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.
Last week in the capital markets an early flight to safety, a late rebound rally
- Equities: Like bonds, it was a week of two parts for equities, with weakness early and a late rally.
- On Monday, the S&P 500 suffered its biggest one-day percentage decline since last June, yet ended the week up almost 1%.
- MSCI Japan followed the U.S. down, also posting its biggest daily loss since last summer as it fell around 6% by mid-week before recovering to end the week down around 3% (in US$ terms).
It wasn’t as bad as it looks though. Remember, the date line is in the Pacific. It’s morning in Asia first (and 5 o’clock there first, for fans of Buffet’s “somewhere” rule). The Japanese stock market closed before the U.S. rally started. It’s likely to open higher Monday as it catches up. The catch-up will also boost next week’s return.
The Yen, more than any other variable, seems to be driving the Japanese stock market. Yen strength is bad for stocks and vice versa. Perhaps the most important event of the week, then was BoJ guidance that they might ease further: The Yen turned down and Japanese stocks turned up.
For the week, the S&P 500 returned 0.9%, powered by the Consumer Discretionary (up 2%) and Information Technology and Financials sectors (each up 1%). Telecom Services (-2.5%) and Utilities (-0.6%) lagged. Also on the downside: the Russell 2000 was down roughly 1%.
- Bonds: From a distance, it was a quiet week in the US bond market
- The 10-year Treasury yield rose 4 basis points to 2.71%; the 10-year TIP was stable at 0.53%. Japanese and Euro Zone sovereign yields were also largely unchanged. High yield bonds finished unchanged.
Up close, it was far more volatile, with the Treasury yields dropping to below 2.60 mid-week before rising more than 10 basis points later in the week as the flight to quality subsided.
- Commodities: Oil rallied strongly, up over 2% to approach 3-month highs. Agricultural prices also rose sharply; Gold rose about 0.5%.
- Currencies: The Yen was up almost 1% early in the week, but dropped Thursday and Friday to end the week down a bit against the dollar. The Euro rose roughly 1% against the Yen and USD dollar, with its biggest gains coming Thursday and Friday. Key EM currencies rallied flattish against the dollar . . .Turkey’s currency rose roughly 2% (its central bank had sharply hiked rates last week). South Africa, Brazil, and Russia’s currencies, laggards earlier, were also notably strong, up 1% or so last week.
January Manufacturing was mixed, but on balance positive
- The ISM manufacturing index dropped to 51.3 from 56.5, far below consensus and the lowest level since last May.
- The ISM non-manufacturing (services) index rose from 53.0 to 54.0; all four components improved (employment rose to 56.4). Note: the services sector has roughly 7 times the weight of manufacturing in the economy. So an appropriately-weighted average of the two IMS indices actually ticked up in January.)
Japan: the Bank of Japan reaffirms its willingness to ease further
- Two Bank of Japan (BoJ) deputy governors (both “doves” supporters of current policy) said that the BoJ would ease further if needed to maintain above-trend growth and attain 2% inflation in 2-3 years. The next BoJ meeting is Feb 17-18,
- Total average monthly earnings of Japanese workers in December were up 0.8% y/y according to the Ministry of Health, Labor and Welfare. Overtime hours were also very high in December, so hourly wage inflation still appears low to me.
The Congressional Budget Office (CBO) issued its annual Economic and Budget Outlook
- This year’s budget deficit is projected at about $500 billion, about 3% of GDP (and around $1,500 per American).
- The CBO projects the deficit will bottom at 2.6% of GDP in 2015, then rise steadily (driven by rising post-retirement spending) until policy is changed or the nation is bankrupt.
The CBO’s Obamacare forecasts sparked a heated philosophical debate
- The CBO’s models forecast that the Affordable Health Care Act will reduce employment by the more than 2 million full-time equivalents over the next decade as people choose to work less (due to the impact of higher subsidies and/or higher marginal tax rates).
- Republicans blogged and sought out cameras to denounce the law’s incentive-crushing and mobility-impairing impact.
- Democrats defended and celebrated people’s increased ability to choose not to work.
Washington watch: Time for the debt ceiling to take center stage
- The debt limit must now be raised. A relatively “clean” raise is the most likely outcome . . . but a deal is not certain.
- The Keystone pipeline passed a critical milestone as an environmental impact statement found it wouldn’t worsen global warming. Now, more than ever, it’s (just) a political question.
- Janet Yellen will appear before Congressional committees on Feb. 11 (House) and 13 (Senate). Wall Street wants clear guidance (so they can make money) . . . I predict Yellen will disappoint them by saying the Fed is data dependent.
- Several speeches by Fed officials reinforced the message that the Fed is focused on the “real” economy, not the stock market: the guidance is to expect the Fed Funds rate to stay low for a long time and for the QE taper to continue.
Indicators suggest retail investor trading is contributing to market volatility
- Lipper said US stock mutual funds and ETFs suffered redemptions of $18.8B in the week ending 2/5 and taxable bond mutual funds and ETF had inflows of $10.7B. Each was the largest on record.
- The American Association of Individual Investors, bullish sentiment indicator has now declined to its lowest reading since last April, down roughly 50% drop from (quite elevated) year end-2013 levels. An Investors Intelligence survey shows a similar pattern.
Data Sources: The Wall Street Journal, Financial Times, Bloomberg.