US investors cheered a decent employment report, ignoring any fears that the Fed may begin to reduce QE sooner rather than later. After what was a very disappointing start to December, US equities managed to claw their way back to flat for the month. Other regions fared much worse with Europe down over 3% and Japan down over 2%.
Yesterday's employment report pretty much hit all the right notes. Employment growth, as measured by both the establishment survey and Household survey, was better than expected. Average hourly earnings and average hours worked were in line and the unemployment rate declined to 7%. Even the participation rate, one of the real blemishes on the employment front this year, showed a modest improvement. Overall a very decent report.
In separate data, personal income growth was disappointing, falling 0.1% month on month although the falling incomes did not prevent personal spending rise 0.3%. It would appear that the personal savings rate is falling to even lower levels, and although we view this as a medium term negative, households themselves would seem to disagree as consumer sentiment rose substantially more than expected as measured by the University of Michigan consumer confidence index. To round things out nicely, the Fed's preferred measure of inflation came in at 1.1% year on year.
The data this week show satisfactory jobs growth, good housing growth, low inflation and rising consumer confidence. The consensus view is that, although Fed tapering may be not far away, it is not imminent and there will always be something (such as core PCE inflation at only 1.1%) that will encourage the Fed to keep printing. Hence, the initial reaction to the jobs report in equities was up, up and away!
As noted above, non-US equity markets did not start the month in such benign fashion. The European data (excluding Germany) continues to show signs of stagnation and the ECB are simply not yet ready to "do whatever it takes" to try and reach escape velocity. After a very decent performance in recent months, European equities gave back two months worth of gains in 3 days. The technical damage suffered in this week's decline indicates to us that the upside is at least capped in the near term. In Japan, we view the currency as the most important driver of returns. So long as the Yen is weakening the Japanese equity market should make upside progress.
The first chart below shows the S&P 500 for the past few months. The pullback of the last few days has been relatively mild and has held at the midline of the moving average envelope (the blue lines) we have placed on the chart. We would note that the S&P is basically flat so far in December in what has been a tricky few days for most assets. We view this relatively mild pullback as evidence that the US has been and likely will continue to be the global leader in the equity space, at least in the short term. This view is dependent on the magical fairy dust (quantitative easing) continuing to do its job!
The next chart shows the Eurostoxx 50 index. The index is down 3.4% this past week and as noted above, two months of gains were wiped out in three days. Having decisively broken short term support, and with the market appearing to roll over we believe that the technical structure of European equities is weakening. If any upcoming rally fails below the recent high, then we will downgrade our technical view to bearish.
So after an action packed week of big data and central bank meetings, most equity markets ended the first week of December lower, with the US being the exception. European equities suffered some real technical damage and we would note that emerging markets continue to underperform as does the FTSE100. Our fundamental view remains that US equity markets are the most expensive in the World but the technical structure of the market remains positive purely because of QE. A similar technical argument can be made in Japan whereas Europe has no QE and now looks technically challenged.
Overall, it makes sense to us to be short term bullish on the US and Japan into the year end, recognising that the technical structure could change at any time.