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%.

Still Mixed News on Housing

  • The FHFA (Federal Housing Finance Agency) House Price Index ticked up in October and November new home sales were solid; September and October results were revised up. The median selling price is up 10.6% y/y and inventories remain low…. good for homebuilders.
  • Mortgage applications to purchase homes fell again in the December 20 week; they’re down 11% y/y. Refinancing mortgage applications fell to their lowest level since the recovery started.

Meanwhile, in the Markets, Santa Claus Came Quietly to Town . . .

  • Equities: The S&P 500 Index rallied a bit more than 1% last week, with materials leading for the second consecutive week; utilities lagged. The MSCI Japan and Europe Indices were each up roughly 2%, while the MSCI Emerging Markets Index lagged.
  • Bonds: The 10-year U.S. Treasury yield rose 13 basis points (bps), to 3.02% and the 10-year TIP yield rose 7 bps, to 0.80%. Credit spreads tightened – the BofA Merrill Lynch High Yield Index narrowed another 8bps to 396, a new cycle low. European and Japanese bond yields generally rose modestly.
  • Commodities: WTI oil rose another 1% to just over $100. Gold recouped roughly half of last week’s loss, rising 1.5%.
  • Currencies: The dollar gained roughly 1% against the yen, which fell to a new five-year low against the dollar. The euro gained roughly 1% against the dollar. Year-to-date, the yen has depreciated by roughly 20% against the dollar, while the euro has appreciated by roughly 5%. Emerging market currencies were generally quiet; the Brazilian Real rebounded after notable weakness last week, and the Chinese currency rose again as the Peoples Bank of China (PBoC) set the central parity rate at a record high 6.105 yuan/$.

In China, the Cash Crunch Eases

  • The short-term liquidity crunch eased as the PBoC injected funds…the cash crunch never got as bad as in June.
  • The CPC (Chinese Communist Party) unveiled a five-year plan to fight graft—the government seems committed. Stocks of suppliers of luxury goods fell on the news.
  • A government official said minimum wages (set at the province level) rose 17%, on average, in 2013 (after having risen 20% last year)…part of the rebalancing toward a more consumer-centric economy.
  • Apple says it has signed a deal to sell its iPhone through China Mobile (763 million subscribers).

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

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