John Davidson's Economic Comments: Week ending Dec. 6
After a series of daily equity market declines, Friday's November Employment Report turned the U.S. markets around. The upside surprise generated positive returns for the week in some of the U.S. markets, but not elsewhere. Bond yields across the globe rose in anticipation of commencement of tapering of quantitative easing. Credit spreads declined on the week. The U.S. dollar gained against the Looney, Pound, and Yen, but declined against the Euro. Energy commodity prices gained, but metals prices declined on the week.
Perspective:
While economic releases and possible actions by Central Bankers captured the attention of the capital markets, another notable event is worthy of this week's Perspective. This week marked the passing of Nelson Mandela, the Economist headlined "A giant passes: The greatness of Nelson Mandela challenges us all." He was a hero to many, changed the course of history for South Africa and had considerable influence around the world.
On a personal note, I also have a hero closer to home. He is my father-in-law. The fact that he was a New York City fireman would be enough to put him in the hero category. But his heroism extends beyond his profession. He is my hero because of the way he lives his life. He is the kind of grandfather to our kids that I aspire to be as we approach the birth of our first granddaughter. By his example, he sets high standards for me as a father and husband. Right now he is fighting a courageous battle with cancer in a Long Island hospital; once again, his will to live and extend his life sets another high standard for us all.
Economic Releases:
The U.S. Employment Report for November was the major market mover of the week. Nonfarm Payrolls (blue in the chart) rose 203,000, just above the range of expectations. Private Payrolls (red in the chart) rose 196,000, near the top end of the range of expectations. Nonfarm Payrolls for September and October were revised another 8,000 higher. Manufacturing Payrolls (green in the chart) rose 27,000. The chart below shows that the recent increases in monthly payrolls have been greater than those in 2007 prior to the Great Recession.
Other employment data releases were also positive. The Unemployment Rate dropped three ticks to 7.0% (on the low end of the range of expectations; the falling participation rate (a negative factor for jobs) contributed to the drop in the Unemployment Rate. Average Hourly Earnings rose +0.2% and the Average workweek extended a tick to 34.5 hours. The weekly Initial Jobless Claims dropped to 298,000, below the low end of the range of expectations and the second lowest number of Claims in this recovery. Continuing Claims also declined to 2.744 million, a recovery low for Continuing Claims.
The Purchasing Managers' Indices remained well into expansion territory (above 50) in November. The ISM Manufacturing PMI (blue in the chart) rose to 57.3, the highest reading in two-and-a-half years. The ISM Services PMI (red in the chart) dropped over a point to 53.9. Markit's Manufacturing PMI rose three points to 54.7.
Other Economic Releases
The Real U.S. GPD revision for the third quarter also surprised on the upside to 3.6%, at the high end of the range of expectations. Since a large portion of the revision was due to inventory growth, the positive for the third quarter may have a negative contribution to the fourth quarter GDP growth. New Home Sales were reported for both September and October due to the government shutdown. September Sales fell to 354,000; October Sales rebounded to 444,000; the medium price fell -4.5% in October to $245,800; the October report was a welcome relief to a string of softer housing releases. Also delayed by the government shutdown, Construction Spending for September and October showed a similar pattern, declining . -0.3% in September and rebounding +0.8% in October. In October Personal Income fell -0.1%, but Consumer Spending rose +0.3%; the decline in PI may reflect the impact of the government shutdown. The University of Michigan's Consumer Sentiment surged seven points in the first half of December to 82.5. On the softer side, Factory Orders for October fell -0.9% in a broad based decline.
The European Central Bank met this week and made no change in rates keeping rates at 0.25%, the record low set in its previous meeting. The Markit PMI slipped a few ticks, but at 51.7 for the Composite and 51.2 for Services remained in the expansion zone. The EU PMI Manufacturing Index rose three ticks to 51.6. The preliminary estimate of third-quarter GDP for the EU was +0.1%. October Retail Sales in the EU fell -0.2%. Germany's PMIs rose in November; the Markit Composite rose to 55.4; the PMI for Services rose to 55.7, and the PMI for Manufacturing rose a point to 52.7. France's PMIs fell into the contraction zone; France's PMI Composite and Services both fell to 48; France's PMI for Manufacturing fell to 48.4.
The Bank of England met and kept its interest rates unchanged at 0.5% and bond purchases unchanged at 375 billion Pounds as expected. The UK's PMIs were well into the expansion zone. The UK's PMI for Manufacturing increased two points to 58.4; the UK PMI for Services slipped two points to 60.0.
China's HSBC Composite and Services were 52.3 and 52.5, the strongest levels in eight months. The CFLP Manufacturing PMI remained unchanged at 51.4. The Japanese PMI's slipped but remained well in the expansion zone with readings of 54.0 for the Composite and 51.8 for the Services.
Equities Markets:
The post-employment report stock market rally that occurred on Friday was not sufficient to offset the declines in the previous four days. Only some of the U.S. markets posted positive returns for the week. The good news of stronger U.S. employment was also balanced by the prospect of renewed talk of the commencement of tapering of QE. On the earnings front, Factset reported that of the 496 companies that have posted Q3 earnings, 73% earned more then the mean estimate and 52% reported sales above the mean estimate.
Bond Markets:
Bond yields rose on the stronger economic news, particularly the U.S. employment report. The decline in credit spreads meant that investors demanded less additional yield to take on bond default risk. Since the ML bond indices have a one-day lag, neither the Option Adjusted Spreads nor the total returns reflect the impact of Friday's Employment Report; my guess is that the impact of Friday's report and the accompanying rising rates would have been more negative on the total returns for the credit sectors.
Currencies & Commodities:
The U.S. dollar rose against the Yen, Pound, & Looney, but fell against the Euro. Energy Commodity prices rose, but metals prices fell on the week.
Who is John Davidson?
John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.
Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.
He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.
His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.
His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.
Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.
Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.
In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.
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