Week ending February
3, 2012
A weekly newsletter
providing a synopsis of the latest market and economic
news and releases and a recap
of the securities markets. Find commentary for a wide range of
sectors: US and European
equities,
US Treasury, corporate, mortgage,
municipal and high-yield bonds,
global bonds and currencies, and emerging-market bonds.
| |
Friday* |
Last Week |
Dec. 31
2011 |
1 Yr Ago |
| Dow Jones
Ind. Avg. |
12, 848 |
12,660 |
12,218 |
12,062 |
| S&P 500 |
1,342 |
1,316 |
1,258 |
1,307 |
| Nasdaq 100 |
2,898 |
2,817 |
2,605 |
2,754 |
| The Russell
2000 |
828 |
799 |
741 |
799 |
| DJ STOXX
Europe |
264 |
255 |
245 |
285 |
| Nikkei Index |
8,832 |
8,841 |
8,455 |
10,431 |
| MSCI EM Index |
374 |
367 |
343 |
389 |
| Fed Funds
Target |
0-0.25% |
0-0.25% |
0-0.25% |
0-0.25% |
| 2-Year U.S.
Treasury Yield |
0.24% |
0.21% |
0.24% |
0.71% |
| 10-Year U.S.
Treasury Yield |
1.94% |
1.89% |
1.88% |
3.55% |
| U.S.$ / Euro |
1.31 |
1.32 |
1.30 |
1.36 |
| U.S.$ / British
Pound |
1.58 |
1.57 |
1.55 |
1.61 |
| Yen / U.S.$ |
76.63 |
76.70 |
76.99 |
81.63 |
| Gold ($/oz) |
$1,737.08 |
$1,739.07 |
$1,563.70 |
$1,354.35 |
| Oil |
$97.06 |
$99.56 |
$98.83 |
$90.54 |
| *Levels
as of 9:30 a.m. PT |
| Year
to Date (1/1/12 -2/3/12) |
| Dow
Jones Industrial Avg |
5.16% |
|
| S&P
500 |
6.71% |
|
| NASDAQ |
11.26% |
|
| Russell
2000 |
11.78% |
|
| MSCI
World Index |
6.54% |
|
| DJ STOXX Europe
600 (euro) |
8.00% |
|
| MSCI EM Index |
9.16% |
|
| Year
to Date (1/1/12 -2/3/12) |
| 90
Day T-Bill |
-0.01% |
|
| 2-Year
Treasury |
0.06% |
|
| 10-Year
Treasury |
0.58% |
|
| ML
High Yield Index |
2.62% |
|
| JP
Morgan EMBI Global Diversified |
2.10% |
|
| JP Morgan
Global Hedged |
0.70% |
|

Jan
30
Personal
Spending – Personal income jumped 0.5%
in December and spending was flat for the month. In terms
of consumer prices, the core personal consumption expenditures
(PCE) gauge rose 1.8% on a year-over-year basis compared
to 1.7% in November.
Feb
1
ADP
Employment Report – The ADP report on
private sector hiring showed an increase of 170,000 jobs
in January, compared to a 325,000 job increase in December.
ISM Manufacturing – The
gauge of manufacturing sector activity ticked up to 54.1
in January from 53.9 the previous month. The gauge is
still telling us the goods-producing sector continues
to expand moderately as we begin 2012.
Feb
3
ISM
Non-Manufacturing – The gauges of services
sector business activity jumped to 56.8 in January from
52.6 in December. A reading above 50 points to expansion
in the services sector, which comprises the majority
of US economic activity.


The popular view is that, without more fiscal and monetary
juice, the US and much of the developed world faces a prolonged
period of economic stagnation. The economy is stuck in a
rut. Our view is that, while there are important structural
impediments to a quick job market recovery, the recovery
proceeds nonetheless.
With that in mind, the Employment Situation report caught the market by surprise on Friday. The market
consensus expected just 140,000 jobs in the payroll survey
but the BLS reported a gain of 243,000. Even better, over
the last 12 months, the US economy added 2.2 million private
sector jobs and over the last three months jobs gained have
averaged 200k/month. Annual benchmark revisions to employment
levels were positive for the first time since 2006.
A key
component of our “structural” view on the US
labor market is to ask: where do jobs come from? Our analysis
tells us that new firm formation is critical to this process.
While difficult to track in real-time, we think the household
survey is a better gauge of this than the payroll survey
of businesses. Start-up activity and self-employment would
be captured in the household survey. How has that gauge fared?
As you can see in the chart below, household employment is
up 2.31 million over the last 12 months—the best 12-month
rolling increase since 2007.
But, allow us one point of caution:
the recovery has a ways to go. Even a steady string of 250k
jobs reports means a recovery to the pre-crisis level of
employment occurs in 2014 or 2015. While the unemployment
rate did fall to 8.3% in January, labor force participation
is at a 28-year low! Further, our favorite labor market indicator,
the Employment-to-Population ratio, is still stuck at 58.5,
meaning that employment growth is advancing just fast enough
to keep up with population growth.
Overall though, regardless
of the way you slice the data, this was a very good report
and a healthy reminder that, yes, the economy will recover.
It is fun to see economists befuddled by that fact and for
a small dose of optimism to be injected into the discussion.


Treasury Bonds
A stronger-than-expected non-farm payrolls
report (+257k versus 160k consensus) led to a selloff
in US Treasuries. The long end of the curve underperformed
in the bear-steepening move, as equities and other risky
assets continue their ascent.
Looking forward
to next week, Treasury plans to sell $72 billion in new
coupon supply for the quarterly refunding, the European
Central Bank and Bank of England both conduct policy
meetings on Feb 9, the Fed will continue its long-end
buyback operations, and the US gets another look at consumer
confidence on Friday.
Large-Cap Equities
The stock market soared to 6-month highs
on an upbeat jobs report and better-than-expected economic
data. Equities have rallied for four consecutive weeks
as volatility continued to normalize. The S&P 500
rose approximately 2% for the week, while the NASDAQ
Composite jumped 3%. Small-cap stocks outperformed large-cap
stocks. In terms of style, large-cap growth stocks modestly
outperformed large-cap value stocks. The best performing
sectors were financials and info tech, while the worst
performing sectors were utilities and healthcare. Earnings
season is a little more than half way through as 67%
of the companies in the S&P 500 index have beaten
street estimates. In the headlines this week, much anticipated
internet social networking company Facebook filed for
its initial public offering. Based on recent private
share sales, the company is estimated to be valued around
$75-$90 billion.
Corporate Bonds
Investment grade primary activity
unexpectedly picked up as several diverse infrequent
issuers tapped the market. The recent one way trade continues
as most shops stretch for yield. Inventories continue
to be depleted and most accounts are worried about selling
into any strength only to see it tighter the next day.
Notable deals this week included Petrobras ($10.5bln)
and IBM ($2.5bln).
Investment grade corporate
spreads tightened once again as there has been no particular
news out of the sovereign space, especially the Greece
PSI deliberations. Primary focus remains on new issuance
as most deals continue to be well oversubscribed and
trade tighter on the break. The Barclays Credit Index
Option-Adjusted Spread (OAS) finished the week at +189,
7 basis points tighter. Financials tightened by 16 basis
points (banks -21, insurance -5); industrials tightened
by 3 (basic materials -4, capital goods -0, telecom -2,
consumer cyclical -4, consumer non-cyclical -2, energy
-5); and utilities tightened by 2 basis points.
Mortgage-Backed Securities
A slew of favorable economic reports and
progress on the European front helped risk assets, including
mortgages, outperform Treasuries. Mortgages weathered
the back-up in Treasury yields as demand outpaced a pickup
in origination and profit taking by money managers. Slightly
higher yields offered long-term investors an opportunity
to buy pass-throughs just south of record highs. Although
economic conditions have improved, Federal Reserve officials
are still toying with idea of buying more mortgages to
lift the housing market. The market is assigning a fifty-percent
probability of another round of asset purchases in the
not-to-distant future. In other memorable news, the Obama
administration announced another housing relief plan
with a focus on the non-agency and good credit borrowers.
The plan is more comprehensive (and costly) than existing
programs and requires passage by Congress. As expected,
the immediate market reaction was negative but prices
rebounded once it became clear that Congress was involved.
The market is betting that any legislation to support
housing is unlikely in election year given the acrimonious
political climate. Within the mortgage market, mortgage
credit (non-agency and commercial) and conventionals
benefited from shifting sentiment away from risk-free
assets (US Treasuries and Ginnie Mae mortgages).
For
the week, 30-year pass-through spreads narrowed 5 basis
points with spreads on FNMA 3.5% mortgages closing at
200 basis points versus the 5-year. According to Freddie
Mac, the 30-year mortgage rate fell to an all-time low
of 3.87%.
Municipal Bonds
Municipals yields marched lower this
week until the nonfarm payroll economic indicator was
announced Friday morning, after which most maturities
backed up 6-8 basis points in sympathy with Treasuries.
Deals were well oversubscribed as continued inflows helped
bolster the market. The state of Washington priced its
marquee deal, selling a billion in new issue. The market
has responded in the past few weeks far more favorably
to new issue rather than secondary market offers. Most
secondary situations developed with fairly wide bid-ask
spreads and traded slowly, reflecting reluctance on both
the buy- and the sell-side to trade.
Given Friday’s
movements, munis are currently 1-3 basis points tighter
on the week, with 10- and 30-year AAA yields at approximately
1.76% and 3.21%. The largest deals of the week included
$1 billion Washington State G.Os (Aa1/AA+) and $220 million
California Department of Veteran Affairs revenues (Aa3/AA).
10-year bonds came at a 1.90% and 3.00%, respectively.
High-Yield Bonds
The global high yield market finished
January 2012 in strong form. The Merrill Lynch high yield
BB/B index was up 2.55% for the month, with the higher-quality
end of the market BB rated bonds (up 2.3%) lagging the
higher beta, more volatile CCC rated bonds (up 4.2%),
as investors globally went in search of yield. The high
yield market during the month benefitted from generally
positive global economic data, especially in the US,
and the meaningful rally in the equity markets. The more
favorable macro-economic environment has resulted in
risk assets in general rallying over the past two months.
The strong demand for high yield bonds has been met with
approximately $23.7 billion in US dollar high yield new
issuance. The bonds issued have been from numerous industries,
including energy, healthcare and telecommunications.
The majority of the new issuance is from US domiciled
companies such as Ford Motor and Limited Brands but numerous
European companies have also been issuing bonds in the
US market, given the strong liquidity in the US dollar
high yield market. Prominent European issuers include
Germany’s Fresenius AG, the largest global provider
of kidney dialysis machines and clinics to Schaeffler
AG, a major German auto-parts company which also controls
Continental AG, a major tire and industrial parts company.
Companies based in such European nations as Poland and
Spain were also active issuers in the month. Partially
driving the heavy new issuance volume were large inflows
into high yield mutual funds, which totaled over $7.0
billion in January.
Eastern European Equities
Stocks in Eastern Europe were up +2.85%
during the week. Manufacturing Purchasing Managers' Index
(PMI) in Emerging Europe was broadly higher in January.
Average PMI increased to 51.1 in January after the December
low of 49.9. The improvement was driven by substantial
increases in Poland (+3.4% to 52.2, driven by new orders)
and Hungary (+1.2% to 49.8, which recovered from end-2011
lows.) This was offset by modest PMI declines in Russia
due to lower new export orders to 50.8, Turkey (fell
to 51.7), and Czech Republic (-0.4% to 48.8). Overall,
today's results were broadly in line with Euro area PMI,
which increased by 1.9% to 48.8 in January, and German
PMI which jumped by 2.6% to 51.
Global Bonds and Currencies
Having drifted lower in the early part
of the week as equity markets sold off and some economic
data disappointed, most major government bond market
yields ended the week higher, following much stronger
US employment and non-manufacturing data. Yield curves
were generally steeper as confidence remained that official
short-term interest rates would be kept on hold for some
time. UK Gilts were hardest hit, with 10-year yields
up by 11 basis points on the week, while same-maturity
bund yields ended 7 basis points higher. The Japanese
bond market ended the week with 10-year yields down slightly,
although the market closed before the sell-off in markets
elsewhere. Risk appetite improved in the financial markets
as signs of a pick-up in global manufacturing activity
boosted investor demand for growth assets. Euro-zone
and German PMI Manufacturing data was higher on the month.
European Union leaders, excluding Britain and the Czech
Republic, agreed on a fiscal-discipline treaty that allows
for sanctions on high-deficit states and requires members
to enact laws to limit budget shortfalls. The talks are
still continuing between Greece and its creditors, with
an agreement yet to be reached. The Italian, French and
Spanish Governments enjoyed successful bond auctions
with lower yields, and the peripheral euro-zone government
yield spreads over bunds tightened. The Italian market
was the top performer, with 10-year yields ending 20
basis points lower having been down by 30 basis points
at their low point; Spanish yields ended only 2 basis
points higher, thereby outperforming Germany. Ten-year
Portuguese yields surged by nearly 200 basis points on
Monday to above 16.5%, but then declined sharply to end
the week down by 116 basis points at 13.5% following
the ECB’s supportive bond purchases.
In
the currency markets, US dollar was initially under pressure
against most major crosses following the increased demand
for higher-yielding assets. However, the US dollar gained
some support late in the week from the stronger-than-expected
economic data; as a result, the currency ended the week
little changed against sterling and the yen, although
it remained 0.8% stronger versus the euro having earlier
been up by a little over 1%. The commodity-based currencies
drew support from encouraging economic data and a rally
in commodity prices; the Australian dollar, for example,
gained 1% versus the dollar on the week.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads were
tighter this week.
The Central Bank of Columbia
surprised the market this week by hiking the overnight
rate by 25 basis points (bps) to 5%. The hike comes after
concerns regarding low interest rates, high economic
growth, overheating credit, and domestic demand growth.
Central Bank Chief José Dario Uribe also cited
high commodity prices and fears of a “greater than
anticipated” recession in Europe as further rationale
for the hike. In quarter three of 2011, GDP growth came
in higher than expected at 7.7% year over year while
domestic demand grew at 9.4% over the same period, driven
by strong household consumption.
Bank Negara
of Malaysia kept its overnight policy rate unchanged
for an eighth consecutive month at 3.0%, in line with
economists’ expectations. The last policy change
came in May, when Bank Negara hiked rates by 25 bps to
the current 3.0%. The Monetary Policy Committee stated
that it expects the global environment to become more
challenging in the near future and that Malaysia’s “growth
and inflation prospects will be affected by these external
developments.”

| Feb 7 |
|
JOLTs Job Openings Survey,
Consumer Credit |
 |
| Feb 10 |
|
International Trade, University
of Michigan Confidence |
 |
 |
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