Friday, December 6, 2013

Market Week Wrap-up  Weekly Market UpdateSolid Economic Gains Promise Imminent Taper

- After data released this week, it is more than likely the Fed will taper QE spending at the Dec 17-18 or the Jan 28-29 meetings. The highlights of the week were the second reading of US Q3 GDP and the November jobs report. The GDP numbers were good and the jobs figures were very good, and taken with the already unambiguously positive housing data, it's hard not to see that the US economy is seeing substantial improvement. After Friday's jobs report, PIMCO's Bill Gross said that he believes there is a 50% chance of a December taper at this point, while Goldman Sachs Chief Economist Hatzius opined that the numbers were not a blockbuster and that the Fed would not taper in December. Retail names suffered all week thanks to a few bad quarterly reports and a rather tepid view of Thanksgiving holiday sales. ShopperTrack saw sales on Thanksgiving and Black Friday up just 2.3% y/y, while the National Retail Federation saw weekend spending falling to $57.4B from $59.1B y/y. Stock indices spent much of the week well into the red with tapper talk and profit booking identified as the likely catalysts, but Fridays jobs report opened to door for rally that recouped much of what had been lost. For the week, the DJIA declined 0.4%, while the S&P500 and NASDAQ were essentially unchanged. 

- The second reading of US Q3 GDP looked very good on first glance, coming in at +3.6% versus the +2.8% advance reading seen back in early November, but there were real caveats to the strong reading. The gains were driven by upward revisions to inventories, which increased by one third over the initial estimate. Meanwhile, the key residential fixed investment and export components were both lower than the advance readings. These key distinctions take some of the shine off the headline figure. 

- The November jobs report was unambiguously positive, with the 203K gain in NFPs well above the 180K expected. The unemployment rate fell to 7.0% from 7.3% in October and the labor force participation rate rose slightly to 63% from 62.8%. The WSJ's Hilsenrath pointed out that markets are much more well-disposed to a taper now than they were in September. The Fed's low rate pledge has sunken in, and fed fund futures suggest markets do not expect a rate hike until Q4 of 2015, whereas in September rate increases were expected by the end of 2014. Nevertheless the US benchmark 10-year yield backed up 14 basis points on the week towards 2.88% with many predicting another run at 3% likely. 

- China's official PMI matched an 18-month high, topping expectations of a slight decline from last month's strong figures, with output, inventories, and employment components all hitting multi-month high levels. The HSBC final PMI was also better than expected, and the HSBC chief economist said new business gains were accelerating. 

- Oil futures climbed to one-month highs in a big breakout early this week. WTI crude had fallen into the $92 handle late last week, while on Monday and Tuesday the front-month contract rose back to $97. Traders said strength came from news that TransCanada would initiate service on the new Cushing-to-Port Arthur pipeline in early January, helping to drain the surplus of US light sweet crude. There was a big 12M bbl drawdown seen in the weekly API crude inventories, which some suggested went to help fill the line. Additionally, OPEC oil ministers agreed in Vienna to sustain output at 30M bpd regardless of the fact both Iran and Libya are expect to ramp production in the near term. 

- November auto sales reports from the big three US automakers all topped expectations. GM sales were up 19% y/y, Chrysler sales rose 16% y/y and Ford's were up only 7% y/y. A Ford sales executive November retail sales were the company's best going back to 2004. Toyota's sales momentum continues to be pretty tepid, up in the low single digits, while Nissan saw a respectable 10.7% y/y gain. 

- The remaining firms that report monthly same-store sales disclosed tepid comps for the month of November. Note that the reports are for the four weeks ended Nov. 30th of this year, which compare to the four weeks ended Dec. 1st, 2012, so this year's comps did not include Thanksgiving Sunday or Cyber Monday, unlike the 2012 reports. JC Penny trumpeted what it called a strong Thanksgiving weekend comp gain of +10.1% y/y, but investors were looking for much better results coming off such an easy comp. Krispy Kreme, Big Lots and Abercrombie & Fitch all reported weak Q3 results, including terrible guidance statements and warnings that not much would improve in the retail environment in 2014. 

- Once again, there were no unexpected developments seen in the BOE and ECB rate decisions. Both institutions left key rates unchanged, and the ECB press conference was low key. Note however that the ECB staff revisions were a point of interest: inflation forecasts were revised lower for both 2013 and 2014, but the revisions were much smaller than some expected and analysts saw little prospect of deflation in the new forecasts. EUR/USD saw four-week highs around 1.3700 by week's end. 

- The Japanese government approved a $182B package of stimulus spending to supplement its huge 'Three Arrows' campaign launched back in April. Initial reports of a smaller package helped knock USD/JPY down from the six-months highs seen on Monday, strengthening the yen. In addition, it emerged that the bulk of the package includes loans from government-backed lenders and spending by local governments that was already scheduled. USD/JPY dropped to around 101.65 on Thrusday, before fresh yen weakness in the face of the better US jobs report helped push USD/JPY to just shy of 103.-