Monthly Archives: November 2014

Market Insights 11/28/2014 – Friday’s Shortened Session

Stocks Pare Gains to Finish Flat in Condensed Week

Despite spending most of the day in positive territory, with consumer discretionary stocks getting a lift amid the focus on retailers on media reports of strong traffic on “Black Friday,” stocks finished an abbreviated session in a holiday-shortened week nearly unchanged.

Energy-related stocks applied most of the pressure, as crude oil prices tumbled in the wake of OPEC’s decision to not cut production amid a supply glut, while the fall in oil prices gave airline stocks a nice boost.

Treasuries finished higher as rates moved lower, as the U.S. economic calendar was void of any major releases today, while gold prices were lower and the U.S. dollar was higher.

The Markets…

The Dow Jones Industrial Average was nearly unchanged at 17,828

The S&P 500 Index was 5 points (0.3%) lower at 2,068

The Nasdaq Composite gained 4 points (0.1%) to 4,792

In light volume, 642 million shares were traded on the NYSE, and 985 million shares changed hands on the Nasdaq

WTI crude oil tumbled $6.32 to $67.37 per barrel, wholesale gasoline plunged $0.15 to $1.86 per gallon

The Bloomberg gold spot price declined $22.32 to $1,170.35 per ounce

Markets were higher on the week, as the DJIA increased 0.1%, the S&P 500 Index gained 0.2% and the Nasdaq Composite Index added 1.7%

Economic front quiet to close out the week

Treasuries finished higher, while the U.S. economic calendar offered no major releases today, as the yields on the 2-year note and the 30-year bond declined 5 basis points to 0.47% and 2.90%, respectively, while the yield on the 10-year note was 6 bps lower at 2.18%.

Stocks moved modestly higher during the holiday-shortened week, successfully notching a sixth-straight weekly advance and back-to-back monthly gains. Sentiment has been supported by carried over optimism from last week’s surprising rate cuts out of China and growing speculation that the European Central Bank will expand its asset purchase program to include government bonds, launching a full-fledged quantitative easing campaign. The heavy pressure on energy-related stocks amid the sell-off in oil prices and some mixed domestic economic data has kept the advance in check. This week, an unexpected upward revision to 3Q U.S. GDP growth to an annualized quarter-over-quarter rate of 3.9% was partially offset by surprising declines in Consumer Confidence and the University of Michigan Consumer Sentiment Index, softer-than-expected personal income and spending, a disappointing durable goods orders report, and a jump in weekly initial jobless claims.

Looking ahead to next week, the domestic economic calendar will bring some key reports for traders to digest, beginning with Monday’s release of the ISM Manufacturing Index, which will be accompanied by the final Markit Manufacturing PMI Index. However, the week will culminate with the headlining November non-farm payroll report. Retail sales rebounded in October, capital spending plans increased in the National Federation of Independent Business’ upbeat small business optimism survey, and the quit rate in the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey rose to its highest level since before the Great Recession. A greater number of workers willing to quit indicates greater confidence in the job market and should help to pressure wages higher in the coming months.

Other releases on next week’s economic calendar include: monthly auto sales, construction spending, MBA mortgage applications, ADP’s employment change, final 3Q nonfarm productivity and unit labor costs, Markit’s Services PMI Index, the ISM non-Manufacturing Index, the Fed’s Beige Book, jobless claims, the trade balance, factory orders, and consumer credit.

European equities mixed, seeing some pressure on energy-related weakness

The European equity markets reversed course to finish mostly higher, with the German market able to eke out a slight gain to add to its winning streak. Oil & gas issues sold off on the heels of yesterday’s sharp drop in oil prices as OPEC decided to not cut production to help alleviate a supply glut, keeping a lid on the gains across the pond. The decline in energy stocks overshadowed a solid advance in travel-related issues, particularly airlines, which benefitted from the decisive downward move in oil prices. Meanwhile, the headline eurozone November Consumer Price Index estimate decelerated to a 0.3% y/y increase, as expected, from the 0.4% rise in October. In other economic news in the region, German retail sales rose more than expected last month, while the eurozone unemployment held steady at 11.5%, as forecasted, for October.

European stocks have rallied for the month, posting their best performance since February, per Bloomberg, aided by growing speculation that the European Central Bank (ECB) will expand its asset purchases to include sovereign debt to combat the threats of deflation and a return to recession for the eurozone economy. Next week, the ECB and Bank of England are expected to deliver their monetary policy decisions, with economists projecting the central banks to leave their benchmark interest rates unchanged at record lows of 0.05% and 0.50%, respectively. Other key economic releases from the international front include: Markit’s global business activity releases, eurozone 3Q GDP, retail sales and the Producer Price Index, German factory orders, Canada’s unemployment rate, China’s manufacturing and services sector reports, as well as the Reserve Bank of Australia’s monetary policy decision and Australian 3Q GDP.

The U.K. FTSE 100 Index was nearly unchanged, Germany’s DAX Index inched 0.1% higher, France’s CAC-40 Index rose 0.2%, Switzerland’s Swiss Market Index gained 0.3%, and Spain’s IBEX 35 Index finished 0.4% higher, while Italy’s FTSE MIB Index fell 0.7%.

Asia mixed following data and oil weakness

Stocks in Asia finished mixed following some lackluster economic data and as energy-related issues saw some pressure as crude oil prices tumbled yesterday on OPEC’s decision to not cut production. Stocks in Japan gained ground, boosted by a weaker yen, while the nation reported that consumer price inflation decelerated more than expected and retail sales dropped more than projected for last month, though a separate report showed the country’s industrial production unexpectedly rose.

Chinese equities continued to rally, rising to the highest level since August 2011, supported by lingering optimism from last Friday’s surprising rate cuts by the People’s Bank of China. However, Australia’s market fell, dragged down by a sharp drop in oil & gas issues, while South Korean equities dipped in the wake of a report showing the nation’s industrial production unexpectedly fell in October. In other economic news in the region, India’s 3Q GDP expanded at a 5.3% y/y rate, a deceleration from the 5.7% growth in 2Q, but above the 5.0% pace of increased output that economists had expected.

Market Insights 11/26/2014 – Happy Thanksgiving !!

Domestic Data Keeps Markets Subdued Ahead of Holiday

U.S. equities finished modestly higher in lower volume ahead of tomorrow’s Thanksgiving holiday that will have all U.S. markets closed, and a shortened session on Friday.

An abundance of disappointing domestic economic data kept the markets in check, as core durable goods orders, jobless claims, personal income and spending, and housing sales fell short of expectations.

Energy stocks saw some weakness and crude oil prices declined on the eve of tomorrow’s highly-anticipated production meeting from OPEC. Treasuries finished higher following the data, while gold and the U.S. dollar were lower.

The Markets…

The Dow Jones Industrial Average gained 13 points (0.1%) to 17,828

The S&P 500 Index was 6 points (0.3%) higher at 2,073, sectors leading the way higher included technology (+.91%) HealthCare (+.61%) and Consumer Staples (+.45%), sectors moving lower included Energy (-1.26%) and Industrials (-.19%).

Meanwhile, SmallCaps gained .28% and MidCaps added .03%^.

The Nasdaq Composite increased 29 points (0.6%) to 4,787

In lighter pre-holiday volume, 695 million shares were traded on the NYSE, and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.40 to $73.69 per barrel, wholesale gasoline was unchanged at $2.01 per gallon

The Bloomberg gold spot price fell $2.93 to $1,198.05 per ounce

Heavy dose of domestic data fosters disappointment

Today’s data is likely dampening yesterday’s optimism that came courtesy of the stronger-than-expected 3.9% growth in 3Q U.S. GDP, but may be keeping premature Fed rate hike concerns at bay. We remain bullish and we are in a traditionally strong period seasonally for stocks. The trend is likely higher but risks exist and overconfidence is a threat.

Durable goods orders rose 0.4% month-over-month in October, compared to the Bloomberg forecast of a 0.6% decline, while September’s 1.3% drop was revised favorably to a 0.9% decrease. However, ex-transportation, orders declined 0.9% m/m in October, versus the forecast of a 0.5% gain, while September’s figure was upwardly revised to a 0.2% rise, from the 0.2% decline initially reported. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 1.3% m/m last month, compared to the projected 1.0% increase, while the 1.7% drop in September was revised to a 1.3% decline. The report showed demand for manufacturing goods and transportation equipment—led by a surge in new orders for defense aircraft and parts—both grew, while demand for most other categories of goods intended to last at least three years were lower.

Weekly initial jobless claims increased by 21,000 to 313,000 last week, well above economists’ expected 288,000 level, as the prior week’s figure was revised upward by 1,000 to 292,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 6,250 to 294,000, while continuing claims declined by 17,000 to 2,316,000, south of economists’ 2,348,000 forecast.

Personal income grew by 0.2% m/m in October, below economists’ projected 0.4% gain, while September’s 0.2% rise was un-revised. Personal spending rose by 0.2% m/m last month, versus the expected 0.3% gain, while September’s 0.2% decline was revised to a flat reading. The October savings rate as a percentage of disposable income remained at September’s downwardly revised 5.0% level. Meanwhile, the PCE Deflator was up 0.1% m/m, compared to the expected flat reading, matching the unrevised rate seen in September. Compared to last year, the deflator was 1.4% higher, matching expectations. Excluding food and energy, the PCE Core Index was up 0.2%, inline with forecasts, and the index was 1.6% higher y/y, versus expectations of a 1.5% rise.

The final University of Michigan Consumer Sentiment Index was surprisingly revised lower to 88.8 from the preliminary level of 89.4 for November, versus the expected 90.0 level, and compared to the 86.9 reading posted in October. The lackluster report came as both the components pertaining to current economic conditions and the economic outlook were revised lower. On inflation, the 1-year expectation was revised higher from 2.6% to 2.8%, and compared to October’s 2.9% figure, while the 5-year inflation outlook was unadjusted at 2.6%, down from the 2.8% rate posted last month.

The Chicago Purchasing Managers Index showed growth in Midwest activity decelerated more than expected, falling to 60.8 for November, from 66.2 in October, and versus expectations of a decline to 63.0, with a reading above 50 depicting growth.

New home sales rose 0.7% m/m in October, to an annual rate of 458,000 units from September’s downwardly revised 455,000 unit pace, and compared to the expected 471,000 rate. Within the report, the median home price rose 15.4% y/y and up 16.5% m/m at $305,000. The 212,000 units of new home inventory was 15.2% higher y/y, representing a rate of 5.6 months of supply at the current sales pace, up from the 5.5 figure posted for the previous month. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings. Regionally, m/m sales in the Midwest rose 15.8% and Northeast sales were 7.1% higher, while the South saw a 1.9% decline and sales in the West were 2.7% lower. Finally, sales in the West were 27.9% higher y/y, while sales in all other regions were lower compared to the same period a year ago.

Pending home sales fell 1.1% m/m in October, versus the projected 0.5% gain, and following the upwardly revised 0.6% increase registered in September. Compared to last year, sales were 2.2% higher last month, versus the 2.5% rise that was anticipated, and following September’s favorably revised 3.4% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly rose in October.

The MBA Mortgage Application Index fell 4.3% last week, after rising 4.9% in the previous week. The decline came as a 3.5% decrease for the Refinance Index was accompanied by a 4.8% drop for the Purchase Index, despite a decline in the average 30-year mortgage rate by 3 basis points to 4.15%.

Treasuries are higher in afternoon action following the data, with the yield on the 2-year note dipping 1 bp to 0.51%, while the yields on the 10-year note and the 30-year bond are decreasing 2 bps to 2.24% and 2.94%, respectively.

Please note: All U.S. markets will be closed on Thursday and will trade in an abbreviated session on Friday in observance of the Thanksgiving holiday.

Europe mixed but German markets continue winning streak

The European equity markets finished mixed, though German stocks advanced for a tenth-straight session. However, oil & gas stocks saw some pressure with uncertainty ahead of tomorrow’s Organization of the Petroleum Exporting Countries (OPEC) meeting festering regarding if the organization will cut production to help alleviate a supply glut. Meanwhile, yesterday’s stronger-than-expected U.S. 3Q GDP report was offset by today’s plethora of disappointing U.S. economic data.

Meanwhile, continued speculation that the European Central Bank (ECB) may be set to expand its stimulus measures to include the purchases of government bonds remained, with ECB Vice President Constancio noting that the central bank will have to consider buying sovereign debt early next year if needed. In economic news, U.K. 3Q GDP growth was unrevised at a 0.7% quarter-over-quarter pace, as expected, decelerating slightly from the 0.9% expansion posted in 2Q. Elsewhere, German import prices declined by a smaller rate than forecasted for October, while French consumer confidence improved more than expected for November.

The U.K. FTSE 100 Index finished flat, France’s CAC-40 Index declined 0.2%, Spain’s IBEX 35 Index decreased 0.5%, and Italy’s FTSE MIB Index descended 0.4%, while Germany’s DAX Index rose 0.6% and Switzerland’s Swiss Market Index gained 0.2%.

Black Friday, Cyber Monday Sales Mislead Investors

Obsessing about Black Friday and Cyber Monday is a pointless exercise for investors. In fact, retail sales on these two most-watched days may even be worse than worthless, pointing you in the opposite direction of where you should go.

However, try telling that to your fellow investors and TV pundits. Virtually everyone appears to be obsessing over every data point and every potential tea leaf in hopes of finding out what the holiday season may tell us about the economy in general and the stock market in particular.

To appreciate the futility of their obsession, consider what happened last year. Initial retail sales figures from Black Friday and Cyber Monday were disappointing, and the stock market dutifully fell. But, the Dow Jones Industrial Average (DJIA), rose 3.5% till the end of the year.

Or take what happened in 2008 in the depths of the financial crisis. Initial Black Friday and Cyber Monday reports that year were particularly disappointing, and the Dow plunged by 6.6% over those two days. Nevertheless, from then through the end of the year, the Dow rose 7.7%.

These two data points are not an outlier.

Looking into the Dow’s performance over the Friday and Monday following Thanksgiving, along with its return, from the “big shopping weekend” till the end of the year. The data was reviewed back to the mid 1970s, which is when, according to Wikipedia, the term “Black Friday” began to be widely used to refer to the big shopping day on the Friday after Thanksgiving. (The data for years prior to 1975 tell the same story.)

**Click to Enlarge**

MW-DA102_dow_th_20141125141921_MG

Notice the inverse correlation: The Dow’s initial reaction to the sales figures is, more often than not, just the opposite direction to how it performs from then until the end of the year.

To be sure, this inverse correlation is not significant at the 95% confidence level that statisticians typically use to determine if a pattern is genuine. So the bulls would be reading too much into those results if they now started to secretly hope that the retail sales this Friday and Monday will be worse than expected.

The proper conclusion to draw: fuhgettaboutit. The retail sales numbers you’ll get over the next few days will be close to worthless. Focus instead on having a happy Thanksgiving!

Market Insights 11/25/2014

Stocks Hovering at Record Highs

The U.S. equity markets finished slightly lower, pausing at record highs following a surprise upward revision to 3Q domestic GDP growth and a rise in housing prices.

However, separate reports showed Consumer Confidence unexpectedly fell and regional manufacturing growth slowed much more than expected. Treasuries were higher and yields fell, while gold, the U.S. dollar and crude oil prices are all lower.

Overseas, European equities finished mostly higher on lingering hopes of expanded stimulus efforts from the European Central Bank.

The Markets…

The Dow Jones Industrial Average was lower by 3 points to 17,815

The S&P 500 Index was lower by 2 points to 2,067

The Nasdaq Composite ended the day higher by 3 points to 4,758

Volume was moderate ahead of the Holiday break.

WTI crude oil is lost $1.96 to a 4 year low of $73.81, while wholesale gasoline is flat at $2.02 per gallon

The Bloomberg gold spot price gained $4 by days end to $1,201

3Q GDP unexpectedly revised upward, while Consumer Confidence surprisingly drops

The second look (of three) at 3Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 3.9%, revised up from the 3.5% expansion reported in the first report. This compared to the Bloomberg expectation of a downwardly adjusted 3.3% increase. 2Q GDP expanded by an unrevised 4.6%. Also, personal consumption rose 2.2% for 3Q, revised from the 1.8% increase previously reported, and compared to the projected 1.9% gain. Personal consumption grew by an unrevised 2.5% in 2Q. Along with the stronger-than-expected personal consumption, the unexpected upward GDP revision came as private inventory investment and nonresidential fixed investment were both adjusted higher, partially offset by a downward revision to exports and an upward revision to imports.

On inflation, the GDP Price Index was upwardly revised to a 1.4% increase from its earlier report of a 1.3% rise, with economists anticipating an unadjusted reading, while the core PCE Index, which excludes food and energy, matched expectations of an unrevised 1.4% gain.

Today’s report showed nonresidential fixed investment—the formal definition of capital spending (capex)—contributed 0.88 percentage points to the stronger-than-expected annualized 3Q GDP growth rate and tomorrow’s plethora of economic releases will be headlined by the October durable goods orders report, giving us a look at manufacturing demand and business spending to begin 4Q. Headline durable goods orders are projected to decline 0.6% month-over-month, following the 1.3% drop in September, while excluding transportation, orders are expected to rise 0.5% last month, after decreasing 0.2% in prior month. Nondefense capital goods orders excluding aircraft, considered a proxy for business spending, are anticipated to rise 1.0%, following the 1.7% drop in September. U.S. GDP has seen a healthy contribution by capex and the tide may be shifting away from companies returning cash to shareholders toward capex. All good news, as capex’s leading indicators point to further economic improvement.

The Consumer Confidence Index unexpectedly fell to 88.7 in November—the lowest since June—from a downwardly revised 94.1 in October and compared to economists’ projected 96.0 level. The disappointing report came as a m/m drop in the component pertaining to expectations of business conditions was accompanied by a decrease in sentiment regarding the present situation. Finally, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—deteriorated to -13.2 from -12.5 last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 4.9% y/y in September, compared to the 4.6% increase that economists had expected. Moreover, month-over-month (m/m), home prices were higher by 0.3% on a seasonally adjusted basis for September, matching forecasts.

The Richmond Fed Manufacturing Activity Index showed growth in the Mid-Atlantic region decelerated much more than expected in November, dropping to 4 from 20 in October, and compared to the decline to 16 that economists had expected, with a reading above zero depicting expansion.

Treasuries were mixed in afternoon action following the diverging data, with the yield on the 2-year note ticking 1 basis point higher to 0.53%, while the yield on the 10-year note is dipping 1 bp 2.29% and the 30-year bond rate is decreasing 2 bps to 3.00%.

Europe gains ground on continued ECB stimulus hopes

The European equity markets traded mostly higher, with sentiment remaining buoyed by optimism that the European Central Bank (ECB) could be moving closer to a full-fledged quantitative easing campaign. ECB stimulus optimism has fueled a rally in European stocks as of late, with the German markets posting their biggest nine-day jump since May 2013, per Bloomberg. However, stocks pared early gains on the mixed U.S. economic data, which followed Germany’s unrevised 3Q GDP growth of 0.1% quarter-over-quarter, matching expectations and rebounding modestly from the 0.1% q/q contraction posted in 2Q.

In other economic news, French manufacturing and business confidence reports both showed improved sentiment for this month, while Spanish producer price inflation declined in October and Italian retail sales dipped for October. Finally, Bank of England Governor Carney offered some dovish commentary, pointing out a “heightened degree of external risks to the U.K.”

The U.K. FTSE 100 Index finished flat and Switzerland’s Swiss Market Index declined 0.2%, while Germany’s DAX Index gained 0.8%, France’s CAC-40 Index rose 0.3%, Italy’s FTSE MIB Index advanced 0.4% and Spain’s IBEX 35 Index increased 0.5%.

U.S. Q3 Growth Raised to 3.9%

The economy in the second and third quarters posted its best back-to-back growth in 11 years, offering fresh evidence that the U.S. entered the final three months of the year with a good head of momentum.

The government on Tuesday said gross domestic product rose at a 3.9% annual pace in the third quarter instead of 3.5%. Combined with a 4.6% gain in the second quarter, the U.S. has posted its best six-month stretch of growth since the middle of 2003. GDP reflects the value of all goods and services produced by the U.S. and it’s the best measure of the nation’s economic health. Consumer spending, business investment in equipment and the buildup in inventories were all higher than initially estimated. That accounted for the upward revision in third-quarter growth.

The upward revision came as a surprise as Economists polled by MarketWatch had expected the government to mark down growth to 3.3%.

Inside the GDP report

The increase in consumer spending, which reflects more than two-thirds of U.S. economic activity, was raised to 2.2% from a first read of 1.8%. Households spent more at retail stores and on auto fuels than previously reported. The increase in business investment in equipment, another major source of economic growth, was revised up to 10.7% from 7.2%. Companies also boosted inventories, which add to GDP, by $79.1 billion instead $62.8 billion.

On the downside, export growth was lowered to 4.9% from 7.8%, a sign that slower growth in Europe and Asia is taking a small bite out of the U.S. economy. Imports fell at a 0.7% annual rate vs. a prior estimate of 1.7%. Most other figures in the GDP report were little changed.

The third-quarter performance dovetails with a raft of evidence showing that the trajectory of an economy has accelerated sharply after a big letdown early in the year. The U.S. is on track to add the most new jobs since 1999 and sectors from manufacturing to retail continue to gain strength.

A plunge in gasoline prices is also fueling renewed optimism about the economy heading into a new year. Consumers are saving $50 or more each month at the gas pump and falling energy costs have reined in inflation after a brief spike in the spring.

Inflation as measured by the PCE index rose at a 1.3% annual rate in the third quarter. That’s down from 2.3% in the prior period.

In the fourth quarter, economists polled by MarketWatch predict the U.S. will grow at a 2.6% rate. A healthy increase in consumer spending could be partly offset by a downturn in federal spending and slower export growth.

The wild card is business inventories. Companies could cut back on production if inventory levels get too high, depressing fourth-quarter growth. Yet that’s unlikely to happen if sales during the holiday season turn out to be as strong as predicted.

Meanwhile, corporate profits slowed sharply in the third quarter, fresh data reveal. The pretax earnings of U.S. companies rose at a 2.1% annual pace, adjusted for depreciation and the value of inventories. That’s down from a 8.4% advance in the second quarter.

Market Insights 11/24/2014

Stocks Advance to Start Week

The U.S. equity markets gained a bit of weight to start out the Thanksgiving holiday-shortened week as the Dow was able to trim losses in the final minutes of trading and push into positive ground.

In the wake of Friday’s global central banking developments, sentiment received some additional support as German business confidence improved for the first time in seven months, while domestic reads showed that U.S. services sector growth unexpectedly decelerated, but regional manufacturing output expanded more than expected.

Treasuries were slightly higher ahead of tomorrow’s second look at 3Q GDP. The U.S. dollar, gold and crude oil prices were all lower.

The Markets…

The Dow Jones Industrial Average added 8 points to 17,818

The S&P 500 Index was 6 points (0.3%) higher at 2,069

The Nasdaq Composite increased 42 points (0.9%) to 4,755

In moderate volume, 706 million shares were traded on the NYSE, and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.73 to $75.78 per barrel, wholesale gasoline was down $0.02 at $2.02 per gallon

The Bloomberg gold spot price lost $3.78 to $1,197.77 per ounce

Services sector activity surprisingly slows to kick off a holiday-shortened week

The preliminary Markit U.S. Services PMI Index showed growth in the sector surprisingly decelerated to 56.3 in November from 57.1 in October, and compared to the modest increase to 57.3 that economists surveyed by Bloomberg had expected, with a reading above 50 denoting expansion. Markit said the fifth-straight monthly deceleration came amid a slower upturn in new business, while the solid pace of job creation continued in November. The release is independent and differs from the Institute for Supply Management’s (ISM) non-Manufacturing Index, as it has less historic value and Markit weights its index components differently. Markit’s services sector gauge is the companion to its manufacturing index, which last week also unexpectedly declined, decreasing to 54.7 for this month, from 55.9 in October.

The Dallas Fed Manufacturing Index showed growth in activity for the region topped expectations, remaining at October’s 10.5 level for this month, compared to the 9.0 figure that was forecasted, with readings above zero denoting expansion.

Treasuries were higher, with the yields on the 2-year and 10-year notes, along with the 30-year bond, all ticking 1 basis point lower to 0.49%, 2.30% and 3.01%, respectively.

Today’s data kicks off a shortened week, with the U.S. markets being closed on Thursday and closing early on Friday in observance of the Thanksgiving holiday.

Tomorrow, the U.S. economic calendar will offer the second look (of three) at 3Q GDP, forecasted to show a 3.3% quarter-over-quarter annualized rate of expansion, down slightly from the 3.5% growth reported in the first release. The docket will also offer some housing data with the release of the S&P/Case-Shiller Home Price Index, expected to show a 4.6% y/y increase during September, while additionally, the Consumer Confidence Index will be reported, forecasted to show an increase in November to a level of 96.0 from the 94.5 posted the month prior. Lastly, we will receive the Richmond Fed Manufacturing Index, with economists anticipating manufacturing activity in the mid-Atlantic region decelerated to a level of 16 for November from the 20 posted in October, with a reading above zero denoting expansion.

Europe mixed on German business sentiment and profit warning out U.K. energy sector

The European equity markets finished mixed, with banking stocks seeing some strength on the heels of Friday’s comments from European Central Bank President Mario Draghi, which suggested a full-fledged quantitative easing campaign may be in the offing. The comments preceded unexpected rate cuts out of China as global economies remain weak, but we are seeing a glimmer of hope from stepped up responses from foreign central banks, which could help to stimulate asset growth.

China’s move to slash lending rates to address slowing economic growth may lack punch as banks likely will hesitate to lower the cost of loans for fear of hurting their profits. The People’s Bank of China on Friday lowered interest rates on both deposits and loans, but it cut benchmark lending rates more than it cut rates on deposits, while allowing banks more flexibility in setting rates paid to depositors. The steps were designed to help Chinese banks attract savers and get the banks to lower funding costs for businesses, especially small and private entrepreneurs.

Meanwhile, with the ECB, China and Japan all easing monetary policy, the U.S. and U.K. appear closer to tightening however having learned from the experience of other central banks over the past five years, the Fed and Bank of England may raise rates slowly (compared to past rate hikes) and end those rate hikes at lower levels than in the past. Modest rate hikes in 2015 may be welcomed by stock markets if accompanied by signs of stronger and sustainable growth. However, if the rate hikes prove to be much like the others over the past five years, policymakers may be forced to lower them right back down again—and bring the stock market down with them.

European sentiment got a boost from a favorable read on German business confidence. The German Ifo Business Climate Index, based on a survey of 7,000 executives, surprisingly improved for the first time since April to 104.7 this month, from 103.2 in October, and compared to the dip to 103.0 that economists had projected. However, U.K. stocks lagged behind, amid a tumble in shares of Petrofac Ltd. after the oil & gas facilities solutions company issued a profit warning due to project delays stemming from the recent drop in oil prices.

The U.K. FTSE 100 Index was down 0.3%, Switzerland’s Swiss Market Index declined 0.2%, and Italy’s FTSE MIB Index dipped 0.1%, while Germany’s DAX Index and France’s CAC-40 Index rose 0.5%, and Spain’s IBEX 35 Index gained 1.2%.

Stocks in Asia finished broadly higher as sentiment across the region was bolstered in the wake of Friday’s unexpected announcement from the People’s Bank of China (PBOC) that it will cut its benchmark lending and deposit rates, marking the first rate cuts since July 2012. Chinese equities rose as the action from the PBOC eased concerns that the nation could miss its 7.5% target economic growth rate. However, volume was lighter than usual, with the markets in Japan closed for a holiday.

Easy Money, Here To Stay ?

Despite the Federal Reserve ending its purchases of Treasury bonds, U.S. monetary policy remains accommodative — and will be for a long time to come. The downside is too great. Withdrawing fiscal stimulus would slow economic activity. Reduction in government services and higher taxes hits disposable incomes, especially when wage growth is stagnant. In turn, this leads to a sharp contraction in consumption. Slower growth, exacerbated by high fiscal multipliers, makes it difficult to correct budget deficits and control government debt levels.

Accordingly, the Fed’s ability to reverse an expansionary fiscal policy is restricted, at best, corroborating economist Milton Friedman’s sarcastic observation: “There is nothing so permanent as a temporary government program.”

The Fed is basically stuck. Its ZRIP QE policies are difficult to change. Normalization of interest rates, reducing purchases of government bonds, and the reduction of central bank holdings of securities, all risk risks higher rates and reduced available funding for economic expansion. Low rates, meanwhile, allow overextended companies and nations to maintain or increase borrowings.

Central banks also cannot sell government bonds and other securities held on their balance sheet. The size of these holdings means that disposal would lead to higher rates, resulting in large losses to the central bank as well as commercial banks and investors. The reduction in liquidity would tighten the supply of credit, destabilizing a fragile financial system.

In 2013, the Federal Reserve’s tentative “taper,” in effect a slight reduction in bond purchases, triggered market volatility. Resulting higher mortgage rates slowed the rate of refinancing of existing mortgages and the recovery of the housing market. A 1% rise in rates would increase the debt-servicing costs of the U.S. government by around $170 billion. A rise of 1% in G-7 interest rates would increase the interest expense of the G-7 countries by around $1.4 trillion.

Higher interest rates would also affect indebted consumers and corporations. In the U.S., for example, a 1% increase in interest rates, according to a McKinsey Global Institute Study, would increase household debt payments collectively to $876 billion from $822 billion, a rise of 7%.

According to the Bank of International Settlements, a 3% increase in government bond rates would result in a change in the value of outstanding government bonds ranging from a loss of around 8% of GDP for the U.S. to around 35% for Japan.

Yet despite a conspicuous lack of success, central bankers persist with the same policies. Central banks have convinced themselves that ZIRP and QE policies are temporary, believing they will be able to exit from a policy of low rates when appropriate.

The balance-sheet expansion required by QE programs exposes a central bank to the risk of losses on its holding of securities from defaults or (more realistically) higher yields, ironically if the economy recovers and rates rise. In theory, there is no limit to the size of the losses a central bank can incur.

And while central banks have not maxed out their capacity to act, and inflation remains low, existing policy does not address pressing issues and may not be capable of restoring economic health.

Market Insights 11/21/2014

Global Central Banks Stimulate a Rise in Equities

The U.S. equity markets ended the week in record fashion once again as the major domestic indices pushed higher following an unexpected announcement from the People’s Bank of China signaling that it will cut its benchmark lending rates for the first time in more than two years.

In the wake of the surprise announcement additional support for stocks arose as European Central Bank President Draghi suggested a possible broadening of the intervention channels the central bank may utilize in its current stimulus efforts.

Treasuries were higher despite the lone report out on the economic docket showing a slightly better-than-expected read on regional manufacturing while gold, the U.S. dollar and crude oil prices were all higher.

The Markets…

The Dow Jones Industrial Average increased 91 points (0.5%) to 17,810

The S&P 500 Index was 11 points (0.5%) higher at 2,064, sectors leading the index higher included Energy (+1.3%), Materials (+1.22%) and Industrials (+.97%). For the week Energy led the way with a 2.37% gain followed by materials better by 1.87% and Consumer Discretionary was higher by 1.32%. Sectors lagging for the week included Financial -.21% and HealthCare which was only ahead by +.28%.

Small and MidCaps lagged the S & P 500 with the SmallCap 600 higher by .07% and MidCaps higher by .45%

The Nasdaq Composite added 11 points (0.2%) to 4,713

In moderately heavy volume, 1.0 billion shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.66 to $76.51 per barrel, wholesale gasoline was $0.02 higher at $2.04 per gallon

The Bloomberg gold spot price added $7.53 to $1,201.32 per ounce

Markets were higher on the week, as the DJIA increased 1.0%, the S&P 500 Index gained 1.2% and the Nasdaq Composite Index added 0.5%

Regional manufacturing activity accelerates, headlining today’s light economic calendar

The Kansas City Fed Manufacturing Activity Index showed growth in the Midwest region accelerated more than expected in November, increasing to 7 from 4 in October, compared to the improvement to 6 that economists had expected, with a reading above zero depicting expansion.

Treasuries are mostly higher in afternoon action, with the yield on the 2-year note nearly unchanged at 0.51%, while the yield on the 10-year note is declining 2 basis points to 2.32% and the 30-year bond rate is decreasing 3 bps to 3.03%.

Quick Weekly Recap – Stocks Push Higher

A fifth-straight weekly rally for domestic stocks manifested despite festering global growth concerns as Japan’s 3Q GDP unexpectedly contracted to signal a technical recession, while manufacturing data in China disappointed and growth in eurozone business activity slowed. Preceding Friday’s surprise rate cuts in China and heightened stimulus optimism courtesy of the ECB’s Draghi, M&A news surged, with Halliburton Co.’s near $35 billion deal to acquire Baker Hughes Inc. and Actavis PLC.’s $66.0 billion agreement to acquire Botox maker Allergan Inc.

The retail sector posted favorable earnings results, highlighted by reports from Dow member Home Depot Inc., Target Corp. and Best Buy Co. Inc. On the economic front, Leading Indicators rose more than expected, while reports on homebuilder sentiment, existing home sales, and building permits. were better than expected. Finally, concerns about a sooner-than-expected Fed rate hike were held in check, as the minutes from the Federal Open Market Committee’s October meeting showed policymakers remain concerned about the risks of slowing global growth and the rally in the U.S. dollar, while becoming more attentive to the possible threat of deflation.

Next week data will remain robust despite short week

With the U.S. markets closed on Thursday and closing early on Friday in observance of the Thanksgiving holiday, the economic calendar will cram in a full week’s worth of data ahead of the break, headlined by the second look at 3Q GDP, durable goods orders and Consumer Confidence.

Other releases on next week’s U.S. economic calendar include: Markit’s U.S. Services PMI Index, the Dallas Fed Manufacturing Index, the S&P/Case-Shiller Home Price Index, the Richmond Fed Manufacturing Index, MBA mortgage applications, jobless claims, personal income and spending, the Chicago PMI Index, the final November University of Michigan Consumer Sentiment Index, pending home sales, and new home sales.

Next week’s international releases include: business and consumer sentiment, retail sales, 3Q GDP and CPI data out of Germany, French consumer spending, U.K. 3Q GDP, eurozone CPI and unemployment, Japanese CPI, retail sales and industrial production, China’s industrial profits, and Canadian retail sales and September GDP.

Europe rallies as surprise China rate cuts met with Draghi’s pledge to boost inflation

The European equity markets rallied broadly, led by oil & gas and basic materials stocks, as the unexpected rate cuts by China were preceded by comments from European Central Bank (ECB) President Mario Draghi, suggesting expanded stimulus measures may be in the offing. After signaling that its asset purchases could be expanded to cover government bonds earlier in the week.

Draghi noted at a conference in Germany today that, “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires.” Draghi also noted that although longer-term indicators are on the whole within a range that it considers consistent with price stability, “Over shorter horizons, however, indicators have been declining to levels that I would deem excessively low.”

Separately, the ECB announced that it has begun the purchase of asset-backed securities. The ECB faces challenges in order to deploy a U.S.-style quantitative easing campaign, the ECB’s existing programs face a legal threat, and its plan to take aggressive action to stimulate the economy and avert another crisis is being shut down. However, the ECB has been effectively shut down from buying government bonds—as the Federal Reserve and Bank of England have done—by some policymakers within the ECB who see such measures as directly aiding certain countries. The ECB is only now beginning to buy bonds from the private sector as it seeks to grow its balance sheet by one trillion euros over the next year. These efforts by the ECB could be too little, too late to foster much of a rebound in economic growth, which may lead to under-performance by the European stock market.

The U.K. FTSE 100 Index was up 1.1%, Germany’s DAX Index increased 2.6%, France’s CAC-40 Index rose 2.7%, Spain’s IBEX 35 Index gained 3.1%, Italy’s FTSE MIB Index advanced 3.9%, and Switzerland’s Swiss Market Index traded 1.0% higher.

Stocks in Asia finished mostly to the upside following a plethora of upbeat earnings and economic reports out of the U.S. yesterday, which overshadowed disappointing business activity reports out of China and the Eurozone. Japan’s Prime Minister Abe dissolved the nation’s lower house of parliament, paving the way for a snap election in the wake of his decision to delay a second sales-tax hike. Gains for Japanese stocks came even as the yen rose on the heels of comments from Finance Minister Aso warning that the yen’s drop this week was too fast.

Chinese equities advanced with the markets continuing to acclimate to this week’s beginning of the trade link between the Hong Kong and Shanghai exchanges. South Korea’s Kospi Index was higher, aided by the comments from Japan’s Finance Minister regarding this week’s drop in the yen, which has weighed on the outlook for South Korea’s trade activity. However, the biggest news out of the region came after the closing bell, as China unexpectedly announced that it will cut its benchmark lending rates for the first time since July 2012, buoying global sentiment and easing concerns about the nation possibly missing its 7.5% target annual growth rate.

Word of The Day

Economic Stimulus

Attempts by governments or government agencies to financially stimulate an economy. An economic stimulus is the use of monetary or fiscal policy changes to kick start a lagging or struggling economy. Governments can use tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few, to accomplish this.

Fresh Records on Draghi, China Stimulus Plans

The S&P 500 and the Dow Jones Industrial Average soared in early trade, setting intra-day records after a fresh dose of liquidity from China’s central bank and dovish comments from European Central Bank President Mario Draghi.

The S&P 500 SPX, +0.75% and the Dow Jones Industrial Average DJIA, +0.74% scored their biggest percent gains in three weeks. The Nasdaq Composite COMP, +0.73% also rallied to higher levels.

China’s central bank cut its one-year loan rate by 0.4 percentage points and its one-year deposit rate by 0.25 percentage points while saying it would allow more flexible deposit rates.

Then ECB said it began buying asset-backed securities Friday, expanding its quantitative easing regimen. Before that, Draghi said the ECB will do what it “must to raise inflation and inflation expectations as fast as possible,” at a banking conference in Frankfurt. The comments were taken as a sign the ECB will step-up asset buying. The asset-backed securities (ABS) purchases represent the second leg of the ECB’s quest to catalyze growth by expanding its balance sheet. In September, the central bank began buying covered corporate bonds, which are guaranteed against a company’s assets.

After China’s move, the majority of the world’s big central banks now have loose policies, while there’s growing consensus that the Fed and the Bank of England will hold off near-term tightening. In light of this, stocks have been bid for the majority of the morning session and apart from some de-risking of portfolios and balance sheets ahead of the weekend, we cannot see any reason for a major correction. It’s onward and upward in our opinion with added fuel from traditional Santa Claus rallies and the January effect.

On Thursday, the S&P 500 SPX, +0.75% logged its 44th record close this year after a marginal 0.2% gain to 2,052.75. The Dow industrials DJIA, +0.75% logged a 27th record close. Trading volumes were thin, something Goldman Sachs said investors should get used to in the coming year.

Europe got a big lift from Draghi’s comments and China, with the Stoxx 600 index SXXP, +1.99% up 2%, while the euro EURUSD, -0.98% slid against the dollar. The yen USDJPY, -0.51% rose against the dollar to around ¥117.89 after Japan Finance Minister Taro Aso said the yen had declined “too fast“ in the past weeks. The Nikkei 225 NIK, +0.33% snapped a four-day losing streak, rising along with the yen.

Market Insights 11/20/2014

Upbeat Data Elevates Stocks

An abundance of favorable domestic earnings and economic reports flooded the Street, influencing the U.S. equity markets to a higher close as the data helped stocks overcome some earlier weakness that arose courtesy of some disappointing business activity reports from across the globe.

Treasuries were also higher despite the U.S. economic docket revealing an unexpected increase in existing home sales and a surge in regional manufacturing activity, while a read on Leading Indicators also came in better than expected.

Additional releases showed that consumer price inflation was flat month-over-month and weekly jobless claims decreased by a smaller than expected amount. Gold was higher, crude oil prices were mixed and the U.S. dollar was nearly unchanged.

The Markets….

The Dow Jones Industrial Average added 33 points (0.2%) to 17,718

The S&P 500 Index was 4 points (0.2%) higher at 2,053, sectors leading the average higher were Energy (1.25%), Technology (.51%) and Materials (.52%), providing the drag were Consumer Staples (-.43%), HealthCare (.42%) and Utilities (-.22%).

SmallCap and MidCaps had good days with SmallCaps up 1.15% and MidCaps up .50%.

The Nasdaq Composite increased 26 points (0.6%) to 4,702

In moderate volume, 656 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil gained $1.35 to $75.85 per barrel, wholesale gasoline was down $0.01 at $2.03 per gallon

The Bloomberg gold spot price gained $12.82 to $1,195.51 per ounce

Robust economic calendar highlighted by home sales, LEI, and regional manufacturing

Existing-home sales in October surprisingly grew, rising 1.5% month-over-month to a 5.26 million annual rate—the highest rate since September 2013—exceeding the Bloomberg forecast of a dip to 5.15 million and posting the first y/y increase in a year. September’s figure was revised higher to a 5.18 million unit pace. The median existing-home price rose 5.5% from a year ago to $208,300. Single-family home sales rose 1.3% m/m, and are now 2.9% higher y/y, while multi-family sales were up 3.3% m/m, and were flat compared to the same period a year ago. The supply of homes available for sale declined 2.6% compared to last month to 2.22 million units, equating to 5.1 months of supply at the current sales pace, but was 5.2% higher y/y.

The National Association of Realtors (NAR) said sales in the Northeast, South and Midwest were all higher m/m and y/y, while sales in the West were down for both periods. Sales of existing homes make up the bulk of the U.S. housing market and reflect closings from contracts entered one-to-two months earlier. NAR Chief Economist Lawrence Yun noted, “buyers continue to be encouraged by interest rates at lows not seen since last summer, improving levels of inventory and stabilizing price growth. The job market has shown continued strength in the past six months. This bodes well for solid demand to close out the year and the likelihood of additional months of year-over-year sales increases.”

The Consumer Price Index (CPI) showed prices at the consumer level were flat month-over-month in October, compared to economists’ forecast of a 0.1% dip, while September’s 0.1% rise was unrevised. Moreover, the core rate, which strips out food and energy, rose 0.2% m/m in October, above the projected 0.1% gain, and September’s 0.1% rise was unadjusted. On a y/y basis, consumer prices were 1.7% higher for the headline rate, above the forecasted 1.6% rise, while the core rate was 1.8% higher, versus the expected 1.7% increase. September’s y/y figures showed unrevised gains of 1.7% for both the headline and core rates.

Weekly initial jobless claims declined by 2,000 to 291,000 last week, above the expected 284,000 level, as the prior week’s figure was revised upward by 3,000 to 293,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 1,750 to 287,500, while continuing claims fell by 73,000 to 2,330,000, south of economists’ forecasts of 2,370,000.

The Conference Board’s Index of Leading Economic Indicators (LEI) increased 0.9% m/m in October, above the projected 0.6% growth, while September’s 0.8% gain was revised to a 0.7% rise. The report showed positive contributions from components pertaining to the yield curve, ISM new orders and jobless claims, while the index was negatively impacted by stock prices.

The preliminary Markit U.S. Manufacturing PMI Index for November unexpectedly declined to 54.7 from October’s 55.9 level, and compared to the increase to 56.3 that economists had expected, with a reading above 50 denoting expansion. The index hit a 10-month low, driven by softer output and new order growth, while new export sales declined at the sharpest pace since June 2013. The release is independent and differs from the Institute for Supply Management’s (ISM) Manufacturing Index, as it has less historic value and Markit weights its index components differently.

Finally, the Philly Fed Manufacturing Index showed growth for the mid-Atlantic region surprisingly surged in November, jumping to 40.8—the highest since December 1993—from 20.7 in October, and compared to the decrease to 18.5 that was forecasted. Readings above zero denote expansion.

Today’s data was mostly positive, highlighted by the unexpected growth in existing home sales, stronger-than-expected Leading Indicators and surge in regional manufacturing data, adding credence to our view that the fundamental support for U.S. stocks continue to look solid, despite ample headwinds, such as tighter Fed policy, inflation/deflation risks, Eurozone economic woes, and weak wage growth.

Treasuries were higher, with the yields on the 2-year note and the 30-year bond losing 2 basis points to 0.51% and 3.05%, respectively, while the yield on the 10-year note was 3 bps lower at 2.33%.

Europe finishes mixed after disappointing eurozone business activity report

The European equity markets ended mixed following yesterday’s release of the U.S. Federal Reserve’s minutes that indicated policymakers have become more attentive to the possible threat of deflation. As well, sentiment was dampened by a disappointing read on Eurozone business activity, which overshadowed the upbeat earnings and economic reports out of the U.S. The preliminary Markit Eurozone Composite PMI Index—a gauge of output from both the manufacturing and services sectors—declined to 51.4 in November, from 52.1 in October, and compared to the 52.3 level that economists had projected. A level above 50 denotes expansion but the unexpected deceleration to the lowest level in 16 months came as German activity expanded at a much smaller rate than expected, while French output from the sectors remained in contraction territory.

The U.K. FTSE 100 Index was down 0.3%, France’s CAC-40 Index declined 0.8%, Italy’s FTSE MIB Index fell 0.9%, and Spain’s IBEX 35 Index is dropped 1.6%, while Germany’s DAX Index and Switzerland’s Swiss Market Index inched 0.1% higher.

Stocks in Asia diverged following some data out of China and Japan, while traders grappled with yesterday’s minutes from the Federal Reserve that showed policymakers may be getting worried about low inflation. Japanese equities ticked higher as the Fed’s release and a preliminary manufacturing activity report showing an unexpected deceleration in growth out of the sector were met with a favorable trade report and some weakness in the yen. Japan’s trade deficit narrowed unexpectedly for October, as exports jumped, outpacing import growth. Stocks in China ended nearly unchanged, amid the continued acclimation to the trade link between the two exchanges, while the preliminary HSBC China Manufacturing PMI Index declined to 50.0—the demarcation point between expansion and contraction—for November, from 50.4 in October, and compared to the 50.2 level that economists had anticipated. Finally, South Korean equities declined on festering concerns about what the impact of the recent sell-off in the Japanese yen may have on trade activity.

Word of The Day

DEFLATION

A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.