biggest risks to the rally outside of Washington remain 1) Lackluster data and 2) A more hawkish Fed. Given those risks, the growth and inflation data this week is important.

Janet Yellen (AP Photo/Jacquelyn Martin)

However, the most important event of the week will be Fed Chair Yellen’s semi-annual Humphrey-Hawkins testimony to Congress, on Tuesday (the Senate) and Wednesday (the House). While she isn’t going to telegraph when the Fed will raise rates, her comments are still important considering the market remains complacent with regards to a Fed rate hike. There is no expectation of a March or May hike, and we continue to think the market is a little too complacent with regards to the potential for a May hike (we admit March seems remote).

Staying on the theme of Fed expectations, the next most important number this week is the January CPI report out Tuesday. The Fed does not believe inflation is accelerating meaningfully (due to the data), but if inflation does pick up pace that will be hawkish and will send yields higher—and most likely stocks lower.

Looking at growth data, Wednesday and Thursday are the key days to watch as we get January Retail Sales (Wed), Empire Manufacturing (Wed), January Industrial Production (Wed) and Feb. Philly Fed (Thursday). Of those four reports, the retail sales number is the most important, because consumer spending has been the engine of growth for the US economy, and it needs to maintain a decent pace because while business investment has picked up, it won’t offset a continued moderation in consumer spending.

The Empire and Philly Fed Indices are the next most important numbers next week, as they will give us the first look at February activity. Since better growth is a key support to this rally, they need to show continued strength. Neither number needs to accelerate meaningfully, but we can’t see much of a retracement, either. Bottom line, strong economic data and benign inflation data (Goldilocks numbers) have been an important support for this market as Washington reverts to the mean (gets more dysfunctional), and that needs to continue if stocks can hold recent gains in the face of confusing political headlines.

Get full Sevens Report delivered to your inbox each morning before 7:00am: http://www.7sreport.com/

Takeaway from Hawkish Fed Minutes

/in /by

 

The bottom line of the minutes from The Fed’s March meeting was that there is little probability of the Fed doing any additional stimulus unless the economic data weakens.

In particular, this is the sentence that got markets moving: “A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below two percent.”

The important part of that statement is “could become necessary” which signals that the committee does not view any additional QE as necessary at the moment.

Effect

The minutes had a big effect on markets. Stocks were already lower heading into the release, but fell sharply post release (Dow down over 100 points) as the realization hit traders that, for now, additional accommodation is off the table.

The U.S. dollar, Euro, Gold and Treasuries were also big movers off the release, as Gold and the Euro fell hard, while the U.S. Dollar and Treasury yields moved sharply higher.

Takeaway

I had said in Monday’s issue, and throughout last week, that I thought the market had misinterpreted Bernanke’s testimony from last Monday and that is wasn’t signaling additional QE. That turned out to be correct.

For a market that has become addicted to quantitative easing and accommodation from the Fed, this news is obviously disappointing in the short term.

But, we need to see the forest for the trees here. The Fed doesn’t see the need to do additional QE because the economy appears to be getting stronger and it isn’t needed.

That is a good thing for stocks if we look beyond the very short term. It is also a good thing for commodities, even through it doesn’t look like it right now. The reason is because The Fed is not going to raise rates any time soon, and we can expect the inflationary implications of The Fed’s previous actions to begin to filter through the economy, and continue the re-inflation that has already begun.

This is a time to use short term weakness to establish a position in equities and commodities. I’m not saying to do it today, as we probably have some more selling to be done—but I will view any decline in the commodities markets based on the disappointment of less stimulus as a buying opportunity. Get your shopping list ready.

 

Bernanke Comments Don’t Signal QE3

/in /by

The market took this speech as dovish, and expectations for QE3 rose slightly. I, however, don’t particularly find the comments “dovish.” Anyone who knows to watch the average work week component in the monthly jobs data knows that we’re not seeing additional hiring because of expanding economic conditions.

Bernanke, in my opinion, just said out loud what many already know. The labor market is getting better, but it isn’t healed, and it is still very fragile.

For a while we’ve known that Bernanke and the Fed are data dependent, and if the data gets worse, they’ll be more accommodative.

We knew this coming into the speech: If the economic data gets worse, the Fed will be quick to move with more accommodative policy. If the data gets better, the Fed will be much slower to raise rates. That was the reality we all knew before the speech, and I believe that is the reality after the speech.