FOMC Minutes: Little Market Reaction. Hidden Message?

Observations on the Capital Markets – Week Ended January 10, 2014:

  • Friday’s labor market report was disappointing – and a little noisy
  • Bond markets rallied on weak job growth
  • U.S. economic news: More positives than negatives
  • Eurozone news: Not good, but getting better
  • China news: Is slower export growth really a sign of global weakness?

The FOMC Minutes Drew Little Market Reaction, but Contained Hidden Message
Harry Truman once famously asked for a one-armed economist, one who couldn’t say “but on the other hand…” On this score, while there were no real surprises or new insights in its minutes, the FOMC is an octopus with an extra arm: the minutes paint the picture of a committee with a range of views on every question – the antithesis of consensus. If decisions are, as the Fed continually reminds us, data-driven, and if there’s no consensus on the committee, how much weight should you put on the Fed’s forward guidance? I suspect the message is: not too much.

What will be the key to Federal Reserve policy in 2014? It may be the labor participation rate. Friday’s Labor Report revealed the unemployment rate fell to 6.7%, in part because the labor force participation rate fell to 62.8% (from a base of 58-60% in the 1950s and ‘60s and a peak of just over 67% in 1999-2000). The question of whether the decline is cyclical or secular is poised to be at the heart of 2014 Fed policy debates. If the decline is cyclical, the economy is still operating well below potential, and could benefit from stimulus. If it’s secular, the economy will reach “full employment” soon, risking overheating and inflation if stimulus is continued.

In other Fed news, the Senate confirmed Janet Yellen as the next Fed chair. Stanley Fisher will be nominated as vice-chair. All good.

Friday’s Labor Market Report was Disappointing – and a Little Noisy

  • The “establishment survey” showed payrolls rising only 74k in December, below consensus expectations of around 200k. The cold weather may have played a role, but the forecasters were still wrong.
  • The “household survey” (the basis for calculating the unemployment rate) showed job growth of 143k (better than the 74k in the establishment survey), but it’s not the number folks focus on. It also showed the unemployment rate declining from 7.0% to 6.7%, but it’s being discounted because both the 143k new jobs and shrinkage in the labor participation rate contributed to the drop (as mentioned above).
  • The sense of surprise was probably exaggerated, because it was so far below the prior day’s “ADP estimate” of 238k. I’m inclined to consider this data point “noise”… but will be increasingly sensitive to weak data. This data series can be noisy: We’ve had weak months before and none marked the beginning of weakness. There’s an old saying: “once is happenstance, twice is coincidence; three times, it’s enemy action.” For now, don’t get too excited. The 12-month moving average is not far below its high for the recovery.

Bond markets Rallied on Weak Job Growth

  • Bonds: U.S. Treasury markets reacted favorably to Friday’s jobs number, with the 10-year Treasury yield ending the week down 13 basis points (bps) to 2.88%; the 10-year TIP yield fell 16 bps, to 0.59%. High yield spreads tightened 3bps to 395%. Japanese and European sovereign yields fell, with the Portuguese 10-year falling another 28 basis points.
  • Equities: MSCI Japan Index was down roughly 0.5% (the Japanese stock market doesn’t like a stronger yen). MSCI Emerging Markets Index was down around 1% (economic concerns). MSCI Europe Index was up about 0.5%; the peripheral countries led (investor confidence is rising). The S&P 500 Index returned 0.6%. Within the S&P 500, leadership was narrowly concentrated in Health Care (up 2.7%) and Utilities (2.5%) led; no other sector returned more than 0.75%. Telecom Services and Materials lagged.
  • Currencies: The dollar was up marginally against the Euro and Yen before Friday’s jobs number; it ended the week down slightly against each. Emerging Markets currencies generally exhibited a similar pattern of returns.
  • Commodities: WTI oil was down just over 1% on higher-than-expected inventory growth. Gold rose a bit less than 1%.

U.S. Economic News: More Positives than Negatives

  • Factory orders rose 1.8% percent in November, and October was revised up by 0.4%. Backlogs rose for the 8th straight month.
  • The trade deficit was down more than expected, to the lowest monthly deficit since October 2009, on strong exports and falling imports. Keys were domestic oil displacing imports and higher exports of capital goods. This report should boost Q4 GDP forecasts.
  • The ISM non-manufacturing fell from 53.9 to 53.0 as the new orders subindex fell from 56.4 to 49.4, its first sub-50 reading since July 2009. Other details were more positive. The new orders weakness was probably noise, but next month’s number will be closely watched.
  • Mortgage applications for home purchase slipped; they’re down 20% year over year (y/y).
  • Consumer revolving (credit card) debt ticked up—a rare back-to-back gain—in November.
  • Inventory data doesn’t seem to signal an imminent slowdown.

Eurozone News: Not Good, But Getting Better

  • The ECB maintained its current policies, made dovish sounds about its future intentions.
  • Standard & Poor’s confirmed Germany’s AAA rating.
  • Ireland successfully issued $4 billion in 10-year debt and Spain sold 5-year bonds.
  • December services PMI fell to 51.0 from 51.2 in November.
  • December flash CPI (consumer prices) was 0.8% y/y; Core was 0.7%. November PPI (producer prices) was -1.2% y/y; ex-energy, it’s -0.3% y/y.
  • The unemployment rate was 12.1% for the fourth consecutive month.

China News: Is Slower Export Growth Really a Sign of Global Weakness?

  • December’s merchandise trade report showed Chinese export growth weakening … but it’s unclear whether it’s a real slow-down or just less speculative “hot money” flows being disguised as trade — the government’s been clamping down on the latter.
  • Chinese CPI rose 2.6% in 2013; PPI was -1.9% y/y.

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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