Treasury Secretary to Emerging Markets: Get Your Fiscal House in Order

Observations on the Capital Markets – Week Ended February 21, 2014

The Congressional Budget Office (CBO) stirred the pot again by saying raising the minimum wage would cost jobs, causing a rare public rebuke from The White House.

The G-20 met for two days in Sidney and agreed on enacting policies to, over the next five years, boost collective GDP by two percentage points compared to GDP under current policies. U.S. Treasury Secretary Jack Lew said President Obama will ask for a new stimulus package including things like infrastructure projects to create good middle-class jobs.

The capital markets last week were calm, even as economic data pointed in both directions. Housing market data was disappointing, blamed largely on weather, while inflation remained well-behaved low but with no apparent threat of deflation.

Janet Yellen appears to have hit a home run in terms of building her “brand” and credibility. This may be the most important development of the week. FOMC minutes suggest Fed policy may be becoming less predictable. Fed minutes showed that there were champions of virtually every policy option and no apparent consensus on anything. This suggests policy decisions might truly become data-dependent, even if there is a bias to predictability and stability. As was the case while waiting for the Fed to begin tapering, markets might focus inordinately on forest, not the trees: on the pace of tapering ($10 billion at this meeting or not?). This might increase market volatility.

Next week holds a lot of data reporting, but not enough to confirm/disprove the “weather” hypothesis. Very much on the radar now: Ukraine and Thailand. Continue reading

Walking a Tightrope: The Credibility of Central Banks and the Risk of Crisis

As we begin 2014, economies in developed countries are gathering momentum and central banks are retaining accommodative monetary policies, which extend support for risky assets. U.S. corporate capital (CAPEX) expenditure is being revived, marking an improvement necessary for upgrading the overall economic growth. In this respect, recent disappointing figures on the job market seem more of a transient occurrence than a trend reversal. Nevertheless, key macro figures are still under close watch amid concerns that the economy is actually getting stronger and can withstand the gradual withdrawal of the exceptional monetary stimulus. Continue reading

What Has Abenomics Achieved?

Pioneer Investments’ Head of Global Asset Allocation Research, Monica Defend, assesses the progress of Abenomics – the series of economic reforms implemented by the government of Prime Minister Shinzo Abe – and discusses her outlook for the Japanese market.

What has the new policy course known as Abenomics achieved and what is yet to be done?
Japan managed to exit a long stagnation, also marked by deflation, thanks to aggressive monetary expansion. That was probably the easy part of Abenomics, as it got a major implicit endorsement from the U.S. Federal Reserve; Japan’s quantitative easing accounted for an even larger part of GDP than the U.S. version, but had the Fed not led the way with quantitative easing, we have legitimate doubts that it would have been as effective.

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Puerto Rico: A Delicate Balancing Act

Recently, the commonwealth of Puerto Rico’s credit ratings were downgraded by each of the three rating agencies to “below investment grade” status. This is significant, since no other state or state-equivalent territory of the U.S, carries a below investment grade credit rating.

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Whether or Not it’s the Weather, the Economy Is Definitely Slowing

The weather has certainly been bad . . . but some of last week’s economic data suggests that the weakness is not just weather-related (e.g. construction jobs have held up relatively well, online sales have been weaker than those of bricks-and-mortar.)

  • January retail sales fell, and December was revised down.
  • With sales soft, the retail inventory:sales ratio ticked up. The factory-level ratio has also ticked up; the wholesale ratio has not.
  • Industrial production fell 0.3% in January. Manufacturing output fell 0.8%, while the cold weather boosted utility output 4.1%.
  • Capacity utilization slipped from 78.9% to 78.5%.
  • Bucking the negative trend, the NFIB small business sentiment index rose 0.2 to 94.1.

GDP US Quarterly Forecast

It’s not weak enough yet for the Fed to signal they might slow the QE taper, but the stock market seemed to display a “bad news is good news” complacency.

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Last Week’s Jobs Report Not as Bad as it Sounded, Same for Capital Markets

Observations on the Capital Markets – Week Ended February 7, 2014

The jobs reports were better underneath than on the surface

The data: Initial unemployment claims for the month were 331K. The “establishment survey” showed headline employment growth of 113k, below consensus expectations of 189k. The details were less disappointing, however.Prior months were revised up by 34k. Wages continued to rise slowly. The household survey — the basis for calculating the unemployment rate — showed employment rising by 616k. But because the labor participation rate rose 0.2 to 63.0%, the estimated workforce rose by 499k and the unemployment rate fell only to 6.6%.

The upshot: The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) fell by 514k (so, by implication, the number of full-time workers rose by 1.1 million!). Finally, we got the periodic revisions to the past year’s data, the net effect of which was to revise 2013 job growth up from 2.19mm to 2.32mm.

Comment: There’s often a pretty big divergence between the “household” and “establishment” surveys. It’s not unusual to have discrepancies . . . they tend to vary month-to-month but converge over time. Continue reading

The Markets Are Acting Skittish, But Data Seems Just Fine . . .

Observations on the Capital Markets – Week Ended January 31, 2014

  • In the Economy: Some weak national data but good regional reports
  • In Housing: No good news last week … maybe just the weather?
  • In Europe: Mixed news
  • In Japan: Signs of strength heading into the tax hike
  • In Washington: Time for the debt ceiling to take center stage
  • In the Capital Markets: The yen and Treasuries outperformed

The Markets Are Acting Skittish, But Data Seems Just Fine . . .

The weather has been a wild card, but the economy carried its momentum into the New Year. Details in last week’s flash 4Q GDP report (first of three) were generally solid, with no big surprises. The report showed solid real GDP growth at a 3.2% rate (and nominal at 4.5%). That strong data was reflected in corporate results, as roughly half the S&P 500 companies have reported; sales are ahead of consensus at 2/3 and earnings are above consensus at 3/4.  The second-half acceleration in the economy that we at Pioneer were expecting seems to be coming through.

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