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.

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

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1-21-2014 Weekly

  • In a week that was full of earnings and modestly important data releases, equities consolidated near all-time highs and interest rates beyond three years fell a few bps as most traders waited on a catalyst for the next move. Despite a number of high-profile negative preannouncements for holiday receipts, retail sales in December managed to beat consensus (+0.2% MoM vs. flat headline, 0.7% vs. 0.4% ex-autos), and the healthy consumer also helped initiate 999,000 housing starts on an annualized basis, besting estimates. Inflation remained muted, per PPI and CPI reports, with both still reading sub-2% at the headline and core levels, but some near-term pressure appears to be forming in gasoline, tobacco, and shelter indices. Both the Empire State and Philly Fed surveys rebounded, to 12.5 and 9.4, respectively, with the former showing strength in new orders and the latter having a positive employment bias. Industrial production rose 0.3% MoM, and capacity utilization stands at 79.2%, it’s highest level since the first half of 2008. Treasury International Capital (TIC) data for November showed a decline of nearly $30 billion in foreign demand for long term US equities and bonds after several months of gains. Jobless claims fell to 326,000 for the week of January 11th, as the 4-week moving average attempts to challenge resistance at 325k once again. Chinese and Japanese portfolios of Treasury paper both rose by $12 billion MoM. Overseas markets are stronger today even though German investor confidence is falling, with a big boost out of China. As their Q4 2013 GDP missed consensus at 7.7% QoQ and the short term repo rates jumped ahead of funding needs for the Chinese Lunar New Year, the PBOC injected $42 billion via reverse repos and a lending facility for commercial banks. It’s a quiet holiday week for domestic capital markets that could get quieter, as more winter weather threatens to bog down the northeastern US in the next 48 hours. The Federal Reserve is in radio-silence mode ahead of next week’s Federal Open Market Committee meeting, the final rendezvous over which Chairman Bernanke will preside, as his eight-year stint comes to a close on January 31st after President Bush appointed him as successor to Alan Greenspan in 2006.
  • While consensus has yet to crystalize on whether the $10 billion-a-month ‘Taper’ will continue, some, including Hilsenrath at the WSJ, suspect the shoddy jobs report has not dissipated enough positive sentiment to warrant a pause in slowing bond purchases. The portfolio stands at $4.07 trillion. All of the data to be gleaned this week will arrive on Thursday, with leading indicators (consensus at +0.1% MoM), jobless claims (330k expected), and existing home sales (4.9MM annualized per estimates, which would be flat MoM) the most notable releases. The FHFA House Price Index should reveal that prices rose 0.4% MoM in November, the 22nd consecutive month of price increases.

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

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1-13-2014 Weekly


  • The arctic vortex wasn’t able to freeze market activity, but the recent data driving asset purchases has managed to cool them off from a torrid close to 2013. With all eyes focused on unemployment targets and how they interact with the Federal Reserve’s efforts to cease bond purchases, bond buyers returned in haste after the jobs report Friday unexpectedly missed consensus by more than 120k net payrolls. The unemployment rate dropped 0.3% all the way to 6.7% as laborers exited the workforce (again), one reason why the Chairman has been stepping back in recent weeks from the Fed’s 6.5% target set several years ago–the rate is not falling for the right reasons enough. With only 74,000 nonfarm payrolls for December, many economists pointed to weather related anomalies and a likelihood for positive revisions again after about 40k more jobs revised into Oct/Nov data. The work week shrunk 0.1 hours, hourly earnings only rose 0.1%, and the accuracy of the ADP report decoupled too, as that gauge of private payrolls was strong at +238k MoM. The intermediate part of the curve was bought heavily after the number, with the 10-year Treasury yield falling more than 10 bps to finish at 2.86%, now 17 bps off its high of the year. While many pension funds and sovereigns may genuinely enjoy the yield opportunities in the current range to match liabilities, the Federal Reserve also has an excuse to not lop another $10 billion off next month, which compares bullishly to the prior consensus that the ‘Taper’ would happen in a continuous, linear fashion until purchases stopped late this fall. The Fed minutes released last week acknowledged the diminishing returns of the bond purchases and highlighted concern about the pain of unwinding the portfolio as it grows beyond $4 trillion. In any event, moving the target rate up from zero seems unlikely to happen sooner than the middle of 2015 based on the current picture. In other releases, ISM services growth missed consensus and the index slipped to 53.0 thanks to a drop in new orders, while factory orders advanced 1.8% in November with foreign demand for capital goods, and the international trade report showed the deficit contracting by $5 billion MoM, which should strengthen Q4 2013 GDP.
  • The near-term trend should solidify this week thanks to traders being back from vacation, earnings season kicking into full swing, and numerous data releases to drive the action. Look for retail sales to be flat MoM tomorrow (+0.4% ex autos), inventories to build slower this month (0.3% consensus), a bit more headline inflation from CPI and PPI reports midweek, and gains for industrial production and import and export prices (0.4% and 0.1% expected, respectively). Empire State Manufacturing and Philly Fed surveys should rebound after softening last month, housing starts should slow after a November surge (985k annualized consensus), and we see the Fed’s Beige book on Wednesday.

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

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1-6-2014 Weekly


  • Just as temperatures drop below zero for half of the United States, vacation ends and traders get back to weighing the world’s value full-time.  What better way to usher in the new year than with a Jobs Friday, with market consensus showing around 200,000 net new payrolls and a steady unemployment rate at 7%.  With all likelihood, Janet Yellen will be fully confirmed in the Senate today (they come back to work as well), officially claiming the Chair of the Federal Reserve for the upcoming four-year term.  Wednesday we will see the minutes from last month’s ‘taper’ meeting, our last glimpse at the Fed psyche until the end of the month.  With only three+ trading days last week, the ‘drift’ was in effect, sending equities modestly lower and keeping interest rates from getting too far from their current bearings.  The weekly data failed to impart feelings of jubilation or dread, but the most notable reports, Chicago PMI (59 down from 61) and ISM Manufacturing (57, at consensus), were strong despite both being weaker than the three-year highs in the November readings.  Jobless claims came in at 339k, an improvement from the volatile figures around the holidays, while S&P Case-Shiller Home prices rose 1% MoM and are now up 13.6% in the last twelve months.  The best news of the week may have come from Markit’s flash PMI report for the second half of December that showed a reading of 55, the highest reading since last January, in fact, and it included positive signs for employment and limited inflationary pressures for the manufacturing sector at the moment.  Construction spending rose 1% MoM and now sits 6% higher from the same period last year.  For the rally to continue, this number and other capital expenditure indicators need to strengthen domestically in the coming year–this may be possible with government austerity lifting to a certain extent as well.  Auto sales for the month came in lighter than expected.  In Asia overnight, service industry data from China softened and Japan’s Nikkei stock index fell over 2% after finishing 2013 with gains approaching 60% in yen terms.  Some pundits expect the rally to commence again this week, as Fed purchase operations (tapered!) kick back in and new-year tax selling (gains-taking) should be over.
  • The lead-up to Friday should be fairly interesting unless the weather ruins our lives this week, since along with the ADP report and other job indicators, we have the Fed minutes, policy meetings for the Bank of England and the ECB (will they taper?…probably not), and then earnings season for Q4 will begin with Alcoa reporting.  ADP should report that private payrolls rose 205k in December, down from 215k in November.  The interesting change that we have seen in the jobs reports of late is that private payrolls are now less than the total, meaning that public payroll cuts have stopped adding to unemployment.  The trade balance should show another -$40 billion deficit for November.

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

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Interesting study from Stanford GSB about how the introduction of weather derivatives allowed for testing the value of hedging for energy companies, utilities, and other weather-sensitive businesses.  If your business or its intrinsic value benefit from certainty of cash flows, energy costs, currency rates, or rain fall, maybe hedging is for you… (Stanford Graduate School of Business)

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