“I will be the first to say that it is always difficult to get monetary policy just right. But the Fed's analytical prowess is top-notch.” – Janet Yellen, Successor to Ben Bernanke
Our Monthly Macro is a recurring post that appears on the first Tuesday of every month and recaps the high level macro developments of the previous month. We highlight the global themes that we believe are the most important and discuss why they matter for investors. This month’s piece will focus on improving economic data in the US, Janet Yellen’s recent nomination and some monumental proposals coming out of China’s most recent third plenary session.
November brought with it a slew of economic data points that confirmed the ongoing recovery in the US. The October labor market report, for instance, showed a net increase of 204,000 jobs for the month vs. the 120,000 that was expected. The prior two months were also revised upward by 60,000 net jobs bringing the 12-month average to 190,000 (Fed officials have mentioned 200,000 average run rate as something they’d like to see). In addition to the jobs numbers, the Chicago PMI and ISM Manufacturing indexes both showed impressive growth in manufacturing despite the headwinds of the government shutdown. And finally, the 3Q13 advance estimate for real GDP grew at a 2.8% annualized pace, it’s strongest performance since 1Q12 (GDP numbers will be revised on 12/5 and again on 12/20).
WHY IT MATTERS: There are still a plethora of reasons to be concerned about our country’s tepid post-crisis recovery, but amidst all the hand-wringing there are pockets of the economy that are plugging away in the right direction. In the same way that it’s important to monitor the weak areas for signs of a reversal, it’s also important to balance out our perspective by remaining cognizant of the bright spots. This is especially true in light of how these positive data points might impact future policy decision by Congress and the Federal Reserve.
Yellen To Relieve Bernanke
After serving as the Chairman of the Federal Reserve Board of Governors for 8 years, Bernanke will be stepping down at the end of January. Taking his place will be Janet Yellen who will be the first female ever to serve as Chairman. Ms. Yellen glided through her confirmation hearing with the Senate Banking Committee in mid-November. She reiterated her support for the Fed’s aggressive policy stances saying, "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy." But her version of “supporting the recovery” might be slightly different than Mr. Bernanke’s. Two new Fed papers were presented at the IMF in November, both of which called for continued aggressive monetary policy via an extended period of low interest rates and proactive guidance instead of a continuation of the Fed’s asset purchase program. In all likelihood these papers would not have been allowed to be presented if they were out of line with where Yellen wanted to take policy next.
WHY IT MATTERS: Fed policy is one of the most influential macro factors impacting financial markets right now. In particular, the pending “taper” of the Fed’s quantitative easing program is in full focus by market participants, and speculation over the timing and size of the taper is moving markets on almost a daily basis. Now that Yellen has been confirmed, the market can begin to anticipate changes that she would be likely to implement in 2014. She clearly is as dovish, if not more dovish, than Ben Bernanke, so it is safe to assume monetary policy as a whole will remain extremely loose. That said, there are also signs that she will be more than willing to begin tapering QE if Bernanke has not already begun doing so by February 1st.
Chinese leadership always convenes for a planning conference one year after the changing of the guard. This conference is known as the third plenary session, or the “third plenum”. The most recent third plenum convened this past month and was overseen by the recently elected President Xi Jinping and Premier Li Keqiang. The results appear to be nothing short of monumental for the country, and comparisons are being drawn to the third plenum of 1978 when China was first opened up to free market enterprise. The output from the conference, a written roadmap for government policy under its new leadership, is expansive and appears to lay the groundwork for the types of reforms that will lead to a meaningful shift of the Chinese economy away from export dependency towards consumption-led growth. According to analysis from Steven Roach of Morgan Stanley, reforms such as relaxing the one child policy, redirecting the profits of state owned enterprises and shoring up the national pension system are designed specifically to address the wedge between Chinese income and consumption.
WHY IT MATTERS: The deceleration of Chinese growth has been a global concern over the past couple of years. There are still a lot of question marks surrounding the financial system and housing market, but recent signs of economic stabilization, coupled with these recently proposed reforms, are beginning to spark a renewed optimism in China’s prospects. Given its sheer size and momentum, anyone participating in the global markets should pay close attention to events in China and their impact on commodity markets and growth in the developing world.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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