1-27-2014 Weekly

  • A holiday shortened week got pretty rocky as the weekend approached, with domestic equities ending down roughly 3% WoW and a 10-bp flop in the yield curve coming as emerging market currencies spooked aggressive investors, principally led by the Turkish lira slipping to all-time lows and an Argentinian peso that plummeted 40% as its government ended support in the currency markets. Default of the peso is now on the table, but certainly developed markets had been looking for an excuse to pull back after the robust 2013 close. Markets are now presented with a bevy of data and action in the week to come, thanks to the swansong FOMC meeting for Chairman Bernanke and a GDP report that could show growth staying above 3% and moderating price inflation. With the first month of ‘Taper’ in the books, most expect another $10 billion to be lopped off the monthly spend at the Fed, but the equity jitters always makes prognosticators reassess. If interest rates stay settled off their recent highs, housing activity is likely to reaccelerate as we clear the winter slow season, so the Fed may be comfortable with a bit more volatility, and the sub-par January jobs report may need to be repeated next week before they decide to pause stimulus extraction. Thursday’s data was mild by most accounts–jobless claims bested consensus at 326k for the week, leading indicators softened in December to only +0.1% MoM but November was revise up 0.2% to +1%, and existing home sales rose 1% to 4.87MM annualized units. Surprisingly, the available supply of homes fell to 4.6 months of inventory, well below ideal levels. US PMI flashed lower at 53.7 vs. 55 consensus, and Chinese PMI slipped below 50 for its first contracting month in the last six, which may have helped get the negative trade moving on Thursday as well. Treasury will issue 2-, 5-, and 7-year notes this week with a face amount totaling $96 billion. Natural gas (thanks to another polar vortex coming) and gold (thanks to a weakening dollar and EM risk) are leading commodity gainers for 2014 at the moment. President Obama will deliver his fifth State of the Union address on Tuesday night, with the Republican response expected from Cathy McMorris Rodgers of Washington.
  • The Fed policy statement and the GDP report will dominate the week along with earnings reports from the likes of Caterpillar and Apple. Futures point to an equity rebound and most of the Treasury yield curve is 3 bps higher in early action this morning. With roughly 25% of the S&P 500 having reported, some 70% of those companies are beating estimates on sales and earnings at the moment, with overall earnings expected to finish about 7% higher for last quarter on sales that grew about 3%. The CBOE exchange traded futures contract on S&P 500 volatility is up roughly 50% in the last two weeks to an 18% annualized level, not far from the 20.5% high of 2013, but well below the 52% 2009 top.

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