Geopolitics Trumped Economics in Last Week’s Capital Markets

Observations on the Capital Markets – Week Ended August 8, 2014

Ukraine developments, more than economic news, seemed to drive the day-to-day pattern of market returns.  Russia first massed troops on the border, prompting NATO to warn of imminent invasion risks, then sent them back to their barracks, keying Friday’s rally.  The conflict is far from over.

Developments in Gaza (a brief cease-fire) and Iraq—where Obama (reluctantly, it seems) authorized airstrikes against ISIS, leaving both domestic hawks and doves feeling unsatisfied—also made the front page, while central banks in Europe, England, Japan, Australia, and India all left policy essentially unchanged—not front page news.  The global composite Purchasing Managers Index (PMI) made a new 9-year high in July at 55.5 ‑ but with war risks high, no one paid much attention.         Continue reading

The FOMC Holds Steady as Markets Hit a “Tipping Point”

 

Observations on the Capital Markets – Week Ended August 1, 2014

The FOMC met last week, expressed satisfaction and maintained course. While their policy decisions (continue the taper—now $25b—and keep the Fed Funds rate where it is) were no surprise, the language of the Fed statement was tweaked to reflect the continued/continuing improvement in the economy and labor markets (e.g.: “the likelihood of inflation running persistently below 2% has diminished somewhat”).  The Fed feels it is accomplishing its goal…so a continuation of policy normalization is appropriate.

At the same time, the Fed statement said “…a range of labor market indicators suggests that there remains significant underutilization of labor resources.” Analysis: the Yellen Fed is moving cautiously…with Japan and Europe still weak, the Fed appears willing to risk an inflationary boom in the U.S. to minimize the likelihood of having to fight a recession and/or deflation when it has a bloated balance sheet and low Fed Funds rate, but very robust tools to fight inflation.  As I said on CNBC last week, a submarine commander doesn’t give the order to submerge when most of the hatches are closed.

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Two Preconditions of Fed Tightening Evident in Last Week’s Data

The Yellen Fed is wary of tightening too soon. It wants to see significant improvement in labor markets. (We’re seeing it.) It also wants to see evidence that U.S. inflation has formed a bottom. This precondition for a tighter Fed policy is also being fulfilled – CPI inflation has been steady and slow…but not slowing.

U.S. Economic Activity Looks Good

  • Initial unemployment claims dropped to 284k, the first reading this cycle below 300k and the lowest since early 2006. These are boom-time readings, not recovering economy readings.
  • CPI came in at 2.1% y/y; Core was 1.9%.
  • About 200 S&P 500 companies have reported so far; more than 70% (slightly better than average) have beaten consensus.
  • The Chicago Fed National Activity Index, a gauge of economic activity, was slightly above-trend.
  • The Markit U.S. manufacturing PMI softened a bit, to 56.3…still strong (50 is break-even).
  • The Richmond Fed’s manufacturing index (zero is break-even) rose from 4 to 7–solid; hiring was notably strong.
  • The Kansas City Fed manufacturing index rose from 6 to 9, lifted by durable goods producers and employment. Rising quit rates particularly among machinists and welders were cited.

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Labor Market Looking More “Healed” Than “Healing”

Observations on the Capital Markets – Week Ended July 18, 2014

Federal Reserve Chairwoman Janet Yellen’s Congressional testimony this week, in my view, was not pointing to bubbles. In her testimony, she suggested that valuations of social media and biotech stocks and lower-rated corporate debt appear “stretched.”  Some observers suggested she was saying we are in a bubble.  But I have a different perspective: I think she was saying, in effect, “yes, prices are high in some niches, but not generally.” In any case, it’s doubtful Yellen is shifting her focus from less-than-full-employment to the question of possible market bubbles. Continue reading

What Happened within the Espirito Santo Group?

Observations on the Capital Markets – Week Ended July 11, 2014

It was a tough week for Europe over all last week – industrial production declined in Germany, Italy, France, and the UK, with the details broadly downbeat. Trade (import and export) data, especially from Germany, was disappointing as well. But the big story in Europe last week came from Portugal, where Banco Espírito Santo (BES), a leading Portuguese bank, suffered a share price crash and trading was suspended after reports of financial irregularities.

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World Cup Syndrome? Few Yellow Cards in Last Week’s Data.

It’s not surprising that World Cup Syndrome has historically been responsible for lower office productivity around the world – in fact, you may have seen the telling chart created by Bloomberg, which uses European Central Bank (ECB) data to track dips in trading volume during games in the 2010 World Cup.

Perhaps ‘WCS’ is owed a nod for last week’s drop in ISIS (Islamic State) activity? The so-called Group of Death (Syria, Iran, Iraq, and the caliphate formerly known as ISIS) was very quiet last week.

  • ISIS renamed itself the Islamist State and said it was a caliphate.
  • Iraq’s parliament appears frozen, with Sunni, Kurdish, and Shiite factions apparently unable to strike a deal.
  • It appears that the Islamist State gained ground…but oil traders don’t seem worried.

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Market Noise: Lowering the Volume for Summer

Observations on the Capital Markets – Week Ended June 27, 2014

Summer, summer, summertime – time to sit back and unwind. The Fresh Prince and DJ Jazzy Jeff might have been talking about the quiet tone last week in the capital markets.

  • Can you spell Goldilocks? Stocks, bonds, and commodities all rallied in the first half of 2014…for the first time since 1993.
  • Currencies: The Euro and Yen each rose 0.5%-1% against the dollar, extending their gains for the month.
  • Bonds: The 10-year Treasury yield fell 9 basis points (bps) to 2.54%; the 10-year TIP yield fell 8 bps to 0.27%.The Bank of America Merrill Lynch High Yield Index (BoAML HY) widened 1 bp to 3.48%. The Japanese 10-year bond fell to 0.55%, a 2014 low. Eurozone bond markets were generally quiet.
  • Equities: The S&P 500 Index declined almost imperceptibly last week. Within the index, Utilities and Consumer Discretionary (each up 1.0%) led; media companies rallied when the Supreme Court effectively shut down Aereo. Industrials (-1.7%) lagged; Consumer Staples (-1.3%) and Energy (-0.9%) were also weak. MSCI Europe and Japan were each down 1.5-2%. The MSCI Emerging Markets Index was down a bit.
  • Commodities: WTI Oil was down about $1 (1%)…still not really reacting to Iraq. Gold, up 3% last week, gained another $5 (0.5%).

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