Weekly Economic Review Dec. 4, 2016
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“The only thing which is way out of line is the price/earnings ratio in the bond market. And that is not an insignificant factor.�
Alan Greenspan Former Chairman of the Federal Reserve
US Treasury Yield Curve 3.5 3 2.5 2 1.5 1 0.5 0 1 mo
3 mo
6 mo
Yield
Maturity 28-Nov2016 2-Dec-2016
1 yr
2 yr
Yesterday
3 yr
5 yr
Last Week
10 yr
30 yr
Last Month
1 mo
3 mo
6 mo
1 yr
2 yr
3 yr
0.32 0.34
0.48 0.49
0.60 0.61
0.79 0.80
1.11 1.11
1.38 1.40
5 yr
10 yr
30 yr
1.80 1.84
2.32 2.40
2.99 3.08
Market Overview After a record-breaking week, most equity indices have fallen flat in the past week. The Dow Jones Industrial Average closed at 19,170.42pts, a modest gain of 48.28pts over the week. The S&P closed at 2,191.85pts, falling 18.26pts. The NASDAQ closed at 5,255.65 pts, falling 132.27pts, a drop of more than 2.5% over the week. In particular, the NASDAQ-100 Technology Sector saw a drop of 100pts, closing at 2,762.22pts, with the lowest point in the week on Friday at 2,727.93. This represents a change in market views, as the index has seen continued growth for the past year, gaining over 800pts since February 2016. With the hopes of deregulation by Donald Trump, the financial sector has continued to do well. The S&P 500 Financials Index rose from 366.78pts to 375.15pts over the week, continuing the trend since the presidential election. Treasury yields continued to rise, opening the week at 2.33% and closing at 2.39%, peaking at 2.49% on Thursday. The general expectation of an upcoming Fed rate hike is further strengthened by the strong jobs report this week. The unemployment rate fell to 4.6%, the lowest level since August 2007. Even though the labor market is doing well overall, manufacturing jobs have fallen yet again, setting up expectations for President-elect Donald Trump as he noted his work in keeping a Carrier plant in the US instead of moving to Mexico. On the foreign currency side, the pound sterling has had a very strong week, with its price to the Euro reaching a 3-month high, closing at 1.1934 euro per pound. It has also rallied to the USD, closing at $1.2729 per pound, up from $1.23 per pound just two weeks ago. This is due to the uncertainty surrounding the Italian referendum on Sunday. Investors worry about the rise of yet another far-right party, the Five Star Movement, should the “No� campaign prevail, which is now the likely result. As a result, many are selling off their euros and are expecting the pound to continue to rise to the euro.
Macroeconomic Overview The European market has been cautious due to the Italian referendum happening on Sunday, December 4. The referendum, seen as a political test to the ruling government of Prime Minister Matteo Renzi, was expected to return a “No” vote. The Prime Minister campaigned for “Yes” and this result could potentially lead to more political instability in an already unpredictable year. Investors were worried a promised resignation by Renzi would prompt the far-right Five Star Movement to come into prominence. Economists also worry that a departure from European integration by Italy, the third largest economy of the Eurozone, could lead to greater impacts than Brexit. Cash has been flowing into the pound sterling from the euro and has led to a 3-month high for the pound to the euro. Unemployment rate in the US has fallen to 4.6%, representing a 9-year low. Nonfarm payrolls rose by 178,000 in November. However, the labor participation rate has actually dropped, meaning more people dropped out of the workforce. The sectors that created the most jobs were services and healthcare. However, the construction sector also added 155,500 jobs in the past 12 months. This is the last job report before the Fed’s meeting, in which the market widely believes the Fed interest rate will be raised for the second time in ten years. The WTI went from $45.20 to close at $51.28 over the week following an agreement by OPEC to cut productions by 1.2 million barrels per day from January. The upcoming meeting between OPEC members and other major non-OPEC producers in Vienna on December 10 further drives up the prices. Russia has pledged to cut outputs by 300,000 barrels per day and OPEC hopes to reach an agreement so that 600,000 barrels per day can be cut by non-OPEC producers. This agreement, if it is carried out, represents a departure from the strategy to drive out shale producers by OPEC members, notably Saudi Arabia, by flooding the market with their crude oil, which is cheaper to produce.
Fixed Income Overview The market continues to expect high government spending by the incoming Trump administration. Treasury bond yields have continued to fall, as the strong job market reinforces the likeliness of a rate hike in the upcoming Fed meeting. After reaching near 1.5-year heights on Thursday, the US 10-year Treasury note yields fell by 4 basis points to close at 2.399%. However, along with the modestly performing equities markets, the MSCI World index dropped by 0.6% and closed at 412.61. The European Central Bank will hold a rate meeting next Thursday, December 8. Analysts, such as Sheena Shah from Morgan Stanley, expect the euro to continue to be weak, relative to the dollar, as they anticipate the ECB to keep rates on hold and add ₏6mm extension to the ECB’s quantitative easing purchase program. The euro has hovered around $1.06 and closed at $1.066 on Friday, but also represented a continued fall to the dollar for the past month, which saw the euro closing at $1.1101 on November 7. Gold opened the week at $1193.90 on Monday and closed at $1179.90 on Friday, part of a continued fall in gold prices since the election of Donald Trump, as the market remains optimistic to the tax cuts and infrastructure programs Trump promised before the election and equity markets remain strong.
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Industry Focus: Alternative Energy
With climate change and its implications looming on the horizon, there has been a lot of attention paid to the alternative energy industry. Among many alternative energy sources such as hydroelectric, wind power and geothermal energy, solar energy definitely has seen much progress. With continued research, applications including solar cars and solar panels have become more accessible and cheaper, with further encouragements coming from tax incentives and financial innovations. Most prominently, SolarCity (NASDAQ: SCTY) announced Thursday morning that it is expanding home solar service in Florida, after the state’s voters rejected the Amendment 1 measure that critics said would make going solar more expensive. SolarCity plans to serve consumers of Duke Energy Florida and Orlando Utilities Commission and spread into other areas of Florida to install solar panels into individual homes as the project proceeds. This moment also carries economic implications, as instead of leaving control of solar power and major utilities into hands of a few monopolies, third-party companies like SolarCity can pitch directly to homeowners. However, there are some worries that the general political trend to the right, especially of the upcoming Trump presidency, would hurt the green tech producers. As government support is the key element for the future of solar and alternative energy industries, it is yet to see if the industries can reach their full potential.
Transaction Highlights Sirius re-approaches Pandora for a takeover Satellite radio company Sirius XM Holdings Inc. recently made a fresh approach to internet radio provider Pandora Media Inc. about a potential takeover, although a specific price was not discussed. Earlier this year, Sirius had offered $15 per share, which Pandora rejected. Pandora is facing tough competition from competitors such as Spotify, Apple Music, Google Play Music and Amazon Music Unlimited which are increasingly asserting their dominance in the on-demand music service market. The company noted in October that it has seen a drop in its active user base. Some sources report that Pandora is now willing to engage more with Sirius and discuss details about the sale. The company has actually been gauging interests from potential buyers earlier this year, including Apple, and Amazon, and Corvex Management, a hedge fund run by Keith Meister, among others. Pandora has a model like an internet radio station that plays songs based on a genre without user’s direct input. An acquisition by Sirius would give Pandora a bigger access to cars and would enable Sirius to expand its mobile and internet presence. Upon the news, shares of Pandora surged 16% on Friday, while Class A shares of Liberty Media, the majority shareholder of Sirius, gained 0.89%. Sirius XM Holdings fell more than 5%. Despite the news, Pandora declined to comment and other sources reported that there is no assurance that Pandora will reach a deal with Sirius or other interested parties. Johnson & Johnson increases its bid for the Swiss drugmaker Actelion Johnson & Johnson’s talks to acquire Actelion, Europe’s biggest biotech firm, are advancing after Actelion rejected an initial proposal at about $246 (249 Swiss francs) per share as too low. Although the exact bid price is not yet announced, J&J will likely increase the new bid to more than $250 (253 Swiss francs) per share, which represents a premium of more than 25% above the current price. Johnson & Johnson has a diversified range of healthcare services including Pizbuin sunscreen, surgical tools and arthritis drug Remicade. Meanwhile, Actelion has built a $2bn business, with advanced developments in debilitating lung disease, which would expand J&J’s portfolio in the biotech segment. As such, its co-founder and CEO Jean-Paul Clozel has been an outspoken defender of an independent Actelion, although its shareholders and hedge fund managers are expecting him to do some explaining if he rejected an offer with such a big premium.
Data & Indicators Current Week Date Time (ET) Statistic For 29-Nov 8:30 AM GDP - Second Estimate Q3 29-Nov 8:30 AM GDP Deflator - Second Estimate Q3 29-Nov 9:00 AM Case-Shiller 20-city Index Sep 29-Nov 10:00 AM Consumer Confidence Nov 30-Nov 7:00 AM MBA Mortgage Index 26-Nov 30-Nov 8:15 AM ADP Employment Change Nov 30-Nov 8:30 AM Personal Income Oct 30-Nov 8:30 AM Personal Spending Oct 30-Nov 8:30 AM Core PCE Price Index Oct 30-Nov 9:45 AM Chicago PMI Nov 30-Nov 10:00 AM Pending Home Sales Oct 30-Nov 10:30 AM Crude Inventories 26-Nov 30-Nov 2:00 PM Fed's Beige Book Nov 1-Dec 7:30 AM Challenger Job Cuts Nov 1-Dec 8:30 AM Initial Claims 26-Nov 1-Dec 8:30 AM Continuing Claims 19-Nov 1-Dec 10:00 AM Construction Spending Oct 1-Dec 10:00 AM ISM Index Nov 1-Dec 10:30 AM Natural Gas Inventories 26-Nov 1-Dec 2:00 PM Auto Sales Nov 1-Dec 2:00 PM Truck Sales Nov 2-Dec 8:30 AM Nonfarm Payrolls Nov 2-Dec 8:30 AM Nonfarm Private Payrolls Nov 2-Dec 8:30 AM Hourly Earnings Nov 2-Dec 8:30 AM Unemployment Rate Nov 2-Dec 8:30 AM Average Workweek Nov
Actual 3.20% 1.40% 5.10% 10710.00% -9.40% 216K 0.60% 0.30% 0.10% 5760.00% 0.10% -0.884M -13.00% 268K 2081K 0.50% 5320.00% -50 bcf 5.21M 8.92M 178K 156K -0.10% 4.60% 3440.00%
Briefing Forecast Market Expects 2.90% 3.00% 1.50% 1.50% 5.20% 5.20% 101 100 NA NA 153K 160K 0.30% 0.40% 0.40% 0.50% 0.10% 0.10% 5140.00% 5200.00% 1.00% 0.70% NA NA NA NA NA NA 255K 253K NA NA 0.30% 0.60% 51.5 52.1 NA NA NA NA NA NA 165K 180K 155K 170K 0.20% 0.20% 4.90% 4.90% 3440.00% 3440.00%
Prior Revised From 2.90% 1.50% 5.10% -10080.00% 98.6 5.50% 119K 147K 0.40% 0.30% 0.70% 0.50% 0.10% -5060.00% -1.40% 1.50% -1.255M NA -24.70% 251K -2043K -0.00% -0.40% 5190.00% --2 bcf 5.12M -9.18M -142K 161K 135K 142K 0.40% -4.90% -3440.00% --
Upcoming Week Date Time (ET) Statistic 5-Dec 10:00 AM ISM Services 6-Dec 8:30 AM Productivity-Rev. 6-Dec 8:30 AM Unit Labor Costs - Rev. 6-Dec 8:30 AM Trade Balance 6-Dec 10:00 AM Factory Orders 7-Dec 7:00 AM MBA Mortgage Index 7-Dec 10:00 AM JOLTS - Job Openings 7-Dec 10:30 AM Crude Inventories 7-Dec 3:00 PM Consumer Credit 8-Dec 8:30 AM Initial Claims 8-Dec 8:30 AM Continuing Claims 8-Dec 10:30 AM Natural Gas Inventories 9-Dec 10:00 AM Mich Sentiment 9-Dec 10:00 AM Wholesale Inventories
For Actual Briefing ForecastMarket Expects Prior Revised From Nov 5600.00% 5560.00% 5480.00% Q3 3.30% 3.30% 3.10% Q3 0.20% 0.20% 0.30% Oct -$40.0B -$41.8B -$36.4B Oct 2.40% 2.50% 0.30% 3-Dec NA NA -9.40% Oct NA NA 5.486M 3-Dec NA NA -0.884M Oct $18.4B $18.7B $19.3B 3-Dec 260K 255K 268K ### NA NA 2081K 3-Dec NA NA NA Dec 9450.00% 9430.00% 9380.00% Oct -0.40% -0.40% 0.10% -