DAILY MARKET COMMENTARY
December 6, 2013
The Dow popped early and powered upward into the close. On the week the Dow was still in negative ground, but it recovered nicely today with a gain of +198.6 points. This took the index back over the 16,000 mark. The S&P just missed closing higher on the week, but the NASDAQ managed it. Today, good news for the economy was good news for stocks. Equities are leading a charmed life. When the news was gloomy and QE tapering was far in the distance, stocks liked the idea of continued Fed support. Now that the economic news is getting better, equities are encouraged by the prospect of better earnings from American companies. What a concept. There is no way to lose.
Bond prices splashed around right at the time of the release of nonfarm payrolls this morning, but as the day progressed price volatility subsided. In the same manner as stocks, bonds did manage to find a bid at the end of the day.
As we head for the hills tonight the 2-year is 0.30%, the 5-year is 1.49%, and the 10-year is 2.86%.
Some of the strength in the longer end of the curve today came from traders unwinding yield steepening trades. Not to get too complicated, but initiating this trade would involve selling 30-year bonds short, while simultaneously buying 2-year notes. This works fine when the curve is steepening, driven by the Fed sitting on short rates while the bond worries about inflation. The better economic news received this week might bring tapering a little closer in time, meaning the Fed will be less accommodative and the curve might start flattening from here. So traders were reversing the position today and this produced a bid for long paper. The Fed was more active in their QE buying today, coming in earlier than usual and buying a bigger chunk than normal. These two ingredients produced the rally in the long end.
There was one last fillip of positive economic news to rejoice over. The University of Michigan confidence reading for early December showed a big bounce from the depressed levels seen during the government shutdown. The report was 82.5, the highest level in five months.
If the Congress can produce some action on the budget deficit by the end of next week, a whole bunch of cobwebs will have been cleared from the Fed's worry agenda. Even the noted bond guru, Bill Gross, has elevated to 50-50 the odds of QE tapering starting in December.
Non-farm payrolls continue to surprise to the upside. Jobs grew by +205k, which was above the official forecast, but pretty close to the whisper number. ADP did a pretty good job with its forecast and helped the market get to a level where it was able to absorb this morning’s number without a lot of dislocation. Well, without much dislocation, anyway. In the few minutes just prior to the report’s release, bond prices spiked higher. Rumors of a leak surged through the trading pits. Then the news hit the tape and the better-than-expected data sent bond prices tumbling. The bond went from up +1/2 a point to down -3/4 of a point in about two minutes. So much for the rumor. On further reflection bonds went back to unchanged. If you blinked, you’d have missed it. They used to call this strictly professional trading.
Sell the rumor, buy the news. This is an old trading mantra and it seems to be playing out this morning in the stock market. After five straight days of lower closes the Dow has decided enough was enough. Dow futures have been itching for a rally and one is currently underway this morning. The rumor was that non-farm payrolls would be good, so traders were selling in anticipation. Now that the news is out, and it wasn’t a number north of 250k, equity traders are busy re-buying their positions. Dow futures are +145 points at this writing. For once, good news on the economy is being taken as good news by the stock market.
A closer look at the number shows the 4-month average of job creation at a 204k pace. The unemployment rate eased down to 7.0% from 7.3%. Manufacturing payrolls gained +27k on the month (its best gain in two years). Hourly earnings grew by +0.2% while hours worked stayed at 34.5. One gainsayer on CNBC noted that the labor participation rate remains near its low of 63% which means that the wealth is not being spread across everybody. This is the one outlier in the report. If the unemployment rate can drop to 7.0% while a whole chunk of the workforce is out of the game, what will it take to create jobs for those currently not working?
Personal income moved lower in October while spending at the consumer level moved higher. However, this is October data and didn’t really come into play today.
On the whole, the employment news was a good report for the economy. It comes after a week when the overall economic news has also been upbeat. Is it robust enough to stir the FOMC to start tapering in December? I doubt it, but as I have been writing, I think QE tapering is a done deal. We’re just waiting around for it to begin.
At the moment the 2-year is 0.31%, the 5-year is 1.50%, and the 10-year is 2.87%.
If we close around these levels, we’ll have seen longer-term rates rise by around +10 basis points this week. However, the market is still pretty jumpy so we’ll see if current levels are still valid at the end of the day. We are also starting to see an upward creep in the front end of the yield curve. It was the pop in the 2-year to 0.52% that stopped the Fed from tapering in September. However, with the job market healing nicely the Fed may be able to tolerate some upward rate movement now.
There is a lot of other news on the docket today. I have to take note of the death of Nelson Mandela. However you feel about his life story you have to concede that he was one of the seminal figures of our time. There really aren’t that many towering figures on the world stage these days. I have known of his presence for most of my adult life. His loss just reminds us that we are woefully short of inspirational leadership around the globe.
Another story told of the Japanese Retirement Fund, the world’s largest, thinking about reducing its holdings of Japanese debt. Unlike the United States, Japan does most of its government financing internally. We happily sell our debt to the Japanese, the Chinese, and lately Saudi Arabia. It has only been the last couple of years that the FOMC has elbowed its way to the front of the line as the world’s largest holder of U.S. debt. Anyway, the Japanese fund’s assets are 56% in Japanese government bonds. Some might call this concentration risk. Some genius over there has decided that since the Bank of Japan has an open-to-buy for Japanese bonds the pension fund should sell into that bid. So the BOJ will own the paper rather than Japanese retirees. This is progress? Talk about rearranging the deck chairs on the Titanic. This decision was rewarded by a nice little pop in the Nikkei overnight.
On the budget front, there does seem to be some progress. Sources report “Budget negotiators will work through the weekend trying to craft a limited deal to ease automatic spending cuts.” (Gee, I am so sorry they have to put in all that overtime. Part of the reason is that the whole House and Senate are only in session a handful of days this month.) However the deal making goes, there is bipartisan support for a short-term bill to fund the government past the January 15 deadline. The debt ceiling is not part of this limited agreement, but it doesn’t come back into play until February 15 at the earliest.
Lastly, German factory orders for October fell more than forecast, reminding us that the European recovery is still uneven.
Taken together, the FOMC has a lot to talk about in a couple of weeks when they adjourn for what will be Bernanke’s last meeting as Fed chair and his last press conference to follow. I doubt if he wants to stir up a lot of controversy in his last days at the Fed.
Director of Investment Sales
Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.
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