Risk-On
Rally Pauses as Officials Discuss QE Fallout
Markets largely moved sideways this week, consolidating last week's big
risk-on rally. Analysts, Fed officials, politicians and market participants
around the globe mulled the implications of massive central bank intervention,
including when and if inflation would strike. Meanwhile, both the DJIA and the
S&P500 are hovering around five-year highs after months of expansion. The
Bank of Japan joined the party on Wednesday, expanding the size of its standing
asset purchase program by ¥10 trillion (roughly $130B) and warned that Japan's
economy has moved "deeper into deceleration." In Europe, a squabble
between the Spanish government and the government of independent region
Catalonia over tax and austerity issues threatened to postpone further a potential
official request for an EU bailout. Spanish officials continue do deny that
they were even mulling a request, while German Finance Minister Schaeuble said
that Spain doesn't need a bailout anyway. In Greece, talks between Athens and
the Troika dragged on, with both sides roughly €2.5B apart on the proper amount
of austerity in the next round of cuts. Peripheral yields remained mostly
lower, however, and both Span and Portugal took advantage of the new atmosphere
to sell longer-term debt at lower yields. The euro came off its post-ECB
bond-buying announcement sugar high this week, with EUR/USD dropping from highs
around 1.3170 to bottom out right around 1.2920. The China September flash
manufacturing PMI, which was more or less even with the August reading, was either
a positive sign of bottoming or a concerning lack of improvement, depending on
the analyst. Note that on Friday, a PBoC advisor warned that China's Q3 and Q4
GDP would come in a little below the official 7.5% target and that the slowdown
might last into 2013. In a similar vein, Brazil and Italy both took down
official GDP forecasts for 2012. There were several more positive US housing
data points, with existing home sales and building permits exceeding estimates,
and the NAHB's September market index bounced to its highest level since June
2006, capping five months of improvement. For the week, the DJIA and Nasdaq
each slipped 0.1%, and the S&P500 fell 0.4%.
- An intense debate among Fed officials took place in the press this week. No
fewer than ten Fed board members and governors spoke out in defense of or
against QE3. In the hawk camp, Bullard, Lacker, Plosser and Fisher all aired
their objections to the new program, emphasizing that the costs of the program
greatly outweigh the potential benefits. Inflation threats were at the heart of
their critique, with both Lacker (the lone FOMC dissenting voter) and Fisher
emphasizing that the program will drive a steep increase in inflation
expectations. Bullard warned it would be dangerous to link the program's
lifespan only to the unemployment rate, which he points out has been very
fickle. Among the moderates at the Fed, Kocherlakota, whose rhetoric has tended
to the hawkish side, said he would have voted in favor of QE3. Lockhart said
that Job growth of 150K or more could constitute Bernanke's 'signs of
improvement.' The doves mainly echoed Bernanke's rationales for QE3, offering
little new color. Evans warned that timid policy moves would only prolong
economic problems and insisted that fears of Fed-fueled inflation have been
consistently wrong, while Dudley highlighted that moving the rate pledge to
2015 was a signal of the Fed's commitment. Nothing in public was heard from
Bernanke, who briefed members of the Senate Finance Committee in a closed door
meeting on Wednesday afternoon. Coming out of the meeting Senators said the
Chairman warned that Congress needs to start acting to fix the nations fiscal
mess, and that there are limits to what the Fed can do alone.
- This week's breakdown in crude futures has confounded markets and seemed to
run counter to both consensus thinking and moves in other risk assets, which
have already greatly benefitted from QE3. Last Friday, WTI futures had spiked
above $100 briefly in a QE3-fueled rally. Then on Monday, Brent and WTI futures
fell by $4 in a matter of minutes, evoking memories of the 'Flash Crash' and
sparking chatter of fat finger trades or a big move by an unnamed hedge fund.
Crude fell another $4 on Wednesday, in part due to weekly DOE data showing an
unusually large build in US crude stocks as production restarted in the Gulf of
Mexico after the closures caused by Hurricane Isaac. Traders also pointed to a
press report on Tuesday that said Saudi Arabia was looking to pump more oil to
hold down prices, although the catalysts for the move still remain somewhat
opaque.
- In earnings news, Oracle saw some softness in sales in Q1, with the total
declining y/y and missing analysts' expectations. The firm's revenue outlook
for Q2 was also a bit soft, given FX headwinds , and more notably warned that
its hardware revenue could fall as much as 18% y/y as it continues its push
into cloud computing.
- Two major transport firms this week indicated that the global malaise is
having real consequences. After cutting Q1 guidance earlier this month, Fedex
reported on Tuesday. The global shipping firm slashed its FY13 outlook only
three months after first offering the forecast back in June, and guided Q2 well
below analyst consensus. The CFO warned that weak global economic conditions
were driving customers away from express services. Railroad operator Norfolk
Southern tanked after the firm warned that earnings would be well below
consensus estimates due to coal shipment volume declines and lower revenue from
fuel surcharges.
- iPhone 5 mania went into full swing as the Apple faithful lined up at
retailers on Friday to upgrade to the latest handset. Apple shares hit fresh
all time highs above $700, as analysts raised their price targets in
anticipation of 8M or more unit sales this weekend. Meanwhile, the architect of
the Apple Store concept, Ron Johnson, may have been looking wistfully at those
lines of customers. Now CEO of JC Penney, Johnson tried to deflect attention
away from the major sales losses incurred in the company's turnaround as he
took analysts on the first big tour of JCP's concept store redesign.
TradeTheNews
