Is This the New Normal'?

Wardwell’s Weekly Market Report

Observations on the Capital Markets – Week Ended October 25, 2013

  • Markets settle into a new “normal”
  • Mixed data for labor, housing and the economy
  • Watching Europe, China and Japan
  • Next week: Wednesday’s Fed statement and lots more data

Markets Settle into a New “Normal”

All sorts of economic data were released last week, but volatility has dropped: rightly or wrongly, market forecasts about the pace of quantitative easing (QE) and earnings growth in the U.S. appear to have coalesced around an outlook for “slow growth with ongoing QE”.

  • Currencies: The dollar dropped about 1/2% against the euro and yen
  • Bonds: The 10-year Treasury yield fell 7 basis points (bps) to 2.53%; the 10-year TIP yield fell 8bps to 0.34%. Key indexes returned 0.5% with credit outperforming as the BoA Merrill Lynch High Yield Index fell 4bps to 442. Foreign sovereign markets were generally quiet.
  • Equities: The S&P 500 was up almost 1% for the week, led by Industrials, Utilities, and Consumer Discretionary. Financials and Energy lagged. The MSCI Europe was up about the same, but MSCI Emerging Markets was down 1% and MSCI Japan fell more than 2%.
  • Commodities: Gold was up 2%; WTI oil was down 1%.

Mixed Data for Labor, Housing and the Economy

  • The Labor Market: The JOLTS labor market report was ok…consistent with sluggish growth and slow improvement. September employment rose, but below expectations, while the unemployment rate fell to 7.2%, down from 9.0% two years ago. Meanwhile, the labor participation rate was unchanged…if it doesn’t stop trending down, we could be at 6.5% unemployment in less than a year. On a very positive note, the number of full-time workers rose 691k to a new cycle high, while the number of part-time workers fell by 594k. Initial unemployment claims of 350k were discounted: the period includes the second week of the government shutdown.
  • The Housing Market: The existing house sales report disappointed: The National Association of Realtors blamed declining affordability caused by rising interest rates and prices. Meanwhile, mortgage applications for home purchases ticked up.
  • Other Economic Data: Gasoline prices trended lower…this boosts consumer after-gasoline spending power. However, the Michigan Consumer Sentiment index fell from 75.2 to 73.7…that depresses urge to spend. Manufacturing and non-airplane durable goods were down slightly. Construction spending climbed a better-than-expected 0.6% in August, and July was revised up. The Architecture Billings Index suggests non-residential construction spending will continue to rise.

Watching Europe, China and Japan

  • We saw more signs of progress in Europe: The ECB, which will become banking supervisor next year, announced a new (stricter) round of stress tests for 124 Eurozone banks. ECB President Mario Draghi said that this time, the ECB will not hesitate to fail banks: it wants the market to view this stress test as credible—the last couple weren’t.
  • Stronger economic data, but tighter monetary policy in China: China’s currency rose to another new high against the US dollar, as manufacturing, business sentiment and new home prices were all up. The People’s Bank of China (PBoC) tightened policy; the SHIBOR overnight rate (equivalent of Fed Funds) rose to 4.4% – the highest rate since the PBoC engineered a late-June credit crunch. Analysts seem to think that this time it’s more a case of general tightening due to rising inflation concerns.
  • In Japan, economic activity is moderately improving: September’s trade deficit was wider than expected, driven largely by larger and more expensive energy imports (no domestic nuclear energy production and the weaker yen). September was the 15th consecutive month of trade deficit, which reached a new 6-month high. Exports were up 9.8% from a year earlier, but imports gained 13.9%, largely because of the cost of imported fuel. In other news, Japan’s biggest financial institutions increased holdings of sovereign debt, maturing in 10 years or more, for the fifth consecutive month.

Next week: Wednesday’s Fed Statement and Lots More Data

  • The next Fed meeting after October will be December 18-19.
  • Lots of other data to be released – however, due to the shutdown, all will be discounted somewhat.
  • The data will include: Conference Board Consumer Confidence Index, September retail sales, Pending Home Sales, Case/Shiller Home Price Index, ISM Manufacturing PMI, Markit PMI, Chicago PMI, Dallas Fed Index, Industrial Production, Capacity Utilization, PPI, CPI.

Data Sources: The Wall Street Journal, Financial Times, Bloomberg

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