Friday, February 6, 2015

Market Week Wrap-up US Employment Heats Up Winter
Fri, 06 Feb 2015 16:14 PM EST

The excellent US January jobs report out Friday heightened expectations that the Fed will have the confidence to raise interest rates later this year, even as the rest of the world grapples with weakening economies and spiraling crises. US short-term interest rates jumped after the jobs data while the ten-year US Treasury yield rose nearly 30 bps to 1.94% from 1.65%. The US Dollar surged while precious metals slid lower as rates popped up. Europe spent much of the week convulsed by the Greek crisis and distracted by diplomatic maneuvering surrounding the Ukraine conflict. As the Greek government began talking details of a new financial plan with European officials, the ECB cut Athens off from its cheapest available funding for its struggling banks. The PBoC's delivered its first Reserve Requirement Ratio cut since May 2012 after China's January manufacturing PMI contracted for the first time in two years and non-manufacturing PMI hit a one-year low. The Shanghai Composite saw its second week of losses, while for the week the DJIA gained 3.8%, the S&P500 added 3% and the Nasdaq rose 2.4%.

Every aspect of the US January jobs report telegraphed strength. The headline nonfarm payrolls widely beat expectations at +257K v +228Ke while the November nonfarm reading was revised to 423K from 353Ke. The unemployment rate rose to 5.7% from 5.6% as one million additional people decided to start looking for work in an improved environment. Wage growth saw its strongest rise since November 2008 (helped in part by over 20 states enacting minimum wage hikes that went into effect in January). The labor force participation rate rose to 62.9% from a nearly four-decade low of 62.7% prior, while the number of people who changed status from "not in the labor force" to employed saw the biggest jump ever.

Greek Finance Minister Varoufakis went on the road this week to press his case for a new Greece deal in European capitals. He got little sympathy, with nearly every single EU partner demanding that Greece stick to its prior agreements through an extension of the current bailout program. The ECB sent a clear signal midweek by refusing to accept any more Greek government bonds as collateral for loans, forcing Athens to use the ELA facility for short-term liquidity, at a cost of 1.5% compared to 0.005% for the repo facility. The decision effectively grants the ECB the ability to turn off the country's funding on short notice and increases the pressure on the Greeks to cut a deal before the Feb 28th deadline when the current program expires. EUR/USD came into the week below 1.1290, shot as high as 1.1530 on Tuesday, then fell back to around 1.1300 to close out the week.

Oil prices trended higher, but were marked by wild volatility all week. WTI bottomed out last Thursday around $44 and peaked this Tuesday above $54, closing out the week around $52. The volatility was palpable, with 5-10% swings in the front-month contracts every day. Various factors helped whip around prices, including last week's reading of the biggest drop in the US rig count since the late 1980s, intensifying conflict in both Libya and Iraq, and a nationwide strike by USW union workers at nine US refineries, one of the biggest strikes in the industry in decades. Meanwhile, the weekly EIA and API inventories continue to see big gains. Many analysts suggested that while a short-term bottom may have been reached, few are prepared to commit to long bets just quite yet.

Exxon's fourth-quarter earnings and revenue fell by double digits from the year-ago quarter. EPS was above expectations as upstream earnings surged, but revenue was well below the consensus view. Total production declined 3.8% y/y. The firm was reluctant to make any material comments about its outlook, although it warned that it would cut share buybacks to $1.0B in the first quarter of 2015 from $3.0B in the fourth quarter. Anadarko had a tough fourth quarter, missing expectations widely. National Oilwell Varco's earnings in its fourth quarter were solid, however backlog and new orders shrank markedly. The company warned 2015 would be very tough.

The Big Three US automakers all topped expectations in January sales, disclosing double digit growth in their monthly reports. Toyota, Nissan and Honda also saw strong, double-digit sales growth last month. General Motors disclosed a very good fourth-quarter report, with earnings way ahead of expectations. GM also raised its dividend by 20% and said it may evaluate returning more capital to shareholders later in FY15. Both Toyota and Daimler reported very strong December quarter results and better FY forecasts.

FCC Chairman Wheeler outlined a net neutrality proposal that would regulate broadband like a utility under the agency's Title II authority but would refrain from regulating rates. Wheeler's plan would ban cable companies from throttling broadband access and setting up fast lanes for some traffic. Broadband industry representatives dismissed the effort as flawed and Congressional Republicans grumbled about overreach. Many analysts suggested that if Wheeler's effort is successfully enacted, then Comcast's pending merger with Time Warner Cable is likely dead in the water. BTIG said Comcast may simply let the drop-dead date pass without consummating the deal (the initial date is February 12th, but either party can extend that by 6 months to August 12th).

On the M&A front, Pfizer agreed to buy Hospira for $90/share, in a total deal valued around $15.2 billion. Hospira is a top provider of injectable drugs, including those used for acute care and cancer treatment. The buyout will give Pfizer an entry to the growing market for biosimilars, while Hospira gets access to Europe and emerging markets. Under pressure from activist investors, Staples reached a $6.3 billion cash and stock deal to acquire Office Depot. The deal will get very close regulatory scrutiny: the FTC rejected a similar deal back in the 90s, and while today's environment is quite different, the two firms are the #1 and #2 industry players.

The ugly multi-month low January PMI figures out of China were worrisome as the period ahead of the Lunar New Year normally sees significant front loading of inventories by the manufacturing industry. In the wake of the weak PMIs, HSBC warned that fiscal easing measures will be needed to prevent another sharp slowdown in growth. Just a day later, the PBoC injected liquidity via OMOs for the fourth consecutive week (the 90 billion yuan injection was its biggest since last January). A day after that, the PBoC cut the RRR for the first time since May 2012, its fourth cut in the current easing cycle, which began in late 2011. The 50 bps cut released an estimated 600 billion yuan into the banking system, suggesting Beijing's concerns about the slowing Chinese economy are trumping worries about the nation's growing credit bubble. Nonetheless, the Shanghai Composite had its second consecutive down week, as the focus shifts to next week's peak in IPO filings.

The Reserve Bank of Australia became the latest leading central bank to cut, dropping its key cash rate by 25 basis points to a new record low of 2.25%. The Australian cut followed the RBNZ's move last week to a more cautious stance, carrying the possibility of a rate cut at its next meeting. For its part, the RBA cited weak growth in Europe and Japan, lower oil prices driving down inflation, and below-trend domestic growth. In the immediate aftermath of the cut, AUD/USD fell 140pips to five-year low of $0.7650 and NZD/USD hit multi-year lows below the $0.72 handle. On Friday, RBA quarterly policy statement also lowered the projections for 2015 GDP by 25bps to a midpoint 2.75% and headline inflation by 50bps to 2-3%.