Monthly Archives: December 2013

Market Insight 12/30/2013

Rangebound

U.S. equities were rangebound to start another holiday-shortened week, amid light volume, with all markets being closed on Wednesday for the New Year holiday. Treasuries finished higher following lukewarm reads on domestic housing sales and regional manufacturing activity, while the U.S. dollar, crude oil, and gold all traded lower.

The Dow Jones Industrial Average rose 26 points (0.2%) to 16,504

The S&P 500 Index was flat at 1,841

The Nasdaq Composite ticked 2 points (0.1%) lower to 4,154

In light volume, 459 million shares were traded on the NYSE, and 1.3 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.03 to $99.29 per barrel, wholesale gasoline lost $0.02 to $2.79 per gallon, and the Bloomberg gold spot price tumbled $15.23 to $1,198.04 per ounce.

Pending home sales tick higher, while regional manufacturing activity accelerates slightly

Pending home sales rose at a smaller rate than expected in November, increasing 0.2% month-over-month, compared to the 1.0% increase that economists surveyed by Bloomberg had projected, while the 0.6% decline registered in October was revised to a 1.2% decrease. Compared to last year, sales were down 4.0% in November, versus the 0.1% rise that was forecasted, and compared to the 2.7% drop posted in October, revised from an initially-reported 2.2% decline. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which declined for the third-straight month in November.

In regional manufacturing news, the Dallas Fed Manufacturing Index showed activity for the region accelerated at a smaller rate than expected, improving from November’s unrevised level of 1.9 to 3.1 in December compared to the 4.0 figure that was forecasted. However, a reading above zero denotes expansion in activity. The report showed new orders fell into negative territory and production output decelerated but continued to expand, while employment, prices paid, and wage growth accelerated.

Treasuries were higher, as the yield on the 2-year note was nearly unchanged at 0.38%, while the yield on the 10-year note declined 3 basis points to 2.98%, and the 30-year bond rate was 4 bps lower at 3.90%.

The U.S. economic front will remain somewhat slow to start 2014, with the typical first Friday jobs report coming instead on the second Friday in January and all U.S. markets closed on Wednesday in observance of the New Year holiday.

After a great year for equity markets in 2013, investors are looking to next year and wondering whether there will be a “payback” coming. Many experts expect the US market to experience a decent pullback at some point during 2014, but still believe stocks will end the year higher. Despite the strong returns in 2013, according to ISI Research, there have been 11 years since 1950 that the S&P 500 has posted 25% plus gains, and with the exception of two recession years, the S&P posted positive results in the following year.

Europe pulls back from multi-year highs, Asia mixed

The European equity markets finished mostly to the downside, pulling back somewhat from more than five-year highs, with volume remaining lighter than usual with the New Year holiday on the week’s horizon. In economic news, Spain’s retail sales rebounded in November, while reports showed Italian economic sentiment and business confidence improved slightly this month.

Stocks in Asia finished mixed, while Japan’s Nikkei 225 Index rose amid some weakness in the yen versus the U.S. dollar, which fell to the lowest level in more than five years to buoy the markets. In the final trading day of the year, the Nikkei 225 Index registered a 57% gain for 2013, the largest annual advance since 1972. As noted in the Schwab Market Perspective, Japan is entering a critical period in its nascent recovery, which makes many analysts cautious.

China’s Shanghai Composite Index declined, despite a pullback in money market rates, which had surged as of late fostering a flare up in liquidity concerns. Elsewhere, the Hong Kong Hang Seng Index finished flat and India’s S&P BSE Sensex 30 Index declined, while Australia’s S&P/ASX 200 Index and South Korea’s Kospi Index both advanced.

Market Insight 12/26/2013

Equities Resume Record Rally

The domestic equity markets extended their year-end rally, posting solid gains, with a larger-than-forecasted drop in weekly initial jobless claims flooding the Street with bullish sentiment as traders returned to action following the Christmas holiday. Treasuries were lower in the wake of the upbeat employment report. Volume remained light in the U.S., while markets in Europe, Canada, Australia, and Hong Kong were all closed for holidays. Gold and crude oil prices were higher, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average increased 122 points (0.7%) to 16,480

The S&P 500 Index added 9 points (0.5%) to 1,842

The Nasdaq Composite gained 12 points (0.3%) to 4,167

In light volume, 414 million shares were traded on the NYSE, and 1.2 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.33 to $99.55 per barrel, wholesale gasoline was unchanged at $2.81 per gallon, and the Bloomberg gold spot price increased $5.74 to $1,210.36 per ounce.

Jobless claims drop

Weekly initial jobless claims fell by 42,000 to 338,000 last week, below the 345,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 1,000 to 380,000. However, the four-week moving average, considered a smoother look at the trend in claims, rose by 4,250 to 348,000, while continuing claims increased by 46,000 to 2,923,000, north of the forecast of economists, which called for a level of 2,827,000. However, the jobless claims data may have continued to be impacted by year-end holiday seasonal adjustments.

Treasuries were lower following the data, with the yields on the 2-year and 10-year notes ticking 1 basis point higher to 0.40% and 2.99%, respectively, while the 30-year bond rate gained 3 bps to 3.92%.

Asia mixed, while several global markets remain closed

Stocks in Asia finished mixed ahead of the return to action for the U.S. markets following the Christmas holiday, while volume remained light as markets in Europe, Canada, Australia and Hong Kong remained closed. Meanwhile, Japan’s Nikkei 225 Index rose to a six-year high, with the yen weakening to a five-year low versus the U.S. dollar to help boost export-related stocks.

China’s Shanghai Composite Index fell amid continued liquidity concerns as the People’s Bank of China held off on injecting more liquidity into the banking system, which overshadowed a report forecasting Chinese economic growth will likely come in at 7.6% for this year, just above the 7.5% expansion that the government is targeting, but a deceleration from the 7.7% growth posted in 2012. Elsewhere, South Korea’s Kospi Index dipped as the weakness in the yen dampened the nation’s outlook for exports, while India’s S&P BSE Sensex 30 Index closed higher.

The international economic docket for tomorrow will yield a plethora of reports from Japan. Figures set to be released by the island nation include: Markit manufacturing data, vehicle production numbers, the jobless rate, CPI data, industrial production and retail sales figures. Additionally, we will receive PPI data from France.

10-year Treasury Hits 3%

Treasury prices slipped on Thursday, sending the benchmark 10-year note yield above 3% for the first time since September. The 10-year note yield rose 1 basis point to 2.992% in recent trade, after hitting an intraday high just above 3% on the Tradeweb and FactSet platforms. Rates have been moving higher in the wake of a Federal Reserve decision earlier this month to scale back its bond-buying program.

The benchmark yield touched 3% on some trading platforms on Sept. 5, but otherwise last closed above that level in July 2011.

Economic data have been improving in recent months, which prompted the Federal Reserve to announce it would scale back its $85 billion in monthly bond purchases, beginning in January. The central bank’s announcement last week went alongside a commitment to keeping its key policy rate low until the unemployment rate falls well below 6.5% in what’s known as forward guidance. The 10-year yield’s climb to 3% is one sign that the environment of rising rates is likely to continue as the Fed exits its stimulus program and the economy picks up steam.

“There’s always some significance with a big round number like that,” said Thomas Roth, director of government trading at Mitsubishi UFJ Securities U.S.A. Inc. “We’ve retraced that whole move since September. Going forward, it’s back to the old school of watching the economy and watching the numbers.”

The 5-year note yield rose slightly to 1.742%. The 30-year bond yield climbed 2 basis points to 3.921%.

Treasury maturities are bumping up against key support levels, and breaking through them could lead rates to move accelerate higher, according to Mike Sacchitello, technical analyst at Stone & McCarthy Research Associates. “If those levels are able to hold again, that should help the market steady as it limps into the end of the year, but should those levels fail to hold in thin trading, the lack of flows could potentially exacerbate the pain from any significant sell stops,” Sacchitello said in a note.

The Labor Department said Thursday that jobless claims fell by 42,000 to 338,000 last week, below the consensus Wall Street forecast of 345,000. While this marks the biggest drop in 13 months, the number may be skewed by the challenges of adjusting for seasonality around the holidays.

Recent improvement in the economic data, as well as some skepticism about the Fed’s forward guidance, has helped pull forward market expectations for when the Fed could begin hiking interest rates. The 2-year note yield, which can move based on the expected path of the fed funds rate, was up a basis point on the day at 0.407%.

The market now puts a 52% probability on the first rate hike coming in April 2015, according to the CME Group’s FedWatch , which makes calculations based on fed funds futures contracts that are tied to the path of rates.

Market Insights 12/23/2013

Markets Continue Higher

The domestic equity markets continued higher as the Dow and S&P 500 continued their recent record-breaking ascent. Treasuries were mostly lower amid the gains for stocks and as December consumer sentiment came in well above the previous month’s level, while personal income and spending figures were mixed. Gold, crude oil, and the U.S. dollar all traded lower.

The Dow Jones Industrial Average increased 73 points (0.5%) to 16,295

The S&P 500 Index added 10 points (0.5%) to 1,828

The Nasdaq Composite gained 44 points (1.1%) to 4,149

In moderately light volume, 607 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.41 to $98.91 per barrel, wholesale gasoline was unchanged at $2.78 per gallon, and the gold spot price decreased $4.74 to $1,198.49 per ounce.

Consumer sentiment unrevised, while personal income and spending mixed

The final University of Michigan Consumer Sentiment Index showed confidence was unrevised from the preliminary report of 82.5 for December, compared to the upward adjustment to 83.0 that economists surveyed by Bloomberg had estimated. The figure was a solid improvement from November’s 75.1 reading, but was below July’s six-year high level of 85.1.

Meanwhile, personal income rose 0.2% month-over-month (m/m) in November, versus the 0.5% gain that economists had projected, and October’s 0.1% dip was unrevised. However, personal spending increased 0.5% m/m in November, matching expectations, while October’s 0.3% rise was revised to a 0.4% gain. The November savings rate as a percentage of disposable income fell to 4.2%, from October’s downwardly revised rate of 4.5%.

Treasuries were mostly lower, with the yield on the 2-year note nearly unchanged at 0.38%, while the yield on the 10-year note rose 4 basis points (bps) to 2.93% and the 30-year bond rate ticked 2 bps higher to 3.85%.

Today’s data kicked off a holiday-shortened week, as the U.S. markets will close at 1 p.m. ET tomorrow and be shuttered on Wednesday due to the Christmas holiday. Tomorrow, the domestic economic calendar will yield durable goods orders, expected to rise 2.0% m/m in November, after falling by the same amount in October, as well as new home sales, projected to decline 0.9% m/m last month to an annual rate of 440,000 units, following October’s 25.4% surge. Other releases on tomorrow’s docket include MBA mortgage applications and the Richmond Fed Manufacturing Index.

Heading into the New Year, we have many reasons to be optimistic, economic growth appears to be gaining some traction and we are seeing some developments that many think will help contribute to a still-positive equity environment. Despite regional differences, an improved global growth outlook in 2014 is likely to have a positively reinforcing impact economically and could improve confidence for businesses, consumers and investors. Meanwhile, improved global growth sentiment was amplified over the weekend as International Monetary Fund Managing Director Christine Lagarde noted on NBC’s “Meet the Press” that it will increase its outlook for the U.S. economy in light of the Congressional budget agreement, declining unemployment, and the Federal Reserve’s plan to rein in its stimulus efforts. All good news…

Europe and Asia move to the upside

The European equity markets traded higher, posting the biggest four-session rally since April, per Bloomberg, with improved U.S. economic sentiment lending a hand, aided by the IMF’s favorable comments over the weekend. However, volume was lighter than usual, with the Christmas holiday on the week’s horizon. In economic news in the region, German import prices unexpectedly rose in November, while Spanish producer prices fell and Italian consumer confidence surprisingly deteriorated for December.

Stocks in Asia finished to the upside on the heels of the record highs posted in the U.S. last week, though volume was lighter than usual as markets in Japan were closed for a holiday. The Hong Kong Hang Seng Index increased and China’s Shanghai Composite Index ticked higher, snapping a nine-session losing streak, which took the index to the lowest level since August last week, with financials leading the way despite continued liquidity concerns in the region.

Stocks in mainland China shrugged off the seventh-consecutive daily increase in China’s benchmark money-market rate, which reached the highest level since June 20, per Bloomberg, fostering the flare-up in credit crunch concerns, despite last week’s announcement that the government has injected liquidity in the financial system. South Korea’s Kospi Index rose and Australia’s S&P/ASX 200 Index advanced, while India’s S&P BSE Sensex 30 Index inched to the upside.

Market Insight 12/20/2013

Stocks Finish Near Flatline as Fed Rally Fades

Before closing in mixed territory, U.S. equity indices stirred along the flatline for most of the trading session The Street sorted through some domestic economic reports following yesterday’s tapering announcement from the Federal Reserve.

U.S. weekly initial jobless claims unexpectedly rose and existing home sales fell for the third-straight month, which may have weighed on sentiment. However a separate domestic reports showed regional manufacturing activity continued to expand and leading indicators registered the fifth-consecutive monthly gain. Treasuries were mixed following the data, gold was lower, while the U.S. dollar and crude oil prices were higher.

The Dow Jones Industrial Average increased 11 points (0.1%) to 16,179

The S&P 500 Index decreased 1 point (0.1%) to 1,810

The Nasdaq Composite declined 12 points (0.3%) to 4,058

In moderate volume, 702 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.98 to $99.04 per barrel, wholesale gasoline gained $0.04 to $2.74 per gallon, and the Bloomberg gold spot price decreased $28.24 to $1,190.29 per ounce.

Home sales drop and jobless claims unexpectedly rise, while leading indicators grow

Existing-home sales dropped for a third-straight month, declining 4.3% month-over-month in November to an annual rate of 4.90 million—the lowest since December 2012—resulting in the first y/y decline (-1.2%) in 29 months. The pace missed the 5.02 million unit estimate by economists surveyed by Bloomberg, and October’s figure was unrevised at a 5.12 million unit rate.

The National Association of Realtors said “home sales are hurt by higher mortgage interest rates, constrained inventory and continuing tight credit.” The NAR added that annual home prices are rising at the highest rate in eight years due to the limited housing supply as a result of the slow recovery in new home construction. However, it is important to keep in mind that higher housing prices are likely supporting confidence among the consumer, which is the largest contributor to U.S. economic growth, and the squeeze on the housing market may find some relief as November housing starts rose to the highest level since February 2008, and the National Association of Home Builders Sentiment Index jumped for December.

Meanwhile, weekly initial jobless claims rose by 10,000 to 379,000 last week, above the 336,000 level that economists had expected, as the prior week’s figure was upwardly revised by 1,000 to 369,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, increased by 13,250 to 343,500, while continuing claims rose by 94,000 to 2,884,000, north of the forecast of economists, which called for a level of 2,770,000. However, the jobless claims data may have continued to be impacted by year-end holiday seasonal adjustments.

Treasuries were mixed following the data, with the yield on the 2-year note increasing 3 basis points (bps) to 0.36% and the yield on the 10-year note gaining 4 bps to 2.93%, while the 30-year bond rate decreased 1 bp to 3.90%.

Yesterday, bond yields diverged after showing some brief volatility initially after the Federal Reserve announced the beginning of the reduction of asset purchases at the conclusion of its monetary policy meeting. The Fed, at least so far, appears to have done a better job than last summer in anchoring expectations for short-term rates; reinforcing the notion that “tapering is not tightening.” Yesterday’s market reaction may ease some of the consternation of Fed watchers that believe there is no way the Fed can engineer a benign exit from its unprecedented policy easing/unwinding of its near $4 trillion balance sheet.

But history may be helpful here, in the post-World War II era, the Fed’s holdings of US securities totaled about 22% of GDP—the same as the current level. In the 1940s and 1950s, the Fed pursued very similar policies to deal with the debt that was incurred during the war. Eventually the Fed’s policies were unwound and the balance sheet restored to normal with limited disruptions; including no major uptick in either inflation or interest rates.

Tomorrow’s economic calendar will yield the release of the final of three reads on 3Q GDP, which is expected to show a quarter-over-quarter annualized growth rate of 3.6%, up from the 2.5% q/q pace of expansion registered in the 2Q. We believe that this is the singe most important economic indictor and hopes continue that GDP shows continued improvement within the economy without any inflation signals being raised.

Europe follows yesterday’s Fed-fueled U.S. rally, while Asia finishes mixed

The European equity markets traded broadly higher, rallying in the wake of the sharp gains registered in the U.S. yesterday as the Federal Reserve announced that it will begin to rein in its stimulus efforts, boosting optimism about the health of the world’s largest economy. U.K. retail sales rebounded in November, with sales excluding autos rising more than anticipated m/m, while the eurozone current account surplus widened more than expected for October. In other economic news, Switzerland’s trade surplus unexpectedly narrowed for last month as exports and imports both rebounded from October’s declines.

Stocks in Asia finished mixed on the heels of yesterday’s decision by the Fed to begin to pull back its stimulus efforts, which led to a rally in the U.S. equity markets. Japan’s Nikkei 225 Index jumped, hitting the highest level since 2007, as the yen fell back to a five-year low versus the U.S. dollar to help boost export-related stocks. The solid advance in Japan came on the eve of tomorrow’s monetary policy decision by the Bank of Japan.

Australia’s S&P/ASX 200 Index rallied with the Australian dollar falling to over a three-year low versus the greenback in the wake of the Fed’s announcement, while financials and mining stocks led the way. However, China’s Shanghai Composite Index and the Hong Kong Hang Seng Index both fell amid festering liquidity concerns as the yield on the seven-day repo rate, a gauge of funding availability in the banking system, rose to the highest level since the cash crunch in June, per Bloomberg. India’s S&P BSE Sensex 30 Index declined in the wake of the tapering announcement by the Fed, while South Korea’s Kospi Index ticked slightly higher, as gains were limited by softness in automaker stocks.

Fed’s Statement – Full Text

The Federal Open Market Committee on Wednesday issued the following statement after their two-day meeting:

Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.

Market Insights 12/18/2013

Stocks Soar as Fed is Set to Scale Back Stimulus

Domestic equity markets surged higher, with the Dow attaining triple-digit gains, after the Federal Reserve said it will begin tapering in January. Fed statements released following the conclusion of the two-day meeting revealed that information received since the previous meeting in October indicates that economic activity is expanding at a moderate pace and that the Central Bank will reduce its current stimulus to $75 billion per month.

Treasuries were mixed following the tapering announcement which were viewed by many as a good sign. Gold was lower and crude oil prices were mixed, while the U.S. dollar rose sharply following the press conference held by Fed Chairman Bernanke.

The Dow Jones Industrial Average rose 293 points (1.8%) to 16,168

The S&P 500 Index increased 30 points (1.7%) to 1,811

The Nasdaq Composite added 46 points (1.2%) to 4,070

In heavy volume, 882 million shares were traded on the NYSE, and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.59 to $98.06 per barrel, wholesale gasoline gained $0.05 to $2.70 per gallon, and the Bloomberg gold spot price decreased $10.74 to $1,231.78 per ounce.

Tapering set to begin, while Housing starts and building permits top forecasts

The statement from the two-day Federal Open Market Committee meeting was released at 2:00 p.m. ET. The Fed announced that economic activity is expanding at a moderate pace and that it will begin to scale back its current stimulus program by $10 billion to $75 billion a month. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month.

The Committee reaffirmed its expectation that the current exceptionally low target range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation of no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Nine of the voting members of the Committee supported the decision to start tapering, while Boston Fed President Eric Rosengren was the lone dissenter.

Additionally, housing starts for November came in above expectations, jumping 22.7% month-over-month to an annual pace of 1,091,000 units—the highest since February 2008—compared to the 955,000 unit rate that economists surveyed by Bloomberg called for. The jump in starts came as a spike in multi-family construction was accompanied by a surge in single-family construction, which is a larger and less-volatile segment of the market.

Today’s gauge on housing construction and future activity comes on the heels of yesterday’s jump in homebuilder confidence, likely boosting optimism regarding the resiliency of the housing market amid the recent spike in interest rates and the government shutdown. Coupled with the improving job market, confidence among the consumer—the largest catalyst for U.S. economic growth—could be set to improve in the coming months, it looks like we are seeing some developments that we think will help contribute to a still-positive equity environment in 2014.

Treasuries were mixed following the statement from the Fed, with the yield on the 2-year note ticking 1 bp lower to 0.33%, while the yield on the 10-year note increased 5 bps to 2.89%, and the 30-year bond rate rose 4 bps to 3.90%.

Other items on tomorrow’s economic docket include weekly initial jobless claims, forecasted to decline by 33,000 from the previous week to 335,000. Additionally, the Philly Fed Manufacturing Index for December is anticipated to increase further into expansion territory to 10.0, with a reading above zero indicating expansion in regional manufacturing activity. Lastly, the Leading Index will be released, which is forecasted to rise 0.7% m/m during November following a 0.2% increase the month prior.

Europe and Asia mostly higher

The European equity markets finished higher despite uncertainty ahead of today’s monetary policy decision by the U.S. Federal Reserve. In addition, the Bank of England (BoE) released the minutes from its December policy meeting, showing a unanimous decision to keep its benchmark interest rate at a record low of 0.50%. Also, the BoE report showed some concern among policymakers regarding further appreciation of the pound and its impact on the economy, which may have limited the gains for U.K. stocks, along with some concerns about the region’s retail sales during the holiday season.

Stocks in Asia finished mostly higher as Japan’s Nikkei 225 Index rallied with the yen weakening against the U.S. dollar, aiding export-related stocks. The yen came under some pressure ahead of the Fed’s policy decision today following a report that showed Japan’s adjusted trade deficit in November came in at a record, and on speculation that the Bank of Japan sees further room to increase government bond purchases if needed, per Bloomberg.

India’s S&P BSE Sensex 30 Index gained ground as the Reserve Bank of India unexpectedly held off on raising interest rates. However, China’s Shanghai Composite Index and Australia’s S&P/ASX 200 Index both dipped amid Chinese liquidity concerns and a warning from Reserve Bank of Australia Governor Stevens that an elevated Australian dollar was not suitable for the economy. Finally, the Hong Kong Hang Seng Index rose and South Korea’s Kospi Index advanced.

Market Insights 12/17/2013

Caution Ahead of Fed Meeting

In a lackluster trading session, U.S. equities finished modestly lower today as the Street awaits tomorrow’s policy decision from the Federal Reserve to see if it will start its campaign on tapering its asset purchases. Treasuries finished higher amid the uncertainty, and after domestic consumer price inflation came in flat and homebuilder sentiment improved. Gold finished lower, crude oil prices were mixed, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average declined 9 points (0.1%) to 15,875

The S&P 500 Index lost 6 points (0.3%) to 1,781

The Nasdaq Composite shed 6 points (0.1%) to 4,024

In moderate volume, 667 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.26 to $97.22 per barrel, wholesale gasoline gained $0.01 to $2.65 per gallon, and the Bloomberg gold spot price lost $9.35 to $1,231.78 per ounce.

Consumer prices remain tame, while homebuilder sentiment jumps

Consumer Price Index showed prices at the consumer level were flat month-over-month in November, versus the 0.1% increase that economists surveyed by Bloomberg had forecasted, while October’s 0.1% decline was unrevised.

In housing news, the National Association of Home Builders Housing Market Index, a gauge of homebuilder sentiment, rose to 58 for December, from November’s unrevised 54, and compared to the 55 level that economists had expected. The index registered the seventh-straight month showing more homebuilders consider the housing market good than poor, denoted by a reading above 50. The NAHB said the stronger-than-expected improvement reflected improvement in all three index components—current sales conditions, sales expectations and traffic of prospective buyers.

Treasuries finished higher, as the yield on the 2-year note dipped 1 basis point (bp) to 0.32%, the yield on the 10-year note declined 3 bps to 2.85%, and the 30-year bond rate fell 2 bps to 3.88%.

Europe lower, Asia mixed amid global data and Fed caution

The European equity markets finished lower, pulling back somewhat from yesterday’s strong gains that came courtesy of stronger-than-expected Eurozone services and manufacturing reports, with caution ahead of tomorrow’s Fed policy decision stymieing sentiment. The downward direction for stocks in the region came despite a much better-than-expected read on German investor confidence.

The German ZEW Survey of investor and analyst expectations six months from now rose to 62.0 in December, the highest level since April 2006, from 54.6 in November, and compared to the modest improvement to 55.0 that economists had forecasted.

In other economic news, U.K. inflation data came in cooler than expected for November, while Eurozone consumer prices dipped 0.1% m/m last month, as expected, resulting in an unrevised 0.9% y/y increase, which is well below the European Central Bank’s target of below but close to 2.0%.

Stocks in Asia finished mixed as traders grappled with yesterday’s upbeat Eurozone business activity data and stronger-than-expected U.S. industrial production report, which led to solid gains in Europe and the U.S. equity markets. Japan’s Nikkei 225 Index rose with the yen stabilizing after yesterday’s advance, while South Korea’s Kospi Index gained ground following a report showing the nation’s decline in producer prices slowed in November.

Australia’s S&P/ASX 200 Index advanced on the heels of the minutes from the Reserve Bank of Australia’s December policy meeting, in which it left its benchmark interest rate unchanged at 2.50%. The RBA noted that the Australian dollar remained uncomfortably high and a lower level would likely be needed to achieve balanced growth in the economy, while adding that it was prudent to gauge the effects of earlier reductions to its benchmark interest rate.

China’s Shanghai Composite Index and the Hong Kong Hang Seng Index decreased, as yesterday’s disappointing read on the country’s manufacturing output continued to weigh on sentiment.

Will the market react to the Fed taper decision?

The Federal Reserve’s Open Market Committee meeting concludes tomorrow with a statement and summary of economic projections mid-day, followed shortly thereafter by Fed Chairman Ben Bernanke’s press conference. Traders are expecting the decision to begin reducing the pace of asset purchases to be a close call, as recent economic data has improved, but the low level of inflation puts little pressure on the Fed to act quickly or aggressively.

If the Fed is talking about changing its “forward guidance” about the thresholds for interest rate policy at the same time it begins tapering asset purchases to signal that rates will remain low until the economy is stronger. By doing this, the Fed hopes to reduce uncertainty about the future path of policy and fuel more long-term investment by businesses and consumers. In terms of implications for bond investors, most experts and managers continue to suggest investors limit the duration of their fixed income portfolios to the short-to-intermediate term until the policy outlook is more clear.

While investors will likely be keying on the events surrounding the Fed meeting tomorrow, there will also be some economic data for traders to digest. Housing starts and building permits will be released, with economists expecting permits to decline 4.7% m/m during November to an annual rate of 990,000 units, while starts will include both the November and October readings, delayed as a result of the government shutdown. As well, MBA Mortgage Applications will be released.

Market Insight 12/16/2013

Stocks Begin the Week on a positive note

U.S. equities rebounded from two consecutive weeks of loses in positive fashion, posting solid gains in today’s session. M&A news and upbeat eurozone business activity reports provided the catalyst, helping to somewhat soothe anxiety over increased speculation that the Federal Reserve could begin to rein in its asset purchases as soon as its two-day meeting which begins tomorrow.

Treasuries finished modestly lower amid the uncertainty, and after reports showed domestic industrial production exceeded forecasts, domestic manufacturing data showed modest expansion and 3Q productivity was revised solidly higher.

The Dow Jones Industrial Average rose 130 points (0.8%) to 15,885

The S&P 500 Index gained 11 points (0.6%) to 1,787

The Nasdaq Composite advanced 29 points (0.7%) to 4,030

In moderate volume, 672 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.88 to $97.48 per barrel, wholesale gasoline gained $0.01 to $2.64 per gallon, and the gold spot price rose $2.24 to $1,240.93 per ounce.

Industrial output tops estimates, while manufacturing data shows modest expansion

Industrial production rose 1.1% month-over-month in November, compared to the 0.6% increase expected by economists surveyed by Bloomberg, and October’s 0.1% dip was revised to a rise of 0.1%. Utilities and mining production both rose solidly, while manufacturing output during the month posted a respectable gain. Capacity utilization increased to 79.0% from the upwardly revised 78.2% in October, compared to forecasts which called for the rate to tick higher to 78.4%. Utilization is 1.2% below its long-run average.

Nonfarm productivitywas revised to a 3.0% increase on an annualized basis, from the preliminary 1.9% gain, and following the 1.8% rise seen in the 2Q. Economists expected an upward revision to a 2.8% gain. Also, unit labor costs were adjusted to a 1.4% decline, from the 0.6% decrease initially reported, matching forecasts, after rising by an upwardly revised 2.0% in 2Q.

Treasuries are modestly lower, as the yield on the 2-year note was nearly unchanged at 0.33%, while the yields on the 10-year note and the 30-year bond inched 1 basis point higher to 2.87% and 3.89%, respectively.

Today’s data kicks off the week’s economic docket, which will likely be headlined by the two-day Federal Reserve’s Open Market Committee meeting, which begins tomorrow and will conclude Wednesday with a statement and summary of economic projections mid-day, followed shortly thereafter by Fed Chairman Ben Bernanke’s press conference. After the skittishness shown by the market leading up to what was believed to be the start of tapering, or reducing its bond purchase program, by the Fed in September, this time around the market seems more prepared.

Tapering is very likely to begin soon and will continue to be a prominent story in 2014, but volatility may not be as extreme as many have assumed. During the summer rout, investors were assuming short-term rates were going to get hiked sooner than originally anticipated; but today, the futures market shows an anchoring of short rates until at least mid-2015. This suggests the market now believes the mantra that “tapering is not tightening.”

Tomorrow, reports slated for release include the Consumer Price Index, forecasted to rose 0.1% m/m during November after slipping by 0.1% in October, while the core CPI, which excludes food and energy, is expected to also inch 0.1% higher m/m, matching that seen in October, As well, the NAHB Housing Market Index will be reported, expected to increase slightly to a level of 55 for December from the 54 posted in November.

Europe rallies on upbeat eurozone data, Asia falters amid mixed reports

The European equity markets rallied broadly in the wake of a stronger-than-expected read on Eurozone business activity. The data more than offset caution ahead of this week’s monetary policy meeting by the U.S. Federal Reserve, where speculation has grown that the Central Bank may begin to rein in its stimulus measures. The Eurozone PMI Composite Index—a gauge of activity in both the services and manufacturing sectors—rose to 52.1 in December, from 51.7 in November, and compared to the improvement to 51.9 that economists had projected, with a reading above 50 denoting expansion. The favorable report was led by a much stronger-than-expected acceleration in growth out of the manufacturing sector in Germany—Europe’s largest economy—which more than offset PMI reports out of France, which showed contractions in the nation’s services and manufacturing sectors both unexpectedly accelerated. In other economic news, the eurozone trade surplus widened in October to a level that matched forecasts.

Stocks in Asia, however, finished broadly lower in cautious trading amid a mixed bag of economic data in the region. Japan’s Nikkei 225 Index fell solidly, with export-related stocks seeing some pressure as the yen rebounded from last week’s five-year low versus the U.S. dollar. Meanwhile, traders digested a mixed reading on sentiment in Japan’s large manufacturing sector. Japan’s 4Q Tankan Large Manufacturing Index rose to 16—the highest level since 2007—from 12 in 3Q, compared to the 15 level that economists had projected, with a positive figure denoting that optimism outweighed pessimism in the sector.

Items set for release on tomorrow’s international economic calendar will include: PPI data from South Korea, Germany’s Zew Economic Sentiment Index, CPI from the eurozone, and PPI, CPI, mortgage payments, housing prices and the Retail Price Index from the U.K.

Market Insight 12/14/2013

Stocks Finish Week Mixed

After a late-day dip into the red, the Dow and Nasdaq were able to snap a three-day losing streak to close out the week with slight gains, as the S&P 500 finished flat. Gains were kept in check, as concerns over whether the Federal Reserve will begin to taper as soon as next week’s meeting continued to be a little black cloud.

Treasuries finished modestly higher, following the third-straight monthly decline in U.S. producer prices, which was the lone report on today’s domestic economic calendar. Gold was higher, crude oil prices were lower, and the U.S. dollar was flat.

The Dow Jones Industrial Average closed 16 points (0.1%) higher at 15,755-

The S&P 500 Index was unchanged at 1,775-

The Nasdaq Composite inched 3 points (0.1%) higher to 4,001-

In moderate volume, 636 million shares were traded on the NYSE, and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.90 to $96.60 per barrel, wholesale gasoline was unchanged at $2.63 per gallon, and the Bloomberg gold spot price rose $10.63 to $1,236.12 per ounce.

Markets were lower on the week, as the DJIA and the S&P 500 Index decreased 1.7%, and the Nasdaq Composite Index was 1.5% lower.

PPI remain subdued

The Producer Price Index (PPI) showed a 0.1% decline month-over-month in prices at the wholesale level in November—the third-consecutive monthly decline—compared to the flat reading that economists surveyed by Bloomberg had projected. The core rate, which excludes food and energy, was up 0.1% m/m, matching forecasts, and October’s 0.2% rise was unadjusted.

Treasuries finished mostly higher, as the yield on the 2-year note was nearly unchanged at 0.33%, while the yield on the 10-year note declined 1 basis point to 2.87%, and the 30-year bond rate fell 2 bps to 3.88%.

Europe posts a fourth-straight day of losses, Asia mixed

The European equity markets gave up early gains, registering a fourth-straight session of red figures, amid festering uneasiness that recent stronger-than-expected U.S. economic data could prompt a reduction in asset purchases by the Federal Reserve as early as next week’s meeting.

Stocks in Asia finished mixed as traders continued to grapple with growing expectations that the Fed may scale back its stimulus measures before year end. India’s S&P BSE Sensex 30 Index fell following yesterday’s disappointing reports on the nation’s industrial production and consumer price inflation.

Japan’s Nikkei 225 Index rose, snapping a three-session losing streak, with the yen falling to five-year lows versus both the euro and the U.S. dollar. Australia’s S&P/ASX 200 Index gained ground on the heels of the sharp drop for the Australian dollar versus the U.S. dollar yesterday after Reserve Bank of Australia Governor Stevens offered comments suggesting a weaker currency is preferable over lower interest rates to help spur its slowing economy, per Bloomberg.

Taper concerns drain conviction

Coming off a rally to end last week as a stronger-than-expected November U.S. nonfarm payroll report appeared to ease concerns about the economic impact of reduced stimulus measures by the Fed, stocks returned to the red this week. Conviction which was likely already stunted by the subdued holiday-season volume, waned ahead of next week’s Fed policy meeting, as recent positive U.S. economic data ramped up the possibility of a pullback in Central Bank stimulus, this coupled by Thursday’s stronger-than-expected read on last month’s domestic retail sales.

Maybe the most important news of the week was that the two-year budget deal reached by Congressional negotiators effectively takes the threat of another government shutdown off the table for 2014 and most of 2015. The deal does not increase any taxes and lessens the impact of the looming sequester cuts. Once the agreement is approved and an appropriations process is completed, the public will have a lengthy reprieve from the seemingly endless series of budget fights in Washington.

However, the debt ceiling fight remains a potential catalyst for market volatility in the spring, especially if Congress again pushes the country to the brink of default. While both parties are saying they would like to avoid the brinkmanship that has defined recent debt ceiling debates, the issue remains one of the most controversial and contentious in Washington. The agreement also removes one hurdle to the Fed’s tapering process. Fed Chairman Ben Bernanke said in September that the series of upcoming budget battles was one reason that tapering had not yet begun, and numerous Fed officials have referenced the fiscal uncertainty as a reason to maintain the Fed’s bond-buying program.

The Week Ahead

Next week’s economic calendar will include the Empire Manufacturing Index, nonfarm productivity and unit labor costs, the preliminary Markit US PMI Index for December, the industrial production and capacity utilization report, the Consumer Price Index, the NAHB Housing Market Index, the housing starts and building permits report, the Philly Fed Manufacturing Index, existing home sales, the Index of Leading Economic Indicators and the Kansas City Fed Manufacturing Activity Index.

The headline event will be the two-day Federal Reserve’s Open Market Committee meeting, which will conclude Wednesday with a statement and summary of economic projections mid-day, followed shortly thereafter by Fed Chairman Ben Bernanke’s press conference. After the skittishness shown by the market leading up to what was believed to be the start of tapering, or reducing its bond purchase program, by the Fed in September, this time around the market seems more prepared. Tapering is very likely to begin soon and will continue to be a prominent story in 2014, but volatility may not be as extreme as many have assumed. During the summer rout, investors were assuming short-term rates were going to get hiked sooner than originally anticipated; but today, the futures market shows an anchoring of short rates until at least mid-2015. This suggests the market now believes the mantra that “tapering is not tightening.”

The headlines on next week’s international economic calendar will include Japan’s quarterly Tankan survey, where businesses of all sizes and industries give their outlooks for production, hiring, and capital spending, among other factors, the German ZEW Survey of Economic Sentiment Index, which measures the sentiment of analysts and investors, Germany’s Ifo index, which measures business confidence, and preliminary November readings in the form of manufacturing and service PMI’s for the eurozone and HSBC’s preliminary manufacturing PMI for China. The central banks of Japan, Sweden and India meet to discuss monetary policy, while the Bank of England and the Reserve Bank of Australia release minutes from their last meetings.