MarketView for December 16

 

 

Summary  

 

Share prices were as a rule higher on Monday as upbeat economic data increased optimism ahead of Wednesday’s key Federal Reserve decision. Wall Street has played a guessing game of trying to gauge when Fed will start winding down its $85 billion of monthly bond purchases, also known as QE3, with some on the Street now looking for the Fed to begin tapering in March.

 

Stronger economic data, including Monday's numbers indicating that manufacturing output rose for a fourth straight month in November and last month's payroll report, led some to believe the tapering could come as soon as the Fed's meeting this week. The Fed has said it will slow the program when certain economic indicators meet its growth targets. However, it also said that would begin sometime in the next several meetings, which translates to the March – June timeframe.

 

Global manufacturing and business activity expanded in December, as euro zone businesses ended the year on a high thanks to a surge in new orders, though the rate of manufacturing growth slowed in China.

 

LSI was the best performer on the S&P 500 after Avago Technologies agreed to buy LSI for $6.6 billion. LSI shares ended the trading day up 38.6 percent to $10.96 and Avago added 9.7 percent to close at $50.10.

 

In other deal news, AIG rose 1.1 percent to $50.28 after it said it would sell its aircraft-leasing business to AerCap Holdings in a deal valued at about $5.4 billion. AerCap ended the day up 33.1 percent, closing at $33.17.

 

Exxon Mobil ended the day up 2.92 percent to close at $177.85 after Goldman Sachs raised its rating on the stock to "buy" from "neutral," writing to clients that Exxon was nearing a turning point in terms of production growth and capital intensity.

 

Shares of Herbalife rose 9.4 percent to $74.83 after the company announced there were no material changes to its financial re-audit. Boeing gained 1.7 percent in after-hours trading after it said it approved a $10 billion stock repurchase and raised its dividend 50 percent to 73 cents per share.

 

About 6 billion shares changed hands on the major equity exchanges, a number that was slightly below the 6.1 billion share average so far this month, according to data from BATS Global Markets.

 

Industrial Output Highest for Year

 

November’s industrial production increased 1.1 percent last month as auto production swung into higher gear resulting in the largest gain for economic indicator in a year. Part of the increase was due to a rebound in mining and utility output. Production at the nation's mines, factories and power plants had edged up 0.1 percent in October. A cold snap last month boosted utilities output, which increased 3.9 percent after falling 0.3 percent in October.

 

Mining production rose 1.7 percent as oil and gas rigs in the Gulf of Mexico which were temporarily shut in October because of Tropical Storm Karen reopened. Mining output had dropped 1.5 percent in October.

 

Manufacturing output, which accounts for three quarters of industrial production, rose 0.6 percent last month, increasing for a fourth straight month. While a 3.4 percent rebound in auto production accounted for a large portion of the increase, there also were gains in other industries such as fabricated metals, textiles, furniture and electrical equipment and appliances.

 

Last month, the amount of industrial capacity in use increased to 79 percent from 78.2 percent in the prior month. Industrial capacity utilization - a measure of how fully firms are using their resources - was 1.2 percentage points below its long-run average.

 

Officials at the Fed tend to look at utilization measures as a signal of how much "slack" remains in the economy, and how much room growth has to run before it becomes inflationary.

 

Rise in Productivity

 

Nonfarm productivity chalked up its largest gain in nearly four years during the third quarter but a drop in unit labor costs underlined a lack of inflation pressure, bolstering arguments for the U.S. Federal Reserve to maintain its massive monetary stimulus.

 

Productivity rose at a 3.0 percent annual rate after increasing at a 1.8 percent pace in the second quarter, the Labor Department said on Monday, driven by a 4.7 percent rise in output. It was the largest rise since the fourth quarter of 2009.

 

Productivity, which measures hourly output per worker, was 0.3 percent higher compared to the same period last year.

 

Unit labor costs - a gauge of the labor-related cost for any given unit of output - fell at a 1.4 percent rate in the third quarter, roughly double the originally estimated fall, underscoring the lack of wage-related inflation pressures in the economy. Unit labor costs had risen at a 2.0 percent pace in the second quarter.

 

New York Factories Recover Somewhat

 

New York State’s manufacturing sector rebounded slightly in December from its weakest level in six months while the region's business outlook stayed relatively upbeat, a report from the New York Federal Reserve released on Monday showed that general business conditions index edged back into positive territory at 0.98 from minus 2.21 in November. It fell short of the 4.75 reading forecast among economists polled by Reuters.

 

The regional Fed's indicator signaled some improvement in current business activity but labor conditions remained weak. On the other hand, the New York Fed said its forward gauges stayed "fairly optimistic."

 

The new orders index was less negative at minus 3.54 compared with minus 5.53 in November, while the shipment component turned positive at 7.66 from minus 0.53 last month.

 

Labor market conditions remained tepid, with the index for the number of employees stuck at zero for a second straight month. The average employee workweek index dropped to minus 10.84 from minus 5.26 in November.

 

The report's outlook indicators pulled back from November's levels but held near their recent peaks. The index of six-month business conditions retreated to 35.72 from 37.51.

 

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.

 

Largest Capital Inflow in 5 Years

 

Foreigners poured money back in the United States in October at the biggest monthly clip in five years after they fled from them in September on fears that the government could default on some of its debt obligations, U.S. Treasury data showed on Monday.

 

Foreigners bought $194.9 billion more in U.S. stocks and bonds than what they sold in October, compared with a net sale of $97.6 billion in September. The September net sale was originally reported at $106.8 billion.

 

October's capital inflows into the United States were the largest monthly increase since a $272.9 billion surge in October 2008 as foreigners went on a safe haven stampede into U.S. assets in the aftermath of the collapse of Lehman Brothers during the global credit crisis.

 

Investors raised their holdings of long-term securities in October for a second straight month by $35.4 billion. This followed a $31.3 billion increase in September, which was adjusted from an originally reported $25.5 billion. Their holdings of short-term securities rose by $11.6 billion following a revised $24.8 billion decline in September. Net private ownership of Treasury bills, however, fell for a second month by $15.3 billion.

 

Foreigners' overall Treasury holdings rose by $39.71 billion in October, followed an upwardly revised $28.5 billion in September. China, the largest U.S. creditor, raised its holdings of U.S. government debt to $1.305 trillion in October, up $11 billion from September. Japan, the No. 2 U.S. creditor, trimmed its Treasuries ownership by $4 billion to $1.174 trillion.

 

To Taper or Not To Taper, That is the Question

 

The possibility that the Federal Reserve could finally start to trim its extraordinary stimulus for the economy could make this week an interesting one for the financial markets. Although the odds still point to no major policy change prior to the end of the year, most of the recent domestic economic data suggest the beginning of the end of their massive bond-buying program.

 

If it acts it may reflect as much a growth in confidence in the global economy, for whom the withdrawal of the flow of cheap dollars will be a shock, as in the recovery in the United States alone.

 

Growth in jobs, retail sales, services and overall output, combined with last week's breakthrough budget deal in Washington - has convinced some economists that the Fed will announce a reduction to its $85-billion a month in purchases on Wednesday.

 

While that could amount to a vote of confidence in the halting recovery from the Great Recession, the risk is that Fed Chairman Ben Bernanke's message sets off a market selloff that undermines growth worldwide.

 

The question is whether more U.S. fiscal stability and some good signs out of Europe and Asia will convince key Fed policymakers that the U.S. economy can handle less monetary support, and that investors won't overreact.

 

Meanwhile, the Bank of Japan, expected to keep in place its aggressive policy easing, and a European Union meeting where a long-awaited deal on a banking union could be struck. The Japanese tankan survey is expected on Monday to show business confidence improved on the back of robust fiscal and household spending. The BOJ, whose monetary stimulus eclipses even that of the Fed, meets December 19-20.

 

In Britain, where the Bank of England has said it will not consider a rate-rise until unemployment falls to 7 percent, a report is expected on Wednesday to show the jobless rate was unchanged at 7.6 percent in the three months to October.

 

At the same time, minutes of this month's BoE meeting are expected to show policymakers stressing their message that rates won't rise automatically once the threshold level is hit.

 

In general the European recovery looks less solid than that in the United States. Central banks in Hungary, Sweden and the Czech Republic are under pressure to ease policy further this week. Turkey's central bank could tighten policy - but that will be out of concern over the impact of a withdrawal of U.S. stimulus on its lira currency, inflation and current account shortfall.

 

Purchasing managers indexes for the euro zone, Germany and France should give a snapshot next week of the health of Europe's manufacturing sector. EU leaders will try on Thursday to reach final agreement on agency for closing down failing banks in the euro zone, a crucial part of efforts to create a single banking framework for the currency bloc that would dampen any future crises.

 

All eyes, however, will be on the Fed's policy decision on Wednesday, just a week before the Christmas holiday. It is Bernanke's last press conference as Fed chairman and he is expected to stress that interest rates will remain low for a long while irrespective of when the quantitative easing program, or QE, is shelved.

 

While unemployment has declined to a five-year low of 7 percent , GDP growth is expected to stall this quarter as businesses cut inventories, complicating the central bank's decision.