*More cash is set to wash over the global economic system after the European Central Bank approved rate reductions and asset purchases last week, and the response from domestic markets was predictable–high equity prices and higher bond yields.  The long bond yield jumped 15 bps WoW, while the S&P 500 closed at new all-time highs at 2007.71, a move made easier by a Russo-Ukrainian ceasefire agreement, one that may have already been broken over the weekend.  The soft Friday jobs report (+142k net new payrolls, a 70k miss, and 6.1% unemployment) failed to scare off the bulls too, since August payrolls are often revised with the back to school season and the news won’t pressure the Fed.  As a former resident of Scotland, it is interesting to see their independence referendum taking center stage in global markets, but some polling indicates that those in favor of seceding have passed 50% ahead of the September 18th vote, which would mean dividing up the UK’s debt, North Sea oil assets, currency, and much more in the spring of 2016.  Several other polls show a lead for unionists, but the pound and European equities are reacting negatively to the news, and interest rates are lower at the short end due to bets that policy rates will stay low in a break-up scenario.

*The NFP report showed 0.2% wage gains MoM, which was in line with consensus and good news to boot.  ADP private payrolls rose 204,000 in August, well ahead of the government data, and Challenger reported 40k new job cuts, down 6,000 from July.  ISM manufacturing and services indices both throttled expectations and printed above 59, showing great accelerating growth for the entire economy in their surveys.  Markit’s flash PMI for manufacturing also stayed in the uptrend, reading 57.9.   Construction spending rose 1.8% MoM, twice the consensus, and factory orders surged 10% thanks to the same Boeing aircraft orders that skewed durable goods orders higher last week.  Strong exports pushed the trade deficit down to -$40.5 billion for July, and nonfarm productivity expanded 2.3% QoQ while unit labor costs fell 0.1%.  The Fed’s Beige book release compiled data from its twelve districts showed moderate to modest growth nationwide, with limited pricing pressure visible.  Treasury will auction $61 billion in 3-, 10-, and 30-year paper this week.  Over the weekend, Japanese GDP was revised lower to -7.1%, its worst contraction in over five years, while China and Germany both reported record trade surpluses.

*It will be a light data calendar this week, with Friday retail sales the most interesting report (+0.6% headline, +0.3% core expected), so we expect the focus to remain on the global landscape, the Middle East turmoil that will be addressed in a Wednesday speech from President Obama, and European quantitative easing.  Import and export prices are both expected to fall MoM, the former more than the latter, business inventories should grow 0.4% MoM while wholesale inventories rise 0.5% MoM, and consumer sentiment is expected to stay near its five-year high.  Consumer credit is expected to rise $17 billion MoM, the same as the June increase and likely fueled by auto and student loan growth.

Eastern US Office:

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4-14-2014 Weekly

  • The holiday week means only four days of trading until Good Friday, and many traders will be enjoying spring breaks as the mid-month data calendar is not expected to move markets appreciably from their current course.  Corporate earnings season got off to an inauspicious start last week, doing little to keep markets from abandoning momentum plays and flooding safer sectors with capital.  The tech-laden Nasdaq market lost 3% WoW, and the minutes from the FOMC meeting released Thursday gave investors a sense that the coming tightening perceived from the Yellen press conference was much less likely, which flattened the yield curve and pushed longer yields down by more than 10 basis points past the 5-year tenor.  Ukrainian tensions rose over the weekend as eastern border towns experienced separatist rallies and some gunfire, causing EU and US leadership to talk up more sanctions ahead of meetings with Russia later this week.  As equity gauges pulled back from recent highs, 1-year LIBOR hit an all-time low below 0.55% this week as a fed funds target below 25 bps into next summer means perhaps only one more year of floating rates near zero.  Nothing in the data is likely to stop the taper of asset purchases, however the softness in GDP coupled with Friday’s PPI for final demand running hot (0.5% headline, 0.6% core MoM with consensus at 0.1% and 0.2%, respectively) could give a governor or two cause for concern.  Import and export prices also rose beyond consensus on a monthly basis to add to the pressure a touch–the Federal Reserve fears stagflation like nothing else, and rightfully so.  The sell-off allowed the longer-dated Treasury auctions to catch bids, absorbing supply that the Fed no longer desires to purchase.  Jobless claims unexpectedly fell to 300k on the week, their lowest level since early 2007.  In early action this morning, retail sales surged 1.1% MoM (0.7% ex autos) in March, showing that the break in the winter weather was heartily welcomed by consumers and that consensus from economists at 0.3% MoM gains for both metrics was too conservative.  February was revised slightly higher as well, and the data positives have pushed already gaining equity futures markets that much higher in the premarket trade.
  • The bond market will close at 2 pm on Thursday before the holiday.  Apart from retail sales, the data calendar is somewhat busy, so watch the CPI report for signs of rising inflation at the consumer level after last week’s surprise for producers, even though economists expect near-flat prices for the month.  Business inventories and industrial production are both expected to rise MoM, Empire State and Philly Fed surveys should show advancement for the month, and leading indicators should rise 0.5% once again.  Housing starts are expected to improve their annualized pace to 965k units as homebuilder sentiment should improve, and TIC data and the Beige book could move markets, too.

Eastern US Office:

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Western US Office:

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4-7-2014 Weekly

  • In what was an interesting data point cluster last week, trading provided for a vicious and potentially lasting reversal on Friday, leaving the Dow and S&P 500 1% below all-time highs achieved midweek and crushing the tech-laden Nasdaq Composite.  Treasuries and other debt instruments were sold off as well, sending yields higher at the back end of the curve in particular.  The nonfarm payrolls report was generally in line with consensus at +192k, all private payrolls, with positive revisions of 37k for February and March readings counterbalancing the shoddy weather, and the unemployment rate was flat MoM at 6.7%.  Wages failed to rise MoM, underemployment ticked up to 12.7%, and the workweek rose to 34.5 hours.  The Friday jobs data was preceded by so-so figures from ADP private payrolls (191k net new) and jobless claims (+326k WoW, up 15k).  The NFP whisper number was for a weather-aided whipsaw beat above 225,000, but perhaps the implied disappointment with the figures was more rally fatigue.  ISM manufacturing and service indices both missed consensus with 53 handles, so modest growth persists in both sectors for the time being.  The trade balance was wider than expected at -$42.3 billion, which will weigh on Q1 GDP projections that already appear to be staggering lower.  The European Central Bank met and decided against further stimulus at the moment, while most of the bankers observed the deflation risk that could force them to ease policy in the near future.  The policy situation seems similar to the US in 2011, although structural unemployment in the EU remains much worse than then or now domestically.  While risk assets may be over-ready for a pullback, what Treasuries will do from here is more of a split decision, with yields in the belly extended beyond likely achieved forward short-rates and the long end may be gaining buyers that are hold-to-maturity types.  The next catalysts will be spring house purchasing season and the myriad earnings reports for Q1 that will be upon us soon.  Chicago PMI remained in growth mode but missed strong consensus of 59.0 by coming in at 55.9, a similar reading to the flash PMI Manufacturing index of 55.5, and factory orders rose 1.6% MoM in February after a fall in January.
  • Price action and quarterly repositioning could be the driving factors this week, so look for the rotation to continue in lieu of many new data points.  We do get the minutes from the FOMC meeting this week, and seeing how Chair Yellen handled preparation for the first press conference may be interesting to absorb.  Friday, the producer price index for final demand (PPI-FD) in March is expected to rise 0.1% MoM and 0.2% excluding food and energy compared to declines of equal magnitude for each in February.  Treasury will auction 3-, 10, and 30-year paper with face of $64 billion as well, and Bullard, Kocherlakota, Evans, Tarullo, and Plosser will be giving Fed speeches this week.

Eastern US Office:

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3-31-2014 Weekly

  • Traders took stock last week and the markets churned, leaving interest rates somewhat relaxed after the prior week’s gyrations, while equity markets sold off modestly.  Crimea was annexed by Russia, and the US and Europe have started some sanctions along with initial diplomatic discourse with the Russians.  The data remained mixed overall, but the final reading for Q4 2013 GDP was revised up to 2.6%, still below the original 3%+ figure, but in line for an economy with begrudging growth.  The catalysts for global markets this week will come from both Europe and the US, with the former’s central bank meeting Thursday to address the persistent disinflationary environment of late and whether additional rate policy easing is warranted, while the BLS releases March employment data for the US on Friday.  If the ECB decides to cut and the US jobs picture turns rosy as the weather has moderated, there may be fuel for another leg higher in equities and interest rates.  The consensus is for no rate cut, however, and while economists expect 206,000 new nonfarm payrolls and an unemployment rate drop to 6.6%, much skepticism remains.  For the data in the books, housing softened the most last week, with new home sales down to an annualized 440k sale rate thanks to the recent rise in mortgages and the tail end of the slow season, and FHFA and S&P Case-Shiller home price indices advanced 0.5% and 0.8% MoM, respectively, however the YoY figures are now declining.  Durable goods orders rose more than expected (2.2% MoM headline, 0.2% core) but were overly aided by the transportation orders.  PMI flashes for manufacturing and services showed readings of 55.5, which are robust.  On the consumer front, both confidence and sentiment reports showed well for the period, and personal income and spending both rose 0.3% MoM in February, while both headline and core PCE price index levels were muted, meaning the Fed still won’t get too worried about inflation, even as more anecdotal metrics around food prices and rent rates make Main Street take notice.  The Federal Reserve Presidents that spoke did their best to elongate the period post-Taper until the Fed raises the target rate from the six months interpreted from Chair Yellen’s presser.
  • The first half of the week starts off slowly, with Chicago PMI this morning (59.5 consensus), ISM Manufacturing tomorrow (54.0 expected), and the ADP private payrolls report on Wednesday (193k expected for March).  After the ECB releases its policy statement on Thursday morning, the trade deficit is supposed to come in at -$39 billion, ISM services should rise to 53.3, and jobless claims will likely tick up to 320k WoW.  So the table will be set for Friday’s NFP report, wherein the workweek should rise 0.2 to 34.4 hours, hourly earnings should rise 0.2%, and private payrolls will once again grow more than the headline number (215k), meaning the government will remain a hiring drag.

Eastern US Office:

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

Western US Office:

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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.

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

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