Market Insights: February 10, 2014
Economic Outlook: The weight of the data…
- Small business employment increased in January by an average of 0.12 workers in January, compared to December [National Federation of Independent Businessmen]. Job creation plans in the survey increased 4 points to a net 12%, the best reading since 2007. Small business owners are more optimistic, though facing some difficulty finding qualified applicants for their employment openings.
- The PMI Manufacturing Index slowed some from December, but still shows expansion at 53.7 [Markit Economics]. Weather factors may have played some role in these slower numbers. This should be evident in the next few months.
- ADP’s Employment Report showed a private payroll gain of 175,000 in January. You may recall a disconnect in December between the ADP jobs gain (227,000) and the official number (only 87,000) released by the Labor Department.
- In a case of “Déjà vu All Over Again…” the Labor Department’s release for Non-farm Payrolls on Friday was below the expected number. The market was looking for a new jobs number of 150,000 and the official number for January came in at 113,000. Average hourly earnings data eked out a gain, at least. Again, weather may have influenced this, but the fact that the number has been disappointing 2 months in a row does cause a bit of pause for the optimistic camp of economists.
- In contrast to the U.S., the European Union PMI Manufacturing Index [Markit Economics] showed further improvement in January, with a strong 54 reading. We’ve been writing about the emergence of the Euro-zone from recession and this is further confirmation. France was the lone laggard in the reporting with a negative reading of 49.3.
- The U.K.’s PMI Manufacturing reading was likewise very strong at 56.7.
Equities Outlook: Getting a foothold on the wall of worry…
- The equity markets rebounded strongly on Friday after release of the somewhat disappointing Non-farm Payroll report (113,000 new jobs; see above). This was a follow-through on Thursday’s gains. A slower job creation number possibly suggests to market participants that the Fed will proceed cautiously with the pace of tapering of Quantitative Easing.
- On the other hand, it is possible that market participants prefer to believe the data coming out of ADP and other sources as compared to the official data from the Labor Department.
- The market’s bounce on Thursday and Friday made up some of the ground given up during the rough start in January. The S&P 500 Index was down about 6.0% from the high in mid-January. However, at Friday’s close, the market is back within less than 3.0% of that previous high.
- Though the market enjoyed a positive week last week, we are only a short distance from another artificial deadline when the Treasury’s borrowing authority expires and there will be difficulty paying the government’s bills. This could occur as early as the end of February and could serve to create a negative backdrop for market sentiment.
- With tax-filing season underway, refunds will be going out the door of the Treasury faster than tax payments will be coming in, leaving the government with less cash on hand than usual. In its latest analysis, the Bipartisan Policy Center projects that the government will reach the point where it can no longer meet all of its obligations sometime between Feb. 28 and March 25. This is likely to create another round of partisan wrangling in Washington. Of course, the market largely ignored this wrangling during the previous round.
- Bottom line: the continuing economic data releases, though they are not unanimously supportive to the growth story, in our view supports the conclusion that global economic recovery continues. With that in place, a major market downturn by world equity markets is not likely in the near term.
The Fed and Fixed Income Markets: Can bad news be good for municipal investors?
- The Ten-Year Treasury again drifted a bit lower this past week. At week’s end, it closed at a yield of 2.68%, down from the previous week’s 2.70%.
- We mentioned last week the need for care and caution in selecting municipal bond investments and cited the situation in Puerto Rico as an example. Moody’s downgraded Puerto Rico’s general obligation bonds to junk status last week.
- The Puerto Rico developments as well as the legal maneuvers in Detroit’s bankruptcy have had the effect of creating some additional risk premium in all municipal bond pricing. If this persists, it means that municipalities, in general, will have to pay more to borrow money and that investors who loan this money will get paid more for these risks.
- There has not yet been sufficient time for the market to digest the news of the rating change for Puerto Rico and determine how it will specifically affect their bond pricing. If it adds to the “fear premium” in bond prices, this may actually signal an attractive opportunity to purchase good quality bonds at a time when some investors are scared away from the entire market.
The Week Ahead:
- Jobless Claims [U.S.]
- Retail Sales (Census) [U.S.]
- Industrial Production (Federal Reserve) [U.S.]
- Consumer Sentiment (University of Michigan) [U.S.]