Was Friday’s Rally A Game changer for the Market?
Economics
Last Week
Friday’s jobs report capped what was a good week for domestic economic data, and the main takeaway was that Fed “tapering” expectations in September were further cemented by the data.
Looking at the jobs report, it was a pretty “Goldilocks” number. The June report was a bit better than expectations (195K vs. 161K) but, almost more importantly, we saw a net 70K increase in the May and June figures. The unemployment rate held steady at 7.6%, but that came with a welcomed increase in the participation rate and employment-to-population ratio. Overall, this was a very solid report.
As mentioned, the rest of the data from last week was also pretty solid. The final reading on both manufacturing PMIs and the non-manufacturing PMIs were in-line or better than expectations. Plus, evidence continues to build that manufacturing is seeing a bit of an uptick in activity.
So, in the context of “WWFD” (What Will the Fed Do?), the good economic data last week—which generally shows there is no loss of economic momentum from Q1, as many expected there would be—further cements the likelihood that the Fed will taper QE in September.
While the domestic data was good and it implies “less-accommodative” monetary policy going forward, the same cannot be said for the rest of the world. Outside of the jobs report Friday, the surprisingly dovish European Central Bank and Bank of England meetings Thursday were the biggest events of the week.
Mario Draghi and new BOE Governor Marc Carney both implemented “forward guidance” to emphasize the different directions of monetary policy between the Fed and the ECB and BOE, respectively. While the Fed looks to taper, both the ECB and BOE remain firmly in easing mode, with a bias toward more accommodation in the future.
Looking at the actual data in Europe, the takeaway from last week is that we are seeing signs of stabilization in the European Union’s economy (small signs, but at least it’s a step in the right direction). Manufacturing PMIs and EU retail sales both showed improvement, and of particular note were the UK numbers, which continue to get better and better.
Finally, China remains the area of greatest concern, economically speaking. Manufacturing and composite PMIs both were in-line with pretty low expectations, and it is clear from the data that the Chinese economy is losing momentum. And, the People’s Bank of China’s recent actions to burst the credit bubble in the property market will only slow growth further.
Seven-percent growth is now the number to watch—if you see expected 2013 GDP growth dip below 7% for China in the coming months (or if a lot of sell-side firms downgrade their growth expectations below 7%) then look for more weakness in China.
Bottom line with data last week was that it 1)Cemented the expectation that the Fed will begin to “taper” QE in September, and 2) Reinforced the monetary-policy divergence between the U.S. and the rest of the world.
So, we can expect recent trends of the higher dollar/lower “everything else” and higher yields to continue until the domestic data becomes soft, or international data improves.
This Week
Focus turns from the “macro” to the “micro” as the economic calendar is very slow this week, and the market’s focus will turn toward earnings.
With little actual data domestically (jobless claims Thursday is the highlight, and PPI Friday is the only other number), the Fed will remain a focal point.
FOMC minutes will be released Wednesday but, given the large amount of communication from Fed presidents over the past two weeks, I’m not sure there’s going to be a lot of additional insight to glean from the minutes. The market expects “tapering” in September, and I doubt anything in the minutes will alter that expectation. (The risk, if anything, is that they are slightly hawkish.)
There are also multiple Fed speakers this week: Bernanke Wednesday, Daniel Tarullo Thursday, and James Bullard and John Williams Friday). Their comments bear watching, as I imagine the Fed will continue trying to “talk down” interest rates and reinforce the “tapering is not tightening” PR campaign. So, expect them to be on balance dovish, but again I doubt any of it will change current market expectations.