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.

The Fed’s taper was no surprise, either – in its statement the Fed noted, “Growth in economic activity picked up in recent quarters.” Another $10 billion taper at each FOMC meeting is now perceived as the “path of least resistance.” The statement didn’t mention currency or emerging market volatility. With this, we believe, silence speaks volumes – the Fed is not planning to accommodate the markets.

In the Economy: Some Weak National Data but Good Regional Reports

  • New factory orders for durable goods dropped in December and November’s growth was revised down.
  • Initial unemployment claims rose to 348k, which is not a good number; although weather may be a factor.
  • The Dallas Fed’s factory activity increased for the ninth month in a row in January, with output growing at an accelerating pace as new orders rose to a seven-month high. Labor market indicators reflected increased hiring and longer workweeks.
  • The Richmond Fed’s index was solid, lifted by strong new orders.
  • The ISM Chicago composite came in at 59.6 (above 50 is good) in January.

In Housing: No Good News Last Week . . . Maybe Just the Weather?
The median new home price was $270k, up 4.6% year over year (y/y); and the “generic” mortgage rate is 4.52%. Beyond that, news was not so good. New home sales dropped sharply in December and prior months were revised down.

  • December pending home sales (a predictor of existing home sales) fell sharply.
  • Mortgage applications ticked up, but are still down 12% y/y.
  • The S&P Case-Shiller 20-city home price index was up 13.8% y/y. Note: the rate of appreciation is moderating.

In Europe: Mixed News
Both unemployment and inflation declined last week.

  • The number of unemployed workers declined for the third consecutive month in December.
  • Private sector lending was down 2.3% y/y.
  • Eurozone inflation slowed unexpectedly in January as flash harmonized CPI was up 0.7% y/y; core (excludes energy, food, alcohol and tobacco) was up 0.8% y/y.

In Japan: Signs of Strength Heading into the Tax Hike

  • Industrial production was up 5.9% y/y.
  • The unemployment rate fell to 3.7%.
  • Retail sales were up 2.6% y/y.
  • Headline CPI was up 1.6% y/y.

In Washington: Time for the Debt Ceiling to Take Center Stage

  • The debt limit should be reached on February 7. We believe a relatively “clean” raise is the most likely outcome.
  • In a display of bipartisanship, an old coalition of urban Democrats and rural Republicans came back together to agree on a “farm & food stamps” bill. The agreement is expected to reduce spending by $23 billion (is that a lot?) over a decade.
  • Janet Yellen has now officially replaced Ben Bernanke as Fed Chairman.

In the Capital Markets: The Yen and Treasuries Outperformed as Investors Sought Safety

  • Currencies: The yen was up again, gaining a bit against the dollar and almost 2% against the euro. Most Emerging market (EM) currencies were flat against the dollar . . . Turkey’s currency rose after its central bank sharply hiked rates. The central banks of South Africa and India also raised rates. Russia’s currency was notably weak, down about 6% against the dollar.
  • Bonds: Solid GDP growth and the Fed’s tapering didn’t spook the Treasury market: the 10-year U.S. Treasury yield declined 8 basis points (bps) to 2.67%. It was a flight to safety week: high yield spreads widened 13 bps to 421 – so the typical high yield bond’s price fell while comparable-duration Treasury prices rose. Japanese and German 10-year sovereign yields were essentially flat.
  • Equities: It was a risk-off week in the equity markets, even though the economic data wasn’t bad and earnings were better than generally expected. The S&P 500 Index fell 0.4%, last week; The MSCI Japan Index was down over 3% in US$ terms; the MSCI Europe and MSCI EM Indices were down around 2%. For the month of January, the S&P 500 Index was down 3.6% and the Russell 2000 Index was down 2.8%.
  • Commodities: WTI oil was up about 1%; Gold fell about 1%.


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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