The stock market continues to look like a one-decision investment, as investors piled in for a second day and drove prices still higher. The S&P rose 1.3%, reflecting the ebullience and dare I say exuberance in European bond markets. Portuguese 10-year debt rallied 55bps, Ireland improved 36bps, and Greece and Spain both picked up 24bps (poor Ireland rallied a mere 14bps). The occasion for this show of enthusiasm was the meeting of the ECB - actually, more to the point it was that the ECB went into the market to buy bonds right after the meeting.
Clearly banks and investors had been pleading for additional support of the sovereign bond market (which they got) and an extension and even expansion of the special liquidity facilities (they got a one-quarter extension of special loans from the ECB, but no expansion of the program). But the ECB didn't exactly surprise the market. ECB President Trichet, insisting that recent growth numbers have surprised on the upside ... imagine how many banks would have failed already if growth had surprised on the downside!! ... admitted that growth risks are currently tilted to the downside although he saw inflation risks as balanced. Yawn.
The equity market rally was aided by a surge in October Pending Home Sales, which leapt 10% month-over-month. Investors overlooked the worse-than-expected Initial Claims (although 436k is still better than we have seen for a while) to focus on this rather unimportant report. To put the jump into context, I think it is worthwhile to look at the year-on-year number. See the chart below (Source: Bloomberg) for that. You see, we also had a surge in Pending Home Sales last fall, so that the monthly spike appears more likely to be the result of poor seasonal adjustment affecting the report in the autumn.
Yeah, the monthly surge in pending home sales doesn't really look impressive on a y/y basis.
U.S. Treasury note yields rose on all of the (scoff!) good news, with the 10y yield rising to a heady 2.99%. The dollar weakened, and the VIX weakened. It would seem that many investors feel the crisis is over. Again. Or perhaps they just hope that it is over for this year.
Before we get too far out in front of this wonderful, powerful, riskless recovery, we probably should pause to look at tomorrow's Employment report. Recall that last month's report was a mess, with strong private payrolls yet an Unemployment Rate that barely missed ticking higher and a labor force participation rate that fell to a 24-year low. The market that day initially focused on the Jobs number but was unable to hold early gains. However, looking back on it now, people seem to recall that it was a strong Employment report and they are looking to draw grand conclusions if tomorrow's report makes it two in a row.
The Consensus forecast is achievable, with expectations for 150k new jobs and a 9.6% Unemployment Rate (unchanged, but this probably implies a small improvement). But while Initial Claims have recently looked positive, there are other indicators that are not so strong. In particular I am mindful of the Jobs-Hard-To-Get element of the Consumer Confidence report. The ADP, which clocked in at a better-than-expected +93k on Wednesday, is consistent with a 101k showing from private payrolls (see chart below).
The 93k ADP figure suggests that +100k is roughly what we should expect from private payrolls.
Accordingly, I am not very sanguine about the number tomorrow although I don't expect a huge miss; given the recent rally into previous resistance I think that playing stocks from the short side is a defensible trading strategy. It also is not clear to me that, once the ECB stops buying PIIGS bonds, there will be lots of other buyers lined up behind them - so while I wouldn't short PIIGS bonds for spite (it is usually a bad short-term bet to fade the central bankers), if I were long I would get out.
The Non-Manufacturing ISM (Consensus: 54.8 from 54.3) is also scheduled for a mid-morning release. This isn't likely to be a market mover.
One final public-service announcement. The Inflation-Indexed Investing Association is soliciting submissions for the inaugural edition of the Journal of Inflation-Indexed Investing. Submissions may be academic/theoretical or practitioner-oriented in nature. We will also consider rhetorical works that are relevant to the topic (these will be clearly indicated as "Opinion" in the Journal). Additionally, we are soliciting research works by undergraduate students on inflation-related topics (which works will also be indicated as such when published). For the full description of the submission process and author guidelines, follow this link. And please feel free to forward that link to anyone you know who may be interested in submitting research.
