John Davidson’s Economic Comments: Week ending Nov. 23

Mon, 11/24/2014 - 8:00am

The U.S. economic releases were mostly positive, but those elsewhere were on the soft side. The equity market rally followed easing moves by the European Central Bank, Peoples Bank of China and the Bank of Japan, where the softness in the data also prompted a tax hike delay. Evercore/ISI's Ed Hyman reported 24 easing moves from around the world in the past month. These easing policy actions, along with increased Merger and Acquisition activity, provided the basis for this week's equity rally. Stock market indices were higher in the U.S. and Europe. Bond yields were lower, but credit spreads widened, especially in the riskier asset classes. The U.S. dollar was stronger against the European and Japanese currencies; energy and metals commodity prices were higher on the week.

Perspective:

This week's news was filled with the politics of immigration. The politics of immigration are complex, but the economics of immigration are pretty straight forward. The demographic structure of the U.S., with the increasing number of baby boomers entering the receiving-end of social security, require an increased number of younger workers. One potential source is through immigration. Immigration is positive for future U.S. GDP growth.

The demographics of the Davidson family Thanksgiving dinner is also changing. In addition to my sister and niece, we have all five of our children and four of the five significant-others joining us for Thanksgiving dinner and to celebrate my wife's birthday. The changing demographic is that we will be joined by two newly born grandbabies. We could not be happier. My family joins me in wishing you and yours the best for this Thanksgiving season.

Economic Releases:

U.S. Housing Starts (red in the chart) slipped to 1.009 million, but Permits (blue in the chart) increased to 1.080 million in October; both September numbers were revised higher. Existing Home Sales (green in the chart) rose to 5.26 million, just above the range of expectations for October. In other Housing news, the National Association of Home Builders Index rose four points to 58.0 in November — just above the range of expectations. The U.S. housing sector continued to improve, but was still well short of pre-Recession levels.

U.S. Industrial Production (blue in the chart) slipped a tick in October. Capacity Utilization also fell to 7.9%, lower than the range of expectations. Slowdowns in mining and utilities weighed on the October numbers.

Other Economic Releases

U.S. Initial Jobless Claims were little changed at 291,000 the week of Nov. 15; the four-week average of Claims inched higher, to 287,500. Reported on a one-week lag, Continuing Claims fell 73,000 to 2.33 million, further indication that the labor market is OK. The Markit Purchasing Managers Index flash report for November fell a couple of points to 54.7, but remained well into the expansion zone, above 50. The Philadelphia Fed Survey showed spectacular strength, doubling to 40.8, well above the range of expectations. New York's Empire State Survey of General Business Conditions Index surged four points to 10.16. These releases showed that the U.S. recovery remained in tack.

Elsewhere, the releases were not as supportive for recovery. In the European Union, the PMI Composite Flash for November slipped, but remained in the expansion zone at 51.4, 50.4 and 51.3 for Composite, Manufacturing, and Services. Germany's PMI Flash reports followed the pattern at 52.1, 50.0, and 52.1 respectively. France's Flash reports were higher, but, at 48.4, 47.6, and 48.8, were all in the contraction zone. In the UK, Retail Sales rebounded +0.8% in October, well above expectations. In the UK inflationary pressures remained well contained in October; CPI rose only a tick; PPI output fell -0.3% and PPI Input fell -1.5%.

In China, the flash PMI for Manufacturing fell four ticks to 50.0, right on the demarcation between contraction and expansion. In response to the deterioration in the economic data, the PBoC announced cuts in both its one-year lending and deposit rates, the first lending rate cut since July 2012; the one-year lending rate was cut by 40 basis points to 5.6% while its deposit rate was cut 25 bp to 2.75%. The Bank of Japan met and, as expected, maintained its interest rate rate policies and indicated that it would by Japanese bonds at a pace of 80 trillion Yen. This easing followed the surprise announcement Oct. 31 that had increased the purchases from 60 to 70 trillion Yen.

Equities Markets:

U.S. and European stocks rose while Asian stocks fell on the week. Easing policies, third-quarter earnings reports, and a pick up in 2014 Merger and Acquisition activity gave stock markets a boost this week. Factset reported a blended third quarter earnings increase of 7.9%, an increase from 4.5% expectation at the end of the quarter for the S&P 500. The S&P 500 recorded its fifth straight weekly increase into record territory. Widening credit spreads caused the Merrill Lynch credit market indices to post negative results for the week.

Bond Markets:

Government Bond yields were lower in the week with expectations of easing policies in Europe and Asia. Credit spreads widened, especially for the riskier asset classes.

Currencies & Commodities:

The U.S. dollar was stronger against the European and Japanese currencies, but slipped against the Looney on the week. Despite dollar strength, energy and metals commodity prices were stronger on the week. On a quarter to date basis, the dollar was stronger and oil and metals prices were lower even after this week's rebound.



Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.