What I’m Watching This Week – 10 February 2014

The Markets

Despite a dizzying 326-point loss for the Dow on Monday after disappointing reports on both U.S. and Chinese manufacturing, domestic equities indices largely managed to rebound on high trading volumes. The S&P 500 finally saw its first positive week following three straight weekly losses. Unfortunately, the small caps of the Russell 2000 didn’t share in the bounce.

Last Week’s Headlines

  • The 113,000 new jobs added to the U.S. economy in January barely nudged the unemployment rate down 0.1% to 6.6%. Meanwhile, the labor force participation rate rose slightly to 63%, and the number of long-term unemployed fell by 232,000 during the month.
  • U.S. manufacturers saw substantially slower growth in January as the Institute for Supply Management’s gauge fell 5.2% from December’s 56.5%. Though the 51.3% reading represents the eighth straight month of expansion, it’s only 1.4% away from actual contraction, and the ISM survey also showed new orders falling a significant 13.2% to 51.2%. Meanwhile, the 50.5% reading on China’s official manufacturing index was more or less in line with an earlier report of contraction there.
  • The ISM’s measure of non-manufacturing activity fared better than the manufacturing sector. January’s 1% increase to 54% represented the 48th straight month of expansion, and new orders for the month increased by half a percent.
  • Led by the residential market, construction spending was up 0.1% in December. The Commerce Department said the 2.6% gain for the month in private residential construction resulted in the biggest annualized increase since June 2008. Construction of single-family homes was even better, rising 3.4% for the month and 21.6% from the previous December. By contrast, commercial and government construction were both down.
  • A 9.7% drop in transportation-related orders accounted for a large portion of the 1.5% decline in factory orders for U.S. manufacturers in December, according to the Commerce Department. However, the $2.3 trillion worth of U.S. exports in 2013 set a new record for the fourth straight year.
  • Labor productivity rose at an annualized rate of 3.2% during Q4 2013, according to the Bureau of Labor Statistics, as output rose 4.9% and the number of hours worked was up 1.7%.
  • Bill Gates stepped down as Microsoft’s chairman to take a more active role as a technology advisor to the company, while longtime executive Satya Nadella will become the company’s third CEO.
  • Both Standard & Poor’s and Moody’s cut Puerto Rico’s bond rating to junk status, citing concerns about the U.S. territory’s ability to tap capital markets. S&P also reaffirmed Turkey’s BB+ rating but cut its outlook to negative, indicating the likelihood of further downgrades.
  • The Congressional Budget Office forecast that the U.S. budget deficit is on track to fall to 3% of gross domestic product this year–close to the average for the last 40 years–and to 2.6% of GDP in 2015. However, after that, it will start rising again because of the aging population, federal subsidies for health insurance, rising health-care costs, and higher interest on federal debt. The 3% projected increase in GDP through Q4 2014 would be the largest rise in almost a decade, though the CBO continued to warn about the size of the federal debt (74% of GDP by the end of 2014). The CBO report also forecast that unemployment will remain above 6% until late 2016. Labor force participation could fall by the equivalent of 2 million jobs in 2017 as a result of the Affordable Care Act, “almost entirely [because of] a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor.” However, the report said that figure will depend on how many people obtain subsidized health insurance through exchanges.
  • The European Central Bank kept its key interest rate at 0.25% for the third straight month despite concerns that without increased monetary stimulus, inflation that has been below 1% in the region for several months could turn into deflation.

Eye on the Week Ahead

Investors will have to determine whether the retail sales to be reported on Thursday were affected by January’s severe weather across much of the country. New Fed Chair Janet Yellen’s testimony before Congress also will be watched.

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