Fed Watchers See Signs of Quicker QE

Weekly Market Report  

Observations on the Capital Markets – Week Ended November 22, 2013:

  • Fed watchers see signs of quicker QE
  • Washington and the world:  Some important developments
  • The capital markets were quiet, except for currency chatter
  • Watching the U.S. economy
  • Watching Europe, Japan and China

Fed Watchers See Signs of Quicker QE
NY Fed President Dudley (a dove) sounded upbeat about the economy in a speech last week. Fed Chairman Bernanke hinted at the Fed moving from quantitative easing (QE) to “forward guidance”, saying “The mix of the tools will change somewhat over time.” Separately, he called the rise in bond yields “unwelcome and unwarranted”.

The FOMC (Federal Open Market Committee) minutes contained no real surprises . . . consistent with the Fed beginning to taper QE soon (data dependent, of course). They showed the Fed talking through lots of ideas.

The Senate Banking Committee sent Janet Yellen’s nomination to the Senate floor; expect her confirmation promptly.

Washington and The World: Some Important Developments

In Washington - File under: just when you thought it couldn’t get worse. Senate Democrats invoked the “nuclear option”, changing the rules to require only 50 votes (vs. 60) to confirm presidential appointees (other than for the Supreme Court). This change weakens the power of whichever party is in the minority . . . it may move some appointees through faster, but it may also inflame partisanship.

In the Ukraine - Officials halted negotiations for a free trade deal with the EU, choosing instead to deepen ties with Russia. This may not be front page news, but Russia’s “win” is a big prize in global geopolitics.

The U.S./West and Iran - have apparently agreed to an interim deal which eases sanctions somewhat in response to some modest concessions . . . I’m not sure whether it is tough enough to satisfy the French. In any case, it’s not a final solution.

The Capital Markets Were Quiet, Except for Currency Chatter

  • Currencies: It was Bank of Japan (BoJ) Governor Kuroda’s turn to talk the Yen down; he said the recent decline in the yen was not abnormal and the BoJ remains open to further easing. The Yen fell 1% against the dollar and a bit more against the euro. Emerging Market currencies are acting like a call on QE: rallying when more QE seems more likely, and vice versa.
  • Bonds: Rates ended up a bit on OK economic news and a sense that the QE taper might start a bit sooner than previously expected.
  • Equities: The Dow crossed 16,000 and the S&P 500 Index crossed 1800, for those who celebrate such things. Within the S&P 500, financials and health care led; utilities lagged. The MSCI Japan was up almost 1% in U.S. dollar terms (more in yen terms).
  • Commodities: Gold was down 3%. WTI oil ended the week up 1%.

Watching the U.S. Economy

  • Inflation is right about where it should be. Core CPI was up 1.7% in October – that’s pretty much what the best central banks aim for (close to, but below 2%). Gasoline prices dropped 3.8% in October. Labor costs were up and wages rose 1.6% year over year (y/y); benefits rose 2.2%.
  • Business is still grinding along. Manufacturing was up, after a lagging a bit. Current output is strong; domestic customers have pushed the new orders index up; lengthening delivery times suggest rising activity, and companies are passing along moderately higher input cost by raising prices a bit.
    • The Census Bureau inventory report showed business inventories rose in Q3 … but sales rose as well, leaving the inventory/ sales ratio essentially unchanged. Remember that rumor that Q3 GDP growth was weak, boosted by a build-up of unsold inventory? It’s just not supported by the data. We had a good harvest (prices down but volumes way up).
  • The labor market data is still grinding along. Initial jobless claims dropped and job openings ticked up to 3.9 million; the number of hires and fires (“separations”) were essentially flat.
  • The housing market isn’t dead yet. Existing home sales fell for the third month in a row … but blame the lack of willing sellers, not a lack of buyers: the median price was up 12.8% y/y … the 11th consecutive month of double-digit y/y gains. The November NAHB (homebuilders) Index was unchanged and purchase mortgage applications rose nicely … a relief after a run of weak readings.

Watching Europe, Japan and China
The OECD (Organization for Economic Cooperation and Development) cut its 2014 global GDP growth forecast by 0.4%, to 3.6%. Their 2014 forecasts are: 2.9% in the U.S., 1% in the Eurozone, 1.5% in Japan, and 8.2% in China.

  • In Germany, Angela Merkel is apparently ready to accept a minimum wage as the price of forming a coalition government. The German ZEW Business Conditions Index rose to a 4-year high today.
  • Eurozone manufacturing activity expanded; service sector activity declined. Germany was strong; France was weak.
  • Tokyo condo sales were down in October: the result of a tax increase effective at the beginning of the month. We’ll see more of these tax rate-driven distortions, since more tax increases are coming.
  • In China, The MNI China Business Survey slid and the HSBC Flash Manufacturing PMI was soft. Peoples Bank of China Governor Zhou said that China will ‘basically’ end intervention in the currency markets and move to market-based floating exchange rate … but didn’t suggest when.

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

About Sam Wardwell

Sam Wardwell, CFA, is Senior Vice President and Investment Strategist at Pioneer Investments. He joined Pioneer in 2003.
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