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.

Continue reading

Are Weak Emerging Markets Linked to Fed Tapering?

The current selloff in Emerging Markets (EM) may be peripherally related to Federal Reserve (Fed) tapering, but any linkage is more psychological than mechanical. In general, Fed tapering is expected to result in a renormalizing of bond yields (i.e. the 10-year Treasury working its way back to 3.5% or a little higher this year), but the Fed is still easing – just a little less aggressively – and they are not tightening. Continue reading

Where Do Global Economies Stand in 2014?

Observations on the Capital Markets – Week Ended January 24, 2014

  • In the U.S.: Few surprises in economic data, though the debt ceiling looms
  • In Europe: Better economic data, but the credit crunch persists
  • In China: GDP growth is on track, but offshore investors watch PMI
  • In Japan: All eyes will be on wages – will they rise?
  • In Argentina:  devalued currency

Last week the IMF raised its 2014 global growth forecast from 3.6% to 3.7%. The U.S. growth forecast rose from 2.7% to 2.8%, Eurozone from 0.9% to 1.0% and China from 7.2% to 7.5%. Here’s a closer look at some of the developments influencing the global economies and markets:

In the U.S.: Few Surprises in Economic Data, though the Debt Ceiling Looms
The debt ceiling will take center stage in Washington, as Treasury Secretary Jack Lew said the government will run out of cash around the end of February if the debt limit (scheduled to be reached Feb 7) isn’t raised (and if tax refunds are sent out on time). The White House wants a “clean” increase; Republicans want something in return for an increase … neither side wants a default.

Continue reading

Everyone Seems to be Reaching the Same Conclusion About Global Growth: It’s Improving

Observations on the Capital Markets – Week Ended January 17, 2014

The OECD’s (Organization for Economic Cooperation and Development) leading indicators showed the global economy accelerating in November. The World Bank raised its 2014 global GDP growth forecast from 3.0% to 3.2% (versus 2.4% in 2013). It expects U.S. growth of 2.8% in 2014, up from 1.8% in 2013. The bank cut its emerging market growth forecast, though, saying sustainable growth rates have declined.

International Monetary Fund Managing Director Christine Lagarde also forecast accelerating global growth in 2014, led by the advanced economies, saying (no news flash here) that the worst-case scenario had been avoided but that risks remain.

Finally, the Fed’s Beige Book portrays a strengthening economy with few bottlenecks. Nine of the twelve Fed districts characterized economic growth as “moderate” in the latest Beige Book; for most, the outlook is for steady or accelerating growth. Manufacturing is leading, with eleven districts reported both growing sales and an optimistic outlook. Nine of the twelve districts noted rising retail activity; eight noted increased hiring. Most districts report seeing little upward pressure on wages and prices. Continue reading

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.

Continue reading

The U.S. Begins an (Un)employment Experiment

Observations on the Capital Markets – Week Ended January 3, 2014

Extended unemployment benefits stopped for 1.3 million people at year-end. This doesn’t change their employment status . . . they just stop getting unemployment compensation. Extended benefits (of up to 99 weeks) was part of the recession-fighting fiscal stimulus package. A question was: did this create a dis-incentive to find a job (aka “funemployment”). Continue reading

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%.

Continue reading

Markets Respond Favorably to the Fed

Observations on the Capital Markets – Week Ended December 20, 2013

Developed market stock markets had generally traded down in the first two weeks of December; they were up strongly last week, catalyzed by the Fed announcement it would begin tapering its monthly bond purchases de-signed to spur growth and employment.

The S&P 500 and MSCI Japan indices were each up 2%; MSCI Europe index was up 3%. Within the S&P 500, In-dustrials and Materials led; Telecoms and Consumer Sta-ples lagged as cyclicals continue to outperform defensives in December. The Fed decision powered the dollar to gains of roughly 1% against the Yen and 0.4% against the Euro (the Yen fell to a five-year low against the dollar).

Bonds seemed to take the Fed’s actions in stride, although high yield bond spreads, as measured by the BofA ML High Yield Master II Index, narrowed 8 basis points to 404, a new cycle low. That’s more than the economic news would seem to justify—but it’s consistent with the stock market’s positive action.

European and Japanese bond markets were quiet, but China’s money markets are experiencing a liquidity crunch—generally thought to be cyclical (year-end) noise, but spill-over effects are possible. Oil continues to rise off its end-November bottom, rising 3% to just below $100. Gold was down 3% (Fed tapering), falling to below $1,200. Continue reading

Looking Beyond the Initial Fed Taper

The Fed’s taper announcement might have been its most closely watched announcement of all time. We pretty much knew what was basically going to happen (eventually taper QE, strengthen forward guidance), we just didn’t know exactly when and exactly how much. Now we know.

The Fed will reduce its bond purchases from $85 billion/month to $75 billion/month in January. In the Q&A, Bernanke suggested purchases might be cut another $10 billion at each upcoming FOMC meeting — implying the program would end in late 2014. It also strengthened “forward guidance”, saying it would keep the Fed Funds rate at current levels “well past the time that the unemployment rate declines below 6.5 per cent.”

Immediate market reaction: good news is good news Continue reading


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