The week ahead will deliver important data from the US and China. In the US, the focus will be on retail sales and housing starts, as well as on the Philadelphia Fed and U. Michigan Consumer Sentiment surveys. Turning to China, the consensus forecast for China Q4 GDP is 7.8%yoy, while secondary data will come from the country's IP and FAI data updates.
We are back to that phase in market euphoria where no news is good news, good news is better, and bad news is best. While there was little news over the weekend, and overnight, what news there was uniformly negative: northern China drowning in smog, the Apple fad bubble bursting, European Industrial production printing below expectations (-0.3%, exp.-0.2%, down from revised -1.0%), and ever louder rumors that the debt ceiling debate may metastasize into an actual government shutdown for at least a few days, which means the first technical default in US history. Yet nothing seems able to faze the risk on mood, still driven by a relentless surge in the EURUSD which touched on 1.34 overnight before retracing, and the EURCHF, which too has soared by over a 100 pips in recent trading action, which according to some is a result of Swatch buying the Harry Winston watch and jewelry brand for $1 billion, and an aggressively selling of CHF into USD by the company. Eventwise, today will be a quiet day in the US, although the action will pick up tomorrow as more companies report earnings as well as the all important retail sales report will put to rest all debate over just how good or bad this holiday shopping season (pre and post seasonal adjustments) truly was.
The underlying trends seen this year have continued, but after strong follow through in Asia, a more subdued tone has been seen in Europe. The US dollar is generally softer, except against the yen and sterling. Japanese markets were closed for holiday, but the MSCI Asia-Pacific Index rose almost 0.3%, lifted by more than a 3% rally in China on speculation that there may be a sharp increase in the cap on foreign investors' ability to invest in Chinese equities. In Europe, the Dow Jones Stoxx 600 is hp about 0.4%, led by a rise in financials. Spanish stock market is at its highest level in almost a year (Feb 2012) and Italy's market is at its best August 2011, though their bond markets are seeing some profit-taking today. With a light economic calendar in North America today, Bernanke's speech in Michigan after the markets close may be the highlight. We identify six key factors shaping the investment climate.
The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.
As a start, identify the trends.
Would be easy to call this boring, given the state of the market and volumes, but undercover Risk On definitively there. Greek 10s over the moon and far away (up 500 ticks)… Strong EUR. Seems a little easy, but who wants to fight? It’s Yule Time – at least until Friday, then we’ll see what the Mayans really meant.
"Oh Come All Ye Faithful" (Bunds 1,42% +0; Spain 5,25% -4; Stoxx 2658 +0,4%; EUR 1,326 +40)
There was little excitement in today's November housing starts and permits numbers, the first of which missed expectations of 872K modestly, and was down from 894K to 861K on a seasonally adjusted, annualized basis (64.6K unadjusted, non-annualized, the lowest since March; the Northeast unadjusted print was 25% lower than a year ago!). The prior two months were also revised lower from from 863K and 894K to 843K and 888K. On the other hand, permits which are nothing more than an opportunity cost fee for an application filed with the local housing office, rose from 868K to 899K. Curiously enough, this was the one series that was supposed to benefit from Sandy, as builders would step up reconstruction efforts in the hurricane impact areas. Alas, that did not happen, in the impacted Northeast Region, as both Starts (73K) and Permits (76K) came at multi month lows (in the case of permits, this was the lowest print of all of 2012). What did drive housing starts and permits? The "South" where both categories saw the respective data prints jump to the highest since 2008. The same south which was promptly featured in our "Interactive Guide to the Housing Recovery." The housing bubble is back in full force.
Blah blah Fiscal Cliff blah. Blah blah blahdy blah Cliff. Cliff blah blah republicans blah democrats blah blah blah blah. Blah blah blah blah, blah blah, blah blah blah blah blah, blah blah, Cliff. Blah blah blah blah, blah blahdy blah.... Blah.
Another boring session, worsened by year end inactivity… Good close. Fiscal Cliff haggling on-going with a positive spin this time and Risk riding high.Spain catching up and paring yesterday’s soft patch, as is Italy. ESToxx at the highest since Aug 2011. Credit very squeezed. EUR strong. Merry Mood!
"I Saw Mommy Kissing Santa Claus " (Bunds 1,42% +5; Spain 5,29% -12; Stoxx 2647 +0,7%; EUR 1,322 +50)
Utterly boring Monday session, worsened by year-end inactivity… Won’t get any better going forward, probably. Fiscal Cliff a cliff-hanger (I know, cheap)… Spain on the heavier side with contingent funding holes still popping up here and there.
"Jingle Bell Rock" (Bunds 1,37% +2; Spain 5,41% +4; Stoxx 2628 unch; EUR 1,317 +30)
Bingo Bongo, Good News hailing, Sleepily digesting in the South to end Stuck… What an uninspiring week… Felt slow as a Sunday Afternoon– for 5 days in a row… The only thing that wasn’t lazy and laid back was the EUR.
Utterly boring Friday session, worsened by year end inactivity… PMI figures, which were actually needed on the more positive side to justify the latest levels in Risk were just so so in Europe. But, who cares? Periphery recovering further with Spain actually the best performer on the week (outside the bailed-out gang). US stuck despite better figures.
"Stuck in the Middle with You" (Bunds 1,35% unch; Spain 5,37% -1; Stoxx 2628 +0,2%; EUR 1,314 +60)
Markets getting back to some normality with the Periphery still recovering, although less today after the auctions, Bunds 5 wider on the week, Italy 10, but Spain 7 tighter across the curve from last Friday. Equities and Risk oblivious to that anyway and synching with the US. Getting difficult to find something crisp out there with reduced news flow and volatility. Excitement to be found in the US on FC developments, now that Greece, Spain and Italy are seemingly off the table and that the FED has moved to QE4.
"When It's Sleepy Time Down South" (Bunds 1,35% +1; Spain 5,38% +4; Stoxx 2622 -0,2%; EUR 1,308 +40)
Last week we noted: "...when taking into account the recent slate of economic weakness, post-election we are likely to see many of the recent job gains revised away as the data aligns itself with overall economic activity...." Since that time jobless claims did indeed rise, and with the release of the November jobs report, we saw the previous two month's gains in employment revised down by a total of 49,000. What is important to remember is that the BLS only publishes revisions to the prior two months even though it has data for months prior. This is why the annual revisions to the employment data can be significant. Furthermore, given the weakness in the employment components of the major economic surveys, as shown by the composite employment index, we should expect to see negative revisions to the 2012 data employment data next year. While it is too early to say that employment has peaked for this current recovery cycle - there is mounting evidence that this may indeed be the case.
All the government subsidies in the world will not revive the construction industry - only demand from increasing wealth will. The guest commentary below offers a vivid picture of the economic and regulatory factors weighing on homebuilders these days. The author is Wayne Siggard, who builds mansions for the super-rich. A UCLA law graduate, Wayne worked for Bechtel Financing Services and was self-employed as an investment banker doing private placements in oil and gas and alternative energy project financing. When oil hit $10/bbl in 1985, he went into the homebuilding business, turning an avocation into an occupation. His real estate operations, including land development, have primarily been in California and Utah. Wayne lived for several years in Italy and Switzerland and speaks many languages.