Last updated: 07:32 / Friday, 26 December 2014
Macro Review by Pioneer

Fed Refreshes Punch Bowl Just in Time for Holidays

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Fed Refreshes Punch Bowl Just in Time for Holidays

Last week U.S. oil plunged sharply then rebounded to end the week down just 1%. The Russian ruble had an even wilder run for the week ‑ down 25% at one point before recovering. Did oil find a bottom? U.S. equities turned in a powerful three-day rally starting Wednesday that reversed prior day losses to finish 3.4% for the week. More solid U.S. economic data: industrial capacity utilization hit over 80, a level that lore says brings capital expenditure. This is a review of what happened last week in the markets by Pioneer Investments.

The FOMC reassured those who feared the Fed might take the punch bowl away, said Sam Wardwell, CFA, Senior Vice President and Investment Strategist at Pioneer Investments. Those are the reasons that back this point of view:

The combination of language change (as projected, ‘considerable time’ gave way to ‘patient’) and press conference statements more clearly pointed to a June lift-off. The changes in the dot plot” were slightly dovish—suggested a slower path of tightening. Also, "we see more solid U.S. Economic Data", explains Wardwell.

  • Industrial production rose 1.3% month over month (m/m), above expectations…and unsustainable…but still very strong.
  • Capacity utilization rose to 80.1%.  Lore holds that sustained 80+ readings bring capex.
  • Initial unemployment claims slid to 289k…fine; the 4-week average is below 300k.
  • The Q3 current account deficit ticked up (incoming Christmas presents).
  • According to the Bureau of Labor Statistics, real (after-inflation) average hourly earnings are up +0.8% year over year (y/y).

In the housing market, Pionner thinks that there is not a bounce, but builders remain upbeat.

  • Homebuilding has been trending sideways at roughly 1 million units per year. Starts slipped to 1.028 million units per year (mm/yr), permits slid to 1.035 mm/yr.
  • Mortgage applications dipped; applications remain down y/y, the generic rate was at 4.06%.
  • The NAHB builder confidence index slid from 58 to 57 after hitting a 9-year high of 59 in September.  Note: builders are natural optimists—characteristic of many industries prone to booms and busts.

To conclude, Sam Wardwell sees that falling energy prices are depressing headline inflation, but not the economy:

  • Core CPI rose 0.1% month (m/m); (y/y) is 1.7% and trending sideways.
  • The average price of regular gasoline declined to $2.554/gallon, down 21% y/y.
  • Headline CPI declined 0.3% m/m as gasoline fell 6.6%. The y/y rate slid from 1.7% to 1.3%.
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