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.

While inventory growth was cited as an outsized contributor to Q3 GDP growth, two inventory reports this week showed that both the wholesale and retail Inventory-to-sales ratios remain very low: no signal to expect production cutbacks (other than normal seasonal stuff in autos).

  • November retail sales—up 4.7% y/y (year over year) —were better than expected. Autos and home furnishings—big ticket stuff—were strong . . . the categories where holiday gifts would be were relatively soft (maybe the late Thanksgiving pushed Christmas shopping into December?). This report bodes well for Q4 GDP.
  • The job openings report from the Bureau of Labor Statistics ticked up to a 5-year high . . . modestly positive trends are intact.
  • The NFIB small business optimism index ticked up from 91.6 to 92.5 . . . the employment components pointed up.

Congress exceeds expectations: produces a bipartisan agreement ahead of schedule…raising tapering fears

  • The Ryan/Murray negotiations produced a compromise (disliked by extremists in both parties) that will fund the government through 2015. No policy breakthroughs or grand bargains . . . incremental stuff.
  • Slightly more near-term spending, balanced by enough revenue increases and spending controls to qualify as reducing the deficit over the next decade. Unemployment benefits don’t get extended.
  • The House promptly approved the deal by a very wide margin. Speaker Boehner said some very bad things about the right wing opponents of the deal.
  • Fiscal policy uncertainty had been cited by the Fed as one of the reasons it didn’t taper in September. This deal removes most of that uncertainty.

Commodity prices continue to suppress headline inflation

  • Import prices are down 1.5% y/y; export prices are down 1.6%. Lower oil prices are pulling down import prices; lower agriculture prices (result of a good harvest) are depressing export prices.
  • Core PPI inflation was 1.3% y/y; Core (ex- food and energy) was up only 0.7%.

Higher interest rates continue to frustrate housing bulls

  • Purchase mortgage applications remain low . . . up 1% . . . weak . . . the 30-year conforming rate is up to 4.6%.

Other stories

  • A Volcker rule (bans proprietary trading at banks) was approved by the regulators.
    • You thought Dodd-Frank (2,000+ pages) was long? The “Volcker rule” alone is almost 1000 pages long.
    • Less than half the rules mandated by the Dodd-Frank Act have been written so far.
  • Stanley Fisher, former head of the Bank of Israel, is apparently President Obama’s choice to be next Fed vice-chair (replacing Yellen). Both Bernanke and Draghi were Fisher’s students at MIT.
  • Facebook is getting added to the S&P 500.
  • The government sold off the last of its stake in GM . . . net cost: around $10 billion (put 50 in, got 40 back).
  • Mexico effectively abolished its national oil monopoly.
  • WTO (World Trade Organization) announced a global trade deal had been reached; the TPP (Trans Pacific Partnership) said it won’t be able to get a deal done this year.

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

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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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