Japanese Economic Update: A Meaningful Recovery?

Monica Defend, Pioneer’s Head of Global Asset Allocation Research, and Alessia Berardi, Japanese Global Asset Allocation Research Economist recently released an update on the Japanese economy. Below are some of the highlights. For the full report, click here. Continue reading

Summer Ends Quietly…with a Market-Moving Speech

Last week in the capital markets: A Quiet Last Week of August.  Economic news again suggested the U.S. economy is fine, while Asia and Europe are facing headwinds.  Mario Draghi’s dovish-sounding speech at Jackson Hole a week ago was probably more market-moving than anything that happened last week. 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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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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Markets are Unfazed as War Risks Escalate

The Capital Markets Were Very Calm Last Week, Considering The Rising War Risks

  • Equities:  After three strong weeks, the S&P 500 ended the week down 0.7%.  Higher oil prices boosted the index’s Energy sector to a 1.7% return; while all other index sectors declined.  MSCI Europe touched six-year highs mid-week but also ended down slightly less than 1%; MSCI Japan and Emerging Markets were up slightly.
  • Bonds:  The 10-year Treasury’s yield ended unchanged at 2.60%; the 10-year TIP yield rose 1 basis point (bp) to 0.41%.  The BoA Merrill Lynch High Yield index touched new cycle lows mid-week, ending 5 bps tighter at 3.47%.  European bond markets were calm.
  • Commodities: WTI was up $4.10 for the week, to $106.87 on war fears (Iraq is OPEC’s second-largest producer).  Gold was up about 2%.
  • Currencies:  The Chinese yuan and Japanese yen each rose about 0.5% against the dollar; the euro was down almost 1%.

A Black Swan Emerges In Iraq

A week ago, ISIS (Islamic State in Iraq and Syria) in Iraq was off the radar of the news media and market strategists.  It has suddenly emerged from the northwest of Iraq, which borders Syria, as a significant threat to the global economy (higher risk of a recession-causing an oil price spike). ISIS, a non-state Sunni militia and major player in the Syrian civil war, turned east (from Damascus to Baghdad), capturing several key Iraqi cities including Mosul, the nation’s second-largest. The Iraqi army apparently collapsed; Baghdad itself is perceived as threatened.  Continue reading

Equities Quietly Rallied; Bond Markets were Quiet

We’ll start this week with some market trivia – Roughly 150 of the stocks in the S&P 500 yield more than the 10-year Treasury. Continue reading

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