Did Bernanke’s Dovish Comments Please the Markets?

Wardwell’s Weekly Market Report

Observations on the Capital Markets – Week Ended July 12, 2013

  • The Federal Open Market Committee (FOMC) minutes reinforced expectations of QE tapering
  • Two quick comments on energy prices
  • The U.S. budget deficit continued to fall
  • U.S. economic data was mixed on balance
  • Inflation (ex-energy) remained tame
  • China watch: weak economic data helped the stock market rally
  • Europe watch

FOMC Minutes Reinforced Expectations of QE Tapering
The key phrase:  “About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants indicated that it likely would be appropriate to continue purchases into 2014.” Bonds rallied, suggesting that the sell-off of the past few weeks had exhausted itself or overshot (at least for now).

  • On Thursday, after a non-controversial speech about history, Chairman Bernanke opened the floor to Q&A and suggested continuing easy money (“a highly accommodative policy is needed for the foreseeable future”). He did not contradict or retract anything he’s said about QE tapering or anything in the FOMC statements, but his message was clearly very dovish. Markets acted pleased.
  • In a surprise, Elizabeth Duke resigned as a Fed Governor and voting FOMC member – she was said to have been the key player in setting up QE

Two Quick Comments on Energy Prices

  • West Texas Intermediate (WTI) oil rallied, but this is probably due more to increased ability to ship oil from Cushing, OK (where WTI is priced) to the Gulf Coast refineries, alleviating the glut at Cushing, than to global demand. Brent Oil (a more global oil benchmark) didn’t rally; the WTI rally was mostly spread tightening.
  • Gasoline prices have risen 30-40 cents/gallon in the past few weeks, putting a drag on non-gasoline consumer demand.

The U.S. Budget Deficit Continued to Fall
The U.S. Office of Management and Budget said it expects the budget deficit this year to be $759 billion, about $214 billion less than its estimate in April, reflecting sequestration (lower spending), higher tax revenues (driven by both higher rates and rising incomes) and funds received from Fannie Mae and Freddie Mac. The federal budget deficit has fallen to around 4.4% of GDP over trailing 12 months, down from around 8% over the preceding 12 months.

Comment: This deficit reduction is the fiscal austerity that the Fed cites as being a drag on the economy. The worst of it is behind us.

U.S. Economic Data was Mixed, on Balance
The Job Openings and Labor Turnover Survey (JOLTS) contained no real surprises. Job openings rose after a couple of weak months. Initial unemployment claims surprised by rising 16k to 360k.

Comment: Claims can be a key indicator of economic strength and a good indicator of labor market momentum, but don’t put too much weight on only one week’s data. Further, auto industry seasonal effects may be causing distortions.

Wholesale Inventories surprised by falling in May, rather than rising. April was revised down, too. This will be a drag on Q2 GDP…but remember, this is mostly noise: lower inventories are bullish for the second-half. In addition:

  • Chain Store Surveys showed some strength
  • The NFIB Index dipped slightly after 2 strong monthly gains
  • Consumer credit rose $20 billion, well above $13 billion consensus
  • Mortgage applications fell…but maybe that was just the holiday…
  • ISI’s high-frequency company activity surveys showed softness, particularly at homebuilders and auto dealers (very interest rate-sensitive groups)

China Watch: Weak Economic Data Helped the Stock Market Rally
Chinese exports fell 3.1% year over year (y/y) last month – attributed to weakening global demand, rising labor costs and strong currency. Perhaps perversely, Chinese stocks rallied (+5.5% in 2 days on the news) – attributed to expectations of easier fiscal/monetary policy. China’s PM talked of, but did not define, a ‘lower limit’ below which growth should not fall. The Chinese Yuan hit a new high against the U.S. dollar mid-week.

Comment: It’s probably peaking for now, since the U.S.-China Strategic & Economic Dialogue meeting is over (no real news from those meetings except non-binding talk about cutting carbon emissions).

Chinese inflation (except for food and houses) is under control and not a barrier to stimulus: Overall CPI was 2.7% y/y; non-food CPI +1.6% y/y (food CPI +4.9% y/y); wholesale prices of consumer durables have now fallen down for 201 consecutive months; residence prices +3.1% y/y.

Europe Watch

  • European leaders decided to provide Greece €3 billion in aid, despite concern about whether the nation is moving fast enough on reform.
  • Italian government bonds yields rose after Standard & Poor’s cut Italy’s credit rating from BBB+ to BBB.
  • German exports fell a seasonally adjusted 2.4% in May, while imports gained 1.7%.

Comment: Export weakness shows global weakness, but a lower German trade surplus is good for the rest of the world.

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