Setting the tone for 2012
Joe Terranova, Chief Market Strategist, Virtus Investment Partners,
offers insights into some of the key economic indicators and meaningful
market events to keep a close eye on throughout November.
November 2011
Sunday
Monday
Tuesday
Wednesday
October 31
10:00 AM: ISM
Manufacturing Index
Mario Draghi’s First Day
as ECB President
9:00 PM:
China PMI
6
7
2
12:30 PM: FOMC
Meeting Announcement
2:15 PM: Bernanke
Press Conference
8
Major China
Economic Data
13
14
9
15
21
16
8:30 AM:
CPI
Eurozone GDP
22
8:30 AM:
U.S. GDP
27
28
23
29
Times shown are Eastern Time. *Expected earnings release date; may be subject to change.
30
2:00 PM:
Beige Book
9:00 PM:
China PMI
Saturday
4
5
8:30 AM:
Unemployment & Private
Sector Jobs
10
11
12
18
19
25
26
Disney & Nordstrom
Earnings*
Italy Industrial Production
Italian T-Bill Auction
17
10:00 AM:
Philly Fed Mfg. Survey
Spanish and French Bond
Auctions
8:30 AM:
Durable Goods Orders
2:00 PM:
FOMC Minutes
Italian Long-Term
Bond Auction
Tiffany Earnings*
Friday
3
ECB Rate
Announcement
G20 Cannes Summit
Major China
Economic Data
Ralph Lauren Earnings*
8:30 AM:
Retail Sales
8:30 AM:
PPI
20
Thursday
1
24
The S&P 500® hit a new high in late October, tracing out an “outside monthly reversal” for the first time since July 2009 – a bullish signal. It’s time to look to November,
a month in which I advise investors to “keep it simple” and prepare their strategy for next year, based on the headwinds and tailwinds expected to prevail. Much of the
economic data we receive this month will provide guidance on whether, as the October numbers suggest, the U.S. has avoided a renewed recession, China has navigated the
perfect economic landing, and European policymakers are truly acting “all for one, and one for all.”
November indicators / events of note:
You should be watching:
China PMI
China PMI (purchasing managers’ index) is released on the last day of the month.
This monthly gauge of China’s manufacturing sector, combined with the monthly U.S.
ISM Manufacturing Index value released the next day, gives a clear picture of global
manufacturing health. An index value above 50 indicates growth, below 50 contraction.
I’ll be watching China PMI on both October 31 and November 30. China PMI was
51.2 in September, up from 50.9 in August. Expectations are for October China
PMI to come in slightly better than that – 51.8. It’s been a year since China’s
monetary tightening cycle began, and it seems to be over. I don’t know if the
People’s Bank of China is necessarily going to ease but, in my mind, discontinuing
the process of tightening is as good as easing.
Mario Draghi’s First Day as ECB President
Mario Draghi, governor of Italy’s central bank, succeeds Jean-Claude Trichet as
president of the European Central Bank.
Mario Draghi starts his new job as chief guardian of the euro at a critical time in
EU history. He will be the second most powerful central banker in the world after
Fed Chairman Ben Bernanke, with responsibility for restoring investor confidence in
Europe’s monetary union.
ISM Manufacturing Index
Issued by the Institute of Supply Management, this report provides an influential
monthly measure of the health of U.S. manufacturing based on an in-depth survey
of 300 manufacturing firms. An index value of 50 is the dividing line between an
expanding or slowing economy. Data released is for the previous month.
ISM Manufacturing has remained slightly above the expansion/contraction line of
50 – 51.6 in October, up from 50.6 in September. We’re looking for November ISM
to come in around 52.5. Other recent manufacturing data have showed signs of
recovery, which is suggestive that ISM will begin to rebound – and that would be a
very favorable condition.
FOMC Meeting Announcement & Bernanke Press Conference
The Federal Open Market Committee (FOMC) releases its interest rate decision
following its two-day monetary policy meeting.
I don’t expect much from this meeting. I expect Bernanke will continue to express
a willingness on the part of the FOMC to stand ready to take action if conditions
warrant. I think an official implementation of QE3, as I’ve said all along, would be
a bearish condition for risk assets because it would be a reaction to deterioration in
capital markets pricing.
ECB Rate Announcement
The European Central Bank controls monetary policy, including interest rates, for
eurozone countries, and strives to keep inflation at about 2%.
ECB interest rates have held at 1.5%. Expectations are that rates will be lowered
25 basis points by the end of the year. Not only is the U.S. central bank providing
a massive ocean of liquidity, but, in essence, the Europeans are doing the same.
As a byproduct of that, we should be watching for a slight uptick in inflation within
emerging markets. If inflation rises, I don’t think demand cools; more likely, it
creates pricing power for corporations that service the demand.
G20 Cannes Summit
World leaders from the Group of 20 (G20) developed countries gather in Cannes,
France for its annual summit meeting.
The G20 summit is an important global event that has bearing on Europe’s debt
situation. We will want to follow what is being discussed at the meeting and learn
about any decisions made.
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November indicators / events of note:
You should be watching:
Unemployment & Private Sector Jobs
Private payroll data is part of the Labor Department’s monthly U.S. Employment
Situation report. This data gives the true employment story, is the best gauge of the
economy’s direction, and has the power to move markets.
The November jobs report may be a mirror image of October’s report. In October,
103,000 jobs were added to the headline number; private payrolls added 137,000
jobs; and the unemployment rate held steady at 9.1%. I expect November’s figures
will be very similar, and continue to fall short of the labor growth we need to see.
Major Chinese Economic Data
On November 8 and 9, key monthly data will be released from China: consumer price
index (CPI), industrial production, retail sales, and imports/exports. CPI is a key measure
of inflation; industrial production measures changes in output for the industrial sector
of China’s economy; retail sales provides a measure of the Chinese economy, which,
while it does not heavily rely on consumer spending, will give a sense of whether the
government’s stimulus measures to encourage spending are working; and China’s monthly
trade report provides import, export, and interest rate data on the Chinese economy.
Evidence suggests the Chinese economy is cooling. Still unclear is whether China’s
central bank is behind the cooldown or if it’s a byproduct of the sluggish U.S. and
European economies. That’s why we continue to monitor key economic datapoints
coming out of China.
>CPI, the primary indicator used by China’s central bank to set monetary policy,
has continued to moderate, from 6.5% in August, to 6.2% in September, to
6.1% in October.
>Industrial production rose 13.8% year on year in October, better than 13.5% in
September, but not as strong as the 14% reported in August.
>Retail sales rose 17.7% year on year in October, better than the 17.0% reported
in September.
>In October, China’s exports rose 17.1%, year on year, lower than September’s
increase of 24.5%. Imports also rose, 20.9% year-on-year, but were lower than
the 30.2% increase reported in September.
Ralph Lauren (RL) Earnings*
Nordstrom (JWN) Earnings*
Tiffany (TIF) Earnings*
High-end consumer discretionary names Ralph Lauren, Nordstrom, and Tiffany are
expected to release earnings on November 9, 10, and 29, respectively.
The shopping habits of the affluent consumer remain an important indicator of
the direction of the economy, and so I will be closely watching the sales numbers
coming out of these and other luxury consumer discretionary names reporting
earnings in the quarter.
Disney (DIS) Earnings*
Targeted for release November 10.
Also, this month, let’s take a look at discretionary spending by the global
consumer. “The Mouse House” offers an excellent read into consumer sentiment
around the world.
Italy Industrial Production
Industrial production measures the physical output of a nation’s factories, mines, and
utilities. This report shows which sectors of Italy’s economy are growing and which are
not. Report data lags by two months, i.e., the October report cites August data.
Italy’s October industrial production report showed growth for the first time in four
months, rising 4.3% month on month and 4.7% year on year, compared to -0.7%
and -1.6%, respectively, the month before.
*Expected earnings release date; may be subject to change.
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November indicators / events of note:
You should be watching:
Italian T-Bill Auction
Italian Long-Term Bond Auction
Spanish and French Bond Auctions
In essence, Greece has defaulted, and the market is no longer focused on Greece.
Now the market is focused on whether, in the process of achieving fiscal unity,
the EU can neutralize the contagion risk. Obviously, Italy, Europe’s third largest
economy, is ultimately the focus, as well as Spain. This is why I’ll be watching
European bond auctions in November. The ECB needs to continue its purchase of
sovereign government bonds, an exercise that outgoing ECB President Jean-Claude
Trichet was hesitant to conduct. With an Italian, Mario Draghi, as the new ECB
head, I think there will be more leniency in this area. The yield on 10-year Italian
bonds rose in early August to 6.39%. In the days that followed, the ECB purchased
Italian debt to suppress yields. That worked for a few weeks, pushing yields below
5%. As yields rise back toward 6%, there must be willingness for the ECB, private
investors, and non-Europeans to suppress yields again. This includes the special
purpose investment vehicle (SPIV) recommended at the October EU summit, which
would be funded by non-Europeans, such as Middle Eastern sovereign wealth
funds and the Chinese. The Chinese, which own $600 billion in euro-denominated
government bonds, need to demonstrate a willingness to buy more.
Retail Sales
Retail sales data is released monthly by the U.S. Department of Commerce. Retail sales
measure total receipts for sales of durable and nondurable goods. Consumer spending
accounts for two-thirds of GDP and is therefore a key element in economic growth.
Each report is based on the previous month’s data.
Retail sales in September provided some reassurance that the consumer is alive
and well, based on the strong jump in this gauge, which rose 1.1% following a
0.3% increase (basically flat) the month before. We will want to see this spending
trend continue in the November data.
Producer Price Index & Consumer Price Index
Monthly PPI and CPI data are significant indicators of inflation. PPI measures the price
of consumer goods and capital equipment at the producer level before they are passed
on to consumers. CPI measures the price of consumer goods and services.
In October, PPI rose 0.8% month on month, and 6.9% year on year, based on
September data. For consumer prices, CPI rose 0.3% month on month, with core
prices (excluding food and energy) rising only 0.1%. CPI year on year rose 3.9%,
with core prices rising 2%.
Eurozone GDP
Q3 advance GDP will be released for the eurozone.
With all that is happening with Europe, this is an important indicator to watch this
month. Q2 GDP was 0.2% annualized, down from 0.8%.
Philadelphia Fed Manufacturing Survey
This monthly survey provides useful intelligence on manufacturing conditions within
the Philadelphia Federal Reserve district and is useful as an indicator of broad
manufacturing sector trends.
We got a big surprise from this manufacturing gauge in October which came in at
+8.7, following -17.5 in September, and -30.7 in August. Based on the trend, it
would seem that August’s dismal figure was most likely a reaction to the divisive
deficit debate on Capitol Hill in July, and not a true reflection of manufacturing
conditions. We will continue to watch this index until we know for sure.
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November indicators / events of note:
You should be watching:
U.S. Gross Domestic Product (GDP)
The quarterly GDP report, released by the U.S. Commerce Department, tracks the
purchases of all U.S. goods and services in all sectors and is the broadest measure of
the economy.
Economic growth finally strengthened in Q3 with the release of October GDP
(Advance Q3), which came in higher than expected at 2.5%, up from 1.3% in Q2.
Can this continue with Q3?
Durable Goods Orders
This monthly release from the U.S. Commerce Department reflects new orders placed
with U.S. manufacturers for immediate and future delivery of factory hard goods, and
is an indicator of how busy factories will be to fill those orders. Data reported is for the
previous month.
The October durable goods report provided more evidence that manufacturing
conditions are not as dire as recently believed. Durable goods orders (excluding
transportation) rose 1.7% over the prior month, and orders for non-defense capital
goods – an excellent measure of business investment – rose 2.4%. Besides beating
expectations, both of these figures reflected their biggest jumps since March. Let’s
see if this momentum carries into November.
FOMC Minutes
The Federal Open Market Committee (FOMC) releases minutes from its October meeting.
I don’t have any special remarks in advance of these minutes, but they are always
worth reading, especially given the increased level of dissent among FOMC
members.
Beige Book
FOMC commentary on current conditions in each of the Federal Reserve’s 12 districts
is released two weeks prior to the next FOMC meeting. This month’s Beige Book is for
the December meeting.
As with the FOMC meeting minutes, I don’t have any particular expectations for
this Beige Book, but given the level of dissent, it merits our attention when it
becomes available.
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Joseph M. Terranova, Chief Market Strategist, Virtus Investment Partners
Joe Terranova is Chief Market Strategist for Virtus Investment Partners. He was elevated
to that position in June 2009, having started with the company in the role of Chief
Alternatives Strategist.
In his current role, Mr. Terranova works with Virtus’ regional sales teams and the financial
advisors who sell the company’s investment products, providing insight into the domestic
and global investing landscape and has represented Virtus as a keynote speaker for several financial
institutions. He is a member of the Virtus Investment Oversight Committee.
Prior to joining Virtus in 2008, Mr. Terranova spent 18 years at MBF Clearing Corp., rising to the position
of Director of Trading for the company and its subsidiaries. In this capacity, he managed more than 300
traders and support staff for MBF, one of the New York Mercantile Exchange’s largest firms. His work was
highlighted as the feature story in the June 2004 issue of Futures magazine.
Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBF’s
proprietary trading operations during some of the most calamitous times for the U.S. markets, including
the first Gulf War, the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he
was one of the first Wall Street professionals to make an early call for higher energy, natural resources,
and commodity prices. In June 2008, he cautioned investors to move to the sidelines in commodities
and, in March 2009, he encouraged investors to ignore the global “embracement of pessimism” and
overweight equities. Before joining MBF, Terranova held positions at both Swiss Banking Corp. and JP
Morgan Securities.
Mr. Terranova is a CNBC contributor and is currently a full time panelist on the highly rated program Fast
Money. He is also a frequent panelist on the CNBC daytime program Fast Money Halftime Report.
In 2007, along with Hockey Hall of Fame player Mike Bossy, Mr. Terranova established “Bossy’s Bunch,”
a program that rewards excellence in the classroom for elementary school students.
Mr. Terranova earned a bachelor’s degree in finance from the Peter J. Tobin College of Business at
St. John’s University in New York.
For more information, visit Virtus.com
This commentary is the opinion of Joe Terranova. Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the
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