So far, the US economy appears to be in pretty good shape.
However, uncertainty remains high overseas. China is decelerating, Japan is stumbling, and Europe is struggling with deflation. These are all big trading partners with the US, so what happens abroad matters in the US as well.
Central banks in all of these economies are expected to ramp up easy monetary policy. On Thursday, we could hear the European Central Bank announce its launch of quantitative easing (QE). QE is when a central bank buys bonds in its effort to keep borrowing rates low and financial markets liquid.
However, Thursday’s stunning announcement by the Swiss National Bank to abandon its cap on the Swiss franc has some experts questioning the credibility of the central banks in general.
Here’s your Monday Scouting Report:
In Central Banks We Trusted. The SNB’s scrapping of its currency cap sent the Swiss franc surging, suddenly making the country’s exports very expensive to the rest of the world. Everyone from hedge funds and currency brokers to Russian businesses and Polish real estate speculators are feeling the pinch.
“In the coming days and weeks there will be more fallout from the SNB disaster,” Bruce Krasting wrote. “But that is a side show to the real story. We have just witnessed the collapse of a promise by a major central bank.”
“The monetary impact might thus be manageable,” UBS’s Beat Siegenthaler said. “The credibility impact might be harder to gauge though. Domestically, many economic actors relied on what was seen as a ‘promise'”
“When one central bank loses its credibility, all central banks suffer,” Cumberland Advisors David Kotok argued. “The burdens on the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and others have now intensified.”
- Martin Luther King, Jr. Day, Markets Closed.
- NAHB Housing Market Index (Tues): Economists estimate this index of homebuilder sentiment climbed to 58 in January from 57 in December. “Homebuilders are likely to be encouraged by the drop in mortgage rates and improving economic data,” Bank of America Merrill Lynch economists note. “However, we suspect builders will continue to express concern about high input costs and worry about pricing pressure in the new year.”
- Housing Starts (Wed): Economists estimate housing starts climbed by 1.2% in December while building permits increased by 0.3%. From Credit Suisse: “An unusually warm December may have boosted buyer traffic, although last month’s building permits decline probably limits the upside potential. In general, growth in housing starts cooled in 2014 following strong gains the previous two years. In 2015, homebuilding looks well-supported by the recent drop in mortgage rates, strong job gains, and potentially easier credit standards.” From Bank of America Merrill Lynch: “The gain in December should be concentrated in multi-family building, as suggested by the recent gain in permits. This should offset a slight drop in single family starts.”
- Initial Jobless Claims (Thurs): Economists estimate the weekly jobless claims fell to 300,000 from 316,000 a week ago. “Initial jobless claims have been choppy in the past several weeks due to seasonal adjustment issues during the holidays,” Nomura economists said. “With the holiday season behind us, we expect the data to give us a better read on the labour markets and show that labour market conditions continue to improve.”
- Markit US Manufacturing PMI (Fri): Economists estimate this activity index climbed to 54.0 in January from 53.9 in December. UBS’s Kevin Cummins offers some context: “In January, the Empire State manufacturing current activity index rebounded — signaling growth. Details were also strong. The ISM-equivalent Empire State index, at 51.7 in January and 48.5 in December, compares with an actual ISM index level of 55.5 in December. In the other direction, the current activity index in the Philadelphia Fed manufacturing survey fell 18 points to 6.3 in January. Details were also softer. Our ISM-equivalent Philadelphia Fed index indicated contraction, falling to 48.8 from 54.4 in December.”
- Existing Home Sales (Fri): Economists estimate the pace of sales climbed 3.0% in December to an annualized rate of 5.08 million units. From Credit Suisse: “One encouraging recent development is the rise in the first-time homebuyer share. Weak demand among first-time buyers has restrained demand over much of the cycle; this could be in the process of normalizing in the context of a stronger labour market.” From Bank of America Merrill Lynch: “The combination of an improving economic backdrop, declining mortgage rates and gains in consumer sentiment should underpin home sales. While we are not looking for a sharp turn higher in activity, we should see a gradual upward trend.”
Volatility has been on the rise in the financial markets. And it’s not too surprising considering the flow of news.
“Over the first two weeks of this year, investors got buffeted by a collapsing oil price, odd US economic releases (falling wages and retail sales and rising claims), soft earnings from US Financials, a sudden rate cut in India, speculation on what the ECB will do next week, and to top it off yesterday, a sudden decision by the Swiss National Bank to abandon its currency cap versus the euro,” JP Morgan’s Jan Loeys wrote on Friday.
Morgan Stanley’s Adam Parker points to the recent end of the Federal Reserve’s latest round of quantitative easing. From Parker: “Maximum drawdowns of the S&P 500 have been much larger in periods without QE than those with QE. The duration of these drawdowns was also much longer outside of QE periods…This drawdown envelope gives a less noisy representation of each event. Since it became clear to market participants in late summer/early fall of 2014 that QE3/4 was ending (and purchases would taper to zero), there have been three palpable drawdowns, and the one ending in October was larger than any since the start of QE4.”
Loeys, however, is optimistic the volatility will soon subside. From Loeys: “1-2 months out, though, we expect much of recent confusion to get resolved and equities to outperform again. Underlying US data flow, as different from the last few data points, remains constructive and supports our view of lower oil prices boosting the US consumer and economy. To us, the Fed remains likely to start hiking early summer. Oil itself is not that far from stabilizing, or better from broad range trading.”
For more insight about the middle market, visit mid-marketpulse.com.
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