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Wardwells Weekly Market Report
Observations on the Capital Markets – Week Ended July 5, 2013
- Fridays jobs report was the domestic market-moving news of the week
- Other U.S. economic data: on balance, not bad
concerns about summer slowdown linger
- China watch: calm is restored in money markets
growth is slowing
- Japan watch: the market may be rallying because the data is good (and the Bank of Japans (BoJs) QE action)
- Political strife in Portugal didnt make big waves beyond its boarders
- The European Central Bank (ECB) and the Bank of England (BoE) articulated expected future policy
- Washington and the Fed: watch, watch and wait
The Germans Deserve Credit for Extending Credit
Germanys government agreed to (indirectly, via guarantees) provide Spain’s government-run ICO development banks with the funding to make up to ?800 million of low-interest loans to small and medium-sized businesses.
Comment: One of Europes weaknesses is that the euro crisis led to impaired cross-border flows of credit
how can German savers lend to Spanish small businesses when they dont trust the Spanish banks? The German and Spanish governments are directly addressing that problem. The German taxpayer is ultimately at risk if the loans arent repaid, but this could (like TARP) look like a good investment if it helps the Spanish recover. This could also set a very positive precedent for other nations
I think the Germans deserve credit for extending credit.
Fridays jobs report was the Domestic Market-Moving News of the Week
Payroll employment rose 195k in June; revisions to April and May added another +70k. This was on the high side of hopes/fears. The details were solid as well. The “household” survey showed the labor force rising 177k as the labor force participation rate rose 0.1% to 63.5% … (maybe the return of “discouraged” workers?)
employment rose a solid 160k
thus a 7.6% (unchanged) unemployment rate. Average hourly earnings rose 0.4% m/m (+2.2% y/y) and the workweek was unchanged (pleased that drag from sequesters didnt lead to a drop)
higher incomes are good for future consumer spending. Temporary employment increased to a 13-year high
this used to be a leading indicator of permanent hiring, but maybe this is the new (Affordable Care) normal.
Comment: Because bond market investors interpreted this news as increasing the risk that the Fed may slow the pace of QE at its September meeting; bonds sold off. Gold sank and stocks rallied. The market might be right, but dont forget: the monthly jobs data is a lagging, not a leading indicator.
Political Strife in Portugal Didnt Make Big Waves Beyond its Boarders
Portugals foreign and finance ministers resigned (they want austerity, just less of it), putting the government of Prime Minister Coelho at risk of collapse. Portugals 10-year bond yield was up 71 basis points (bps) on the week (the yield on the German 10-yr fell one basis point on the week).
Comment: Portugal has made good progress, so stretching out the time frame should be negotiable. No one (in power) wants a rerun of last years Greek drama.
The ECB and BOE Articulated Expected Future Policy
For the first time, the European Central Bank gave public guidance on future monetary policy, saying it would keep interest rates at or below current levels “for an extended period of time” and confirming that its bias was to ease further (it still has room to do so). Mark Carney, the new governor of the BOE, also made notably dovish statements.
Comment: “Transparency” in central bank policy guidance is now widely considered a best practice
like parenting: be clear and be consistent. The idea, in theory, is that if investors know whats coming, they wont be blindsided. In practice, it seems to have led to the inflation and (rather sudden) deflation in bond prices. Heres a further question: Were they already about to make that policy shift or are they, too, reacting to the “Bernanke sell-off”?
Washington and the Fed: Watch, Watch and Wait
- The Federal Reserve voted to adopt the Basel III capital rules for the U.S. banking system. The White House announced that the Affordable Care Acts mandate – that companies with more than 50 full-time workers provide health insurance – has been pushed back to 2015.
- July 17-18: Bernankes Congressional Humphrey-Hawkins testimony.
- September 18-19: next Fed meeting
will the pace of QE be trimmed?