Friday, November 22, 2013

Market Week Wrap-up  Weekly Market UpdateMarkets Grind Higher as December Taper Looks Unlikely

- The DJIA and S&P closed out a seventh consecutive week of gains and both ended the week at all-time highs. The FOMC minutes from the October meeting suggested the taper could begin in two or three months, but very dovish comments in speeches from Yellen and Bernanke seemed to take a December taper off the table, further aiding gains among risk assets. There was some decent US data out this week: the initial jobless claims slipped back to lows last seen in September and the November Markit manufacturing PMI survey rose to 54.3, its highest level since March. In Europe, German data, including manufacturing PMI and IFO survey data, were strong. China's flash HSBC/Markit PMI stumbled, while the Japan trade deficit spiked to its highest level on record for October, with imports up 26% y/y. The Senate Banking Committee approved Janet Yellen's nomination to become the first woman to lead the Federal Reserve, sending it to the full Senate for a final vote, due in December. The DJIA rose 0.6% on the week, closing out Friday above 16000, while the S&P500 gained 0.4%, closing above 1800 for the first time. The Nasdaq added 0.1% on the week.

- In FOMC minutes, members highlighted improving economic data, and "some" indicated that "if economic conditions warranted, the FOMC could reduce the pace of purchases at one of its next few meetings." How to keep short-term yields low as tapering gets underway was a major subject. Some economists think the Fed should lower the 6.5% unemployment threshold to provide more support to the job market, but there wasn't a great deal of support for such a move. Most participants thought a reduction in interest rate on excess reserves (IOER) might be worth considering, although the benefits were seen as small except as a signal of policy intentions. Establishing a lower bound on inflation got some support, but the benefits of adding it were viewed as uncertain and modest, with big communication challenges.

- Both the headline and core October retail sales data were a bit stronger than expected (+0.4% v +0.1%e) despite the government shutdown. However growth in sales remains very muted, while the ex-autos figure was even weaker. In comments at an industry conference, executives from Coach said that the consumer situation is volatile and fragile, with mall traffic seeing a sharp decline in November.

- Retail earnings reports out this week reflected this weak prognosis. Target disclosed weak third quarter results, with revenue less than expected and comps up less than 1% - with strong parallels to Walmart's report, out last week. Mall retailers Abercrombie and Limited Brands sustained decent numbers in the third quarter, but also offered weak Q4 guidance. Despite another quarter of losses and negative comps, shares of JC Penney advanced as the company promised more progress in Q4. Gap had tepid results and flat comps.

- Home Depot and Lowes continue to be notable exceptions to the gloominess in the retail sector. Both firms continue to beat expectations and rack up good y/y growth thanks to the sustained housing recovery. In their third quarters, both HD and LOW beat expectations, raised FY13 guidance and saw decent comp store sales gains.

- Coming into the week, the euro continued its gradual float higher, although EUR/USD seemed to encounter upside resistance at the 1.3550-1.3560 areas several times this week. On Wednesday morning, EUR/USD dropped sharply from 1.3545 after press reports emerged suggesting the ECB was considering a negative deposit rate. Numerous ECB officials have indicated over recent months that the council was considering negative rates, and President Draghi said at his last several press conferences that the bank was "technically prepared" for a negative deposit rate. Draghi responded to the report the next morning, warning in a speech in Berlin that markets should not assume that implementing them was a done deal. Draghi's comments and the strong November Germany IFO survey on Friday morning helped force EUR/USD back toward the highs of the week.

- USD/JPY moved back above parity mid-week after Japan pension fund GFIF's advisory panel recommended the world's largest pension fund review its domestic bond-focused portfolio and diversify investments. USD/JPY later pushed out to four-month highs above 101.30 after BoJ chief Kuroda said the bank had scope for more easing and would not hesitate ease further, if necessary. EUR/JPY closed out the week around four-year highs thanks to Kuroda's remarks

- In China, the PBoC fleshed out further the currency and financial market reforms that were disclosed following the Third Plenum. The PBoC will "basically end" normal intervention in the currency market and broaden the yuan's daily trading limit in an orderly manner, although no specific time frame was provided. Investment caps for both domestic and foreign investors will be phased out, and a ceiling on deposit rates offered by local banks will be gradually removed as well.