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Leveling the Playing Field September 2, 2014 _______________________________________________________________________ For years I ’ ve been asking myself,

Leveling the Playing Field

September 2, 2014

_______________________________________________________________________

For years Ive been asking myself, How many basis points is the word invasionworth? Turns out its about 7bps if you are talking about a global superpower attacking an eastern bloc country.

The week was relatively tame until Wednesday morning, when we awoke to news that Ukrainian President Poroshenko was cited as saying Russia was invading Ukraine. Newswires corrected the story, saying instead that Russian troops had entered Ukraine. This temporarily calmed markets while Poroshenko called an emergency security and defense council meeting where he in no way sounded completely prompted by outside forces. Im not even going to bother looking for the exact quote, but it was basically Russian troops were trying to rescue their comrades following a Ukrainian butt kicking.

This stopped the downward spiral of interest rates following the typical flight to safety and everyone basically pressed pause to await further developments. Equity markets continued to behave like your perpetually bubbly (and kinda dumb) friend that seems to be ignorant of anything negative going on in the world, with the S&P cracking 2k for the first time. The EU expressed concernand the UK raised its threat level.

The bottom line is that yields pushed to technical support levels, such as 2.33% on the 10yr Treasury. These levels will provide resistance against all but the most catastrophic data prints (eg horrible job data Friday), so we are unlikely to push lower without the help of escalation in Ukraine. But if Russia ramps up military activities or if Putin rides a horse bareback and shirtless across the border, risk off will be in full effect.

That means data like GDP (0.2% stronger than previously expected) and corporate profits (huge swing up to $154B last quarter) are being completely overshadowed by global concerns.

With all eyes on Russia, the impact of this weeks heavy data calendar will be somewhat muted. At a minimum, these concerns are keeping a lid on interest rates and we are unlikely to experience a jump in rates in the near term even if data comes in strong.

Here ’ s what we think it would take for three rate scenarios to play out

Heres what we think it would take for three rate scenarios to play out this week.

Rates Move 10bps + Higher

News in the Ukraine suggests stabilization/improvement AND domestic data comes in strong. Strong domestic data alone will NOT push the 10yr Treasury into the 2.40%s. Markets react favorably to Penn States dramatic come from behind win over the 5 th best football school in Florida.

Rates Stay in the Same Range

This is probably the most likely scenario. No escalation in Ukraine, but no resolution,

either. We may get increased rhetoric around sanctions. Domestic data is overshadowed and rendered largely irrelevant for now.

Rates Move 10 + Lower

Escalation in Ukraine OR more of the same coupled with weak US data.

Bottom line a very full economic calendar, headlined by Fridays labor reports and a very full Fed calendar of speakers, will only carry as much significance as the events in

Ukraine will allow.

Just like the classic logic statement, If Ukraine, then X.

Economic Data Day Time Report Forecast Previous Tuesday 9:45AM Markit US Manufacturing PMI - 58.0 10:00AM

Economic Data

Day

Time

Report

Forecast

Previous

Tuesday

9:45AM

Markit US Manufacturing PMI

 

-

58.0

10:00AM

ISM Manufacturing

 

56.9

57.1

10:00AM

ISM Prices Paid

59.0

59.5

10:00AM

Construction Spending MoM

0.80%

-1.80%

Wednesday

7:00AM

MBA Mortgage Applications

-

2.80%

10:00AM

Factory Orders

10.70%

1.10%

Thursday

8:15AM

ADP Employment Change

213K

218K

8:30AM

Trade Balance

-$42.5B

-$41.5B

8:30AM

Initial Jobless Claims

-

298K

8:30AM

Continuing Claims

-

2527K

8:30AM

Nonfarm Productivity

2.50%

2.50%

8:30AM

Unit Labor Costs

0.60%

0.60%

9:45AM

Markit

US Services PMI

-

58.5

9:45AM

Markit

US Composite PMI

-

58.8

10:00AM

ISM Non-Manf. Composite

 

57.2

58.7

Friday

8:30AM

Change

in

Non-Farm Payrolls

220K

209K

8:30AM

Change in Private Payrolls

 

200K

198K

8:30AM

Change in Manufacturing Payrolls

 

20K

28K

8:30AM

Unemployment Rate

 

6.10%

6.20%

8:30AM

Underemployment Rate

-

12.20%

8:30AM

Average Hourly Earnings

MoM

0.20%

0.00%

8:30AM

Average Hourly Earnings

YoY

2.10%

2.00%

8:30AM

Average

Weekly Hours All Employment

 

34.5

34.5

Speeches and Events

Day

Time

Report

Place

Wednesday

2:00PM

2:00PM

US Federal Reserve Releases Beige Book

 

Kansas City

Thursday

12:00AM

Fed's

Powell Speaks

New York, NY

12:30PM

Fed's Mester Speaks on Monetary Policy

 

Pittsburgh, PA

8:15PM

Fed's

Fisher Speaks

Dallas, TX

9:00PM

Fed's

Kocherlakota Speaks

Helena, MT

Friday

3:45PM

Fed's

Rosengren Speaks

Boston, MA

Treasury Auctions

Day

Time

Report

Size

None

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