Monthly Archives: February 2014

Market Insights 2/25/2014

Sentiment Pressured

After moving in and out of positive territory in today’s session, stocks finished lower amid a slew of mixed earnings and economic reports. Consumer Confidence unexpectedly declined and a read on regional manufacturing activity surprisingly fell into contraction territory, overshadowing a separate release showing domestic home prices continued to rise in December.

On the earnings front, Dow member Home Depot posted mixed quarterly results, but upped its dividend, Macy’s reported softer-than-expected 4Q sales, but reaffirmed its 2014 guidance, while Toll Brothers bested the Street’s estimates, but reported a decline in contract signings. Treasuries gained ground amid the divergent news and gold was higher, while the U.S. dollar and crude oil prices traded lower.

The Dow Jones Industrial Average declined 27 points (0.2%) to 16,180

The S&P 500 Index shed 3 points (0.1%) to 1,845

The Nasdaq Composite was 5 points (0.1%) lower at 4,287

In moderate volume, 639 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.99 to $101.83 per barrel, wholesale gasoline lost $0.04 to $2.97 per gallon

The Bloomberg gold spot price increased $4.51 to $1,341.48 per ounce

Consumer Confidence unexpectedly drops, while housing prices continue to rise

The Consumer Confidence Index surprisingly declined in February, decreasing from a downwardly revised 79.4 in January, to 78.1, and compared to the 80.0 reading that economists surveyed by Bloomberg had anticipated. The disappointing read on sentiment came as an improvement in the component pertaining to the current situation was more than offset by a decline in the portion related to expectations of business conditions. However, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—improved to -18.6 from -20.2 last month.

In housing news, the 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 13.4% y/y in December, matching the increase that economists had expected, after November’s 13.7% rise. Moreover, month-over-month, home prices were higher by 0.8% on a seasonally adjusted basis for December, compared to forecasts of a 0.6% increase, and following November’s 0.9% gain.

Treasuries finished higher following the data, as the yield on the 2-year note dipped 2 basis points (bps) to 0.31%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 2.70% and 3.66%, respectively.

Tomorrow’s domestic economic calendar will provide new home sales, forecasted to fall to an annual rate of 400,000 in January from the 414,000 posted in the month prior, as well as MBA Mortgage Applications.

Europe and Asia mixed amid Chinese concerns and lackluster data

The European equity markets finished mixed after paring losses in late-day trading that came amid festering Chinese economic concerns, as well as the softer-than-expected U.S. economic data and some lackluster Eurozone reports. On the economic front, Italian retail sales unexpectedly declined in December, Italian consumer confidence and French business sentiment both came in south of economists’ forecasts for this month, and Germany’s 4Q GDP was unrevised at a 0.4% quarter-over-quarter rate of growth, matching estimates.

Stocks in Asia finished mixed, with Japan’s Nikkei 225 Index gaining on the heels of yesterday’s advance in the U.S. and Europe, despite some late-day strength in the yen versus the U.S. dollar. However, China’s Shanghai Composite Index suffered, with property-related stocks continuing to see pressure following yesterday’s reports that some banks in the nation have tightened lending to the sector, as well as data showing home price increases slowed in January. Also, the recent weakness in the Chinese Yuan exacerbated sentiment regarding corporate earnings, per Bloomberg.

Market Insights 2/24/2014

Corporate Deals Spark Rally

U.S. equities started the week on a positive note, courtesy of a slew of corporate events. Chesapeake Energy said it is pursuing strategic alternatives for its oilfield services unit, RF Micro Devices and TriQuint Semiconductor agreed to merge, Netflix agreed to pay Comcast to bolster its streaming services, and Men’s Wearhouse increased its cash tender offer for Jos. A. Bank Clothiers.

Health care stocks got a boost, led by Humana, after a preliminary report from the Centers for Medicare and Medicaid Services suggested smaller-than-estimated declines in Medicare funding for the sector. Treasuries finished nearly unchanged, despite a surprising drop in a gauge of regional manufacturing activity.

The Dow Jones Industrial Average rose 106 points (0.7%) to 16,209

The S&P 500 Index gained 11 points (0.6%) to 1,848

The Nasdaq Composite was 30 points (0.7%) higher at 4,293

In moderate volume, 707 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.62 to $102.82 per barrel, wholesale gasoline added $0.01 to $3.01 per gallon

The Bloomberg gold spot price increased $12.34 to $1,336.59 per ounce

Dallas manufacturing activity slows more than expected

The Dallas Fed Manufacturing Index showed growth in activity for the region decelerated by a much larger amount than expected, falling from January’s unrevised level of 3.8 to 0.3 in February, and compared to the 3.0 figure that was forecasted by economists surveyed by Bloomberg. The report showed expansion in new orders and the order growth rate declined, while finished goods fell into contraction territory. However, the index remained modestly in expansion territory denoted by a reading above zero.

Treasuries finished nearly unchanged, as the yield on the 2-year note was flat at 0.32%, the yield on the 10-year note lost 1 basis point to 2.74%, while the 30-year bond rate increased 1 bp to 3.71%.

Today’s report kicked off the U.S. economic week, which will deliver reports on manufacturing activity, including tomorrow’s Richmond Fed Manufacturing Index, expected to show manufacturing activity in the mid-Atlantic region decelerated to a level of 3 during February from the 12 posted in January, the Chicago PMI Index, and the Kansas City Fed Manufacturing Activity Index, as well as the durable goods orders report.

Although the global manufacturing picture still appears a bit murky to us, we continue to believe in our recommendation of outperform on the industrials sector. The national ISM Manufacturing Index remained in territory depicting expansion but weakened quite a bit from the previous month. As usual, however, we suggest not paying too much attention to any one number, especially given the weather situation in the U.S. lately, and we believe the upward trend will return in the near future.

Europe higher following German sentiment report, Asia lower

The European equity markets finished higher, following an upbeat read on German business sentiment. Also, Ukrainian stocks rallied following last week’s agreement to try to end the deadly political turmoil in the nation and amid optimism that the European Union and other global authorities may provide financial assistance to the nation. The German Ifo Business Climate Index, derived from a survey of 7,000 executives, unexpectedly rose to 111.3 in February—the highest level since July 2011—from 110.6 in January, and compared to the 110.5 level that economists had anticipated. Meanwhile, a separate report showed Eurozone consumer prices fell month-over-month in January as expected, bringing the year-over-year rate to 0.8%, well below the European Central Bank’s target of close to or near 2.0%, while Moody’s Investors Service upgraded the Spain’s credit rating.

Stocks in Asia, however, finished mostly lower to begin the week, with China’s Shanghai Composite Index and the Hong Kong Hang Seng Index led by weakness in property-related stocks. The sector came under pressure amid a media report that suggested Chinese banks had tightened lending to the property sector, while a report showed growth in the nation’s new home prices slowed in January. Meanwhile, Japan’s Nikkei 225 Index decreased 0.2%, as the yen showed some strength compared to the U.S. dollar, while South Korea’s Kospi Index traded 0.5% to the downside, pulling back from its recent one-month high. However, Australia’s S&P/ASX 200 Index finished flat, and India’s S&P BSE Sensex 30 Index rose 0.5%, led by strength in capital goods and banking stocks.

Market Insights 2/21/2014

Early Gains Lost Markets Finish Lower

The major U.S. indices gave up early gains and closed the trading session slightly lower as investors received a mixed bag of corporate earnings results and another disappointing economic report, which revealed a softer-than-expected read on domestic existing home sales. Treasuries were higher following the housing data. Gold was modestly higher and crude oil prices were lower, while the U.S. dollar was flat.

The Dow Jones Industrial Average decreased 30 points (0.2%) to 16,103

The S&P 500 Index lost 4 points (0.2%) to 1,836

The Nasdaq Composite was 4 points (0.1%) lower at 4,263

In moderate volume, 789 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.50 to $102.20 per barrel, wholesale gasoline was $0.02 lower at $3.00 per gallon

The Bloomberg gold spot price increased $0.93 to $1,323.90 per ounce

Markets were mixed on the week, as the DJIA lost 0.3% and the S&P 500 Index declined 0.1%, while the Nasdaq Composite Index was 0.5% to the upside

Existing home sales miss expectations

Existing-home sales fell 5.1% month-over-month in January to an annual rate of 4.62 million—the lowest level since July 2012—and below the 4.67 million unit estimate of economists surveyed by Bloomberg. December’s figure was unrevised at a 4.87 million unit rate. The median existing-home price rose 10.7% from a year ago to $188,900 and the supply of homes available for sale equated to 4.9 months of supply at the current sales pace, up from 4.6 months in December. Single-family home sales fell 5.8% m/m, while multi-family sales were unchanged m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier. Lawrence Yun, Chief Economist at The National Association of Realtors (NAR), noted that “disruptive and prolonged winter weather” is impacting a wide range of economic activity, and housing is no exception. However, Yun added that, “at the same time, we can’t ignore the ongoing headwinds of tight credit, limited inventory, higher prices and higher mortgage interest rates.”

Although it appears weather has had an impact on economic data, the weakness should not be completely dismissed. In terms of growth trends in the economy, we don’t believe this will inflict lasting damage. Meanwhile, the NAR noted that housing sales will continue to be hindered by the aforementioned headwinds until job growth and new supply from higher housing starts begin to make an impact. Most experts point out that one benefit that should not be overlooked from the weak equity start to the year has been the downtrend in yields that we’ve seen. This helps to support both equity valuations and the housing market. As rates began to move higher last year, we saw the improvement in the housing market slow; but with rates lower again, it could reignite the housing market, supporting both the economy and consumer confidence.

Treasuries were higher in the wake of the housing report, with the yield on the 2-year note nearly unchanged at 0.31%, while the yield on the 10-year note declined 2 basis points (bps) to 2.73% and the 30-year bond rate decreased 3 bps to 3.69%.

Stocks show resiliency

The equity markets showed some relative resiliency in the holiday-shortened week amid some lackluster global economic data, while the Nasdaq managed to gain ground for third-straight week. In the U.S., housing starts and building permits dropped more than expected and homebuilder sentiment fell much more than estimated to add to the recent string of soft housing data. Minutes from the Federal Reserve’s January meeting showed the Central Bank remained on the path to policy normalization.

Finally, the domestic equity front was mixed, as Facebook Inc. (FB $69) agreed to acquire WhatsApp for $16.0 billion and Tesla Motors Inc. (TSLA $210) posted stronger-than-expected quarterly results, while Dow member Wal-Mart Stores Inc. (WMT $73) offered disappointing sales and guidance.

4 Key Economic Indicators to Watch in 2014

The Fed projects the economy will grow at about a 3% pace in 2014 and even faster in 2015.

We think long-term rates will likely continue to move higher, possibly testing the 3.5% to 3.75% region this year.

We think this is likely because fiscal policy is less constrained than in the past few years, the risk of relapsing into recession has diminished and consumer and business finances appear to be in better shape.

Stronger growth isn’t a sure thing and with the rise in interest rates in the past six months, the market already seems to be discounting the likelihood economic growth will hit a higher plateau this year.

Daily we are watching real 10-year Treasury yields, bank credit, long-term unemployment and the U.S. dollar/euro exchange rate to try to determine if 2014 is the year when those expectations actually are realized.

Europe and Asia mostly higher

The European equity markets closed mostly higher, as gains in the region pushed the Stoxx Europe 600 Index to a six-year high on the heels of the solid gains posted in the U.S. equity markets yesterday. Italian government bonds rose, with 10-year securities extending a fourth weekly gain, amid speculation of a possible acceleration in economic reforms as the Prime-Minister-designate prepared to name his cabinet and chose Pier Padoan, chief economist of the Organization for Economic Cooperation and Development, to be Italy’s finance minister. Meanwhile, a report showed U.K. retail sales fell more than projected in January, posting the biggest drop in almost two years, due to sluggish demand at food and clothing stores, per Bloomberg. Additionally, a separate report revealed that Britain posted a budget surplus that was less than expected in January as taxes from incomes and company profits fell.

Stocks in Asia finished mostly to the upside in the wake of yesterday’s resiliency for the U.S. markets, which came on the heels of a stronger-than-expected read on the manufacturing activity for the world’s largest economy. Japanese equities led the way, rebounding from yesterday’s sell-off, supported by a pullback in the yen versus the U.S. dollar. However, Chinese stocks were under pressure amid continued concerns about a slowing of the nation’s economic growth, following yesterday’s seven-month low preliminary read on manufacturing output.

Market Insights 2/20/2014

Stocks Higher as Markets Recover From Morning Losses

The domestic equity markets showed some resiliency in the wake of mixed economic and earnings reports from the U.S. and around the world, as stocks overcame early session losses and closed the trading session nicely higher.

The domestic docket yielded an unexpected acceleration in manufacturing activity and a rise in leading indicators, which overshadowed separate reports that showed U.S. jobless claims declined by a smaller-than-anticipated. Consumer prices rose inline with forecasts and regional manufacturing activity surprisingly fell into contraction territory.

The Dow Jones Industrial Average (DJIA) increased 93 points (0.6%) to 16,133,

The S&P 500 Index added 11 points (0.6%) to 1,840, and

The Nasdaq Composite gained 30 points (0.7%) to 4,268.

In moderate volume, 669 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq.

WTI crude oil declined $0.09 to $102.75 per barrel, wholesale gasoline increased $0.03 to $2.85 per gallon, and

The Bloomberg gold spot price increased $12.00 to $1,323.60 per ounce.

Jobless claims decline less than expected – consumer prices match forecasts

Weekly initial jobless claims decreased by 3,000 to 336,000 last week, above the 335,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was unrevised at 339,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 1,750 to 338,500, while continuing claims rose by 37,000 to 2,981,000, north of the forecast of economists, which called for a level of 2,970,000.

The Consumer Price Index showed prices at the consumer level were up 0.1% month-over-month in January, matching the increase that economists had forecasted, while December’s 0.3% rise was revised to a 0.2% gain. The core rate, which strips out food and energy, rose 0.1% m/m in January, matching the gain that was projected, and December’s 0.1% increase was unadjusted. On a y/y basis, consumer prices were 1.6% higher, inline with forecasts, and the core CPI was up 1.6%, matching expectations. December’s y/y figures showed unrevised gains of 1.5% and 1.7% for the headline and core rates, respectively.

Treasuries were slightly lower, with the yield on the 2-year note nearly unchanged at 0.32%, while the yields on the 10-year note and the 30-year bond increased 1 bp to 2.75% and 3.72%, respectively

Tomorrow, the lone report on the U.S. economic calendar will be the release of existing home sales, expected to decline 4.0% m/m to annual pace of 4.68 million units in January, from 4.87 million units in December. Home sales lost some steam toward the end of the year amid higher interest rates and disappointing job growth, along with ongoing issues of constrained inventory and restrictive mortgage credit, as noted by the National Association of Realtors.

Europe pares losses, Asia mostly lower

The European equity markets overcame early losses and finished mixed, showing some late-day strength as the U.S. markets shrugged off mixed domestic data and some disappointing reports out of China and Japan. Moreover, stocks in the region managed to show some resiliency in the face of a softer-than-expected Eurozone business activity report and continued deadly Ukraine protests. The preliminary Eurozone PMI Composite Index—a gauge of activity in both the services and manufacturing sectors—surprisingly declined to 52.7 in February, from 52.9 in January, and compared to the improvement to 53.1 that economists had expected. However, a reading above 50 denotes expansion. The disappointing report came as continued growth in business activity in Germany was more than offset by accelerated contractions in French services and manufacturing output. In other economic news, French consumer price inflation fell more than expected for January.

Stocks in Asia finished mostly to the downside in the wake of some disappointing economic reports out of China and Japan. The yen gained ground on the U.S. dollar following a report that showed Japan’s trade deficit widened more than expected to a record in January, fueled by rising import costs. Meanwhile, China’s preliminary HSBC/Markit Manufacturing PMI Index unexpectedly declined to a seven-month low, exacerbating concerns about a slowdown for the world’s second-largest economy.

Market Insight 2/19/2014

Stocks Falter

Stocks finished lower following some disappointing economic reports and the release of the Federal Reserve’s January meeting minutes. Wholesale inflation came in slightly above forecasts, housing construction fell more than expected, and mortgage applications declined again. The news of the day showed the Fed report showed participants felt that incoming economic data warranted continued reduction of its asset purchases.

The Dow Jones Industrial Average declined 90 points (0.6%) to 16,041

The S&P 500 Index fell 12 points (0.7%) to 1,829

The Nasdaq Composite tumbled 35 points (0.8%) to 4,234

In moderate volume, 702 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.74 to $102.84 per barrel, wholesale gasoline lost $0.01 to $2.82 per gallon

The Bloomberg gold spot price declined $11.30 to $1,310.73 per ounce

Housing starts and building permits miss expectations, ahead of Fed minutes

Housing starts for January fell 16.0% month-over-month to an annual pace of 880,000 units, compared to the 950,000 unit rate expected by economists surveyed by Bloomberg. December’s starts were upwardly revised to an annual pace of 1,048,000, from an initial 999,000 rate. Building permits, a leading indicator of future construction, dropped 5.4% m/m in January to an annual rate of 937,000, after December’s upward revision to a 991,000 rate from the originally reported pace of 986,000 units. Economists forecasted a 975,000 unit rate for January. The disappointing report came as both single-family and multi-family starts and permits were lower m/m.

Today’s report is the latest batch of data that appears to be impacted by the recent adverse weather in the nation. However, new home activity has also been hampered by a shortage of lots and labor, as noted in yesterday’s disappointing drop in homebuilder confidence report by the National Association of Home Builders. In addition to constrained inventory, overall housing sales have been hamstrung by higher mortgage rates and the ongoing issue of restrictive mortgage credit.

The Federal Reserve released the January Federal Open Market Committee (FOMC) meeting minutes, where it announced another $10.0 billion reduction to its monthly bond purchases to a pace of $65.0 billion. The discussion showed most participants judged incoming economic data broadly inline with their expectations and that “a further modest step down in the pace of purchases was appropriate.” However, a couple participants raised questions about the desirability of reducing the pace of purchases in light of continued low inflation readings and considerable slack in the labor market, but decided a pause in the reduction was not justified.

Nevertheless, “a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.” On the softer-than-expected December payrolls figure, a number noted that it “may have been an anomaly, perhaps importantly reflecting bad weather.” Finally, the FOMC agreed that, with the unemployment rate approaching 6.5%, it would soon be appropriate for it to change its forward guidance in order to provide information about its decisions regarding its benchmark fed funds rate after that threshold was crossed, with some favoring quantitative guidance and others preferring a qualitative approach.

It appears the Fed remains comfortable enough with economic progress in the United States to continue paring back purchases. Although it appears weather has had an impact on economic data, the weakness should not be completely dismissed. In terms of growth trends in the economy, we don’t believe this will inflict lasting damage. One benefit that should not be overlooked from the weak equity start to the year has been the downtrend in yields that we’ve seen, as the 10-year Treasury yield has moved from about 3% at the end of last year back down to under 2.7% recently. This helps to support both equity valuations and the housing market. As rates began to move higher last year, we saw the improvement in the housing market slow; but with rates lower again, it could reignite the housing market, supporting both the economy and consumer confidence.

Finally, the MBA Mortgage Application Index decreased 4.1% last week, after the index declined 2.0% in the previous week. The decrease came as a 2.7% drop for the Refinance Index was accompanied by a 6.3% fall for the Purchase Index. Moreover, the average 30-year mortgage rate rose 5 basis points to 4.50%.

Treasuries finished modestly lower following the Fed minutes and economic reports, as the yield on the 2-year note rose 2 basis points (bps) to 0.32%, while the yield on the 10-year note and the 30-year bond increased 3 bps to 2.74% and 3.67%, respectively.

Tomorrow’s domestic economic calendar will be fairly busy and include reports ranging from inflation to jobs data. The day gets rolling with the Consumer Price Index (CPI), forecasted to have increased 0.1% m/m during January following December’s 0.3% increase, while the core rate is also expected to show a 0.1% m/m rise, matching that seen in the month prior, weekly initial jobless claims, expected to fall slightly to a level of 335,000 from the prior week’s 339,000, and the preliminary Markit US PMI Index, with economists expecting a level of 53.6.

Europe and Asia mixed amid U.S. data and Ukraine protests

The European equity markets diverged as traders digested the U.S. economic data ahead of the Federal Reserve’s January meeting minutes, while the deadly Ukraine protests applied solid pressure to stocks in the nation. Meanwhile, the U.K. reported an unexpected increase in its unemployment rate to 7.2% for December, from 7.1% in November, where economists had expected it to remain, and Eurozone construction output rose in December.

Stocks in Asia also finished mixed ahead of today’s release of the January meeting minutes from the Federal Reserve in the U.S., while Japan’s Nikkei 225 Index gave back some of yesterday’s rally as the yen rebounded compared to the U.S. dollar to pressure export stocks. Moreover, China’s Shanghai Composite Index and the Hong Kong Hang Seng Index advanced amid some eased concerns about liquidity issues as money market rates moved lower even as the government drained some funds from the financial system.

Fed Minutes Could Shed New Light

Minutes of the Federal Reserve’s January meeting could shed light on how the central bank may decide to reinforce its pledge to keep interest rates low for a long time. With the unemployment rate dropping the Fed needs to alter its tightening threshold. At the moment, the Fed has said it will not raise rates until “well past” the point where the unemployment rate drops below 6.5%, as long as inflation remains tame.

Some economists had expected the Fed to rework its forward guidance at the January meeting, but Fed officials made no changes in the language.Despite weak job growth, the unemployment rate fell to 6.6% in January. There might have been some discussion at the January meeting of dropping the threshold to 6%, economists said. Other Fed officials have said they favor scrapping the unemployment rate as a threshold and switching to more “qualitative” description of economic conditions that would necessitate a tightening.

New Fed Chairwoman Janet Yellen told Congress earlier this month that the Fed needed to look at more than just the unemployment rate to gauge the health of the labor market. Yellen indicated that the Fed’s outlook didn’t change much between December and the January meeting, making the tapering “an easy call”.

At the January meeting, Fed officials agreed unanimously to reduce the pace of its asset-purchase program by another $10 billion to $65 billion per-month. Overall, the January meeting was a rare moment of tranquility for the central bank, mainly remembered as the last policy deliberation under the leadership of ex-Fed chairman Ben Bernanke. The vote to taper was unanimous, the first since 2011.

Since the meeting, Fed officials have said they believe the weaker tone to the economic data since the New Year reflects bad weather rather than anything fundamental. Yellen also told the House Financial Services Committee that it would take a notable change in the outlook to derail what appears to be a $10 billion -per-meeting taper plan, noted Ian Shepherdson, chief economist at Pantheon Economics.

Fed officials will meet again on March 18-19. Economists expect the central bank to taper its asset purchase program by $10 billion once again.

The minutes of the Fed’s January meeting will be released at 2 p.m. Eastern.

Market Insights 2/14/2014

Bulls Roar

The equity markets closed the trading day higher as stocks posted their largest weekly advance of the year. Sentiment may have received a boost from some stronger-than-forecasted Eurozone GDP readings and calm Chinese inflation reports. In economic news, U.S. consumer sentiment came in above expectations, while other domestic reports showed import prices surprisingly rose and industrial production unexpectedly declined.

Treasuries were nearly unchanged following the data; however, volume was a bit on the light side ahead of the three-day Presidents’ Day holiday weekend, with all U.S. markets closed on Monday.

The Dow Jones Industrial Average increased 127 points (0.8%) to 16,154

The S&P 500 Index added 9 points (0.5%) to 1,839

The Nasdaq Composite was 3 points (0.1%) higher at 4,244

In moderately light volume, 618 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.05 to $100.30 per barrel, wholesale gasoline was $0.03 higher at $2.81 per gallon

The Bloomberg gold spot price increased $15.62 to $1,318.54 per ounce

Stocks chip away at 2014′s losses

The domestic equity markets posted a solid week of gains, reducing some of the red figures that have accompanied the start of 2014. Stocks showed resiliency in the face of an unexpected drop in January retail sales and a surprising increase in jobless claims, as the data continued to be discounted by the likely impact of the recent adverse weather conditions. Sentiment was underpinned by the debut of Federal Reserve Chairwoman Janet Yellen in front of Congress this week, where she said she expects “a great deal of continuity in the FOMC’s approach to monetary policy,” suggesting that the Central Bank’s current highly accommodative monetary will remain intact. Plus, the debt ceiling was extended to after the November elections in Congress.

Consumer sentiment holds steady, while industrial production unexpectedly declines

The preliminary University of Michigan Consumer Sentiment Index remained at January’s 81.2 level this month, compared to the decline to 80.2 that economists surveyed by Bloomberg had anticipated. The preliminary report came as a m/m decline in the economic conditions component was offset by an improvement in the outlook portion of the survey. On inflation, the 1-year outlook rose to 3.3%, from 3.1% in January, while the 5-year inflation outlook remained at 2.9%.

Treasuries were mostly flat following the data, with the yields on the 2-year note and the 30-year bond nearly unchanged at 0.31% and 3.69%, respectively, while the yield on the 10-year note ticked 1 bp higher to 2.74%.

Please note: In observance of the Presidents’ Day holiday, all U.S. markets will be closed on Monday.

Shortened week will likely focus on the Fed minutes

Next week’s economic calendar will include the Empire Manufacturing Index, the NAHB Housing Market Index, the housing starts and building permits report, the Producer Price Index, the Consumer Price Index, the preliminary Markit US PMI Index for February, the Philly Fed Manufacturing Index, the Index of Leading Economic Indicators, and existing home sales.

However, the focus for the week will likely be on the minutes from the January Federal Open Market Committee (FOMC) meeting. The reduced pace of asset purchases by the Fed, or “tapering,” has exacerbated problems for some emerging markets, but the Fed remains comfortable enough with economic progress in the United States to continue paring back purchases. However, for the past four years, the economy has underperformed compared to the elevated expectations at the start of the year. While we think 2014 could experience stronger economic growth, and long-term rates will likely continue to move higher, possibly testing the 3.5% to 3.75% region this year, it’s not a sure thing. We are closely watching real 10-year Treasury yields, bank credit, long-term unemployment and GDP for any material changes

European stocks higher following upbeat Eurozone GDP data

The European equity markets traded higher, as traders digested some stronger-than-expected GDP data out of the Eurozone. Preliminary 4Q Eurozone GDP grew at a 0.3% quarter-over-quarter pace, from the 0.1% growth rate in the previous quarter, and compared to the 0.2% expansion that economists had projected. The upbeat report was led by accelerated economic expansion out of Germany, France, and Spain, while Italy’s economy grew modestly after being flat in the previous quarter. Italian stocks moved nicely higher following the data and as Italian Prime Minister Letta tendered his resignation after his party withdrew support for him.

Stocks in Asia finished mixed following the resilient session for the U.S. markets yesterday in the face of some disappointing retail sales and employment data. In light regional economic news, reports out of China revealed that consumer and wholesale price inflation for January were mostly inline with economists’ forecasts, while Indian equities staged a late-day rally, on the heels of a report that showed the nation’s wholesale price inflation slowed more than anticipated for January.

Market Insights 2/12/2014

Rally Stalls

The U.S. indices closed the trading session in mixed fashion following yesterday’s impressive surge, which coincided with testimony from the Central Bank’s new Chairwoman Janet Yellen signaling that the Fed will continue its highly accommodative policy. The recent rally for stocks paused, despite some stronger-than-expected Chinese trade data and as both Legislative bodies passed a “clean” measure to suspend the debt limit on the federal government’s borrowing authority until March 2015, sending it on to President Obama to be signed into law.

The Dow Jones Industrial Average (DJIA) declined 31 points (0.2%) to 15,964,

The S&P 500 Index was flat at 1,819

The Nasdaq Composite rose 10 points (0.2%) to 4,201

In moderate volume, 639 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil added $0.43 to $100.37 per barrel, wholesale gasoline gained $0.01 to $2.76 per gallon

The Bloomberg gold spot price decreased $0.34 to $1,291.02 per ounce

Mortgage applications decline

The MBA Mortgage Application Index decreased 2.0% last week, after the index rose 0.4% in the previous week. The decline came as a 0.2% dip for the Refinance Index was accompanied by a 5.0% decline for the Purchase Index. Moreover, the average 30-year mortgage rate fell 2 basis points to 4.45%.

Treasuries were lower, with the yield on the 2-year note ticking 1 bp higher to 0.34%, the yield on the 10-year note gaining 4 bps to 2.76%, and the 30-year bond rate increasing 3 bps to 3.72%.

Tomorrow, the January advance retail sales report is likely to garner the Street’s attention, with the headline figure expected to come in flat month-over-month, after increasing 0.2% in December. Meanwhile, excluding autos, sales are forecasted to rise 0.1% compared to last month, following the 0.7% gain in December, while stripping out autos and gas, sales are also expected to increase 0.1%, after gaining 0.6% in the previous month.

Additionally, tomorrow’s domestic docket will yield the release of weekly initial jobless claims, which are expected to decrease slightly to a level of 330,000 from the prior week’s 331,000 level.

Europe and Asia mostly higher

The European equity markets finished mostly higher, following yesterday’s Congressional testimony by Fed Chairwoman Janet Yellen, in which she suggested the Central Bank will maintain its current highly accommodative monetary policy stance. Sentiment in the region received additional support as the Bank of England (BoE) boosted its forecast for economic growth to 3.4% this year, compared to the 2.8% estimate it issued in November.

Stocks in Asia finished higher in the wake of Fed Chair Yellen’s remarks to Congress and an upbeat read on Chinese trade. China reported stronger-than-expected trade data, as the nation’s exports jumped 10.6% y/y in January, after rising 4.3% in December, and compared to the 0.1% gain that was expected by economists. Also, China’s imports rose 10.0% last month, following December’s 8.3% rise, topping the 4.0% gain that was estimated. As a result, the country’s trade surplus unexpectedly widened. However, per Bloomberg, the data may have been distorted by false invoices and the recent Lunar New Year holiday.

Australia reported a decline in the nation’s consumer confidence, while a South Korean report revealed that the country’s unemployment rate unexpectedly moved higher last month. After the closing bell, India reported its industrial production declined by a smaller amount than expected for December, while the nation’s consumer price inflation slowed by a larger amount than forecasted for January. Finally, Japanese equities shrugged off a report that showed the island nation’s machine orders fell much more than expected for December as the Nikkei 225 Index returned to action following yesterday’s holiday.

Market Insights 2/11/2014

Stock Roll

U.S. equities finished higher for a fourth-consecutive session, as remarks from Fed Chair Janet Yellen in her first Congressional monetary policy testimony gave the bulls a boost after the Chairwoman indicated continuity in the Fed’s posture. Helping the cause, domestic small business optimism rose for a third-straight month to its highest level since August 2013, overshadowing a smaller-than-expected increase in wholesale inventories.

The Dow Jones Industrial Average rallied 193 points (1.2%) higher to 15,995

The S&P 500 Index jumped 20 points (1.1%) to 1,820

The Nasdaq Composite rose 43 points (1.0%) to 4,191

In moderate volume, 708 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.12 to $99.94 per barrel, wholesale gasoline gained $0.03 to $2.75 per gallon

The Bloomberg gold spot price increased $16.91 to $1,291.69 per ounce

Yellen On Fed policy; while small business optimism improves

Federal Reserve Chairwoman Janet Yellen conducted her semi-annual report on monetary policy and the outlook for the U.S. economy in front of the House Financial Services Committee, her first Congressional testimony as Fed Chair since being sworn in on February 3. Yellen “emphasized” that she expects “a great deal of continuity in the FOMC’s approach to monetary policy,” and she “strongly” supports the current policy strategy. Yellen added that if economic data broadly supports expectations of ongoing improvement in the labor market 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, while stressing that “purchases are not on a preset course.” Commenting on the softer-than-expected December and January employment reports, she noted that “we have to be very careful not to jump to conclusions in interpreting what those reports mean.” She pointed out that recent weather may have played a role and that it would take some time to get a true sense of the underlying trend. Yellen will conclude her Congressional testimony on Thursday in front of the Senate Banking Committee.

When the Fed first began to talk about tapering its bond purchases last spring, bond yields moved up sharply, but since short-term rates remained near zero, and many of the riskier sectors of the markets continued to attract capital. Now that the Fed is actually tapering, the higher risk sectors of the markets—like emerging market and high yield bonds—are losing ground to the less risky sectors like Treasuries and investment grade corporate bonds. In the weeks or perhaps months ahead, we think this trend could continue and volatility in the markets could remain high, with greater potential for losses.

Our view was that 10-year Treasury yields could move up toward the 3.5% region by years end on the premise that the real or inflation-adjusted yields would need to move back toward the long-term average. We aren’t ready to change that view yet, but we will be monitoring the economic data and the global financial markets to assess if that’s still a realistic expectation. We think bond investors would be better served by reducing exposure to riskier sectors of the fixed income markets than trying to ride out the storm.

Meanwhile, the National Federation of Independent Business (NFIB) Small Business Optimism Index improved in January to 94.1 from an unrevised 93.9 in December, where economists had expected the index to remain. This was the third-straight monthly improvement and the index hit the highest level since August 2013. The NFIB said owners did find a reason to be more positive about their own sales and plan more hiring, but they continue to find inventories “too high” and sales and earnings trends continued to deteriorate for more owners. The NFIB added that overall, the index is still just treading water, and is well below the pre-recession average of 100.

Treasuries ended lower on the data and Yellen’s comments, as the yield on the 2-year note rose 2 basis points to 0.33%, the yield on the 10-year note increased 6 bps to 2.72%, and the 30-year bond rate advanced 3 bps to 3.69%.

Europe and Asia higher

The European equity markets traded broadly higher, as the U.S. equity markets are posting gains for a fourth-straight session following Fed Chair Janet Yellen’s first Congressional testimony. Meanwhile, automakers in the region led the European Stoxx 600 Index to its fifth-straight gain following an increased outlook for auto sales growth in Western Europe from Goldman Sachs, per Bloomberg. In economic news, U.K. same-store sales rose much more than anticipated for January.

Stocks in Asia finished broadly higher following the three-day winning streak in the U.S., ahead of Fed Chair Yellen’s debut in front of Congress. However, volume was lighter than usual as Japanese markets were closed due to a holiday. China’s Shanghai Composite Index and the Hong Kong Hang Seng Index benefited amid some strength in financials following some upbeat analyst recommendations for stocks in the region and the sector. In economic news in the region, Australia’s business confidence and assessment of current conditions both improved for January, South Korea’s retail sales data for January was favorable, and India’s exports rose last month.

Janet Yellen on Capital Hill

Janet Yellen’s first appearance before Congress was notable as much for her style — a slower speaking pace than Ben Bernanke, and far more understandable than Alan Greenspan — as substance. But the Federal Reserve chairwoman did make notable policy points. Here are a few.

1.) The economy is still not “normal.”

We learned this in a back-and-forth with Rep. Jeb Hensarling, the chairman of the House Financial Services Committee, who pressed Yellen on why the Fed is basically ignoring its 6.5% unemployment threshold for considering interest rates.

“Congressman, I believe that I am a sensible central banker and these are very unusual times in which monetary policy for quite a long time has not even been able to do what a rule like the Taylor rule would have prescribed. For several years, that rule would have prescribed that the federal funds rate should be in negative territory, which is impossible,” Yellen said.

“So the conditions facing the economy are extremely unusual. I have tried to argue and believe strongly that while a Taylor rule or something like it provides a sensible approach in more normal times, like the great moderation, under current conditions when this economy has severe headwinds from the financial crisis and has not been able to move the funds rate into the negative territory that rule would have prescribed, that we need to follow a different approach.”

2.) We’re not quite at the point at which the debate over the labor-market participation rate matters for Fed policy.

The participation rate is near 35-year lows, and many have pointed out that the decline in this rate is because of aging baby boomers leaving the workforce. The debate isn’t esoteric — the question of labor-market slack is key to the Fed’s decisions on interest rates. All the while, Yellen’s comment suggests the Fed is not yet at the point at which the cyclical vs. structural debate will matter.

“So there’s no — no doubt in my mind that an important portion of this labor force participation decline is structural,” Yellen said. “That said, there may also be, and I’m inclined to believe myself based on the evidence, that there are also cyclical factors at work. So that decline has a structural component and also a cyclical component. There’s no sure-fire way to separate that decline into those two components, but it is important to realize that we’re seeing declining participation also among prime-age workers and among younger people.”

3.) Let’s chill out over the last two jobs reports.

They weren’t good. But Yellen is willing to look past them.

“There were weather factors — we’ve had unseasonably cold temperatures that may be affecting economic activity in the job market and elsewhere. The Committee will meet in March. We will have a broad range of data on the economy to look at, including an additional employment report, and I think it’s important for us to take our time to assess just what the significance of this is,” she said.

4.) What it would take for the Fed to actually hike the pace of bond purchases.

It doesn’t look likely at this point. But Yellen did spell out what conditions would be necessary.

“Well, I think a significant deterioration in the outlook, either for the job market or concerns — you know, very serious concerns that inflation would not be moving back up over time. But the Committee’s emphasized that purchases are not on a preset course and we will continue to evaluate the evidence,” she said.

5.) Emerging markets are on their own.

This is consistent with what other Federal Reserve officials have said, for sure, but Yellen reiterated that point.

“Well, certainly capital markets are global, and the monetary policies of any country affect other countries in such a world,” Yellen said when asked about what’s been happening in Indonesia, India, South Africa, Turkey and Brazil. “But we’ve been very clear at the outset that we initiated our program of asset purchases and an accommodative monetary policy more generally to pursue the goals that Congress has assigned to the Federal Reserve, namely supporting economic growth and employment in the context of price stability. We have tried to be as clear as we possibly can about how we would conduct this policy.”