From Rodrigo Serrano of Rational Capitalist Speculator [25],
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
Bull
+ Obama’s State of the Union Speech (SOTU) will inspire confidence throughout the middle class [26]. Improvements in infrastructure and education, as well as retraining the labor force to complete in today’s dynamic global economy, are sound economic policies that will reignite the American competitive spirit and consequently the economy. Meanwhile, the U.S. energy boom quietly proceeds [27].
+ The U.S. job market continues to heal as per high-frequency indicators such as Weekly Jobless Claims. The 4-week average for New Jobless Claims [28] is near its lowest level of the recovery. Firms are confident in the outlook and are not cutting staff.
+ U.S. housing data continues to look up, according to individual city figures [29]. Additionally, commercial real estate price trends show improvement [30].
+ Consumer confidence in the U.S., which had been a growing thorn for the bulls, is finally starting to turn. University of Michigan’s Consumer Sentiment survey rises to its highest reading in 3 months with a preliminary February reading of 76.3 vs. a final January reading of 73.8. Bloomberg’s Consumer Comfort Index is carving out a bottom, printing its highest reading in a month [31]. Improving confidence is percolating to weekly sales metrics. Redbook reports [32] that consumption in February has started off on a strong note. Growing confidence is also finding its way into financial markets [33].
+ While January U.S. Industrial Production came in negative, the result came after two very strong months and shouldn’t heighten concern of a reversal of fortune for the sector. Moreover, other indicators point to stabilization and possibly the beginnings of a new inventory-build. The New York Empire Manufacturing survey, prints its first positive number in more than half a year in February [34]. Within the report, confidence in improving future conditions remains constructive.
+ Internationally, G-7 officials affirm their commitment to “market-determined” exchange rates [35]. Major governments understand that weakening their respective currencies will disadvantage their trading partners. Cooler heads will prevail. Meanwhile, financial conditions in the Eurozone have clearly improved [36]. Along with an overall pace of slower contraction in the EMU, the worse has likely passed [37]. Stabilization is developing.
Bear
- Yes Obama’s speech had great ideas on boosting economic growth, if you believe that more government intrusion into the private sector (by picking winners and losers) and higher taxes are sound policies [38]. Overall, political paralysis [39] looks set to continue [40]; nothing will get done.
- From a valuation [41] and earnings perspective, U.S. risk markets are significantly overbought. Additionally, buybacks (usually financed by debt) have in the past represented turning points in equity returns [42]. Furthermore, BofA’s proprietary sentiment indicator is screaming “sell. [43]” All this is taking place, while the sequester budget cuts are close to becoming reality [44].
- Redbook’s report of strong February U.S. consumption growth isn’t confirmed by Walmart’s “sales disaster [45]” in February. Higher payroll taxes and rising gas prices [46] will be too much for the consumer to bear in the coming months. Furthermore, oil looks set to continue its rise (pressuring gas prices higher), when looking at recent [47] developments [48] in the Middle East [49].
- Small Business, the engine of job creation in America, remains in a multi-year slump, notching a feeble 88.9 in January vs. 88.0 [50]. The average during recovery/expansion is roughly 97. Without this important cohort of the American economy, job creation will remain tepid [51].
- Fed officials lack confidence in implementing policy. Large disparity of opinions among Fed Presidents is detrimental to investor confidence and implies a lack of Fed control of current economic and financial conditions. San Fran Fed’s Janet Yellen [52] (Bernanke’s right hand dove) and St. Louis Fed’s James Bullard [53] further convince investors that easy monetary policy is here to stay. Meanwhile [54], Esther George of the Kansas City Fed, Richmond Fed’s Jeffrey Lacker, and Philly Fed’s Charles Plosser all caution of market disruptions once the Fed is obligated to tighten monetary policy, thereby limiting the Fed’s ability to unwind monetary largesse and risking longer-term inflation. Sandra Pianalto [55] of the Cleveland Fed believes the FOMC should elect to reduce their scheduled purchases through year-end.
- The ugly European data continues: French [56], German [57], and Italian [58] (remember that they have elections coming up [59]) Q4 GDPs all print below expectations; meanwhile, Spanish Industrial New Orders for January print worse than expected at -3.1%. Worse, Europe is supposed to be restructuring its economy, with Germany becoming more of an importer; the latest German Trade data is disappointing in this respect [60]. In the U.K. a disappointing January Retail Sales report [61] (4th consecutive decline) fans fears of a triple-dip recession.
And Citi's Steve Englander on What To Worry About This Weekend...
Blistering criticism of Japan from US, continental Europe and Asia. The G20 statement may mention looking at spillover effects form policies and that would be viewed as buffer against competitive depreciation, but it is unlikely that there would be significant follow-though as too many G20 countries would be caught in that net. The Japanese FM said he encountered no criticism of Japan at the G20 meeting but officials from other countries will likely argue that Japan was in the spotlight. We think the currency war theme is so well discussed that the downside to USDJPY is limited, even if other countries are blunt in their comments.
More leaks on BoJ governorship. In low liquidity periods rumors on the BoJ governorship could push JPY sharply in both directions. There have been rumors supporting each of the candidates, so there is more than a little spinning going on. Muto scares USDJPY bulls less today than he did earlier in the week, so it is possible that any quick shift would be short lived.
ECB comments. The ECB has been trying to find a formula to be above the currency war fray but still convey that they are not going to let the EUR appreciate to a point where it is a first order hindrance to recovery. Successive comments have been more and more blunt. ECB and German officials carry more sway than French or Italian on this score.
UK comments that unwind criticism of Japan. The UK has not intervened but it has done everything else to weaken it currency. Japan has not intervened and Japanese official comments are arguably no worse than anything that BoE officials said this week. Note that UK comments on JPY will have an impact on GBP and their comments on GBP will have an impact on JPY, as they will be seeing as extending the scope for verbal intervention.
Cyprus, Italian elections, Spanish scandals, weak growth – EUR punching above its weight this week and weekend news flow could be unfriendly.
AUD and CAD – left behind as investors focus on weak domestic economies and ignore the pickup in global growth. Economic surprise index for Canada and Australia are both very negative. AUD positioning is already very short, Canadian positioning moderately so. An informal survey that we conducted this week suggested that sentiment with respect to was more negative than either positions or price would expect. Recovery in Asia and the US may come to the rescue of these currencies but there is short term downside risk.