Friday, October 5, 2012

Market Week Wrap-Up

US Sees Strong Auto Sales and Surprise Drop in Unemployment; Europe Creeps Toward Next Round of Bailouts

- Manufacturing and jobs data plus central bank decisions were the major highlights this week, as well as Mitt Romney's surprisingly strong performance in the first presidential debate. Over the weekend, the official and the HSBC China manufacturing PMI readings both remained in contraction territory below the 50 threshold. There were surprising improvements seen in peripheral PMI manufacturing data from Ireland, Spain and Italy, however continuing eurozone bailout dramas obscured the slightly better data, and Spain's September unemployment reading showed that the labor market is only getting worse. Spain continues to take its time on seeking a bailout, and making the semantic case that a bond buying program would be an aid package, not a bailout. In the US, both the ISM services and manufacturing indices for September ticked higher. The ISM manufacturing index popped above 50 after three months of declines, while the new orders index picked up considerably over the prior month. August factory orders fell 5.2% y/y by the most since January 2009, however much like last week's durable goods data the numbers were significantly impacted by the slump in demand for transport equipment. Ex transportation, orders rose 0.7%. The US September jobs report was the main event: non-farm payrolls of +114K more or less met expectations and the August numbers were revised higher. Meanwhile the decline in the unemployment rate to its lowest level since January 2009, at 7.8% from 8.1% in August, provoked a minor media firestorm as various conservative commentators questioned the integrity of the data. Deeper analysis of the report showed that the surprise drop was based in large part on a surge in part time employment, likely helped by an influx of more active jobseekers whose emergency unemployment benefits have been exhausted. For the week the DJIA gained 1.3%, the S&P500 rose 1.4% and the Nasdaq added 0.6%.

- September auto sales numbers from Ford and General Motors were about in line with expectation, with the former's coming in flat and the latter's up a measly 1.5%. On the other hand, Chrysler's September sales were up 12%, the firm's best September since 2007, and Japanese automakers surpassed expectations for September, bringing the industry annual rate for the month up to nearly 15M, the best pace since February 2008. Both GM and Ford noted that sales of small cars such as the Chevrolet Cruze and the Ford Focus were strong.

- Same-store sales data for the month were mixed for major retailers, and consumer demand appeared to be somewhat weaker than in the first half of the back-to-school season. Apparel names mostly met or beat expectations. Discounter TJX was a real standout, with a nice 6% gain. Department names were a different story, with nearly the entire sector missing expectations. Kohl's saw a significant y/y decline in comps while Target was the rare department store name that topped expectations.

- Shares of Hewlett-Packard fell nearly 15% between mid-day Wednesday and the end of the week after the company offered very poor 2013 guidance at the firm's analyst day. CEO Whitman warned that the firm's turnaround would take longer than expected and that FY13 would be a "fix and rebuild" year. Online game name Zynga and aerospace manufacturer Curtiss-Wright also lost ground on big guidance cuts, while apparel name PVH gained ground after the firm raised its Q3 outlook and its FY12 guidance.

- The big deal news of the week was an offer from Deutsche Telekom's T-Mobile USA to merge with pre-paid mobile firm MetroPCS. The deal is effectively a reverse merger, with the smaller MetroPCS buying T-Mobile. If the merger goes through, the combined company will be called T-Mobile, will have 42.5M subscribers and pro forma revenues in 2012 of $25B. Late in the week, reports circulated that Sprint may try to play the spoiler by launching a counterbid for MetroPCS, or could even consider making an offer for the combined T-Mobile/MetroPCS entity after their merger.

- There was little news in the ECB decision on Thursday, with rates on hold and no revelations at the press conference. ECB President Draghi spent most of the press conference laying out a strong verbal defense of the new OMT bond buying program from various northern European antagonists, emphasizing that rather than a capitulation to political demands the OMT enhances ECB independence because it reduces moral hazard and acts as a "credit enhancement" to government bonds. Draghi also clarified that the OMT would not apply to countries already under bailout programs, including Ireland, Portugal and Greece. The euro gained steadily all week, from just above 1.2810 on Monday to peak around 1.3070 late on Friday before trading off a bit.

- Wrangling between the Troika and Greece over additional austerity continued this week without resolution. Athens's cash position worsened, and Prime Minister Samaras warned that the country would be out of funds by November. Cyprus said that it would ask for an €11B rescue package, including €5B to recapitalize its banking system. In a rare piece of good news in the euro zone, Portugal made its first steps toward returning to public debt markets this week. Portuguese debt agency IGCP sold €3.76B in 2015 notes as part of a bond swap, its first public transaction since the EU/IMF bailout in 2011. However there is a strong chance that continuing economic weakness will require more bailout funding for Portugal, putting off full market access for a while yet.

- The Bank of Japan left rates unchanged at 0.0-0.1% and did not change its asset purchase target. The decision provoked little reaction in FX markets, nowhere near the amount of volatility that followed last month's surprise ¥10T expansion of the BOJ asset program. USD/JPY sold off 25 pips below ¥78.30 after the BoJ stood pat on its program and inflation target - the two levers that some of the more dovish analysts continue to fixate on for further easing. Notably, BoJ did cut its economic assessment for the second consecutive meeting stating that "activity is leveling off more or less."

- On Tuesday, the Reserve Bank of Australia shocked markets with an unexpected 25 basis point rate cut, its first since the June meeting. The RBA said the rate cut was needed due to the slowing global growth outlook over recent months. Notably, the RBA also added that terms of trade were down 10% since the peak and would fall further, and also projected the peak in resource investment is likely to occur next year. In the wake of the cut, AUD/USD crashed over 60 pips toward the 1.030 handle - its lowest level in nearly four weeks. By the end of the week AUD/CAD had sunk to 1.0150.