When will the job market thaw?

The last two months is reminiscent of the semester I spent in London, when talk of the weather seemed to assume an outsized importance in all conversations. Even Fed Chair Janet Yellen had to bow to Mother Nature during her semi-annual testimony before the Senate Banking Committee last week, which of course was delayed due to…weather. “Mr. Chairman, let me add as an aside that since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it's difficult to discern exactly how much.” Economists say that some, although not all, of the recent slowdown in job growth is due to the run of unusually bad weather. Over the past three months, the economy has added an average of 154,000 positions each month, 40,000 fewer than the 2013 monthly average. Bad weather could also impact the February results, because the Southeast and Northeast were hit by more heavy snowstorms in the week that the BLS conducted its survey, which is why analysts expect that just 150,000 jobs were created and that the unemployment rate will remain at a five-year low of 6.6 percent.

If weather really is the culprit, then a spring thaw should help the employment recovery. But nearly five years after the end of the recession, there are still almost 300,000 fewer private sector jobs now than when the recession started in 2007, according to Calculated Risk. With corporate profits and stock markets soaring, why is it taking so long for jobs to snap back? Henry Blodgett of Business Insider has a theory: “Because American companies and their owners are greedier now than at any time in history.”

Despite the over-the-top headline, Blodgett has a point. He notes that just as corporate profits hit another all time high, companies are paying employees less than they ever have as a share of GDP. That gibes with research that has shown that the spoils of the recovery have gone disproportionately to wealthy Americans, who coincidently own stocks in much great proportion than everyone else. As a result, the top 1 percent captured 95 percent of the income gains in the first three years of the recovery.

So when does this trend return to more historic averages? That’s the magic question that I posed to a number of economists last week, all of whom gave me the same response as my favorite weather pals, when I ask when the spring thaw is coming: “Hopefully, soon.”

MARKETS: February was a strong month for stocks, putting talk of a correction on the back burner, at least for now.

• DJIA: 16,321, up 1.4% on week, up 4% on month, down 1.5% YTD
• S&P 500: 1859, up 1.3% on week, up 4.3% on month, up 0.6% YTD
• NASDAQ: 4308, up 1% on week, up 5% on month, up 3.1% YTD
• 10-Year Treasury yield: 2.66% (from 2.73% a week ago)
• Apr Crude Oil: $102.59, up 0.4% on week
• April Gold: 1321.60, down 0.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.45 (from $3.77 a year ago)

THE WEEK AHEAD: Monthly automobile sales are expected to come in at a seasonally adjusted annual rate of 15.3 million units, about the same as last year. While bad weather may slow down sales during these early winter months, those purchases are likely to be delayed a couple of months, leading many to forecast a strong spring.

Mon 3/3:

Motor Vehicle Sales

8:30 Personal Income and Spending

10:00 ISM Mfg Index

10:00 Construction Spending

Tues 3/4:

President Obama releases fiscal 2015 budget proposal

Weds 3/5:

8:15 ADP Private Employment Report

10:00 ISM Non-Mfg Index

2:00 Fed Beige Book

Thurs 3/6:

7:30 Challenger Gray Job Cuts

8:30 Weekly Jobless Claims

8:30 Productivity

10:00 Factory Orders

12:00 Q4 Flow of Funds

Former Federal Reserve Chairman Ben Bernanke will be deposed in conjunction with a lawsuit about the 2008 government bailout of AIG

Fri 3/7:

8:30 February Employment

8:30 International Trade

3:00 Consumer Credit

Week Ahead: Groundhog’s Day for Jobs?

After weaker than expected December jobs data, investors are preparing for the January report, due Friday. In the last month of the year, the economy added 74,000 positions, far below the two-year average of 182,500. Yes, December was a stinker and it may have been negatively impacted by severe weather (the team at Capital Economics believes that “at least half of the slowdown appears to have been due to the unusually heavy snowfall that prevented some people from getting to work and stopped others from conducting business as normal”), but 2013 was pretty good, according to David A. Rosenberg, the chief economist at Gluskin Sheff (h/t NYT’s Floyd Norris).

Rosenberg notes that total employment rose 2 percent last year for a total of 2.26 million new jobs; part timers and those working part-time for economic reasons fell 0.7 percent and 2 percent respectively; the number of people who needed second or third jobs fell 2.2 percent; and job openings increased by 5.6 percent, while layoffs sank 14.3 percent.

These are pretty good results for an economy that grew by just 1.9 percent for the entire year. (On an annual basis, real GDP increased 1.9 percent, but on Q4-over-Q4 basis, real GDP increased 2.7 percent Note: See GDP: Annual and Q4-over-Q4 for the difference in calculations. For the 18 quarters of the current expansion, the economy has grown by about 2.4 percent annually.)

So what about the December problem? Sure, it was just one month and many economists are sticking to the theory that there were some weather related issues. Still, the jobs situation is far from ideal -- employment is still below the pre-recession peak, albeit by less than 1 percent. And the ranks of the long term unemployed (who have been unemployed for more than 26 weeks and still want a job) remain far too large at 3.88 million.

Economists are all over the map with predictions for January’s results, but other indicators, like weekly claims and the employment components of manufacturing and service sector surveys, have shown improvement. As a result, most expect job creation to return to last year’s average rate of about 185,000 for the month. The unemployment rate, which dropped to a five-year low in December, is expected to remain at 6.7 percent.

Weather watchers remind us that it was pretty chilly in January too, so there could be a chill in January’s results. That may be a little Groundhog’s Day-ish for some, but there it is. The BLS will also release its update to previous data, back to January 2009, so be prepared for revisions, especially to last year’s readings.

MARKETS: According to an old Wall Street saying, “As goes January, so goes the year.” Does that mean all is lost for 2014? The statistical support for the so-called “January Barometer” is shaky at best, so let’s not go crazy. US stocks were down for the month, but nearly as much as emerging markets, which tumbled 6.6 percent, according to the broad MSCI Emerging Market Index. Those once high-flying performers have cratered by 22 percent from post-crisis highs in 2011 and by almost a third from the peak in 2007. The downdraft convinced many to bail on the whole lot of ‘em: In this week alone, investors pulled 6.4 billion dollars from emerging stock funds and $3 billion from emerging bond funds. Those panicky investors headed to the safety of US government bonds.

• DJIA: 15,698, down 1.1% on week, down 5.3% in Jan/YTD (worst month since 5/12, worst Jan since 2009)
• S&P 500: 1782, down 0.4% on week, down 3.6% in Jan/YTD (worst month since 5/12, worst Jan since 2010)
• NASDAQ: 4103, down 0.6% on week, down 1.7% in Jan/YTD
• 10-Year Treasury yield: 2.66% (from 2.74% a week ago; best month since 5/12)
• Mar Crude Oil: $97.49, up 0.9% on week, down 0.9% in Jan/YTD
• April Gold: 1239.80, down 1.9% on week, up 3.1% in Jan/YTD
• AAA Nat'l average price for gallon of regular Gas: $3.28 (from $3.46 a year ago)

THE WEEK AHEAD: In addition to employment, the week ahead will feature monthly automobile sales, which likely dipped because of the cold weather and manufacturing and factory data. Investors will be on guard for a fall-off in manufacturing activity after China recently reported a slowdown in growth. On the earnings calendar, social media will be in focus, as Twitter and LinkedIn report results.

Mon 2/3:

Yum Brands

Automobile Sales

10:00 ISM Mfg Index

10:00 Construction Spending

Senate subcommittee holds hearing on recent data breaches at major retailers

Tues 2/4:

Clorox

CBO releases its U.S. economic outlook

Weds 2/5:

Time Warner, Twitter, Walt Disney, GlaxoSmithKline, Merck

8:15 ADP Private Sector

10:00 ISM Non-Manufacturing

Thurs 2/6:

GM, LinkedIn

Chain Store Sales

7:30 Challenger Job-Cut Report

8:30 Weekly Jobless Claims

8:30 International Trade

8:30 Productivity and Costs

Fri 2/7:

8:30 January Jobs Report

3:00 Consumer Credit

Week Ahead: Bernanke's Swan Song

All eyes will be on the Federal Reserve this week, when the central bank concludes its last policy meeting of the Ben Bernanke era. (Janet Yellen will succeed Bernanke as leader of the central bank on February 1^st.) Before launching into what will happen at the upcoming meeting, it’s worth considering Ben Bernanke’s legacy during his seven years as Chairman of the Federal Reserve. Bernanke presided over one of the most turbulent periods in U.S. economic history and reviews of his performance have varied. Critics note that Bernanke has been a modern-day money printer, who missed the implication and severity of the subprime crisis in 2007. Who can forget his May 2007 comment, “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Woops!

But Bernanke fans see him as the savior of the financial system. After recognizing the magnitude of the crisis, he rose to the occasion, according to Martin Wolf of the Financial Times. “Bernanke acted decisively and effectively, slashing interest rates and sustaining credit.” Once the worst of the crisis passed, Bernanke realized that political fighting in DC had made the Federal Reserve the economy’s best hope for recovery. He resorted to extreme measures to prod growth: maintaining short term interest rates at zero and purchasing bonds for the Federal Reserve’s portfolio.

The naysayers contend that although these actions have not yet created inflation, they will down the road. They also say that unwinding these policies under Janet Yellen will lead to destabilizing events across the globe-just take a look at the emerging markets in the last week alone!

How history judges Bernanke will depend in large part on what happens in the next group of years. As the legacy of the Bernanke era develops, there is no doubt that the man will be seen as one of the most important Fed Chairmen in the 100-year history of the central bank.

And now, the week ahead!

At the December FOMC meeting, Fed officials began the process of unwinding their bond-buying program by reducing purchases by $10 billion dollars to $75 billion. Many believe that with economic activity picking up, the Fed may announce another $10 billion dollar cut to $65 billion at this week’s meeting. Others say that the weaker than expected December jobs report may encourage the Fed to hold off until the March meeting.

In addition to the FOMC, the first estimate of fourth quarter growth is expected to show that the economy grew by an annualized pace of 3.3 percent, despite the government shutdown and unusually bad weather. If the consensus comes in on target, the result would be slower than the previous quarter’s 4.1 percent, stronger than the 2013 real (inflation-adjusted) growth of 2-2.25 percent; and equal to the 60-year average.

Just a few weeks ago, economists predicted that US growth in 2014 would finally match the historic norm. The boost would come from an accelerating jobs recovery, waning household debt burdens and the fading of sequestration’s fiscal drag. The combination would encourage consumers and businesses to spend more freely, creating a virtuous economic cycle. That line of thought came under scrutiny last week, after disappointing Chinese manufacturing data prompted a sharp sell off in global equities and emerging market currencies.

As the rosy growth picture dimmed, some worried that companies might err on the side of caution and restrain spending. According to Factset, total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, despite the fact that those companies are sitting atop $2.8 trillion in cash. Of course, corporate plans can shift quickly. If sales and growth pick up more than expected, businesses may go on a mini-spending spree.

MARKETS: Just a week and a half ago, the S&P 500 reached a new all-time high. Last week, worries about slowing growth in China, an emerging market melt down (led by a potential currency crisis in Argentina and exacerbated by the eventual withdrawal of Fed stimulus), and weakness in some blue chip earnings, sent stocks lower. Investors may have forgotten the word volatility, but before we get too nutty, the S&P 500 is now off 3.1 percent from its all-time high on Jan 15^th. The classic definition of a correction is a drop of 10 percent or more from the peak. Meanwhile, risk-averse investors piled into highly rated government bonds (US and Japanese).

• DJIA: 15,879, down 3.5% on week, down 4.2% YTD (biggest weekly drop since 11/11)
• S&P 500: 1790, down 2.6% on week, down 3.1% YTD (biggest weekly drop since 6/12)
• NASDAQ: 4128, down 1.7% on week, down 1.2% YTD
• 10-Year Treasury yield: 2.74% (from 2.83% a week ago and a 7-week low)
• Mar Crude Oil: $96.64, up 2.1% on week
• April Gold: 1264.50, up 1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.29 (from $3.32 a year ago)

THE WEEK AHEAD:

Mon 1/27:

AAPL, Caterpillar

10:00 New Home Sales

Tues 1/28:

AT&T, Ford, Pfizer, Yahoo

8:30 Durable Goods Orders

9:00 Case-Schiller Home Price Index

10:00 Consumer Confidence

Weds 1/29:

Boeing, Facebook

2:00 Fed Meeting announcement (no press conference)

Thurs 1/30:

3M, Altria, Amazon, Colgate, Exxon Mobil, Google, UPS, Visa

8:30 Weekly Jobless Claims

8:30 Q4 GDP (1^st estimate)

10:00 Pending Home Sales

Fri 1/31:

Chevron, Master Card, Mattel

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment

Sat 2/1:

Janet Yellen becomes Fed Chair, the first woman to do so

Sun 2/2:

A football game will be played in NJ

Week Ahead: Labor Market Has Work to Do

The US economy created far fewer jobs than expected in December – just 74,000, the smallest number since January 2011. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, but the rate went down for the wrong reason - it was largely due to 347,000 would-be workers leaving the labor force. That pushed down the participation rate (the number of people actively looking for a job or employed) to a 35-year low of 62.8 percent. (As a point of reference, the participation was about 66-67 percent over the last 20 years. A large portion of the drop (as much as one-half to two-thirds) is attributable to demographics, i.e. Baby Boomers retiring). Considering that analysts were predicting 200,000 jobs created and that the participation would increase, you are not alone in asking, “What happened?”

Some economists noted that the big miss was due to unseasonably severe winter weather last month. The Bureau of Labor Statistics attempts to adjust its findings for seasonal factors. But since more snow fell than in a normal December, the adjustment may have lagged reality. The government’s household survey showed that 273,000 people reported not being able to work because of the weather in December, that’s well above the long-term average of 166,000 for the final month of each year. The folks at Capital Economics said, “It’s even possible that some people who couldn’t get to work were incorrectly recorded as unemployed rather than employed.”

Doubters contend that bad weather should not matter, because the government still counts workers as employed as long as they were paid for one day in the sample period, regardless of whether they turned up. Hard to say, but eyeballing the 16,000 decline in construction and the drop in average weekly hours worked, chances are that bad weather played some role. If that’s the case, then the next few months should show a pickup, as the chill from the Polar Vortex (and all other unnamed weather patterns) pass.

For now, the labor market still has work to do…

Now that the jobs report is behind us, it’s time for earnings season! Fourth quarter earnings for all S&P 500 companies are expected to rise by 6.1 percent, according to FactSet, compared to a 5.1 percent increase in the third quarter. Earnings estimates are down since September 30^th, with the energy sector seeing the largest cut. It’s the financial sector that is expected to lead the way, with earnings expected to rise by over 20 percent.

On the economic calendar, December retail sales will provide a closer look at the holiday shopping season. Last week, ShopperTrak said that sales were up 2.7 percent from a year ago in brick-and-mortar stores, despite a steep drop in traffic, which fell 14.6 percent. Separately, low-end retailers Dollar Stores and Sears reported that their customers continue to struggle economically and as a result; the holiday season was a bust.

MARKETS:

• DJIA: 16,437, down 0.2% on week, down 0.8% YTD
• S&P 500: 1842, up 0.6% on week, down 0.3% YTD
• NASDAQ: 4174, up 1% on week, down 0.05% YTD
• 10-Year Treasury yield: 2.86% (from 2.99% a week ago)
• Feb Crude Oil: $92.72
• Feb Gold: $1246.90
• AAA Nat'l average price for gallon of regular Gas: $3.31 (from $3.31 a year ago)

THE WEEK AHEAD:

Mon 1/13:

Tues 1/14:

JPMorgan Chase, Wells Fargo

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Weds 1/15:

Bank of America

8:30 PPI

8:30 Empire State Manufacturing

2:00 Fed Beige Book

Thurs 1/16:

American Express, Citigroup, Goldman Sachs, Intel

8:30 Weekly Jobless Claims

8:30 CPI

10:00 Philadelphia Fed

Fri 1/17:

GE, Morgan Stanley

8:30 Housing Starts

9:15 Industrial Production

9:55 Consumer Sentiment

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Image by www.lendingmemo.com

Week Ahead: Back to Work for Wall Street

Wrapping up the year in one post is tough, but let’s give it a try. Although the financial industry likes to think that the center of the universe is located somewhere between lower Manhattan and the hedge fund enclave of Greenwich, CT, most of 2013 was dominated by events in Washington DC. Fiscal Cliff: The year started with a cliffhanger Congressional vote that occurred 90 minutes after the January 1 “fiscal cliff” deadline. The agreement raised roughly $600 billion in taxes over 10 years, by increasing contributions to Social Security  from 4.2 percent, back to 6.2 percent on earnings up to $113,700; and by increasing taxes for wealthy Americans.

Sequestration: The genesis of the automatic $1.2 trillion in spending cuts, known as “sequestration,” occurred in August 2011, when lawmakers were battling over raising the debt ceiling. When the  “supercommittee” failed to devise an alternative to avert across-the-board cuts to defense and non-defense programs, the government was forced cut $110 billion from its budget, starting on March 1^st.

Economists warned that the combination of tax increases and spending cuts would reduce growth, which is exactly what occurred. Q1 came in at a measly 1.1 percent annualized pace, but as the year advanced, things picked up. GDP advanced to 2.5 percent in Q2 and then to a sizzling 4.1 percent in the third. The economy likely expand by about 2.25 to 2.5 percent for the year, a bit ahead of the worrywart predictions, but still about one percent slower than the post-World War II average of 3.3 percent.

Bernanke’s Taper Talk: During Fed Chairman Ben Bernanke’s May 22^nd testimony on Capitol Hill, he said that the central bank could taper its $85 billion monthly bond-buying program, if the economy were to perk up. The stock and bond markets fell on the suggestion that the central bank would remove stimulus from the economy, though the stock market recovered and eventually moved higher. By the time the Fed finally announced the dreaded taper at its last policy meeting of the year, investors took the news in stride and bought stocks. However, the bond market suffered a lasting blow: the yield on the 10-year treasury soared from 1.62 percent in the beginning of May to a two-year high of 3 percent and pushed down the value of bonds.

Government shutdown/Debt Ceiling: Budget fights are like clockwork, but 2013’s drama led to a partial government shutdown from Oct 1 - 16. Lawmakers finally agreed on a deal to reopen for business and to raise the debt ceiling, averting what the Treasury Department said would be an unprecedented and potentially catastrophic default.

Housing Recovery: 2013 was a big turning point for the US real estate market. The combination of low interests rates and bargain-basement prices brought big investors into the fray. The result was a 13 percent increase in home prices this year and a big uptick in activity. The pace of price gains will likely slow in 2014, due to higher mortgage rates and an increase in inventory, but single-digit increases would be increases nonetheless.

Stocks Soar: The Federal Reserve’s low interest rate policy and bond buying program made stocks the go-to asset class for investors. (See below for 2013 totals.)

First FULL WEEK of 2014: It’s back to work for Wall Street, after two consecutive holiday-shortened weeks. No time to gloat over those big gains for stocks, because this week the focus will be on Friday’s December jobs report. Economists are hoping to build on the strength of the past few months, when monthly job creation averaged over 200,000.

The economy added nearly 2.1 million jobs through November and with December expected to show an increase of about 200,000, total monthly job creation for the year is expected to be 190-195,000, a slight improvement from the 183,000 in 2012. The unemployment rate should remain at a five-year low of 7 percent. As a reminder, unemployment  was at 5 percent in December 2007, the month that the Great Recession officially started. It doubled to 10 percent at the end of 2009, before starting to drop.

Investors will also eye the minutes from the Fed's December policy meeting, when the central bank announced a $10 billion reduction in monthly bond-buying. There will be interest in whether Fed officials discussed the pace of future reductions.

MARKETS 2013:

• DJIA: 16,576, up 26.5% on year (including dividends: 29.7%)
• S&P 500: 1848, up 29.6% on year (including dividends: 32.4%)
• NASDAQ: 4176, up 38.3% on year (including dividends: 40.1%)
• Nikkei 225: up 57% (remains 40% below all-time high in 1989)
• Venezuelan Stock market: up 480%, best performer worldwide
• China’s Shanghai Composite: down 6.7 percent
• Brazilian Bovespa: down 15 percent
• 10-Year Treasury yield: 3.03% (including interest: down 1.3%)
• Barclay’s US Aggregate Bond Index, down 2.02% (first decline since 1999)
• Feb Crude Oil: $98.42, up 9.3%
• Feb Gold: $1202.30, down 28.7% (first losing year in 13)
• AAA Nat'l average price for gallon of regular Gas: $3.32 (from $3.30 a year ago)

THE WEEK AHEAD:

Mon 1/6:

10:00 Factory Orders

10:00 ISM Non-Mfg Index

Tues 1/7:

8:30 International Trade

Weds 1/8:

8:15 ADP Private Sector Jobs

2:00 FOMC Minutes

3:00 Consumer Credit

Thurs 1/9:

8:30 Weekly Jobless Claims

Fri 1/10:

8:30 December Jobs Report

Week Ahead: Asset Class Envy

With all of the celebrations over stock market records these days, you might think that investors are once again partying like it’s the nineties. But most investors learned hard lessons in the near two decades since those halcyon days. The 1990’s-2000 Internet boom and bust, followed by the 2000’s housing boom and bust, along with a once-in-a-generation financial crisis and two associated stock market crashes, cured most investors of their stock-only portfolios. They soon learned the beauty of a diversified portfolio, which can provide comfort during stormy periods of time. But those diversified portfolios are not nearly as comforting when stocks are soaring and bond and commodity markets are falling. That’s why when many investors review their year-end statements, their total gains are likely to be much less than the 30 percent returns of the S&P 500. The main culprit is the bond market, which has taken it on the chin in 2013. The price of the 10-year Treasury has dropped precipitously this year, as yields have soared from a springtime low of 1.62 percent to 3 percent on Friday. The result is a total loss in return of about 2.7 percent for an asset class known as a "safe haven"!

Analysts note that the rise in rates is occurring for a good reason: the economy is strengthening and as a result, the Federal Reserve can slowly get out of the stimulus business. That may be cold comfort for diversified investors, who no doubt are feeling a bit of asset class envy right about now. Let’s just hope that they do not bail out of bonds and jump into stocks at the wrong time, which in hindsight can seem like premature reallocation.

Worrying about losses in bond positions probably seems like a pretty good problem to have, if you are one of the 1.3 million Americans who have just seen long-term unemployment benefits expire. The benefit has paid an average of $300 per week for up to an additional 47 weeks for those who have exhausted the roughly 26 weeks of unemployment benefits that most states provide.

Late last week, Sen. Jack Reed (D-RI) announced plans to introduce a three-month extension of  long-term unemployment benefits, and is aiming for a procedural vote as soon as January 6. The $6.5 billion proposal would maintain aid for recipients, who would have their benefits restored retroactively, while buying legislators more time to work out a longer extension. Costs for a full year of extending the benefits are estimated at $25 billion, according to CBO.

Reed has his work cut out for him: Many lawmakers are reluctant to extend benefits unless other cuts are proposed to offset them. Economists caution that cutting long-term unemployment benefits could reduce first quarter GDP by 0.2-0.4 percent.

MARKETS:

• DJIA: 16,478 up 1.6% on week, up 25.7% on year
• S&P 500: 1841, up 1.3% on week, up 29% on year
• NASDAQ: 4156, up 1.3% on week, up 37.7% on year
• 10-Year Treasury yield: 3% (from 2.89% a week ago)
• Jan Crude Oil: $100.32, up 1% on week
• Feb Gold: $1214, up 0.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.30

THE WEEK AHEAD: The trading week between Christmas and New Year’s is often the lowest volume week of the year. With New Year’s Day falling mid-week, expect the first two trading sessions of 2014 to be equally quiet. Reports from the nation’s housing market, are expected to confirm that the sector is closing out a strong year. The Conference Board’s confidence index is expected to recover from October’s steep drop and November’s slide, both of which were probably due to the government shutdown and debt ceiling drama.

Mon 12/30:

10:00 Pending Home Sales

Tues 12/31:

9:00 Case-Schiller Home Price Index

9:45 Chicago PMI

10:00 Consumer Confidence

Bond markets close early, while stock markets have regular hours

Weds 1/1: GLOBAL MARKETS CLOSED FOR NEW YEAR’S DAY

Hold the sarcasm: Greece assumes the EU presidency from Lithuania

Thurs 1/2:

8:30 Weekly Jobless Claims

10:00 ISM Manufacturing

10:00 Construction Spending

Fri 1/3:

Motor Vehicle Sales

Week Ahead: Fed Proclaims “Let the Good Times Roll!”

For the first time in five years, the Fed shifted policy and guess what? The world kept spinning! In fact, stocks soared on the news that the central bank would reduce its monthly bond purchases by $10 billion to $75 billion and keep short-term interest rates at rock-bottom levels. I guessed last week, that “Given what the Fed has told us, now would seem to be the right time to start unwinding the policy. If there is a change to policy, it’s not likely to be anything to dramatic-probably a reduction of $10 to 15 billion per month, evenly split between treasury securities and mortgage-backed securities.” What I did not anticipate was a central bank Christmas bonus: not only would the pull-back in bond buying occur slowly, but the Fed plans to keep short-term interest rates at near zero, even after the unemployment rate dropped below 6.5 percent, which likely means that rates will stay low at least for another year.

Put a different way, it’s like your parents announcing that they will reduce the proof of the punch bowl booze from 85 to 75 AND the party will continue right through next year! Sure, the festivities may not be quite as much fun in six months from, when the proof drops to 45, but for now, let the good times roll (h/t The Cars)!

MARKETS: Finally, a REAL milestone. The Dow hit a new inflation-adjusted high on Friday. The blue chip index had to reach 16,186.39 to have the same buying power (based on CPI) it had when it was worth 11,722.98 on January 14, 2000, according to the WSJ.

• DJIA: 16,221 up 3% on week, up 23.8% on year
• S&P 500: 1818, up 2.4% on week, up 27.5% on year (best week since July, on track for best year since 1997)
• NASDAQ: 4104, up 2.6% on week, up 36% on year (18% below 3/00 all-time high of 5,048)
• 10-Year Treasury yield: 2.89% (from 2.87% a week ago)
• Jan Crude Oil: $99.32, up 2.5% on week
• Feb Gold: $1203.70, down 2.5% on week, down 28% on year (on track for first annual decline in 13 years)
• AAA Nat'l average price for gallon of regular Gas: $3.24

THE WEEK AHEAD: Take a load off…it should be a quiet, holiday-shortened week!

Mon 12/23:

8:30 Personal Income and Spending

8:30 Chicago Fed National Activity

9:55 Consumer Sentiment

Tues 12/24:

8:30 Durable Goods Orders

9:00 FHFA Home Price Index

10:00 New Home Sales

1:00 Markets close early Christmas Eve

Weds 12/25: GLOBAL MARKETS CLOSED FOR CHRISTMAS

Thurs 12/26:

8:30 Weekly Jobless Claims

Fri 12/27:

Sat 12/28:

Long-term unemployment benefits expire for 1.3 million Americans

Week Ahead: Federal Reserve Nerve

Will they have the nerve to do it or won’t they? For the last time in 2013, investors and economists are wondering whether or not the Federal Reserve will finally pull the trigger and announce a reduction in its monthly bond purchases (aka “Quantitative Easing” or “QE3”). According to my non-scientific poll, odds are running at about 50-50. Those who say that the Fed will act, point to the September FOMC meeting rationale that Ben Bernanke laid out for why the central bankers maintained the status quo. At the time, he cited three concerns that put taper talk on hold: (1) the labor market was still weak (2) the recent rise in interest rates could slow down the economy and (3) lawmakers in DC could throw everything for a loop.

In the subsequent three months, there has been positive movement on all fronts.

1. Employment: Job growth has accelerated, boosting the average monthly gain to over 200,000 for the past three months. Additionally, the unemployment rate has dropped to 7 percent. Way back in June, Bernanke said that an unemployment rate of 7 percent could be a trigger for pulling back on the Fed’s stimulus.
2. Economic slowdown: Despite higher interest rates, the economy is picking up steam. Q3 GDP was revised higher to an annualized pace of 3.6 percent; November retail sales were stronger than expected; and the increase in home and stock prices are combining to increase the so-called “wealth effect,” which should encourage more consumer spending.
3. DC Drama Queens: It may have been a small budget deal, but it was a deal. Congress agreed to increase spending by $63 billion over two years, with the caveat that there will be more than $22 billion in deficit reduction over the next decade. While lawmakers reserve the right to screw things up over the long-term, the short-term pressure is off.

Despite the progress, doubters note that the Fed is still worried that the labor market is not sufficiently healed and that the drop in rate is occurring not just because employment is rising, but also because people are leaving the labor force. Additionally, there is lingering concern that the low level of inflation is causing anxiety among some central bankers. Then there’s the theory that the Fed may wait until Janet Yellen takes over as Chairman in January, before retreating from five consecutive years of aggressive action. (The Senate is expected to vote on Yellen’s nomination this week.)

Given what the Fed has told us, now would seem to be the right time to start unwinding the policy. If there is a change, it’s not likely to be anything to dramatic-probably a reduction of $10 to 15 billion per month, evenly split between treasury securities and mortgage-backed securities.

Aside from the Fed meeting, there will also be news from the real estate market. Analysts say that the housing recovery is entering a new phase. The recent rapid rise in prices, which was driven by strong investment buying and tight supply conditions, will soon start to moderate as higher mortgage interest rates and increased inventory slow down progress. The recovery may take a breather, but it is likely to remain intact.

MARKETS: Boo-hoo…two consecutive weeks of losses is nothing compared to the massive year-to-date gains of 20 to 30 percent for stocks. As a reminder, the current bull market began in March 2009 and the S&P 500 is up 162 percent since then.

• DJIA: 15,755 down 1.7% on week, up 20.2% on year
• S&P 500: 1775, down 1.7% on week, up 24.5% on year
• NASDAQ: 4001, down 1.5% on week, up 32.5% on year
• 10-Year Treasury yield: 2.87% (from 2.88% a week ago)
• Nov Crude Oil: $96.60, down 1.1% on week
• Feb Gold: $1234.60, up 0.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.24

THE WEEK AHEAD:

Mon 12/16:

8:30 Q3 Productivity

8:30 Empire State Manufacturing Index

9:15 Industrial Production

Tues 12/17:

FOMC begins

8:30 CPI

10:00 Housing Market Index

Weds 12/18:

8:30 Housing Starts

2:00 FOMC Policy Announcement & economic projections

2:30 Bernanke Press Conference

Thurs 12/19:

8:30 Weekly Jobless Claims

10:00 Existing Home Sales

10:00 Philadelphia Fed

Fri 12/20:

8:30 Q3 GDP – final reading (2^nd estimate=3.6%)

8:30 Corporate Profits

Week Ahead: Strong Jobs Report leaves Fed in a Pickle

The stronger than expected jobs report leaves the Fed in a pickle. The economy added 203,000 jobs in November and the unemployment rate decreased to a five-year low of 7 percent from 7.3 percent. You may recall that soon-to-be-departed Fed Chairman Ben Bernanke said that when the data indicated that the economy in general – and the labor specifically – was showing progress, the Fed would take its pedal off the gas and reduce its monthly bond purchases, known as Quantitative Easing or “QE3”. The Fed launched QE3 in September 2012. Since then, the unemployment rate has dropped from 8.1 percent to 7 percent and the economy has added over 2.8 million jobs, or an average of nearly 190,000 per month. That sounds pretty good, except when you consider that it’s only about 10,000 per month more than before the introduction of the program.

Still, there is evidence that the pace of job creation is picking up. Over the past four months, the average monthly gain has been over 200,000 after a late spring/summer slow down. Additionally, the November jobs report showed broad-based gains in a variety of sectors, with manufacturing, construction, education, health and retail all demonstrating improvement. Independent research firm Capital Economics believes that the Fed has “all the evidence it needs to begin tapering its asset purchases at the next FOMC meeting later this month.”

Not so fast, says Jon Hilsenrath in the Wall Street Journal. He notes that the drop in rate was driven by a reversal of some of the shutdown-related increase the month before. “A meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell…because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.”

Indeed, the labor force participation rate (the number of people employed or actively seeking a job) remains at near 36-year lows. Oh, and there are still 10.9 million Americans are out of work, of which more than 4 million have been unemployed for more than six months; total payroll employment (136.8 million) is still short of the January 2008 peak of 138.1 million workers; and while an unemployment rate of 7 percent seems good compared to the recession high of 10 percent, it seems miles away from the 4.7 percent rate seen six years ago in November 2007, the month before the recession officially started.

In other words, if the Fed wants to punt on unwinding QE3 at the December 17-18 policy meeting, it could easily find a way to do so. With unemployment still a good distance above the Fed’s 6.5 percent threshold, it is unlikely to raise short-term interest rates until next year.

Volcker Rule: On Tuesday, regulators are expected to approve the "Volcker Rule," named after former Fed Chairman Paul Volcker. The rule is one of the most controversial parts of the 2010 Dodd-Frank financial overhaul because it seeks to stop banks with federally insured deposits from making trades and putting their own capital at risk, in pursuit of speculative trading profits. But as noted in the Financial Times, “after three years of lobbying, wrangling and debating over the rule, there is the potential for a depressingly messy execution…The desire for a rule specific enough to turn grey into black and white risks turning Volcker into a 1,000-page horror.”

MARKETS: Good news was finally good news on Friday, which saved stock investors from steeper losses. Still, it was the first losing weekly decline in nine weeks for the Dow and S&P 500. According to John Linehan, Head of U.S. Equity at T. Rowe Price, this bull market has lasted for 57 months so far, which is the average length of bull markets since 1930.

• DJIA: 16,020, down 0.4% on week, up 22.2% on year
• S&P 500: 1805, down 0.04% on week, up 26.5% on year
• NASDAQ: 4,062, up 0.06% on week, up 34.5% on year
• 10-Year Treasury yield: 2.88% (from 2.75% a week ago)
• Jan Crude Oil: $97.65, up 5.3% on week
• Feb Gold: $1229, down 1.6% on week (5-month low)
• AAA Nat'l average price for gallon of regular Gas: $3.26

THE WEEK AHEAD:

Mon 12/9:

Tues 12/10:

7:30 NFIB Small Bus Confidence

10:00 Job Openings and Labor Turnover (JOLTS)

10:00 Wholesale Trade

Volcker Rule vote

Weds 12/11:

Thurs 12/12:

8:30 Jobless Claims

8:30 Nov Retail Sales

10:00 Business Inventories

Fri 12/13

8:30 PPI

Week Ahead: 2 Important Days for the Economy Remain in 2013

Good news: you only have to pay attention to the economy, and by extension, the markets for two days this month! The first one comes this week, on Friday December 6^th, when the November employment report will be released and the second occurs 10 days later on Wednesday December 18^th, when the Federal Reserve concludes it’s final policy meeting of the year. That’s it – really! Sure there will be other stuff in between, like car and retail sales, some manufacturing and housing data, but let’s be honest: there’s a limited amount of attention anyone can direct to the economy and markets during the holiday season, so let’s focus on the important issues at hand.

For the November jobs report, investors are hoping to build on the better than expected October numbers, when the economy added 204,000 non-farm positions. The results, along with the positive revisions to the previous two months, brought the three-month average of job creation to a respectable 202,000. The consensus for November job creation is 185,000 and the unemployment rate is expected to edge down to 7.2 percent.

If job creation is stronger than expected, then the pressure will be on for the second (and last!) important date of the month, December 18^th. On that day, the Federal Reserve will conclude it’s two-day policy meeting, distribute its economic projections and Ben Bernanke will preside over his last press conference as Chairman of the central bank. If the employment situation improves dramatically, it might prompt the Fed to reduce its monthly bond purchases.

But if the jobs report is disappointing, there is unlikely to be any change in policy and you can basically tune out for the rest of the month, with one caveat: Congress is due to return by December 9, and if the debate over the nation’s budget and debt gets contentious, all best are off!

MARKETS: It has been an amazing year for stocks and according to economist at JP Morgan, history suggests an 80 percent chance for a higher market in December.

• DJIA: 16,086, up 0.1% on week, up 3.5% on month, up 22.8% on year (12 closing records during the month)
• S&P 500: 1805, up 0.1% on week, up 2.8% on month, up 26.6% on year (8^th straight week of gains, the longest stretch of weekly advances in a decade)
• NASDAQ: 4,056, up 1.7% on week, up 3.6% on month, up 34.5% on year
• 10-Year Treasury yield: 2.75% (from 2.75% a week ago)
• Jan Crude Oil: $92.72, down 1.3% on week
• Feb Gold: $1250.40, down 2.9% on week, down 5.5% on month, the worst November since 1978
• AAA Nat'l average price for gallon of regular Gas: $3.27

THE WEEK AHEAD:

Mon 12/2:

Cyber Monday - last year, sales totaled $1.46B

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 12/3:

Motor Vehicle Sales

Weds 12/4:

8:15 ADP Private Sector Jobs

8:30 International Trade

10:00 New Home Sales

10:00 ISM Non-Manufacturing

2:00 Fed Beige Book

Thurs 12/5:

7:30 Challenger Job Cuts

8:30 Jobless Claims

8:30 Q3 GDP – 2^nd estimate (1^st estimate=2.8%)

10:00 Factory Orders

Fri 12/6

8:30 November Jobs Report

9:55 Consumer Sentiment

3:00 Consumer Credit