Wardwell’s Weekly Market Report
Observations on the Capital Markets – Week Ended August 2, 2013
- Q2 GDP was soft.
- The jobs report disappointed
- No reason for the Fed not to taper.
- Europe watch: beneath the headlines, hints of improvement
Q2 GDP Data was Soft.
There are a million ways of saying, “It could have been worse.” And, while they could have been worse, last week’s economic releases still were not good.
Second quarter U.S. Gross Domestic Product (GDP) growth came in at 1.7% (flash estimate) better than the 1%-ish growth that some feared, but Q1 growth was revised down from 1.8% to 1.1%, so first-half growth did not surprise on the upside, despite the decent Q2 report. The details weren’t inspiring either…still 2.9% nominal year over year (y/y) GDP growth keeps the default/foreclosure rate down. Again – not terrible, but still not good.
As I said mid week, the “fiscal cliff” tax increases were squeezing consumers’ disposable income – and spending growth was coming at the cost of a lower savings rate. Suspending the “social security tax” was expected to stimulate the economy, so it’s only logical that it would work in reverse, too.
The Jobs Report Disappointed
The monthly jobs numbers can be noisy month over month (m/m), but the patterns are there. This month, the unemployment rate dropped by 0.2% (7.6%-7.4%), but almost all the other numbers – hours worked, average hourly income, etc. – were on the weak side. Believe everything but the headline unemployment rate. It was a weak employment report and the drop in the unemployment rate was normal statistical noise.
- Non-farm payrolls (employment) rose 162k in July … and there were also revisions amounting to -26k in prior months (below expectations)
- The average work week dropped slightly (m/m) and hours worked are up 2.1% y/y.
- Average hourly wages fell 0.1% m/m in July; they’re up 1.9% y/y.
- The household survey showed employment rising 227k and the labor force declining by 37k, as the labor force participation rate edged down to 63.4%.
Bottom line: The trend matters more than individual data points. The trend still suggests a gradually healing labor market.
That’s No Reason for the Fed to Hesitate
All that said, there’s nothing in last week’s releases that suggests that the Fed should deviate from the course of QE tapering that they’ve floated (begin tapering this year, get to zero QE mid-2014). Last week’s data was all within normal error tolerances around the trend line of a ‘square root’ slow growth recovery.
Of course, the Fed is, as it has repeatedly said, data dependent. It can accelerate, decelerate, stop and restart QE as it sees fit. It is independent and unaccountable. To date, the Fed hasn’t “walked back” Chairman Bernanke’s hypothetical timeline – but they have stressed that everything is data dependent.
The Fed will, I think, begin tapering QE in September. I suspect that it thinks it must do so, even if the amount of the taper is small. To do otherwise would risk its credibility, sow doubt that it can be swayed by the mob or that it is so unwilling to see bond rates rise in the short term (to see a possible bond bubble deflate before it pops), that it is willing to issue a “put” to speculators.
If the Fed’s September meeting ends with a decision not to start tapering QE, I’m afraid one of two very bad things will be true:
- The Fed will have concluded that the real economy is in very bad shape, materially worse than it thought at mid-2013.
- The Fed will have concluded that there’s a bond bubble that it can’t afford to pop. If that’s the case, we’re all in big trouble.
Let’s hope that the economy is strong enough to function without extraordinary support from the Fed; and let’s not be shortsighted, hoping for the Fed to blow a bond bubble for us.
Europe Watch: Beneath the Headlines, Hints of Improvement
- Italy’s highest court upheld a prison sentence for former PM Berlusconi for tax fraud, but sent a five-year ban on his participation in government back to an appeals court for review. Naturally, there are fears that this will bring down Italy’s coalition government (Berlusconi’s party is a coalition member).
- The European Central Bank (ECB) and the Bank of England left benchmark interest rates unchanged; The ECB offered extended guidance, suggesting rates would remain low for an extended time.
- The number of unemployed people in the Eurozone fell 24k in June, the first drop since April 2011. The unemployment rate remained at 12.1% (19.3 million unemployed).
Data Sources: The Wall Street Journal, Financial Times, Bloomberg