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Global Market Wrap-Up - April 28, 2014

Monday, April 28, 2014
Mark Hanna

5 Themes for the Week

1) Busy Week for Global Economic Data - As the month ends this week, we have a bevy of economic data across the globe which should move markets. There will also be a two day FOMC meeting on Tuesday and Wednesday, with the Fed expecting to announce on Wednesday a decrease in asset purchases from $55 billion per month to $45 billion per month. The central bank last month abandoned their pledge to link ultra low interest rates to a specific unemployment level. Federal chief Janet Yellen and her colleagues will now consider a “wide range” of information.

  • Tuesday: First estimate of U.K. first quarter GDP. Estimates are that the U..K economy accelerated from the fourth quarter pace of 0.7% to 0.9%-1.0%.
  • Wednesday: First estimate of first quarter U.S. Gross Domestic Product - expectations are for a sluggish 1.1% due to weather.
  • Thursday: U.S. ISM Manufacturing Index. The consensus is for an increase to 54.2 from 53.7 in March. Any reading over 50 indicates expansion while below 50 signals contraction. The U.S. ISM Services Index will be reported early next week.
  • Thursday: China's April manufacturing purchasing managers’ index (PMI) readings will be released. This data point fell to its lowest level in nine months in March, but is expected to rebound slightly in April. Consensus is that the index will rise to 50.5 from 50.3. We will see similar readings out of Europe.
  • Friday: U.S. government employment report; expectations are for 215,000 jobs added versus last month's 192,000. The unemployment rate is expected to decline to 6.6% from 6.7%; as always keep in mind this rate keys off a decades low labor force participation rate - a more normal participation rate would garner an unemployment rate nearer to 9%.
  • Friday: The Eurozone unemployment rate will be announced; it is expected to hold flat at 11.9%.

2) Massive Japanese Retail Sales Surge Ahead of Tax Hike - Data released on Sunday showed that Japan’s retail sales rose 11% in March as shoppers hurried purchases in advance of an April 1 tax hike. Sales totaled ¥13.7-trillion in March, the second highest amount on record after ¥14.6-trillion in March 1997, which was the month before the most recent consumption tax increase. In 1997 retail sales rose an annual 12.4% in March and fell an annual 3.8% in April.

The government raised the nationwide sales tax to 8% from 5% on April 1. The move is intended to earn extra income for rising welfare costs, but it has also caused some volatility in economic data and concern that the world's third-largest economy will enter a prolonged contraction if consumers shun higher prices.

3) Student Loan Forgiveness - Nice Intentions, Bad Economic Policy Comes Home to Roost- The Wall Street Journal reported last week on a massive surge in grad student enrollment in a program the federal govenment introduced that capped monthly payments and allowed for forgiveness of loans after a set term. Of course, as any basic economic course would tell you this led to a rash of enrollment - I mean what could be better, pay a fixed cost out of pocket and let the government eat the rest? Of course, our nation's universities also salivated at the plan - essentially they can charge any figure and since the student has limited lifetime liability all costs in excess of that figure is born by the taxpayer. In essence, another case of BAD economic policy.

  • Enrollment in the plans—which allow students to rack up big debts and then forgive the unpaid balance after a set period—has surged nearly 40% in just six months, to include at least 1.3 million Americans owing around $72 billion, U.S. Education Department records show.
  • The fastest-growing plan, revamped by President Barack Obama in 2011, requires borrowers to pay 10% a year of their discretionary income—annual income above 150% of the poverty level—in monthly installments. Under the plan, the unpaid balances for those working in the public sector or for nonprofits are then forgiven after 10 years. Private-sector workers also see their debts wiped clean—after a longer period of 20 years.
  • Max Norris, a 29-year-old lawyer for the state of California, illustrates the potential costs of the program. He pays about $420 a month to the Education Department on his $172,000 in debt, which he says fails even to cover the interest owed. Mr. Norris, who makes $60,000 a year in his job, would have about $225,000 in debt forgiven after 10 years, assuming he stays in public service and his salary rises 4% annually.

Stunning costs for just 1 student; but when you provide incentive of such actions at the government level it is not surprising at all.

4) European Bank Stress Test Guidelines to be Set - Tuesday, broad details of the upcoming European bank stress tests will be announced by the European Banking Authority. In particular, the stress scenarios under which banks will have to demonstrate that they can withstand without assistance will be revealed. It will be interesting to watch how strict these tests are or if they are lenient so as to not spook markets.

5) U.S. Housing Data Continues to Soften - Last week the U.S. reported data on both existing and new home sales; existing home sales make up 90% of transaction but of course home building has a lot more near term impact to the economy. Data was soft on both counts; existing home sales fell to 4.59 million annual rate, the lowest since July 2012. Meanwhile, new home sales tumbled 14.5% month over month to an annualized pace of 384k units vs 450k expected. On a related note, as we are receiving data in from earnings reports from major banks we are seeing the pace of refinancing slow after a 5 year binge - at this point just about anyone who could refinance has - so the trigger of the housing market as an economic boost could be slowing here in the year ahead.