View from the Hill 04 November 2014
by J. Clinton Hill
With Malice Towards the Yen, Japan’s Abe Saves the DayStocks, which were already rallying from the onset of the week, increased sharply on Friday as the bulls made quick work of any bears lingering around for a late afternoon selloff. Japan’sPrime Minister, Shinzo Abe, laid his chips on the table with an expansive monetary policy thattranslates into being allinon the war against deflation. A far cry a royal flush, the Yen went spiraling down the drain on such news and the U.S.
Dollar rebounded fiercely. Such deflationaryfears also robbed gold of much of its luster and stocks resumed center stage. Although Value is waiting in the wings, small caps are the opening act in this phase of the business cycle since they are somewhat insulated from a strong U.S. dollar. They clearly provided market leadership. Nevertheless, the love for stocks is not an international trend as European, Asian and Latin American equities remain bearish. Miss America continues to rule the investment universe.
Market Condition
It was quite an impressive continuation rally for the market and the only missing ingredient was volume, with the exception of the Russell 2000. U.S. equity indexes are trading well within the confines of their bullish channels, but the stock market is overbought and overextended at this juncture. As equities are at or approaching key resistance levels, it would not be unfathomable to see them take a pause to consolidate. Our status update has reverted to bullish.
Bullish Events
Central Banks
- Europe / ECB / M3 Sept2014: Money supply in the EU increased 2.1% yr/yr vs. prior @ 1.3% andestimates @ 2.0%. Private Sector Lending also improved yr/yr to 1.2%vs. prior @ 1.5%.
- Europe / Stress Test: Earlier in the week, the ECB reported most banks within the EU regionsatisfied the financial requirements. (However, on Thursday, the head of the EU banking zoneauthority forewarned that the recently implemented stress tests were not “foolproof”.)
- Asia / BOJ / Monetary Policy Announcement Oct302014: Japan central bank’s monetary policyremained unchanged and matched expectations with accommodative rates @ 0% to 0.1%. Yet, it also surprised the markets by expanding its monetary base to an annual rate of 80 trillion yen ($724bn USD) vs. previous @ 60-70 trillion yen. Essentially, it will be buying JGBs (Japanese Govt Bonds) in the amount of $200 trillion JPY by the end of 2014 vs. $143 trillion JPY in 2013.
Consumer
- USA / US Consumer Confidence Oct2014: Despite a spotty recovery, confidence amongst consumers was @ 96.0 vs. prior @ 89.0 and estimates @ 86.8.
- USA / Consumer Sentiment Oct2014: Sentiment amongst the American consumer is at its highest level since July 2007 with a reading @ 86.9 vs. prior @ 86.4 and consensus @ 86.4.
Economic Growth
- USA / GDP Q32014: Although GDP decelerated, it still indicated robust growth for the U.S. @3.5% vs. prior @ 4.6% and consensus @ 3.0%.
- USA / Chicago PMI Oct 2014: This month’s PMI was robustly strong @ 66.2 vs. prior @ 60.5 and consensus @ 60.5.
Employment
- Europe / Germany / Unemployment Rate Sept 2014: S.A. employment for Germany declined for the first time since July 2014 by 22k,while its jobless rate was unchanged @ 6.7% vs. previous @6.7% and consensus @ 6.7%.
Energy
- USA / EIA Petroleum Status Report Week of Oct 24 2014: Demand for oil and its derivative products increased this week Crude Oil Inventories rose less than expected @ 2.1mm vs. prior @7.1 mm and estimates @ 3.1 mm bbls. Gasoline supplies dipped 1.2 mm bbls vs. prior @ 1.3 mm and estimates @ 700k. Distillates declined to 5.3 mm bbls vs. prior @ +1.0 mm and estimates @1.3 mm.
Real Estate
- USA / Pending Home Sales Sept 2014: The Pending Home Sales Index rose to 105 vs. prior 104.7 and estimates @ 104.7. Mth/mth, the index improved to 0.3% vs. prior @ 1.0%andestimates @ 0.8%. A continually improving labor market and low mortgage rates attributed to thismonth’s positive results.
- Europe / Great Britain / HPI: The nationwide home price index surpassed expectations @ 0.5%mth/mth vs. prior @ 0.01%and estimates @ 0.3%.
Manufacturing
- USA / Dallas Fed Mfg Survey Oct2014:Business Activity registered @ 10.5 vs. prior @ 10.8 andestimates @ 7.5, while the Production Index component was 13.7 vs. prior @ 17.6. Manufacturingconditions still indicate growth, but at a decelerating pace.
- Europe / Italy / Mfg & Mining Survey Oct2014:Sentiment climbed to 96 vs. prior @ 95.5 andestimates @ 95.0.
Production
- Asia / Japan / Industrial Production Sept2014:The rising son of the east delivered a surprisingmth/mth 2.7% increase vs. prior @ 1.9%and estimates @ 2.2%, while yr/yr results also improvedto 0.8%vs. prior @ 1.6%and estimates @ 0.1%.
Bearish Events
Business Sentiment
- Europe /Germany / Ifo Survey Oct2014:Weaker expectations prevailed for the sixth consecutivemonth. Economic Sentiment was @ 103.2 vs. prior @ 104.7 and estimates @ 104.0. CurrentConditions were 108.4 vs. prior @ 110.5 and estimates @ 109.8.
Central Banks
- USA / FOMC Announcement Oct292014:With inflation running below the stimulative rate of 2%,the Federal Reserve left its targeted funds rate unchanged and ranging between 0% and 0.25%,which reflects its somewhat dovish and accommodative posture. As expected, it has ended its QEprogram as of October 2014 and will no longer be actively purchasing bonds in the market basedupon its assessment of an improved job market and moderate economic growth.
Consumer
- Europe / Germany / Retail Sales Sept2014:Mth/mth retail sales declined 3.2%vs. prior revised@ 1.5%. While yr/yr sales increased 2.9%, the data is skewed due to a greater number of shoppingdays this year.
- France / Consumer Mfg Goods Consumption Sept2014:Monthly Household spending formanufactured goods dropped to 0.7%vs. prior @ 1.0% and consensus @ 0.3%.Annually, itdeclined to 0.7% vs. prior @ 1.6%.
- Asia / Japan / Household Spending Sept2014:The recently added sales tax is negativelyaffecting consumer spending @ 5.6%vs. prior @ 4.7%and estimates @ 3.9%.
Employment
- Asia / Japan / Unemployment Rate Sept2014:Asia’s rising son experienced an increase in itsunemployment rate to 3.6% vs. prior @ 3.5% and estimates @ 3.5%.
Inflation
- Europe / France / PPI Sept2014:Producer prices rebounded monthly to 0.5% vs. prior revised @0.4%and consensus @ 0.0%. Annually, they are still down 1.4%vs. prior revised @ 1.5%.
- Europe / Germany / CPI Oct2014:Mth/mth Consumer Prices receded to 0.3%vs. prior @ 0.0%and estimates @ 0.1%,while yr/yr inflation remained unchanged @ 0.8% vs. prior @ 0.8% andestimates @ 0.9%.
- Asia / Japan / Sept2014:Inflation remains well below the targeted 2% rate with actual consumerprices rising only 0.2% mth/mth vs. prior @ 0.2%. Yr/Yr inflation was 3.2% vs. prior @ 3.2% butthis number does not reflect actual conditions due to the impact and inclusion of the recentlyimposed sales tax.
Manufacturing
- USA / Durable Goods Orders Sept2014:The bellwether economic indicator disappointed to thedownside with New Orders @ 1.3%mth/mth vs. prior @ 18.3%and estimates @ 0.9%; and 3.3%yr/yr vs. prior @ 8.9% and estimates @ 8.7%.
- Asia / China / CFPL Mfg PMI Oct2014:China’s PMI index hit an 8monthlow @ 50.8 vs. prior @51.1 and consensus @ 51.2.
Real Estate
- USA / CaseShillerHome Price Index Aug2014:Home prices, seasonally adjusted, declined forthe 4th consecutive month to 0.1%vs. prior @ 0.5%and estimates @ 0.1%.
Geopolitical
- Europe / Russia / Currency Value: The Russian Ruble depreciated to its lowest level @ 42.597vs. the U.S. Dollar
Neutral Events
Consumer
- USA / Personal Income and Spending Sept2014:Personal Income showed a modest monthlyincrease @ 0.2% vs. prior @ 0.3% and consensus @ 0.3% while spending contracted monthly @0.2%vs. prior @ 0.5% and consensus @ 0.1%.
Economic Growth
- Canada / GDP Aug2014:Monthly GDP contracted to 0.1%vs. prior @ 0.0% and consensus @0.0% while annual growth came in @ 2.2% vs. prior @ 2.5%.
Economic Sentiment
- Europe / Economic Sentiment Oct2014:Economic Sentiment in the EU moved above thepsychological 100 level @ 100.7 vs. prior @ 99.9 and estimates @ 99.5. Overall, the report showsvery little change and is still relatively weak vs. 3 years or only 3 months ago.
Employment
- USA / Jobless Claims week of Oct252014:The overall trend for New Jobless Claims remainssignificantly lower than levels 1 to 2 years ago. However, this week’s report showed an increase of3000 @ 287k vs. prior @ 284k and estimates @ 280k. The 4weekmoving average was unchanged@ 281k vs. prior @ 281k and consensus @ 281.5k.
- Europe / Unemployment Rate Sept2014:The unemployment rate remained unchanged @11.5%, which was equivalent to the prior month and current expectations.
Inflation
- USA / Employment Cost Index Q32014:Employment costs were 0.7% higher vs. prior quarter @0.7% and consensus @ 0.5%. The annual increase was 2.2% vs. prior @ 2.2%.
- Europe / Italy / CPI Oct2014:Consumer prices increased more than expected monthly @ 0.1%and prior @ 0.4%and consensus @ 0.2%.Yr/yr inflation also improved to 0.1% vs. prior @ 0.2%.
- Europe / HCIP Oct2014:The harmonized index of consumer prices increased yr/yr to 0.4% vs.prior @ 0.4%.
ETF Weekly Summary of Capital Markets
*For your reference, “TWS” is a proprietary indicator that measures relative strength in a weighted manner overvarious time frames. “Vol %” compares weekly volume to average weekly volume and changes are expressed inpercentages. At times, our investment bias indicator may temporarily display conflicting views between ETFs andthe underlying indexes or securities they are designed to mimic or represent, but such divergences are temporarilyshorttermand may be due to variances in price, volume and investment allocation to their component assets.
The Road Ahead
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