As global leaders convene this week in Beijing for the Asia-Pacific Economic Cooperation (APEC) forum, investors are wondering whether governments can take full advantage of the opportunities provided by accommodative monetary policy. In Japan there is a steadily growing risk that Prime Minister Shinzo Abe’s administration will delay the second consumption tax hike. According to a report this morning by Takuji Aida, Société Générale’s chief economist in Japan, “If this materializes, the lower house [of the National Diet] may be dissolved and an election could be held in around mid-December at the earliest.” In China, accommodative policy may provide a cushion to ensure a soft landing for now, but the pace of structural reform to the economy outside the financial sector remains muted as the central government there supports the status quo. Over in Europe, there is no sign that leaders are any closer to an agreement on increased deficit spending by recovering economies such as France and Italy as Germany continues to insists on austerity despite floundering growth and inflation data. Taken as a whole, it appears that leaders of primary economies remain content to let central banks to do the heavy lifting.
The U.K. released mixed numbers. While the U.K.’s headline unemployment index for third quarter held at 6 percent, wages bested forecasts at annualized 1 percent growth. Bank of England governor Mark Carney said today in the central bank’s quarterly inflation report that average salaries in the U.K. are on track to rise by a 2 percent annualized rate by the end of 2015. Carney warned, however, that inflation could drop below 1 percent in the next six months and will likely miss the 2 percent target over the next three years.
China and the U.S. agree on environmental pact. In Beijing U.S. President Barack Obama and Chinese President Xi Jinping unveiled a new mutual accord to cap carbon emissions. This marks the first time that China has adopted a formal target for limiting greenhouse gas emissions and was hailed by the White House as a major diplomatic advance between the two nations.
Production numbers in Europe are a slight let down. Industrial production for the euro zone registered at a marginally softer pace than forecast according to data for September released this morning. On a year-over-year basis the headline index rose by 0.6 percent after a 1.4 percent contraction in August but increased by less than forecast on a monthly basis.
U.S. wholesale trade data scheduled for release. Wholesale inventories for September due out today are expected to register at a 0.2 percent increase for the month after a 0.7 percent jump in August. The August reading combined a large build in inventories with a decline in sales which distorted the ratio. Much of the inventory glut was specifically auto related.
Cisco and JCP to announce quarterly earnings. Technology bellwether Cisco Systems will report quarterly results after equity markets close today, as will embattled retailer J.C. Penney. Research analysts’ consensus forecasts are for flat earnings growth from Cisco. Investors’ main focus, however, will be on forward guidance given rising concern over demand in emerging markets. JCP, which significantly beat second-quarter consensus forecasts, recently announced that its stores would open at 5 p.m. on Thanksgiving Day. Analyst expectations are for a loss of 85 cents a share by the department store chain for the three months ending in October, versus a $1.94 during the same period last year.
Portfolio Perspective: It Doesn’t Pay to Be Too Bearish — Chun Wang, The Leuthold Group
The main takeaway from October is, “What was that?!” Both stock and bond volatility exploded, with the VIX reaching a two-year high and the Merrill Option Volatility Estimate (MOVE), a measure of bond volatility, spiking to a level not seen since last year’s taper tantrum. But it was all just a flash. The mini-capitulation on October 15 marked an oversold bottom for risky assets and an overbought top for U.S. Treasuries. The subsequent reversal was much stronger for stocks than for bonds. We believe the comments made by St. Louis Fed president James Bullard that Fed tightening might be delayed was the reason that stocks went up so much more than bond yields.
For the month, both stocks and bonds ended up with gains, as stocks made new highs and bond yields in general were 15 to 20 basis points lower. In two months, the market basically went through a fear-of-tightening phase in September, in which stocks and bonds suffered losses, followed by an easing expectation phase in October in which stocks and bonds gained. Risk-off periods — lower stock prices and lower bond yields — were not the worst case because they typically lead to an easing-expectation phase. This is basically what happened. Before September, the Fed funds futures market priced in a near certainty of seeing a 50-basis-point rate hike by the end of 2015. That probability dropped to as low as just north of 60 percent in mid October, however, as slowdown concerns promptly put a more dovish Fed back in the picture. In other words, rate hikes are not a done deal.
In an investment world where central banks are the biggest manipulators, it does not pay to be too bearish. Indeed, speculators that had been very bearish on Treasuries at the beginning of the year have recently pared back their short positions to around neutral. The bottom line is that U.S. domestic factors are pointing to moderately higher inflation, while global headwinds are likely to offset some of these effects. These factors explain our rather neutral view on interest rates.
Chun Wang is a senior analyst and co-portfolio Manager for the Leuthold Global Fund, Leuthold Core Investment Fund and Leuthold Select Industries Fund at the Leuthold Group in Minneapolis.
