Weekly Economic Review Oct. 30, 2016
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“Monetary policy has been pushed to the edge of its powers.”
Wolfgang Schäuble Federal Minister of Finance of Germany
US Treasury Yield Curve 3 2.5 2 1.5 1 0.5 0 1 mo
3 mo Yield
6 mo
1 yr
2 yr
Yesterday
Maturity 1 mo 3 mo 6 mo 24-Oct-2016 0.23 0.33 0.46 28-Oct-2016 0.18 0.30 0.49
3 yr
5 yr
Last Week
1 yr 0.66 0.66
2 yr 0.84 0.86
10 yr
30 yr
Last Month
3 yr 1.00 1.02
5 yr 1.27 1.33
10 yr 30 yr 1.77 2.52 1.86 2.62
Market Overview Overall equity markets were modestly lower this week, and interest rates generally firmed. U.S. stock indices were mixed on the week among factors such as strong economic growth, uncertainty from the election, and various earnings reports. S&P 500 closed at 2,126.41pts, recording a loss of 0.69% over the week while Dow Jones Industrial Average closed at 18,169.68pts, 0.09% higher compared to the beginning of the week. Most notably, U.S. GDP growth rate for the third quarter was reported 2.9%, boosted by a rise in inventories and a narrower trade deficit. This annualized growth rate marked the fastest pace since the third quarter of 2014. Expectations for a December rate hike from the US Federal Reserve continued to solidify, while investors began to anticipate the reduction of accommodative monetary policies from other major central banks during 2017. Perhaps due to uncertainty from the election, the volatility index (VIX), edged up 8.93% to 15.25pts from 14 a week ago. Oil prices declined this week. West Texas Intermediate crude fell to $49.25 from $51 last Friday, while global Brent fell to $50 from $52. Firmer economic data, particularly in Europe and the United Kingdom, helped extend the recent move higher in most global bond yields. The Citigroup Economic Surprise Index, which measures how economic data fares relative to expectations, has lately shown a marked uptick, as neither the Eurozone nor the UK have displayed much malaise in the wake of the surprise Brexit outcome in June. German 10year bunds are solidly in positive territory, ending the week around 0.17%. UK 10-year gilts are at postBrexit highs of 1.26% after strong Q3 GDP data, while US 10-year yields are trading near 1.85%, the highest level in four months.
Macroeconomic Overview U.S. economic growth accelerated in the third quarter of 2016 at 2.9%, with a rebound in inventory investment and an increase in exports. Consequently, there are stronger expectations of a rate hike in December and another spike in bond yields. This trend seems to extend beyond just the U.S., with the European economy bouncing back. Germany’s Ifo index of business confidence went up to a two and a half year high and in the purchasing managers’ indices. The Eurozone manufacturing PMI also rose to its 30-month high at 53.3pts. Regardless, Eurozone inflation has yet to reach 2% and the ECB is expected to extend its quantitative easing program as Mario Draghi defended the central bank’s policies. Moreover, French growth rebounded in Q3, after contracting in the previous period. GDP in France increased by 0.2%, which was actually a lower number compared to its neighbors such as Spain, which grew by 0.7%, and Britain, which grew by 0.5%. Meanwhile, China has been making changes to its Macro Prudential Assessment risk-tool to expand its regulatory supervision to better reflect is balance sheet – namely, to include wealth management products often sold by banks on their records. The move marks another step in PBOC’s efforts to control excessive leverage that is straining the nation’s financial system with an implicit understanding that unsustainable credit could diminish an already slowing economy. However, China actually reported steady growth rates of around 6.7% for three straight quarters, which has left some economists dubious. Oil indices settled down much lower by the end of the week, recording its biggest weekly loss since midSeptember. During the OPEC delegate meeting on Friday, Iraq and Iran refused to curb output and caused a deadlock. Iraq is financing an intensifying war against Islamic State, and Iran is competing to gain back market shares it has lost during the nuclear sanctions. Investors are becoming increasingly skeptical of OPEC’s ability to coordinate, and oil prices have consequently fallen to a three-week low. U.S. WTI fell 4.20% to $48.70 a barrel and Brent crude futures were down almost 4% at $49.78 on Friday afternoon. Iran announced that it plans to further increase output from 3.8M barrels per day to 4.2M barrels per day.
Fixed Income Overview As noted above, stronger economic data all around sent bond yields rising around the world. The 10-year Treasury yield rose nearly 11 bps this week to end Friday at 1.847%, which was the highest close since May 27. The yield is up more than 24 bps so far in October, but remains around 43 bps below where is started the year. Similarly, the yield on the 10-year British government bond this week hit 1.255%, the highest since the Brexit vote in June. Also, the yield on the German 10-year bond, which was negative as recently as early October, also hit 0.167%, increasing to its highest level since May. There is heightened expectation of a rate hike in December, as the U.S. seems to grow at a much higher rate than it has been in the last two years. In the meantime, Mario Draghi kept its interest on hold at historic lows and said the ECB was committed to pursuing asset purchases to spur growth and inflation, with the quantitative easing program continuing through March 2017 at least. Draghi also made remarks on Thursday about a possible extension of its 1.74 trillion euro bond-buying program. However, he also stated that the Eurozone economy is exhibiting a moderate recovery and a gradual rise in inflation, as backed by multiple economic indicators announced this week. Gold futures have traded lower in the past few weeks with a more stable economy and with this week’s data that further confirmed the strength of the U.S. economy. However, gold futures finished higher on Friday, marking their highest close in about four weeks as weakness in the U.S. dollar and a new investigation into Clinton’s emails raised new concerns, decreasing the metal’s appeal as a safe-haven investment. Gold rose $7.30 to settle at $1,276.80 an ounce, the highest finish since October 3.
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Industry Focus: Tech Giants Several major tech companies announced new products that could change the way gadgets are currently used, most notably Apple and Microsoft. With their events held practically back-to-back, many have directly compared the two. While the jury is still out on these new products, both companies did not have magical week in terms of their stocks. Apple announced its first revenue decline in 15 years on Tuesday and a decrease of 9% year-on-year in fourth quarter sales. Its stock went from $118.50 on Tuesday afternoon to hovering around $115 and ended the week at $113.61. The decrease in both iPhone and Mac sales and questions over its innovation did not help its cause. However, the outlook is relatively positive as a strong holiday season could boost the world’s highest valued company. Microsoft peaked at $61.43 in the week just as Apple started falling, but its event on Wednesday did not boost its stock as it closed the week at $59.95. On the other hand, online services giants Alphabet and Amazon reported different performances in the past quarter. Alphabet posted increased revenue across the board and investment banks have raised the price target of its stock after the thirdquarter results announcement. Amazon saw its worst quarter in a year even though it was the sixth consecutive quarter with profit. Its earnings stood at $252mm but missed expectations as opening new warehouses and increased delivery costs caused it to underperform. Shares dropped 6% in after-hours trading.
Transaction Highlights Qualcomm to buy NXP Semiconductors Qualcomm announced on Thursday its acquisition of Dutch company NXP Semiconductors for $39bn. This represents a union of the major designer of cell phone chips and a leader in development of automobile chips. The sale is for $110 per share, a 34% premium, and including debt, the deal is worth $47bn, according to the Wall Street Journal. The deal will be financed by offshore cash and new debt. This is the hitherto biggest acquisition in the industry and shows a move in automobiles to be integrated in the next generation of “smart” gadgets, in the same way cell phones, computers, and increasingly furniture, are incorporated. Qualcomm will be able to diversify its business from designing and selling chips and from licensing patents it owns to cell phone manufacturers. The industry has been described as plateaued and Qualcomm looks to move into the future with the help of NXP executives. Baker Hughes and GE in talks to merge The oil-and-gas part of General Electric and Baker Hughes, an oil-field-services company are in talks to merge. The deal could be worth more than $20bn, as reported by the Wall Street Journal. “While nothing is concluded, none of these options include an outright purchase,” according to a spokesperson for GE. This comes after the failed acquisition by Halliburton, rival of Baker Hughes, earlier this year, as it was blocked by the Justice Department. This deal could be significant as both companies endure challenges. For GE, the growth of its oil-and-gas division had lagged behind other divisions despite various attempts to expand through acquisitions. For Baker Hughes, it had been stuck in the same state since the ultimately failed acquisition by Halliburton, which started in 2014. Both sides could take advantage of the other as GE could use the downstream services Baker provides while Baker could utilize the technology GE provides, as reported by Reuters.
Data & Indicators Current Week Date 25-Oct 25-Oct 25-Oct 26-Oct 26-Oct 26-Oct 26-Oct 27-Oct 27-Oct 27-Oct 27-Oct 27-Oct 27-Oct 28-Oct 28-Oct 28-Oct 28-Oct 28-Oct
Time (ET) Statistic For 9:00 AM Case-Shiller 20-city Index Aug 9:00 AM FHFA Housing Price Index Aug 10:00 AM Consumer Confidence Oct 7:00 AM MBA Mortgage Index 22-Oct 8:30 AM International Trade in Goods Sep 10:00 AM New Home Sales Sep 10:30 AM Crude Inventories 22-Oct 8:30 AM Initial Claims 22-Oct 8:30 AM Continuing Claims 15-Oct 8:30 AM Durable Orders Sep 8:30 AMDurable Orders, Ex-Transportation Sep 10:00 AM Pending Home Sales Sep 10:30 AM Natural Gas Inventories 22-Oct 8:30 AM Chain Deflator-Adv. Q3 8:30 AM GDP-Adv. Q3 8:30 AM Chain Deflator-Adv. Q3 8:30 AM Employment Cost Index Q3 10:00 AM Michigan Sentiment - Final Oct
Actual 5.10% 0.70% 9860.00% -4.10% -$56.1B 593K -0.553M 258K 2039K -0.10% 0.20% 1.50% 73 bcf 2.90% 1.50% 0.60% 8720.00%
Briefing Forecast Market Expects Prior Revised From 5.00% 5.10% 5.00% -NA NA 0.50% -10200.00% 10080.00% 10350.00% 10410.00% NA NA -0.60% NA NA -$59.1B -$58.4B 620K 610K 575KK 609K NA NA -5.247M 256K 259K 261K 260K NA NA 2054K 2057K -0.20% 0.00% 0.30% 0.00% 0.30% 0.30% 0.10% -0.40% 1.10% 0.60% -2.50% -2.40% NA NA 77 bcf NA NA 2.30% 2.20% 2.50% 1.40% -1.30% 1.40% 2.30% -0.60% 0.60% 0.60% -8810.00% 8820.00% 8790.00% --
Upcoming Week Date 31-Oct 31-Oct 31-Oct 31-Oct 1-Nov 1-Nov 1-Nov 1-Nov 2-Nov 2-Nov 2-Nov 2-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 3-Nov 4-Nov 4-Nov 4-Nov 4-Nov 4-Nov 4-Nov
Time (ET) 8:30 AM 8:30 AM 8:30 AM 9:45 AM 10:00 AM 10:00 AM 2:00 PM 2:00 PM 7:00 AM 8:15 AM 10:30 AM 2:00 PM 7:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 10:00 AM 10:00 AM 10:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM 8:30 AM
Statistic Personal Income Personal Spending Core PCE Price Index Chicago PMI ISM Index Construction Spending Auto Sales Truck Sales MBA Mortgage Index ADP Employment Change Crude Inventories FOMC Rate Decision Challenger Job Cuts Initial Claims Continuing Claims Unit Labor Costs Productivity-Prel Unit Labor Costs Factory Orders ISM Services Natural Gas Inventories Nonfarm Payrolls Nonfarm Private Payrolls Hourly Earnings Unemployment Rate Average Workweek Trade Balance
For Sep Sep Sep Oct Oct Sep Oct Oct 29-Oct Oct 29-Oct Nov Oct 29-Oct 22-Oct Q3 Q3 Q3 Sep Oct 29-Oct Oct Oct Oct Oct Oct Sep
Actual -
Briefing Forecast Market Expects 0.40% 0.40% 0.50% 0.50% 0.20% 0.10% 53.7 54 5190.00% 5170.00% 0.50% 0.50% NA NA NA NA NA NA 172K 165K NA NA 0.38% 0.38% NA NA 260K 256K NA NA NA 1.20% 1.70% 1.80% 1.30% 1.20% 0.20% 0.20% 5600.00% 5580.00% NA NA 180K 175K 175K 170K 0.30% 0.30% 5.00% 4.90% 3440.00% 3440.00% -$37.8B -$38.5B
Prior Revised From 0.20% 0.00% 0.20% 5420.00% 5150.00% -0.70% 5.30M 8.85M -4.10% 154K -0.553M 0.38% -24.70% 258K 2039K 4.30% -0.60% 4.30% 0.20% 5710.00% 73 bcf 156K 167K 0.20% 5.00% 3440.00% -$40.7B -