Sunday, January 10, 2010

Weekly Market Wrap

Trading was driven by widely anticipated economic data this week. Monday's strong December ISM Manufacturing data kicked the week off on a positive note, with the headline number higher than at any time since April 2006 and the critical new orders component hitting its highest level since late 2004. Investors waited eagerly for Friday's US December employment reports, with the intervening ADP and weekly claims numbers dampening hopes for positive job growth. Analyst expectations for the Non-farm data called for breakeven job growth but the actual number was a very disappointing -84 thousand, while the annualized December unemployment rate didn't budge from the 10% level. In the wake of the report, the Fed's Rosengren asserted that slow job growth justifies low interest rates, while the spin from the White House's Christina Romer was that hesitant employers were not rushing to hire full-time employees. PIMCO's Bill Gross reiterated that he is worried about the Fed's exit strategy and does not believe the US economy is ready for the Fed to take away the punch bowl. In its minutes from the December 16th meeting, FOMC members noted that more stimulus in the form of large scale asset purchases may become necessary, especially if the economic outlook weaken. In any case, markets took the jobs data in stride, with equity indices sustaining levels that had been seen all week long. For the week, the DJIA gained 1.8%, the Nasdaq rose 2.1%, and the S&P 500 added 0.3%.

There were mixed signals on US housing this week. The m/m November pending home sales data fell much more than expected, registering its biggest sequential decline since 2001. Apparently the expiration of the first time homebuyer tax credit is partially to blame for the decline; the NAR's chief economist warned that it would be early spring before any sales gains were seen from the reauthorization of the tax credit. Meanwhile, Lennar's very strong Q4 earnings report sent the entire homebuilder sector higher on Thursday. Lennar was well ahead of revenue expectations, and the company's CEO noted that continued stabilization in housing is being seen throughout the business. Beazer Homes was also out with in interim update, noting that its Q1 new orders were up 36.6% y/y and closings were up +8% y/y (both metrics fell on a m/m basis due to seasonality). On Friday, the Fed's Lacker said that housing was no longer a drag on growth, although he also warned that commercial real estate would remain a problem for the economy in the near term.
December same-store sales showed a big reversal from November's disappointing comps, with more than a few positive surprises. Mid- and high-end department store names showed strong improvement over November, with most major names beating analysts' projects, a few by very wide margins. Among apparel names American Eagle, Aeropostale, Children's Place and Zumiez crushed analysts' expectations. The latter two firms demonstrated surprising improvements, with comps that moved into the black and exceeded targets and (after months of negative disappointments). Discount apparel name TJX reported double the expected gain in comps. No improvement was seen at industry laggards Abercrombie & Fitch or Hot Topic. Broadlines Costco and Target were a bit ahead of expectations, while BJs barely missed the Street's estimates.

Kraft altered the terms of its offer for Cadbury on Tuesday, in what may be a final push ahead of a looming January 15th deadline to close the deal, set by UK regulators. Kraft sold off its North American frozen pizza unit to Nestle (which confirmed it would not pursue Cadbury) for $3.7B in cash, and said it would use the proceeds to offer Cadbury holders a bigger share of cash in its standing offer. In a related development, Kraft's largest holder Berkshire Hathaway voted against Kraft's proposal to issue 370M shares to help in the Cadbury takeover.

Corporate issuance, particularly in the financial sector, got off to a flying start in 2010, and with year-end out of the way and plenty of cash ready to be put to work the veritable deluge of supply was generally well received. Swap related hedging spilled over into government bond markets, putting a floor under prices and capping yields in a week where equities also were stronger at least in part due to the new accounting period.
Friday's US employment reports were the decisive event of the week and for bond longs, the data certainly didn't disappoint. The worse than expected reading saw Treasury yields move sharply lower and the yield curve steepen, with the 2-year note falling back below 1% and the benchmark 10-year back towards 3.75%. Rate hike expectations have been pared back as well. Heading into the figures the August fed fund future was pricing in better than an 80% probability the Fed will begin cutting rates by the middle of this summer. It has since slipped back towards 50%.

Currency dealers watched US yields this week for clues on the direction FX trading would take in the first months of the new year. The dollar price action mirrored yields in the US two-year note all week: yields in the note climbed to test 1.18% early on, aiding the dollar, but then retreated back toward the 1.0% handle ahead of the payroll report. On the interest rate front, a higher Chinese three-month bill auction hinted at potential tightening from the PBoC and added a bit of caution for equities. Commentators speculated the central bank is guiding its T-bill yields higher to curb fears a speculative bubble is growing. The move would limit local loan growth, possibly undercut the global stock market rally and prompt risk aversion - all to the benefit of the dollar.

Friday's disappointing US employment report prevented the greenback from breaking several key technical levels that might have supported further upside momentum, leaving the dollar vulnerable to the issues that plagued it throughout 2009, including the reserve currency question. But the dollar held up remarkably well in the face of the employment data, thanks in part to the sovereign jitters holding back the euro and Japan's cabinet shake up.

In Japan, the PM Hatoyama finally accepted the resignation of Finance Minister Fujii for health reasons. Fujii was seen as the architect of the new government's firm yen policy, and his replacement wasted no time in trying to reverse Fujii's positions. Finance Minister Kan commented that he would "likely to continue the shift from strong to weak-yen policy" and work with the BoJ to bring the yen to a more appropriate level, noting that Japanese companies preferred USD/JPY around the 95 level.

USD/JPY initially maintained a firm tone, with dealers citing Japanese exporters taking advantage of the recent carry-trade sentiment and buying JPY. The pair's inability to break through the downtrend line established last March was shaking out some model-type funds, which were long the dollar over the latter part of December. However, the JPY suffered from political fallout mid week from the cabinet reshuffle. USD/JPY remained below the key 93.30/50 area and dealers were pondering whether Japanese exporters would be tempted to pull offers following the Kan comments.

Elsewhere in Asia, a highly anticipated decision from the Bank of Korea, widely believed to be among the next few central banks to follow Reserve Bank of Australia's lead in raising interest rates, saw little progress toward that end. The BoK left rates unchanged at 2.00%, noting that while the trend of recovery has been maintained, uncertainty over the path of economic growth still remains. Moreover, while conceding that the current rate presents a significant gap from normal levels, Governor Lee said he did not see clear signs of adverse effect from prolonged low interest rates, suggesting that the worrisome housing appreciation had eased. Instead, governor Lee showed greater concern over the strength of Korean Won, which could make the central bank more reluctant to raise rates in the near term. The central bank also warned that inflation is likely to remain stable because of weak demand - a far cry from concern over rising consumer inflation expressed in the prior month.

The Aussie economic calendar saw both November retail sales and trade figures beating estimates on Thursday. The Aussie dollar extended its week-long rally after the release of the data, just as fixed income markets repriced their early February RBA rate hike probabilities from around 50% to above 60%.
Europe's sovereign debt situation continued to simmer in the background. The ECB's Stark commented in press interview that Greece would not be bailed out. Greece resorted to "damage control" and once again sought to reassure markets that it has the ability to meet its funding requirements and put in place measures to reduce its deficit to GDP ratio to 3% by 2012 from the 12.7% level in 2009. Other sovereign concerns receded somewhat, particularly after the UK's first Gilt sale of the year was reassuringly successful. Nonetheless the Treasury will return with a smorgasbord of bills, notes, bonds and TIPS next week in auctions which should gain the market's undivided attention.

EUR/USD approached its 200-day moving average 1.4850 various time during the week. This moving average was last tested back in late December, when the pair was trading at 1.4200 (the Dec low in pair was 1.4215 on the 22nd). The 200-day moving average was last breeched back in early May 2008 at the 1.3460 level. Dealers believe a break of the level might provide enough momentum to spark a retest the mid Jun pivot point around 1.38. GBP/USD began the week on a softer tone as former UK Labor Ministers Hoon and Hewitt tried to launch a secret ballet on PM Brown's leadership. In the end the coup did not work out, however. M&A flows continued to play a role: Nestle said it would not bid for Cadbury and instead purchased a pizza unit from Kraft, greatly reducing the potential for a bidding war for the UK chocolate maker.

Trade The News Staff
Trade The News, Inc.
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