Weekly Economic Review April 18, 2014

Transcription

1 Weekly Economic Review April 18, 2014 Both the labor market and growth have stabilized, albeit at low levels, which has bolstered the confidence of Americans in their own individual personal finances and the state of the national economy. Across the board in income levels, you saw broad improvement. 1m 3m 6m 1y 2y 3y 5y 10y 30y Apr Apr Joseph Brusuelas Senior Economist Bloomberg LP Market Overview The start of earnings season gave U.S. stocks a boost after weakness from the recent cold winter weather and biotech sell- off. Earnings this week were mixed, with some missing and others beating expectations, but were strong enough to set a positive tone for the holiday- shortened week. U.S. markets closed on Friday in observance of Good Friday. The Dow, S&P 500 and Nasdaq rose 2.4%, 2.7% and 2.4% for the week to end at 16,469.49, and , respectively. The S&P 500 recorded its biggest weekly gain since last July while the Dow closed in slightly negative territory on Saturday because of disappointing earnings from Google and IBM. Less than one- fifth of S&P 500 companies have reported results so far, and about 63% have exceeded earnings expectations. Morgan Stanley and General Electric led the market rally after posting strong earnings. Morgan Stanley rose 2.9% to $30.76 after reporting stronger than expected first- quarter earnings, while competitor Goldman Sachs edged up 0.1% after reporting earnings that fell less than expected. General Electric s stock gained 1.7% to $26.56 after posting a 12% increase in overall profits. Tech shares, on the other hand, dampened the S&P 500 s gain, with Google and IBM down 3.7% and 3.3%, respectively. The results raise questions about other tech- sector companies as they are set to release earnings in the coming weeks. Nearly one- third of S&P companies, including Apple and Netflix, are set to post results next week as earnings season shifts into high gear. In worldwide news, global equities rose this week following solid U.S. economic data and positive earnings results. The FTSE EuroFirst 300 index, which measures the top European shares, ended the week up 0.46%, while the MSCI world equity index, which tracks shares in 45 nations, rose 0.28% on Thursday.

2 Macroeconomic Overview omic Overview The U.S. economy continues to improve as the number of Americans filing for unemployment benefits rose by less than expected in the latest week. Jobless claims increased by 2000 to 304,000 in the week ended April 12, which is the lowest level since September Layoffs are on the decline as companies gear up for rising sales as the economy improves. Retail sales increased by a more- than- expected 1.1% in March according to the Commerce Department. Not only are layoffs slowing down, but the total number of people on state benefits has decreased. The total number of people receiving benefits fell by 11,000 to 2.74 million in the week ended April 5, which is fewest since December Manufacturing continues to pick up as the Federal Reserve Bank of Philadelphia s factory index, which measures changes in business growth, increased to its highest level since September. The index s 22.9 point increase this month and last is the biggest since September- October In particular, automakers reported positive results as motor- vehicle purchases rose by the largest amount since September The March annualized 16.3 million rate is the fastest since May Even with the improving conditions, Federal Reserve Chair Janet Yellen continues to be mindful of how the U.S. can achieve its goals of full employment and price stability. In her first major policy speech as Fed Chair, Yellen reminded lawmakers that inflation measured by personal consumption expenditures has remained below its 2% goal for almost two years and continues to drop. There is also the employment gap, with the 6.7% unemployment rate more than a full percentage point higher than the high end of the FOMC s estimate of 5.6% full employment. China s economic growth is slowing down. The economy grew at 7.4% in the first quarter of 2014, which is the slowest pace in 18 months. However, this is still better than analyst expectations, suggesting that authorities are in no rush to provide major economic stimulus. China is currently attempting to increase the role of consumption and decrease its reliance on exports and industrial production. Fixed Income Overview Treasuries fell this week as talks on the crisis in Ukraine ended with an accord and the strengthening U.S. economy dampened demand for safe- haven assets. Investors also interpreted a more hawkish tone in Yellen s Economic Board of New York speech. Benchmark 10- year yields, which rise as bond prices fall, increased nine basis points to 2.72% on Thursday. 5- year and 30- year yields also increased to 1.73% and 3.52%, respectively. The yield curve continues to flatten, with the yield spread between the 5- year note and the 30- year bond touching 1.75 percentage points, the narrowest since October As mentioned previously, flattening yield curve reflects falling inflation expectations and the speculation that the Fed will soon raise interest rates. The recent $18 billion 5- year Treasury Inflation Protected Securities auction drew the most demand from overseas investors, including foreign central banks. These investors bought 58.4% of the TIPS securities for sale, compared with an average of 42.3% in the past 10 auctions. The notes sold at a yield of %, which is below analyst forecasts. The strong TIPs demand suggests that money managers still are aware of rising inflation concerns, even as inflation expectations have generally been falling.

3 Transaction Highlights omic Overview Google Buys Drone Maker, Titan Aerospace Google is known to be a start- up absorbing behemoth, with projects ranging from Google Search algorithm enhancements to developing new wearables, like Google Glass. The primary thesis is that if Google tries everything, some projects will prove sticky and worthwhile. Those projects will be the ones to get further funding. It appears Google is now entering a new realm, the sky. On Monday, Google announced that they have acquired Titan Aerospace, a solar- powered drone maker. The firm s jet- sized drones are able to fly without pause for years. Google currently has a few ideas regarding what to do with the New Mexico- based company. The two primary intentions at the moment are to have the drones collect aerial images, as well as offer online access to remote areas. However, the technology required to broadcast Internet down to the ground remains largely unproven. Despite potential difficulties, Facebook actually made a similar transaction earlier this year when they bought U.K.- based Ascenta, which has also been working on solar- powered unmanned aerial vehicles. Post- transaction, Chief Executive Vern Raburn will remain in place, as well as his 20 employees. Google will be integrating the Titan into Project Loon, which is currently working on high- altitude balloons that broadcast internet to underdeveloped areas. There are talks that Google may also pair Titan with Makani, which is working on high- altitude wind turbines. If Google can eventually master this technology and integrate it into the larger business, they would be able to build proprietary networks offering wireless bandwidth worth billions of dollars, according to drone expert Patrick Egan. Further details, such as deal value, have yet to be disclosed so investors will continue to follow this story as they try to assess the potential for value creation. Zebra Technologies Buys Select Motorola Solutions Businesses Motorola Solutions will be selling a large chunk of its enterprise business to Zebra Technologies for $3.4 billion. Motorola Solutions is currently is a data communications and telecommunications equipment provider, structured as a subsidiary of Motorola Inc. The unit was separated following the spin- off of Motorola Mobility in The transaction will leave Motorola Solutions with a few main businesses, namely its government and public safety products. The remaining parts of Motorola Solutions brought in $6.2 billion of revenue last year and vigorous efforts will be made to grow those remaining product lines. Zebra s purchase includes enterprise mobile computing, bar- code scanning technology and wireless LAN, or local area networking. Large businesses like General Electric and Amazon are increasingly looking for these types of services that enable data mining of real- time feeds. Zebra is currently aiming to grow its global presence and hopes that the deal will help in that effort.

4 Motorola Solutions is yet to decide how the proceeds will be distributed to shareholders, but does intend to return the capital. Morgan Stanley advised Zebra and both Goldman Sachs and JP Morgan advised Motorola Solutions. Data & Indicators Date Time (ET) Statistic For Actual Market Expects Prior 14- Apr 8:30 AM Retail Sales Mar 1.10% 1.00% 0.70% 14- Apr 8:30 AM Retail Sales ex- auto Mar 0.70% 0.50% 0.30% 14- Apr 10:00 AM Business Inventories Feb 0.40% 0.60% 0.40% 15- Apr 8:30 AM CPI Mar 0.20% 0.10% 0.10% 15- Apr 8:30 AM Core CPI Mar 0.20% 0.10% 0.10% 15- Apr 8:30 AM Empire Manufacturing Apr Apr 9:00 AM Net Long- Term TIC Flows Feb $85.7B NA $7.7B 15- Apr 10:00 AM NAHB Housing Market Index Apr Apr 7:00 AM MBA Mortgage Index 12- Apr 4.30% NA % 16- Apr 8:30 AM Housing Starts Mar 946K 955K 920K 16- Apr 8:30 AM Building Permits Mar 990K 1003K 1014K 16- Apr 9:15 AM Industrial Production Mar 0.70% 0.50% 1.20% 16- Apr 9:15 AM Capacity Utilization Mar 79.20% 78.80% 78.40% 16- Apr 10:30 AM Crude Inventories 12- Apr M NA 4.030M 16- Apr 2:00 PM Fed's Beige Book Apr - NA NA 17- Apr 8:30 AM Initial Claims 12- Apr 304K 312K 302K 17- Apr 8:30 AM Continuing Claims 5- Apr 2739K 2800K 2750K 17- Apr 10:00 AM Philadelphia Fed Apr Apr 10:30 AM Natural Gas Inventories 12- Apr 24 bcf NA 4 bcf Market Data Item Apr- 11 Apr- 17 % Change DJIA % S&P % EUR- USD (0.53%) USD- JPY % Crude Oil (WTI) %

5 Opinions "We are still off our highs, but we still remain in an uptrend, so it would not surprise me to see sideways action. If we were to have a set of earnings releases that were well off expectations to the downside, that could create hesitation in the market." Andre Bakhos Managing Director Janlyn Capital LLC Broadly, we are seeing improvement in the labor market. As the economy gains more momentum, employment increases and spending improves. Michael Wolf Economist Wells Fargo Securities LLC Wage gains continue to proceed at a historically slow pace in this recovery, with few signs of a broad- based acceleration The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained. Janet Yellen Chairman Federal Reserve Bank "The slowdown of China's economy is a reflection of a transformation of the economic mode. There is no fundamental change in the improving trend of China's economy. The economy is still moving steadily towards the expected direction." Sheng Laiyun Spokesman China National Bureau of Statistics

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7 Upcoming Releases Date Time (ET) Statistic For Briefing Forecast Market Expects Prior 21- Apr 10:00 AM Leading Indicators Mar 0.70% 0.80% 0.50% 22- Apr 9:00 AM FHFA Housing Price Index Feb NA NA 0.50% 22- Apr 10:00 AM Existing Home Sales Mar 4.55M 4.60M 4.60M 23- Apr 7:00 AM MBA Mortgage Index 19- Apr NA NA 4.30% 23- Apr 10:00 AM New Home Sales Mar 430K 455K 440K 23- Apr 10:30 AM Crude Inventories 19- Apr NA NA M 24- Apr 8:30 AM Initial Claims 19- Apr 315K 312K 304K 24- Apr 8:30 AM Continuing Claims 12- Apr 2750K 2750K 2739K 24- Apr 8:30 AM Durable Orders Mar 2.00% 2.00% 2.20% 24- Apr 8:30 AM Durable Goods - ex transportation Mar 0.70% 0.50% 0.10% 24- Apr 10:30 AM Natural Gas Inventories 19- Apr NA NA 24 bcf 25- Apr 9:55 AM Michigan Sentiment - Final Apr