Weekly Market Update: As January Goes...
- Global equity markets saw even more turbulence this week, although the equity declines were more muted overall. The final week of January saw the Federal Reserve taper asset purchases for a second consecutive meeting, reducing the pace of monthly buys by $10 billion to $65 billion, split equally between US treasuries and MBS. There was little change in the Fed's language and no press conference, but the absence of any commentary on the emerging market currency rout was unsettling for some. Three of the "fragile five" nations (Brazil, India, Indonesia, Turkey, and South Africa) raised interest rates in an attempt to stem capital flight and bolster currencies, but the sense is that the emerging market situation will only be getting worse. US GDP and inflation data were pretty solid, while European unemployment and inflation data was anything but, which pummeled the euro and drove key UST-Bund spreads to their widest levels in six months. For the week, the DJIA dropped 1.1%, the S&P500 lost 0.4% and the Nasdaq declined 0.6%, leaving all three major indices down low-single digit percentages for the opening month of 2014.
- US advance fourth quarter GDP met expectations at +3.2% and the personal consumption expenditures component hit its highest growth rate since 2010. Recall that the Q3 final GDP figure was +4.1%; the Commerce Department said that the deceleration reflected lower nonresidential investment, a larger decrease in federal spending and weaker PCE and exports. It was estimated that the government shutdown subtracted 0.3% from the Q4 headline GDP growth, while Federal spending fell 12.6% y/y in the quarter, pushing total government spending down 4.9% y/y. Some analysts speculated that in the absence of Federal austerity measures, GDP would have been above 4%.
- The Fed's favored measure of inflation inched higher in December. The core PCE price index rose 0.1% from a month earlier, bringing the y/y core inflation rate to 1.2% from 1.1%. The core measure remains well short of the Fed's 2.0% inflation target. Contrast the US data with the Eurozone flash January CPI reading: headline inflation was 0.7%, matching the four-year low seen in October. The German state CPIs for January all sank lower. The ECB has vocally dismissed arguments that Europe is facing deflation, however the bank cut rates by 25 bps to 0.25% in the wake of the October CPI report. The next ECB rate decision will be on Thursday, and many analysts are now forecasting another 15-20 bps rate cut. Recall that after the bank's last decision, President Draghi stated two contingencies would force the ECB to act: a worsening inflation outlook or unwarranted money market tightening. In the wake of the two inflation reports, the US-German 2-year spread hit six-month highs, at a little more than 26 bps. EUR/USD dropped below the 1.3500 level for the first time in two months.
- Three emerging market central banks boosted interest rates this week in attempts to grapple with the volatility seen in currency markets. India hiked its base rate by 25 bps to 8.00%, Turkey raised its overnight lending rate by a huge 425 bps to 12.00% and the South Africa Central Bank raised its key rate by 50 bps to 5.50%. The moves have limited the decay of the three nations' currencies for now, but they have hardly reversed the ugly trend. USD/INR remains just shy of the 63.5 high seen before the decision. The Turkish Lira had spiked to a fresh all-time low of nearly 2.40 to the dollar and dropped to 2.16 after the decision, but weakened back to the 2.25 area in the second half of the week. The South Africa Rand got close to all-time lows, hitting 11.36 to the greenback before the decision, and has only strengthened slightly after the rate hike.
- Industrial names Boeing, Ford, and Caterpillar offered decent but not excellent results for the December quarter. Cat's Q4 earnings and revenue totals widely topped expectations, with profits higher y/y but revenue down 10% from last year's Q4. The firm's initial FY14 earnings outlook was also very good, although executives cautioned that the mining industry would remain weak in the near term. At first glance, Ford's earnings crushed the consensus view, but before a big tax benefit profits fell nearly 25% y/y. Likewise Boeing's EPS blew out expectations, but only because of a very low corporate tax rate. Ford warned that the launch of a big range of new models, including the new aluminum body F-150, would hold back North America earnings in FY14. Boeing's guidance for commercial deliveries around 715-725 planes indicates another year of growth for the firm.
- Revenue and weak production figures were the main focus in earnings out of Chevron, ConocoPhillips, and Exxon. Conoco's fourth quarter revenue declined 15% y/y, Exxon's fell 3% y/y while Conoco's declined 7%, and all three firms missed expectations. Profits were better, although COP's earnings were bolstered by asset sales and Chevron's fell by more than 30% y/y. The firms saw production fall Q4 and offered anemic production growth forecasts for 2014. In other sector news, the State Department's long-awaited statement on the stalled Keystone XL pipeline said it would have only a limited environmental and climate impact, removing one more roadblock for the project.
- Shares of Apple are down about 10% in the wake of Cupertino's Q4 report, thanks to perceptions that the company's iPhone business is leveling off. Apple sold 51 million iPhones in the quarter, +6.7% y/y, missing analyst expectations of 55-57 million. Executives hinted the low growth was due to a contraction in North American sales, but also highlighted rest-of-world sales up by double or even triple digits. Carl Icahn took the opportunity to buy the dip, acquiring another $500 million of the company's shares.
- After several quarters of tiny or zero profits, Amazon earned $510M in its fourth quarter on pretty decent margins, but its headline EPS and revenue figures missed tough consensus expectations. After running up 5% on Thursday in anticipation of the earnings release, the online retailer's shares dropped over 10% on Friday. Facebook's EPS and revenue saw very good y/y growth and beat estimates. Advertising revenue grew a whopping 76% y/y to $2.34B, while mobile users increased nearly 40% y/y, accomplishing the key goals laid out by both management and the analyst community. Google more or less met revenue expectations in its fourth quarter, on a solid 31% increase in paid clicks, but profits were a bit short. The day before reporting, Google agreed to sell the Motorola Mobility device business to Lenovo for $2.6B in cash and Lenovo stock (back in 2012, the company paid $12.5 billion for Motorola). Lenovo gets the Motorola brand, its portfolio of devices (Moto X and Moto G) and some patent assets. Google will hold on most of the patents it has extracted from the company.
- Walmart cut its Q4 and FY14 guidance to "slightly below" the low end of its prior ranges. The firm's outlook for Q4 SSS was bumped lower to slightly negative from flat. The retailer blamed cold, heavy winter storms and a steeper-than-expected impact from the reduction in certain welfare payments (namely SNAP, the government's Supplemental Nutrition Assistance Program).
- In China, an unnamed investor stepped in to save ICBC's China Credit Trust Co. unit from defaulting on its high-yield "Credit Equals Gold" fund. The mysterious rescue prevented what could have been a very bad moment for China's creaking financial system but many commentators drew parallels to the rescue of Bear Sterns in early 2008, a precipitating moment in the Great Recession.
- There was contrasting January manufacturing PMI data out of China and Japan. In Japan, the Markit/JMMA report hit 56.6, the highest reading in the series since February 2006. The upcoming sales tax hike was a key factor driving the recent gains, as customers ordered early to avoid higher tariffs, but analysts suggest the continued expansion of employment indicates the depth of the upturn. The China HSBC/Markit manufacturing PMI entered contraction for the first time in six months, and the employment component showed the fastest rate of job losses since early 2009. The official Chinese government manufacturing PMI reading is due out Friday night (20:00ET), and could be an early indicator for next week's market action. The Yen ended the week around 102.2, more or less flat, after a brief run up to 103.4 mid-week.