Succinct Summations of Week’s Event’s 1/9/15 (+ bonus)

Note:  So after a two week sabbatical, Barry Ritholtz is once again publishing his concise little eye-shot of all the significant events for the week gone by.  Below this is a little bonus, a brief narrative about events with the European Central Bank this week, providing another viewpoint of where the national and global situations stand for this past week:

by Barry Ritholtz - January 9th, 2015, 4:00pm

Positives:

1. The economy added 252k jobs in December.
2. The unemployment rate fell to 5.6%.
3. Revisions to the jobs report added 50k jobs to each of the prior past two months.
4. ADP’s December private payrolls rose by 241k, vs expectations of a 225k rise.
5. U.S. consumer confidence jumped to a seven-year high
6. Eurozone retail sales rose 0.6% m/o/m, better than the expected rise of just 0.2%.
7. German unemployment fell to 6.5%, the lowest level in almost twenty-five years.
8. Vehicle sales came in at 16.8mm SAAR, slightly lower than the 16.9mm expected but still strong and above the 12-month average.

Negatives:

1. Wages rose just 1.7% y/o/y, well below the 2.2% expected and the weakest readings since October 2012.
2. Average hourly earnings fell 0.2% m/o/m.
2. Factory orders fell 0.7% in November, vs the 0.5% expected decline.
3. December was the first time ever that all ten components of the ISM services report declined.
4. Markit service sector fell to a ten-month low, coming in at 53.3.
5. ISM non-manufacturing PM came in at 56.2, vs the 58 expected.
6. Initial jobless claims came in at 294k, slightly higher than expected.
7. The labor participation rate fell to 62.7%, levels not seen since 1977.

 Bonus:

US & the EuroZone

by Kiron Sarkar - January 11th, 2015, 10:30am

The 2 major data points during the week were

December CPI data for the EuroZone (EZ); and
US December non-farm payrolls.

EZ December CPI came in at -0.2% Y/Y, weaker than the decline of -0.1% Y/Y and below Novembers +0.3%. However, core inflation rose to +0.75%, up from +0.67% in November.

The data is yet another indicator which suggests that the ECB will announce a sovereign bond QE programme at its next meeting on the 22nd January. The size is expected to be E500bn and, most likely, will involve central banks of the countries in the EZ buying their own bonds up to their relative shareholding (which roughly equates to their respective GDP’s) in the ECB. Each central bank will be liable for their own credit risk, thereby avoiding German fears that the bond buying programme will pose a joint and several risk on all EZ countries.

Whilst the announcement is a near certainty, I have to say it is unlikely to work. The size, in any event, is too small and will, almost certainly, will need to be increased in due course. However, the QE programme will result in further weakness of the Euro. However, net Euro shorts are up from 152k to 161k contracts as at the 6th January, getting closer to the record net short position of 179k contracts last October, which could limit the Euro’s decline in the shorter term. Short positions on Sterling, C$, A$ against the US$ rose, though JPY shorts declined to 90k contracts, as opposed to 96k previously.

3 days later on the 25th January, the results of the Greek national elections will be announced. As it’s Greece, expect some twists and turns, but the market is remarkably complacent. Greece will not be kicked out of the Euro in the immediate future. The uncertainty will however weigh on the Euro further.

The US December non-farm payrolls data reported that 252k jobs were created in December, with job gains spread across most sectors. The unemployment rate declined to 5.6%, mainly due to a fall in the participation rate. A good number and the highest increase in employment since 1999. However, the fly in the ointment was the -0.2% decline in wages and November’s downward revision. Clearly disappointing and hard to explain, though the ECI data (which the FED looks at and, I suspect, is more reliable) suggests that wage growth continued to increase in Q3/Q4. Wage growth in the energy and related sectors are bound to have been negatively impacted by the oil price decline, but I continue to believe that wage growth will accelerate this year as the employment market tightens.

The market is panicking over deflation. Whilst inflation levels are and will remain low, the prospect of a Japanese style deflation is not on the cards. Indeed, lower inflation, due to a decline in commodity prices (energy, in particular) is a massive positive factor for consumer driven economies such as the US and UK. I remain convinced that oil prices (Brent) will decline to below US$50 (US$45?), though unlike markets, I see this as a huge positive. I remain bullish US and other developed equity markets, together with consumer driven emerging markets such as India. Having said that, there is a risk of higher inflation and a wider budget deficit in India, I must admit. Government reforms have been slower than expected – no great surprise – the new administration promised far too much and certainly will be unable to deliver this year.