Markets Calm Despite Tones of Tapering from the Fed

Wardwell’s Weekly Market Report

Observations on the Capital Markets – Week Ended August 9, 2013

  • Last week in the capital markets: relatively quiet outside Japan
  • U.S.  economic data was generally upbeat
  • More positive data from the housing market
  • Europe watch: generally positive economic data
  • China watch: a bunch of upbeat data points—no hard landing visible
    Japan watch: Increasing concerns about Abenomics
  • Washington watch: Congress is on recess
    Fed watching: waiting for the September taper
  • The week ahead: relatively quiet

Last Week in the Capital Markets: Relatively Quiet Outside Japan

Currencies: The dollar has been weak the past month; last week, the Yen was up 2.5% against the dollar; the Euro was up 0.5%.

Equities: Region and Country indices measuring their respective market changes like the MSCI Japan was down 5%, giving back the prior week’s gains . . . it doesn’t like the strong Yen;  MSCI Europe was flat. The S&P 500 and MSCI Emerging Markets Indices were down around 1%.  Within the S&P 500, mining companies boosted the Materials sector while money center banks pulled down the Financials sector.

Bonds: The 10-year Treasury, Barclays Aggregate Bond Index, which measures the broad bond market, and BoAML High Yield Master II index, which measures high yield bonds, all posted near-breakeven returns.  The 10-Year Treasury’s yield ended the week down 6 basis points, at 2.57%.  European and Japanese sovereign debt markets were quiet.

Commodities: Gold was essentially unchanged.  Oil was down about $1 per barrell.  The GSCI Agricultural and livestock commodity index was down a bit.

U.S.  Economic Data was Generally Upbeat

  • Earnings continue to come in about as expected. Revenues continue to modestly and pleasantly surprise.
  • The non-manufacturing (services) rose from 52.2 to 56.0, according to the PMI (Purchasing Managers Index), for which over 50 indicates expansion and under 50 indicates contraction.
  • Initial unemployment claims were 333k, up only 5k from last week (anything below 350k is very encouraging).  The four-week average fell to 335,500, the lowest level since 2007 (pre-recession).  
  • The trade deficit came in far lower than estimated—exports were stronger and oil imports were lower . . . that might lead to as much as a ¾% upward revision in GDP growth for the second quarter.
  • The Fed’s Senior Loan Officer Opinion Survey showed banks are generally easing lending standards.
  • Consumer credit jumped $14B . . . but revolving loans (mostly credit cards) dropped $3B, the biggest drop in a year, while non-revolving credit (student and auto loans) rose $17B. This suggests the consumer is tightening its belt.
  • The JOLTS labor market report from the Bureau of Labor Statistics measuring job vacancies wasn’t perfect, but showed more job openings, fewer layoffs.

More Positive Data from the Housing Market

  • The mortgage delinquency rate declined again, hitting 7% in 2Q versus its 2010 peak of 10%.
  • The foreclosure rate declined to 3.3% in the second quarter versus its 2010 peak of 4.6%.
  • Purchase mortgage applications ticked up . . . stIll running below the Q2 level, though.
  • The median selling price of an existing single-family home was up 12% year-over-year (y/y) in the second quarter.  Comment: Don’t confuse this number with home price appreciation . . . this is the median price. If there are fewer distressed/foreclosure/short sales in the mix, the median transaction price will move up, and vice versa.  (p.s. the median price is $203,500.)

Europe Watch: generally positive economic data

  • Bank of England Governor Carney effectively copied the Fed playbook, initiating a new policy of forward guidance on rates: UK monetary policy is now tied to a 7% unemployment target.
  • UK non-manufacturing PMI rose to 60.2%; June industrial output was strong.
  • German industrial production was up +2.1% y/y in June.
  • A variety of other data meet/beat expectations.

China watch: a bunch of upbeat data points—no hard landing visible

  • July non-manufacturing PMI rose to 54.1 in July.  July factory output was +9.7% y/y, retail sales was +13% y/y, CPI is up only 2.7% y/y . . . this doesn’t feel like a hard landing.

Japan Watch: Increasing concerns about “Abenomics”

  • Recent economic data has been somewhat disappointing/underwhelming.  Most important: second quarter GDP (released over the weekend) surprised to the downside: +2.6%.
  • The Bank of Japan (BOJ) concluded its meeting with no notable change in monetary policy…no surprise.
  • Fiscal policy is a growing concern.  A two-part increase in the consumption tax is scheduled for 2014: from 5-8% in April; from 8-10% in Oct 2015 . . . the current buzz is whether it will it be delayed . . . if not, Japan faces significant fiscal tightening in the next few years (stimulus coming off, tax hike coming on).

Washington Watch: Congress is on recess

  • The Obama administration overruled a U.S. International Trade Commission order stopping Apple from selling some older iPhones and iPads (the commission had found that Apple violates Samsung patents). Apple won a ruling against Samsung in a different case. Will the treatment be symmetrical?  Bottom line: not real important for GDP
  • The Energy Department approved a third liquified natural gas LNG export facility, this one in Lake Charles LA, with a capacity of 2 billion cubic feet/day.
  • Jeff Bezos bought the Washington Post.
  • Expect noisy, angry budget and debt ceiling debates in September.

Fed Watching: waiting for the September taper

  • A lot of Fed speakers last week . . . they continue to guide the markets to expect a September taper.
  • Next meeting: September 17-18.
    Jackson Hole conference the last week of August.

The Week Ahead: relatively quiet

  • Housing: National Association of Home Builders, mortgage applications, housing starts
  • Inflation: Produce Price Index, measuring prices for goods in production, Consumer Price Index measuring inflation
  • Activity: industrial production, labor productivity, unemployment claims

Data Sources: The Wall Street Journal, Financial Times, Bloomberg

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