Market Insights: November 4, 2014
Economic Outlook – The U.S., Europe, and Japan…
- Most of the U.S. economic news last week continued to be positive.
- Consumer confidence, measured by the Conference Board, hit a new recovery high at a level of 94.5. Most notable were improved readings in the consumer expectations component.
- The initial post on third quarter GDP showed 3.5% growth, an attractive level. This number was helped by strong defense spending in the quarter. Whether this contribution by defense spending will continue may be tied to this week’s election outcomes in Congress.
- Initial jobless claims last week remained “in range”. The four week moving average is now down to 281,000 and has consistently remained below the 300,000 level.
- There has been some concern about the effects on the economy of lower oil prices. It is notable that last week’s Dallas Federal Reserve regional manufacturing survey showed a business activity index rating of 10.5 and a production index rating of 13.7. These are strong numbers for the oil patch, and a welcome sight to see in light of declining energy prices.
- The core PCE measure of inflation (the Fed’s preferred measurement gauge) was up 0.1% this month. The increase over the last year is only 1.5%, which is lower than the Fed’s announced target range for inflation.
- The foreign economic data last week was more mixed.
- The German IFO survey continues with a slow, but steady downward trend. This trend has been in place most of 2014.
- Somewhat surprising, the Economic Sentiment Gauge, released by the European Commission, rose slightly in the month of October. Notable in the survey was a rise in business confidence.
- The biggest news, last week, from overseas, concerned Japan. Japanese household spending, as we’ve commented, has been down more than 5% over the past year. The September inflation numbers in Japan showed no gain over the previous month. In response to these continued signs of weakness, the Japanese Central Bank announced increased monetary stimulus.
- The Bank of Japan announced a major expansion of its own Quantitative Easing program. In the same week that the U.S. Federal Reserve ended quantitative easing in the United States, the Bank of Japan has announced a program that is larger, relative to the size of Japan’s economy, than that undertaken by the U.S. Federal Reserve.
- The market’s reaction was quick with the Nikkei equity average up almost 5% on the day of the announcement, and the Japanese Yen declining by about 2% in the currency exchange markets. This will create a very positive near term outlook for the Japanese equity market. It likely means further depreciation of the Japanese Yen, versus the U.S. dollar. (If you’re in the market for a Japanese manufactured automobile, you might see some pretty good deals in the near future).
Equities Outlook: The Strong and the Weak…
- For the second week in a row, equities continued to rally from their mid-October low point. Virtually all major market indexes are back in positive territory on a year-to-date basis. The EAFE International Index is the only significant exception, which remains in negative territory by about 4% for 2014.
- The week finished strong on Friday, as a follow through to the announcement by the Bank of Japan, that they were instituting a Quantitative Easing program of significant size.
- This strong market performance echoes a strong earnings reporting season, for third quarter earnings.
- 54% of S&P 500 companies have now reported third quarter results. 73% have exceeded the industry analysts’ earnings forecast. On average, year-over-year earnings growth is 10.8%, a strong performance. Reports from the financial sector and the materials sector, have been particularly strong. The reports are skewed to a degree, by Bank of America earnings. Excluding the report from Bank of America, year over year earnings growth is actually 12.6%.
- The energy sector continues to be weak, due to lower oil prices. However, energy company earnings have surprisingly not been particularly disappointing.
Fixed Income Markets: Q?
- The interest rate on the Ten-Year U.S. Treasury Note firmed a bit further last week to 2.34% on Friday. This is a further easing of the “flight to safety” reaction. The previous week’s yield was 2.29%.
- Last week, the Federal Reserve released the minutes from the most recent meeting. These provide insight into the decision to end the program of quantitative easing that was announced.
- The Committee’s comments characterized the economy to be “expanding at a moderate pace.” The Committee’s report cited improved labor market conditions and solid job gains as well as progress on the unemployment rate.
- The comments regarding inflation are interesting. The Fed seems to be looking ahead of the recent weak inflation numbers which have been impacted by low oil prices. “Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.” The language of the report holds out the promise of continued low interest rates for considerable period of time.
The Week Ahead
- U.S., PMI Manufacturing (Markit)
- U.S., ISM Manufacturing (ISM)
- China, PMI Composite (Markit)
- U.S., ADP Employment (ADP)
- EU, Retail Sales (Eurostat)
- Employment Report (BLS)