In a repeat of the prior week, markets with little dependency on commodities (especially oil) gained, while those with such dependency declined. US markets gained an average of +0.2%, with the S&P 500 up +0.4% and the Dow Jones up +0.7% (the seventh straight week of gains for those two indices), but the Nasdaq 100 indexed slipped -0.6%. Canada’s TSX retreated by -1.8%, having given up all its earlier year-to-date lead over the US as a consequence of the slide in oil and other commodities. Despite gains in some European indices, both the Developed and Emerging Market averages slipped for the week, -0.1% and -1.5% respectively.
US economic news was positive on balance, capped off by a blowout November jobs number (as long as you don’t read the “household survey” too closely, which was considerably less enthusing). The Non-Farm Payroll (NFP) figure for November showed a seasonally adjusted gain of 321,000, the strongest month since January 2012, and the 10th consecutive monthly gain of 200,000+. October’s figure was revised up to 243,000 and September’s to 271,000. As economists had been expecting November’s figure to be in the 225,000 range, this was a large expectation-beater. The unemployment rate was 5.8%, unchanged, though still at the lowest level since mid-2008. For 2014, the economy is on track to produce the strongest annual payroll growth since 1999. Average hourly earnings rose +0.4%, a solid gain, and are now up +2.1% year-over-year – closer to a level that will generate higher spending by wage-earners.
Canada, on the other hand, surprised with a negative November jobs report. Employment declined by -10,700 in November after jumps of +43,100 and +74,100 the last two months, as reported by Statistics Canada. The unemployment rate rose to 6.6% from a six-year low of 6.5%. The Canadian dollar, the “Loonie”, dropped to a 5-year low concurrent with oil dropping to a 5-year low, and few think it to be a mere coincidence.
In the Eurozone, the November Purchasing Managers Index (PMI) was reported to be just 50.1 vs. October’s 50.6, barely above the 50 dividing line between growth and contraction. Germany was 49.5, a 17-month low, Italy clocked in at 49.0, Greece 49.1, and France 48.4 – all in contraction territory. Ireland, Netherlands and Spain are bucking the trend and reported decent PMI numbers at multi-month highs, but they are by far the exceptions to the rule. A composite reading that includes both new orders and the service sector was 51.1 vs. 52.1 in October, the lowest for the Eurozone in 16 months.
In China, HSBC Bank’s final reading on the November manufacturing PMI was at the flat-line of 50.0, a 6-mo. low and down from 50.4 in October. The services reading were 53.0 vs. 52.9. The government’s official manufacturing PMI was 50.3, an 8-month low, vs. 50.8.
By a wide margin, this year’s most important economic story has been the slide in oil prices, from a high this year of $107 down to the current $67, which is a 38% decline that has had significant positive and negative consequences for countries, companies and people. Many industry experts claim that booming oil production in the US, particularly from the spreading of fracking extraction techniques and from the shale-oil areas of the country, have been the major factor pushing prices down. A look at a 30-year chart of US oil production tells the story:
Many high-yield bond investors have been wondering why their high-yield mutual fund and ETF holdings have been declining steeply for the past 4 months (now off almost 20% for many ETFs and mutual funds). One non-obvious reason is that energy-related loans now comprise triple the share of the high-yield universe compared with just 10 years ago, and with falling energy prices comes a higher expectation of loan defaults from energy-industry borrowers. This chart shows the steep rise in energy-related borrowers within the high-yield universe: