What I’m Watching This week – 21 October 2013


The Markets

Near-debt experience: The ceasefire in Washington that put federal employees back to work and averted a debt ceiling disaster also brought relief on Wall Street. One-month Treasury yields had skyrocketed in October as investors abandoned them; that sell-off reversed after a deal was announced, cutting the yield in half overnight and to one basis point by week’s end. Long-term debt saw less impact, but equities rallied strongly. The S&P 500 built on a 1.4% gain on the day of the announcement by hitting a new all-time closing record on Friday. The small caps of the Russell 2000 also set a fresh record, and along with the Nasdaq gained roughly 3% over the three post-announcement closes. However, the Dow was hampered by disappointing earnings reports from a couple of its key components.

Last Week’s Headlines

After 16 days of partial government shutdown and debt ceiling gridlock, a last-minute agreement broke the impasse the day before the Treasury was scheduled to begin running out of cash to pay the nation’s bills. The legislation suspends the debt ceiling until February 7 and provides funding to reopen the government through January 15. The deal to end the stalemate also established a congressional budget conference that must report by December 13 on ways to address longer-term budget issues.
Growth in the world’s second-largest economy accelerated in the third quarter, according to China’s National Bureau of Statistics. The 2.2% increase from Q2 on an annualized basis would represent a 9.1% annual growth rate, higher than the actual 7.8% increase seen over the past year. The increase was attributed to the effects of massive lending in the first two quarters as well as government spending on urban infrastructure in an attempt to counteract a slowdown earlier in the year.
Manufacturing reports from the Federal Reserve’s Philadelphia and Empire State regions were mixed. The Philly Fed index edged down to 19.8 in October from September’s 22.3, and the Empire State’s outlook on general business conditions fell 5 points to 1.5. However, new orders were up in both regions.
The Federal Reserve’s beige book report, based on data collected before October 7, showed “modest to moderate” expansion. Businesses were said to be cautiously optimistic about future activity, but the report registered an increase in uncertainty because of the government shutdown and debt ceiling debate. Several of the Fed’s 12 districts noted caution about expanding payrolls because of uncertainty about implementation of the Affordable Care Act and fiscal policy in general, but demand for skilled labor remained high in many districts.
The lack of government data meant that the Conference Board’s index of leading economic indicators and the Federal Reserve’s industrial production numbers for October were not available.
Eye on the Week Ahead

With the debt debacle temporarily resolved, investors are free to turn their attention to an onslaught of earnings reports and begin speculating about whether the shutdown’s economic impact, estimated by Standard & Poor’s at $24 billion, will delay any Fed tapering. October’s delayed unemployment report for September is now scheduled for release on Tuesday; concerns about the anticipated impact of the shutdown could amplify any disappointment with September’s numbers.

Key dates and data releases: home resales (10/21); unemployment/payrolls (10/22); new home sales (10/24); durable goods orders (10/25).*

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); http://www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

*Some data releases postponed by the government shutdown are being rescheduled and may not be available.