3-24-2014 Weekly

  • While everything in the policy statement from the Federal Reserve was forecasted accurately, with highlights being no change to the target rate, another $10 billion of tapering, and removal of the 6.5% unemployment level as a threshold for raising said rate, Chair Yellen managed to rile markets notably in her first quarterly press conference.  The resultant steepening of the yield curve made for some great drama that will continue as the bond market gets comfortable with higher implied rates.  The quarterly economic forecasts that accompanied the March meeting consisted of reduced GDP and unemployment high ends of their ranges, flat core inflation consensus, and an average expectation for the target rate that rose +0.04% to 0.34% at December 2014, +0.07% to 1.13% to close 2015, and +0.24% to 2.42% at the end of 2016.  Coupled with Chair Yellen’s equating the “considerable” amount of time after QE ends before the target rate might rise to roughly six months, the front end of the yield curve got crushed and yields rose 10-17 bps from the 2-5 year range, while the 30-year bond stayed relatively flat.  Even though core inflation guidance stayed below worrisome levels, look for the Fed to get near-term dovish in their speeches after this likely-unintended result from the comments, or expect LIBOR to rise faster if you think the hawks will gain even more traction.  Equities managed to get through the Fed meeting and end higher for the week, although the intraday record high for the S&P 500 did not hold from midweek.  On the data front, business surveys out of Philly Fed and Empire State Manufacturing were relatively positive, housing starts and existing home sales were in line with expectations as permits rose more than expected, consumer inflation (CPI) remained muted, jobless claims held relatively low at 320k for the week, and leading indicators rose 0.5% MoM after a 0.2% revision downward for January.  Industrial production and capacity utilization both jumped MoM.  With the rate of purchases of MBS and Treasuries now down to $55 billion a month, the current pace of reductions and the schedule for FOMC meetings puts an end to QE either in late October or mid-December, depending how the extra $5 billion is handled.
  • Treasury will auction into the sensitive front-belly of the curve this week, with $96 billion of 2-, 5-, and 7-year paper coming.  Several Fed presidents are speaking this week and should dispute the assessment of rhetoric from last week.  The final revision for Q4 2013 GDP will be released on Thursday, with expectations for 2.7% QoQ annualized economic advancement and 1.6% higher prices.  Durable goods orders likely advanced 1% MoM, but transportation will have a lesser effect on February numbers.  FHFA and S&P Case-Shiller update housing prices (both likely up +0.5% MoM or so), personal income and spending are expected to both rise 0.3% MoM, and core PCE inflation should be 1.1% YoY.

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3-3-2014 Weekly

  • Political turmoil have jumped to the global forefront as markets open for an interesting and likely volatile week, as Russia effectively invaded the southern Crimea region of Ukraine, North Korea fired two short range missiles, and dozens were killed in terror attacks in Nigeria and Pakistan over the weekend.  Both US and European leadership are already threatening sanctions against the Russians unless Vladimir Putin withdraws troops from a nation whose protestors forced out its Russia-sympathizing president only a week ago.  As the ruble got crushed, Russia raised its weekly funding rate by 150 bps to 7%, and the Russian stock market is down over 8%.  Futures in this jobs week are responding as might be expected, with global equities headed down roughly 1%, bond yields falling in safe places and rising in risky ones, and prices in the global energy complex and gold up about 2%.  Before the thought of a cold/land war in Europe re-merged after 25 years of dormancy, domestic equities had risen to another all-time high last week, thanks mostly to more well-received Congressional testimony by Fed Chair Yellen, along with some data stabilization.  Yellen essentially reiterated that the taper of asset purchases was probable to continue unless the outlook darkened dramatically, and she and other FOMC board members have managed to defuse the detonator of a 6.5% unemployment rate on the liquidity-busting bomb that is the Fed’s raising of the target rate.  An inflation spike seems the only impetus for raising the target rate anytime soon unless GDP averages above 3% for 2014.  However, the revised GDP report for Q4 2013 was expectedly revised lower to 2.4% QoQ annualized from 3.2%, and both the headline and core inflation metrics in the release rose above 1.3%.  Durable goods orders fell 1% but gained 1.1% excluding transportation, both better than consensus.  While jobless claims rose to 348k new, new home sales unexpected rose 10% in January.  As weather drag begins to fade, economic data needs to improve.  Both FHFA and S&P Case-Shiller home price indices rose 0.8% MoM in their latest readings, but those are for late 2013 sales.  Chicago PMI stayed very strong and bested consensus with a reading near 60.
  • While the nonfarm payrolls report and the ADP private sector jobs data are both expected to show net jobs gains of about 155k, the unemployment rate is expected to hold at 6.6% and average hourly earnings should rise 0.2%.  Personal income and spending are expected to rise 0.2% and 0.1% MoM, respectively, and the important inflation gauge that is the core PCE price index should rise a modest 0.1% MoM.  ISM services and manufacturing readings should maintain near 54 and 52, respectively, when released in the first half of the week.  Construction spending and factory orders are expected to decline MoM, and the international trade deficit is likely to hold at -$39 billion for January.

Give Chris Hunt a call at (440) 892-8000 to discuss or be added to our weekly rate email distribution.

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2-24-2014 Weekly

  • Three weeks of regrouping has almost entirely absorbed the recent mini-correction, and as we take stock of the overall impact, equities are a wash, commodity prices are higher, and bond yields are a touch lower across swap and Treasury curves.  Though the Winter Olympics close in Sochi, we see a new beginning in nearby Ukraine as the pro-Russian government has crumbled under the revolt, with the former President now fleeing arrest and the opposition leader being released from imprisonment and awaiting her potential run for President in May.  Since Ukraine is a gateway country for Russian oil and gas resources to eastern Europe and they are nearly insolvent at the moment, the country’s stability is keenly important and will be supported by the international community.  The domestic momentum has improved just as the data has soured, and most pundits give credit to Fed Chair Yellen’s well-received launch into her new role as the primary positive.  This sentiment was evinced through her testimony, in the FOMC minutes release, and also in the newly published full-meeting transcripts from 2008, which encapsulate the credit crisis and the Fed’s response in great detail.  While the qualitative outlook has brightened, data have missed on so many fronts that the expectation for Q1 GDP has already been revised down to 2.5% from 3.2%, and most are happy to blame the weather, particularly with Polar Vortex III on the way.  Existing home sales slipped to 4.62MM annualized units for January, 10% below their recent peak and off 5% YoY, while housing starts also missed consensus at 880k annualized vs. 950k and single family and condo units slipped over 15% MoM.  Along with the frigid buying environment, mortgage rates remain elevated, forcing affordability down.  The homebuilder index fell 10 points from 56 to 46, a record drop.  On the manufacturing front, the Empire State survey was half expectations but still positive, while the Philly Fed survey slipped into negative territory at -6.6.  Leading indicators did advance 0.3% MoM, and CPI and PPI inflation reports, the latter which now includes components for the service and construction sectors, both rose 0.1% MoM ex food and energy, well controlled by the Fed’s general metrics.
  • The solitary strong report of last week, the Markit PMI manufacturing index flash at 56.7, with a good story for new orders and backlogs, can give us hope for the week ahead.  To close out the month, we will see durable goods orders (-1.6% headline, -0.4% core ex transports expected) and house price data (FHFA and S&P Case-Shiller Indices) along with what should be soft new home sales.  The GDP report on Friday morning should show prices contained at 1.3% QoQ annualized even as growth slips.  Treasury will issue its second round of floating rate notes, after the first 2-year maturity ended up yielding the 13-week T-Bill + 0.045%.  Fed Chair Yellen will meet with Senate Banking on Thursday.

Give Chris Hunt a call at (440) 892-8000 to discuss or be added to our weekly rate email distribution.

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2-18-2014 Weekly

  • Our forefathers were kind enough to inspire a holiday that gave markets a three-day weekend, but despite the vicious never-ending winter, activity should heat up this morning, although a direction is not apparent in the early trade.  Last week brought a bond selloff and rate/equity rally as Fed Chair Yellen spoke to the House Financial Services Committee for the first time.  Rates rose roughly 5 bps across the Treasury curve and global equities regained 2-3% in most markets.  The leader of the Federal Reserve plainly conveyed that recent data weakness and equity volatility alone would not be enough to stop the ‘Taper’ at this point, but obviously she is watching the trend and ready to act if the recovery stumbles, or in her words, “the work of making the financial system more robust has not yet been completed.”  The data for the week wasn’t great, frankly, and prognosticators are trying to figure out how much impact is weather-related and how much is a cramped consumer.  Retail sales fell 0.4% MoM and were revised to -0.1% for December, and the core reading ex autos was flat, so all the numbers missed consensus.  Industrial production fell 0.3% MoM when a gain of same magnitude had been expected, jobless claims rose to 339k for the week, and import and export prices remain down YoY despite rising 0.1% and 0.2% MoM, respectively.  It feels like the US is the tail of the dog at the moment, with rocky EM capital markets and Asian policy gyrations.  Overnight, Japan’s central bank doubled the amount of cheap money for banks to lend after their recent GDP report of 1% QoQ annualized missed its 2.8% projection, sending the Nikkei up 3% and weakening the yen.  China is switching between liquidity and tightening policies while bailing out some the nations questionable ‘wealth’ products, which usually present as leveraged real estate or infrastructure bets at first glance.  Commodity markets remain overachievers as we start 2014, with natural gas surging on the coldness and gold and silver springing back somewhat from massive losses in 2013.  The 30-year fixed rate residential mortgage sits at 4.33% currently, 10 bps worse than the recent low but 70 bps higher than a year ago (15-year average is 5.63%, high was 8.27% in 2000).
  • A fair bit of data will get crammed into the remaining four days of this week plus we see FOMC minutes from Bernanke’s final convention.  Empire State and Philly Fed surveys both are expected to remain positive despite the soft trends in other business indicators, and leading indicators should rise 0.2% MoM when published on Thursday.  Treasury International Capital (TIC) flows just showed a $46 billion outflow of money from long-term US assets in December.  Markets are hopefully that housing will pick up when the weather breaks, but housing starts, the Housing Market Index from homebuilders, and existing home sales could all be weak in the interim.  Consensus says CPI will stay low.

Give Chris Hunt a call at (440) 892-8000 to discuss or be added to our weekly rate email distribution.

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2-10-2014 Weekly

  • As earnings season nears a close, equities in 2014 are proving to be 40% more volatile on a daily basis than they were at the close of 2013.  The domestic indices shook the weekly losing streak despite another headline-soft jobs report for January, and while yields jumped in a 20-bp range towards the long end of the curve during the week, they settled only fractionally higher as the yield curve steepened.  After spiking to its highest level in more than a year, the VIX slumped 30% to 15.29% to close out the week, leaving investors guessing as to whether this recent downdraft will become a true correction or is bought decisively as was the case last year.  The other commonly followed fear gauges indicate that we haven’t seen the worst yet, meaning rates likely have a lower plateau to visit in the coming month.  The nonfarm payrolls report checked in at 113,000 net new jobs, well below the 180k expectation level but up from a revised 75k December metric.  On the positive front, the household survey was strong, hourly earnings rose 0.2% MoM, and the unemployment rate ticked down to 6.6% even as the workforce participation rate rose for the first time in 7 years.  The 63% labor force participation is comparable to late 1970’s levels, but this slow moving metric has been between 58% and 67% during the last 65 years, and if the decline that started with the rise of the Internet has ended, the economy may have found a stronger footing.  ADP private payrolls beat estimates at 175k new jobs, so we now have two months in a row where this report and the government report have diverged.  Ending the week positive was impressive considering the bloodbath on Monday after the ISM Manufacturing index slumped from 56.5 to 51.3, resoundingly missing the estimate of 56, as new orders slipped 13 points MoM.  The service index released Thursday bested consensus at 54 vs. the prior at 53, and covers a broader swath of economy than the manufacturing index.  Consumer credit jumped in December as spending went on credit cards to the tune of $5 billion, with another $13.8 billion of non-revolving credit comprised mostly of auto and student loans.  Jobless claims fell 20k WoW to below the 4-wk average, and factory orders fell less than expected.
  • The debt ceiling debate seems to be moving along as the vast majority of constituents nationally inform their Congress people that the game of chicken is unacceptable, but we will still could hit the threshold by the last day of February if nothing is ratified prior.  Newly minted Fed Chair Yellen will give her first Congressional testimony on Tuesday, and several House members are expected to give her some tough questions.  The largest data point for the week will be retail sales, where soft auto sales are expected to pull the headline reading negative, but the core ex autos and gas should rise 0.2% MoM.  Both the wholesale trade and business inventory reports should show a roughly 0.5% rise MoM.

Give Chris Hunt a call at (440) 892-8000 to discuss or be added to our weekly rate email distribution.

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