Friday, February 20, 2015

Market Week Wrap-up Weekly Market Update: Fed Stays Patient While Greece Talks Come to a Head
Fri, 20 Feb 2015 18:45 PM EST

The Greek saga dominated headlines this week, as negotiation continued even as Athens appeared to be closer and closer to running out of cash. European and Greek negotiators held tense meetings all week, and by Friday managed to agree to a tentative deal for a 4-month extension of the bailout program. Meanwhile, the ceasefire in Ukraine quickly unraveled as Russian forces took the key rail junction of Debaltseve and continued shelling the southern port city of Mariupol. Japan officially climbed out of its latest recession, although the +2.2% annualized expansion in December was weaker than expected. After some more tepid housing data, China closed up shop for the New Year holiday. The US 10-year yield gained 50 basis points in the first half of February, closing on Feb 17th at 2.14%. FOMC minutes that showed some members were concerned about removing "patient" from the statement and jitters about Greece caused some volatility in fixed income and currency markets in the latter half of the week. For the week, the Nasdaq rose 1.3%, while the Dow and S&P closed at fresh record highs, with the DJIA up 0.7%, the S&P500 adding 0.6%.

Negotiations early in the week were inconclusive, and Finance Minister Varoufakis pleaded in an op-ed that Greece was just looking for a few months of stability to allow the country to embark upon reform the population could support. The banking system looked weaker and weaker, with up to €1.0 billion in outflows in the second half of the week alone, raising talk about the possibility of capital controls. On Wednesday, the ECB extended only another €3.3 billion in ELA funding, well short of the €10 billion expansion that Athens had requested. Greece caved in to most European demands in the proposal made on Thursday, as it recognized that the existing bailout agreement was binding and asked for fewer concessions. On Friday, the Eurogroup meeting of financial ministers emerged with a tentative deal for a 4-month extension of the bailout program that would keep Greek banks capitalized. Under the agreement, by Monday the Greek government must produce a list of reform measures it plans to carry out during the extension, which will be reviewed by the Eurogroup on Tuesday to decide if the measures pass muster.

Markets dissected the January FOMC minutes for any scrap of insight into the Fed's intentions when it comes to potential 2015 rate hikes. The minutes showed that some Fed officials were worried that higher rates might generate credibility problems with a market that believes the FOMC will stay easy until inflation reaches target. JP Morgan said the minutes show a Fed in no rush to tighten policy, with only some members saying rates have been at zero for long enough. BMO saw a fair number of members wanting more reassurance about the economy before normalization, skewing the odds of a hike toward September or even later. Goldman saw no clear indication that most parties thought "patient" language should be removed. Late in the week, Fed hawks cautioned the markets that the committee views expressed in the minutes may have shifted since the very positive employment report released in early February.

There was softness in the homebuilders on some downbeat winter numbers. The February NAHB index of homebuilder confidence slipped lower for a second month in a row. The single-family home sales component fell for the first time since last October. January housing starts and building permits narrowly missed expectations. The January PPI prices report was softer than expected, with all components undershooting expectations. Core PPI contracted and the alternative core measure that includes trade fell by 0.3%, the first negative monthly reading in the brief 17-month history of the series.

Crude prices were contained within the range seen last week, with WTI ranging from $54 to $49 and Brent ranging from $63 to $58. There were spectacular headlines regarding a crude train derailment and explosion in West Virginia and a major accident at Exxon's Torrance, CA refinery. Meanwhile the underlying inventory data continues to show stocks growing at a breakneck pace. The API inventories data racked up its sixth consecutive increase, with the huge 14.3 million barrel build, the largest seen in years. The 7.7 million barrel build seen in the EIA data was less extreme, but still twice the expected amount.

Walmart announced that it would raise wages for up to 500,000 current and future sales associates (out of a total workforce of 1.8 million) to $9/hour this year and $10/hour in 2016, well above the federally mandated minimum wage of $7.25/hour. Walmart's move comes in response to rising pressure from tightening labor markets, where low-skilled workers easily move between retailers and fast-food chains. The hike will drive more wage hikes across the retail and fast-food sectors.

With the earnings season in Tokyo concluded, the Nikkei225 hit its highest level in 15 years, above 18,300. The 4% rally of the last two weeks is particularly impressive considering that the selling in Japanese Yen has abated, as USD/JPY continued to struggle retesting the ¥120 level. As widely expected, the Bank of Japan policy statement maintained its annual monetary base increase target rate at ¥80T. For the third consecutive meeting however, the BOJ also raised its assessment of industrial output, along with a slightly improved view of exports. To that end, subsequent trade data out of Japan showed the smallest adjusted trade deficit in nearly 3 years, as exports rose at the fastest annual rate in over a year amid double-digit gains in shipments to US and China. More significant progress on inflation remains a key hurdle for Abenomics - late in the week, Japanese press hinted policymakers could consider delaying the timing for achieving 2% inflation target beyond the FY15/16 prior forecast.

Prior to shutting down for the Lunar New Year, China released its latest data on home prices for the month of January. The findings were unimpressive, as the trend of smaller sequential declines across all 70 top cities was reversed. Overall, prices were also down m/m for the 9th consecutive month. National Stats Bureau economist remarked there was significant divergence in prices across the country - top-tier cities saw little change in prices while 3rd tier cities saw declines of over 0.5%. Separately on the mainland, press reports suggested that the government is discussing consolidation in the energy sector, potentially involving a merger of Sinopec, CNPC, Cnooc or Sinochem, which lifted those firms stocks.