June 2nd, 2013
Part 1: Lessons For The Coming Week: What To Watch This Week
Here’s a brief rundown of what to watch for the coming week and beyond:
Markets Moving Up/Down With QE Tapering Speculation
If there is news that raises the likelihood of QE reduction, markets fall. They rise on the opposite news. We saw this all week long in all regions.
For example, leading global indexes fell Monday on rising fear, then bounced back Tuesday on ECB and BoJ pledges to continue in easing mode.
Good News Becomes Bad News
- US revised estimated Q1 GDP disappointed, coming in at 2.4%, below the predicted 2.5% that is believed to be the minimum needed to keep the US economy from sliding into recession.
- US Corporate after tax profits also missed expectations, down 1.9% vs. an expected gain of 0.2%
- US weekly initial jobless claims also disappointed, coming in higher than expected.
That caused European and US indexes to close higher, as the news showed that US growth continues to struggle. That kind of news eases fears of QE tapering.
US Growth, Inflation Picture Unchanged: Too Slow To Warrant Much QE Cutback Concern
US data for the week continued to reflect a mixed bag of positive and negative news in line with the steady but still slow growth picture.
- Chicago manufacturing data beat expectations, but income and spending data were disappointing, etc.
- Friday’s core PCE figures showed 0% change, less than the meager 0.1% expected, so there’s no inflationary pressure on the Fed to tighten.
Conclusion: Don’t Fear The Taper Yet
As discussed below, continued weak global and earnings growth should further ease these concerns. We’ve mentioned before that Bernanke believes premature tightening helped bring the US Great Depression and Japan’s Lost Decade, so he’s going to err on the side of tightening later rather than earlier.
Continued Evidence of Slowing Global Growth
The week saw further evidence of weakening global growth. For example:
On Wednesday Chinese Premier Li Keqiang continued to get the world used to slower economic expansion in China as it embarks on reform, saying the country needs an annual expansion of 7%, down from an earlier 7.5% target. Earlier in the week China had reported disappointing manufacturing data. That same day the IMF also cut its growth forecast for China.
That same day:
The OECD cut its world economic growth outlook to 3.1% for 2013 and 4% for 2014 from prior forecasts of 3.4% and 4.2% respectively. In its twice-yearly Economic Outlook it predicted that the U.S. will improve and that Japan will rebound, while the recession battered euro-zone will fall further behind. The OECD also warned that cuts in QE by central banks could cause spikes in bond yields and harm the world economy.
→ Euro-zone unemployment hit yet another record high
→ Germany reported its biggest joblessness jump in 4 years
Italy’s 10 year bond auction saw rates rise from 3.94% at the prior auction to 4.14%, though that could be at least in part a reflection of rising bond rates ever since QE tapering fears hit the scene and sent US, Japanese, and other 10 year note yields rising (ok, soaring in Japan’s case).
EU Crisis Risk Remains As Reforms Stall
On Wednesday the EU once again waved its 3% deficit reduction requirement for Spain, and also for core nations France and Holland. Per Nicholas Spiro (via seekingalpha.com):
“The tide has turned decisively against the entire economic reform drive in the Eurozone.”
Meanwhile, things continue to deteriorate in the EU’s next likely bailout case, Slovenia. Its economy contracted 4.8% in Q1, versus and expected 2.9% drop.
QE Spikes Bond Yields
When $85 bln of bond demand per month threatens to disappear, it’s no surprise that bond prices will fall (and thus yields will rise). That’s not good for any struggling economy. The mere threat that the Fed might cut back on bond purchases was enough to send US and other benchmark bond yields soaring this week. Unless those fears of QE cutbacks subside, bond prices will remain under pressure. That’s a particular problem for Japan.