Friday, May 3, 2013

Market Week Wrap-up  Weekly Market Update: Central Bank "Put" and US Jobs Push Equities to Record Highs

- This week's focus was squarely on central bank policy decisions and the US April payrolls data. Mid-week the FOMC reinforced the "Bernanke put" by stating explicitly that quantitative easing can be increased if conditions worsen. On Thursday, the ECB cut its main refi rate by 25 bps to 0.5% from 0.75%, while press reports indicated that some members of the governing council were prepared to take even stronger action. On Friday, the April payrolls and unemployment reports were much better than expected. Equity markets were flat through mid-week, but then the ECB decision and the US jobs numbers pushed the S&P500 above 1,600 and the DJIA above 15,000 for the first time ever. The DAX closed on Friday at 8,122, its highest closing level ever and only points away from intraday highs. Crude pushed out to one-month highs above $95 as of Friday, and while gold was mostly flat on the week the yellow metal has retraced roughly half its losses from the mid-April slide. For the week, the DJIA gained 1.8%, the S&P500 added 2% and the Nasdaq rose 3%.

- The April jobs report may not have been a "substantial improvement" in labor market conditions, but it was better than expected. Ahead of the release, expectations had been downbeat after the ADP report missed estimates by over 30K. Thwarting expectations, non-farm payrolls rose 165K versus the 140K estimate and the earlier months of 2013 were revised higher, fueling a new surge in stocks. The disappointing March nonfarm figure was revised up to +138K from +88K, while February nonfarm payrolls were revised up to +332K from +268K. The YTD average is now 196K versus 183K for 2012 as a whole. The decline in the unemployment rate to 7.5% from 7.6% likely reflects a real gain in employment rather than people leaving the workforce as the labor force participation rate held steady at 63.3%.

- The FOMC statement was revised only slightly, refraining from commenting on recent fluctuations in the economic data. The Fed did take the opportunity to remind everyone that its ability to revise the QE program does not exclusively mean tapering, and that the Fed can boost asset purchases above $85B/month if the outlook on the labor market and inflation expectations deteriorate further. The Fed's revised statement said that it is "prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

- Apple sold $17B of bonds this week to help finance a return of $100B in capital to shareholders. Apple has $145B of cash but only $45B on hand in the US, and thus not enough to fully fund its expanded dividend and share buy-back program. The company issued $3 billion of floating-rate notes and $14 billion of fixed-rate securities in six parts with maturities from three to 30 years. The offering was very well received as investors found a new avenue for investing in the world's premier device maker; the order book was very strong, reaching over $50B.

- Insurance names had an extremely successful March quarter as better pricing levels helped firms beat earnings expectations. AIG's property and casualty business booked its first underwriting profit in two and a half years in Q1. Prudential saw its biggest one-day gain in two years after the firm's earnings crushed expectations thanks to blowout profits at its international unit. Metlife and Allstate also had excellent quarters.

- Reports this week showed April US auto sales slipped below a 15M annual rate (SAAR) for the first time since October. Ford, GM, Chrysler all posted double-digit y/y gains in April as expected, though Ford was the only one of the Big-Three to beat estimates. Toyota and Nissan posted worse than expected results for the month. GM's flagship pickup truck, the Silverado, had an April sales rise of 28% while Chrysler's Ram pickups rose 50%. In quarterly results out this week, GM saw its net income and revenue fall y/y, although after certain items EPS beat expectations.

- Facebook's monthly and daily active user numbers are higher than ever, topping 1.11B and 665M, respectively. However, it is worth noting the slow decline in that growth rate over the past year on deeper penetration into the US and Europe. Earnings missed by a hair but FB shares rose on strong growth in mobile users and advertising revenue.

- The consensus coming into the week was that an ECB rate cut was a real possibility at the May meeting on Thursday. On Monday the preliminary March German CPI report indicated German inflation was hitting multi-year lows. Then on Tuesday the March eurozone unemployment rate hit another all-time high at 12.1%, paving the way for ECB to cut rates. At the post rate-decision press conference, ECB Chief Draghi kept door open for more easing and outlined preliminary measures to increase credit flows. Midway through the conference, Draghi stated that the ECB was "technically prepared" for negative interest rates, which knocked the EUR/USD pair down from 1.3218 to around 1.3060. The euro strengthened a bit on Friday, ending the week around 1.3112.

- The yen sustained the levels seen after last Friday's disappointing BoJ policy announcement through most of the week. USD/JPY failed to move below the 97 handle several times during the week spurring dealer chatter of a possible binary option play. There were several reports circulating of an outstanding 97.00-104.00 option structure as well. After the strong US payroll data, the pair was back above the 99 handle and seemed poised to test parity in the near future.