A Quiet Santa Claus Rally Leads Us into the New Year

Weekly Market Report
Observations on the Capital Markets – Week Ended December 27, 2013:

  • Signs of acceleration for the U.S. economy
  • Still mixed news on housing
  • Meanwhile, in the markets, Santa Claus came quietly to town
  • In China, the cash crunch eases

Signs of Acceleration for the U.S. Economy Last Week . . .
Last week’s economic news was generally strong, providing momentum for the economy as we step into 2014. The U.S. Q3 GDP growth rate was revised up to 4.1%, and the Chicago Fed National Activity Index (a weighted average of 85 monthly indicators of national economic activity) rose in November, signaling an accelerating economy.

  • New factory orders for durable goods rose in November – up 10.9% year over year (y/y).
  • Initial unemployment claims dropped to 338k.
  • Personal Income rose 0.2% month over month (m/m) in November (2.3% y/y).
  • November consumer spending hit the highest level in five months – up 3.5% y/y.
  • Still no inflation: the PCE (Personal Consumption Expenditures) Price index was up 0.9% y/y; core was up 1.1%.

Continue reading

A Few Quick Thoughts on the U.S. Dollar and Japan

I recently participated in a webinar where I was asked a few questions regarding the U.S. dollar and Japan, which I think are on many people’s minds right now. I wanted to pass along my thoughts on both subjects.

What are the chances of the U.S. dollar losing its reserve currency status and what might replace it? Continue reading

China’s Economic Reform Plan

In a recent conversation, my colleague Mauro Ratto, Head of Emerging Markets, helped boil down China’s recent economic reform plan.

China’s “Breakthrough” in the Making

The ruling communist party’s gathering (also known as Plenum) in early November was followed closely by the expected announcement of a major plan of economic reforms.  Three major reforms that were highlighted during the plenum concerned:

Markets Respond Favorably to the Fed

Observations on the Capital Markets – Week Ended December 20, 2013

Developed market stock markets had generally traded down in the first two weeks of December; they were up strongly last week, catalyzed by the Fed announcement it would begin tapering its monthly bond purchases de-signed to spur growth and employment.

The S&P 500 and MSCI Japan indices were each up 2%; MSCI Europe index was up 3%. Within the S&P 500, In-dustrials and Materials led; Telecoms and Consumer Sta-ples lagged as cyclicals continue to outperform defensives in December. The Fed decision powered the dollar to gains of roughly 1% against the Yen and 0.4% against the Euro (the Yen fell to a five-year low against the dollar).

Bonds seemed to take the Fed’s actions in stride, although high yield bond spreads, as measured by the BofA ML High Yield Master II Index, narrowed 8 basis points to 404, a new cycle low. That’s more than the economic news would seem to justify—but it’s consistent with the stock market’s positive action.

European and Japanese bond markets were quiet, but China’s money markets are experiencing a liquidity crunch—generally thought to be cyclical (year-end) noise, but spill-over effects are possible. Oil continues to rise off its end-November bottom, rising 3% to just below $100. Gold was down 3% (Fed tapering), falling to below $1,200. Continue reading

Looking Beyond the Initial Fed Taper

The Fed’s taper announcement might have been its most closely watched announcement of all time. We pretty much knew what was basically going to happen (eventually taper QE, strengthen forward guidance), we just didn’t know exactly when and exactly how much. Now we know.

The Fed will reduce its bond purchases from $85 billion/month to $75 billion/month in January. In the Q&A, Bernanke suggested purchases might be cut another $10 billion at each upcoming FOMC meeting — implying the program would end in late 2014. It also strengthened “forward guidance”, saying it would keep the Fed Funds rate at current levels “well past the time that the unemployment rate declines below 6.5 per cent.”

Immediate market reaction: good news is good news Continue reading

2013 A Pretty Good Year

This time last year we were bullish about equities and positive on the slow but steady strengthening of the economy. The market did not disappoint. The economy was almost heroic, you might say, with its performance enduring government sequestrations and higher taxes almost a 2% drag on GDP but comporting with our expectations of 2 – 2.5% growth. 2013 is ending with GDP and the markets coming fairly close to what we thought they’d achieve. Now the year is almost out, so let’s take stock of 2013 but look ahead to 2014. Continue reading

Economic Data Good . . . Good Enough to Raise Tapering Fears

Weekly Market Report
Observations on the Capital Markets – Week Ended December 13, 2013

Good news was bad news for stocks last week: good economic data (especially Tuesday’s labor report and Thursday’s retail sales reports led the markets to increasingly discount a December taper. The overall picture is of an economy that’s in a sustained economic upturn—not one that needs extraordinary assistance from the Fed. Continue reading


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