A Lot Of Action In What Was Expected To Be A Quiet Week Pioneer Investments By Sam Wardwell August 20, 2013 Observations on the

Capital Markets – Week Ended August 16, 2013 Most of the U.S. economic data released last week was rather ho-hum, consistent with continuing slow growth, but markets weren’t boring. Maybe markets are thin because it’s August, but the U.S. Treasury market had one of its worst weeks in a long time, and the selling spilled over into the U.S. stock market. The Fed has signaled that employment will be what drives its policy, and employmentrelated data has been strong enough for the Fed to begin to taper in September. It’s not a done deal, but even the Fed “doves” seem open to the idea . . . so the big question is now becoming “how fast will the Fed taper?” Signs that Europe and China are strengthening gave no comfort to bond bulls. Inflation remains restrained and growth remains muted, so we can’t blame “bond vigilantes” for last week’s sell-off. Instead, it seems increasingly apparent that Quantitative Easing (QE) did blow a bubble in the bond market (size unknown) and that bubble has now been punctured. (Note: this is not a market forecast: markets typically overshoot, so yields may well fall back after this sharp rise, but it’s hard to see how bond prices return to their prior highs.) Executive Summary: Last week in the capital markets: a Treasury sell-off takes U.S. stocks with it Initial unemployment claims fell sharply 15k to a new cycle low of 320k The National Federation of Independent Business (NFIB) Small Business Index, which measures the optimism of small business owners, rose 0.6 to 94.1 Somewhat soft data from the manufacturing sector Business inventories were flat in June even as sales inched up. Retail sales weren’t awful, but investors weren’t pleased Consumer Sentiment (Reuters/University of Michigan) surprised on the downside Good coincident housing data, but still cause for concern about the impact of rising interest rates Inflation and unit labor costs ticked up, but remain low U.S. consumers continue to deleverage Detroit fallout Washington watch Fed watching: waiting for the September taper Foreigners are selling Treasuries The Eurozone posted positive Q2 GDP growth Other Eurozone news was constructive Japanese GDP grows…tax policy is in the headlines

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Page 2 ©Advisor Perspectives. Regional MSCI indices MSCI Japan and MSCI Europe. The 10-year Japanese government bond (JGB) was unchanged. Inc. new orders and shipments) were consistent with very slow growth…but the employment growth and workweek components were strong and optimism in the six-month outlook were strong. not bank unwillingness to lend. lagging global equity markets. Within the S&P 500. stocks with it Currencies: The U. Bonds: Ten-year Treasury yields rose 27 basis points. stock market was down 2%. Initial unemployment claims fell sharply 15k to a new cycle low of 320k The four-week average also hit a cycle low. A key July drag was a dip in motor vehicle production after June posted a 6-year high (10. the Euro was marginally down. Somewhat soft data from the manufacturing sector July Industrial production was flat (below expectations).56 million in January 2009.68%. Apple (up 10% for the week after Carl Icahn said he’d taken a position) boosted the index by almost 40 bps.6 to 94. dollar was up against most currencies (consistent with rising higher interest rates). at 332k. the highest level in two years. producing a 1-week return of -2%. growing retail sales and stronger labor market data suggested that the UK economy is expanding. Commodities: Gold rallied $60 to $1. up 35 basis points to 0. stock in the Information Technology sector led. most of the details (e. were barely positive. Oil was up about $2. and Portuguese yields fell (spreads narrowed) as confidence in the European economy rose. the annual growth of Industrial production has fallen to below 2%. a common measure of the commodity market performance. All rights reserved. The British pound was notably strong as rising house prices. The MSCI Emerging Markets Index was up almost 2%. The German 10-year yield rose 20 bps to its highest yield since March 2012 while Italian. the Yen fell roughly 1. that is holding loan volumes down. up from a low of 3.S.S. Equities: The S&P 500 Index which measures the broad U. .5% against the dollar. The Agriculture Department’s Agricultural and Livestock Commodity index. to 2. Credit availability was a “non-issue” lack of demand for loans.84%. while Utilities lagged.S. The BoAML High Yield Master II Index HY measuring high yield bonds posted only a small loss as its spread over Treasuries narrowed 10 bps to 470.98 million/year rate). The 10-year TIP yield rose even more. the fourmonth average hit a new cycle high. Spanish.50. The Empire State Index (the NY Fed’s monthly survey of NY state manufacturers) weakened modestly.g. was down a bit. which measure their respective stock markets. the BarCap Aggregate declined a bit more than 1%. The NFIB Small Business Index rose 0.369. Still.China watch—New York Times watch India tries (without success thus far) to stop the decline of the rupee Mexico announces plans to open its petroleum sector Egypt watch Last week in the capital markets: a Treasury sell-off takes U.1 Hiring intentions rose to the second highest reading since the recovery began.

Further.The Philly Federal Reserve’s report on manufacturing was softer than expected (after a big jump last month). and had had hit a 6year high last month. was pulled down by weakness in both the current conditions and expectations components. but remain low Both headline CPI (which measures inflation) and core CPI (which excludes food and Page 3 ©Advisor Perspectives. the biggest gain in 7 months. Inc. Reports from Macy’s and Wal-Mart added to the gloom. . I’m inclined to view both last month’s strength and this month’s weakness as possible statistical noise (the survey is based on a sample of only 500 households). especially given the decent retail sales number.2% in July. Inflation and unit labor costs ticked up. up 0. with strength coming from both current sales activity and builders’ outlook. June sales were revised up by 0. which measures how consumers feel about the economy. but the new orders component was ok. its highest reading since November 2005. this was below expectations.2%. Mortgage applications for purchases fell 5% in the week ending 8/9. suggests future strength. given that jobless claims and gasoline prices have been falling and home prices have been rising. Comment: retail sales account for roughly half of total consumer spending and one-third of GDP. Business inventories were flat in June even as sales inched up Comment: inventory/sales ratios remain low. Consumer Sentiment (Reuters/University of Michigan) surprised on the downside The index. Comment: Despite headline weakness. Good coincident housing data. Excluding autos and gasoline. continuing a 3-month trend. this bodes well for the second half (no excess inventories to be worked off means no production cuts are needed) Retail sales weren’t awful. All rights reserved.5%. which compares prices paid with the prior month’s prices. Still. of course. strength in the ISM Purchasing Managers Index. Starts and permits had/have stalled just below 1 million units/year. July sales rose 0. rates have risen since then. Comment: The current conditions decline is surprising. but still cause for concern about the impact of rising interest rates Housing permits and starts rebounded. the strength in the new orders and employment components is supportive of Fed tapering. but investors weren’t pleased Nominal retail sales rose for a fourth consecutive month. and refinancing applications fell 4% despite a 5bp decline in 30-year mortgage rates…and. with the volatile multifamily component driving both June weakness and July strength. The National Home Builders housing market index rose from 56 to 59.

2% on higher petroleum prices.petroleum.9% annual rate in Q2.” the market may be pricing in a less accommodative Fed. ex. Import prices rose 0.5%.7%.6% in Q2. Page 4 ©Advisor Perspectives. net sales were quite large in June.2 percent in July.6% U.4% rate. Comment: because Yellen is considered a major “dove. Chatter is now centering on the size/rate of the taper more than its start date: what is priced in? Foreigners are selling Treasuries The Treasury’s report has shown foreigners to be net sellers of Treasuries most of this year. . . Most commentators find the Justice Department’s reasoning/logic/arguments pretty weak . Both Chinese and Japanese accounts were large sellers in June. headline rose from 1. Year-on-year.the one closest to DC. export prices are up 0. both hourly compensation and unit labor costs rose 1. . The Wall Street Journal says the White House has moved to quiet Senate Democrats from pressing the claims of Janet Yellen as the next Fed head. The delinquency rate fell from 8. ex-petroleum import prices were -0. Year over year. Washington watch Odds that Larry Summers will be the next FOMC chairman are rising.7% in the second quarter (Q2). productivity was unchanged. Higher tax revenues continue to shrink the deficit. hitting $67 billion. The Justice Department moved to block the American/USAir merger.5%.0%. Export prices fell 0. Year/year. Inc. No substantive progress on the budget or debt ceiling. All rights reserved. Fed watching: waiting for the September taper Next Federal Open Market Committee (FOMC) meeting: September 17-18 Fed speakers continue to guide the markets to expect a September taper. saying the President “will not be pressured” into an appointment.gasoline) rose 0. Year/year. consumers continue to deleverage Consumer debt declined 0. the only place the combined airline might seem to have excessive market share would be at Reagan (DCA) Airport . Labor productivity rose at a 0. unit labor costs rose at a 1. import prices fell 0. Detroit fallout Moody’s is inviting comment on a proposed methodology change which would raise the weight it gives to pension obligations from 10% to 20%.4%.1% in Q1 to 7.8% to 2. . Core rose from 1.1% on lower agricultural product prices.6% to 1.S. .

while the Reserve Bank of India imposed new capital controls. India boosted import duties on gold and silver and banned the import of gold coins. All rights reserved. core was up 1. India tries (without success thus far) to stop the decline of the rupee Facing a large current account deficit.3% Q1 Germany (+0. Mexico announces plans to open its petroleum sector Page 5 ©Advisor Perspectives. and falling currency. machine tool orders (an important indicator for Japan) was weak There’s lots of speculation/uncertainty about whether the government will seek to delay a rise in the consumption tax and/or cut corporate tax rates. causing “thousands of businesses to close.3% (-0.6% year over year.5%) drove growth.6% quarter over quarter.1%) was also solid. China watch—New York Times watch Economic data was generally encouraging. Real consumer spending is outpacing overall GDP growth…but is that rising confidence or buying in anticipation of prices rising? On the downside.1% Japanese GDP grows…tax policy is in the headlines Q2 GDP rose for the third consecutive positive quarter. notably rising factory output.” Comment: it’s unclear whether this is just another “wall of worry” story (journalistic sensationalism… the New York Times is not a “China booster”) or a valid warning…there’s no independent verification of the story yet.1%) and Italy (-0. but the rate of decline slowed (the trend is improving).The Eurozone posted positive Q2 GDP growth Flash Q2 GDP was +0. . Other Eurozone news was constructive German investor confidence (the ZEW report) and industrial production surprised on the upside. It didn’t help last week: stocks fell and the rupee hit a new alltime low intraday Friday. A Friday New York Times article said that a credit crisis is spreading through China as the informal lending called “shadow banking” system dries up. albeit more slowly than anticipated (0. 3. Note: Indians were the world’s largest buyers of physical gold in Q2…given the decline of the rupee. Headline CPI was up 1. Comment: a positive Q2 number is a pleasant surprise—the end of the recession might have come a bit earlier than expected…but one positive quarter is not enough for a victory dance. Inc. The government said it would accelerate the cutback of excess industrial capacity.7%) and France (+0. Portugal (+1. electrical generation/consumption. and demand for copper…indications that growth is not collapsing. mass repossession of luxury cars and street protests. Spain (-0.7% year over year) after a -0.8% year over year).2%) remained in negative territory. gold doesn’t look bad in local currency terms.

com Page 6 ©Advisor Perspectives. Bloomberg (c) Pioneer Investments us. All rights reserved. Egypt watch The unrest is boosting both geopolitical fears and oil prices The week ahead New and existing home sales.pioneerinvestments. Financial Times.Mexican President Enrique Peña Nieto proposed changes to the constitution that would allow private investment in the development of oil and gas resources (currently there’s a state-owned monopoly). Inc. FHFA house price index Kansas City Fed survey July FOMC meeting minutes…may shed some light on taper plans Fed Jackson Hole meeting…Bernanke won’t attend: no notable Fed policy guidance expected Eurozone and China PMI Data Sources: The Wall Street Journal. .

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