Daily Agenda: All Eyes Remain on the Fed

Chinese HSBC PMI surprises to the upside; Cushman & Wakefield goes up for sale; RBC reports record income.


Andrew Harrer

Federal Reserve chairwoman Janet Yellen’s testimony before the U.S. Senate Banking Committee yesterday largely kept to her nuanced prior script. She stressed that rates will rise by a measured pace and that factors such as a strong dollar and cheap oil were, in fact, double-edged swords providing offsetting benefits. Even if investors have yet to find clear footing, with the Fed’s semiannual testimony entering its second day, one thing is clear: the specific statements made by Yellen and her colleagues are a key factor for global market sentiment across all asset classes.

Chinese PMI at multimonth high despite weak exports. Flash manufacturing purchasing manager index data compiled by HSBC was released in China today, with the headline index slightly inside positive territory at 50.1, the highest reading since October. The breakout of inputs showed internal demand more than offset external shipment with the export orders sub-index at 47.1, down from 50.2 the previous month.

Germany to vote on Greece. With the acceptance of Athens terms for a four-month extension by the Eurogroup, the decision must now be ratified by the German parliament on Friday. While typically a mere formality, given the sometimes public displays of animosity between German and Greek leadership, the vote may provide an opportunity for more tough rhetoric.

U.S. new home sales on deck. The U.S. Census Bureau will release new homes sales data for January later today. Consensus forecasts for a marginal contraction to an annual pace of 471,000 after volatile swings in December and January. Existing home sale data released on Monday surprised to the downside, with a 4.9 percent month-over-month contraction to reach the lowest rate in nearly a year, defying analysts who were predicting an uptick in real estate activity on the back of an improving job market.

Cushman & Wakefield on the block. Reports surfaced yesterday that Exor SpA, the holding company of Italy’s Agnelli family, has hired investment banks to pursue strategic sale options for commercial real estate services behemoth Cushman & Wakefield. Exor acquired a 67.5 percent stake in the company for $565.4 million in 2007, subsequently increasing its position to 81 percent during the downturn following the 2008–’09 financial crisis.

RBC reports record income. Royal Bank of Canada reported a 17 percent year-over-year jump in quarterly net profit for fiscal first-quarter 2015 with gains across commercial lending and capital markets segments that helped beat consensus analyst estimates by a wide factor. Net income reached a record $2.5 billion for the period. A marginal decline in wealth management revenues and increased provisions for bad loans were the primary negatives in the otherwise upbeat release, which included the announcement of an increased dividend.

Portfolio Perspective: Tightening U.S. Labor MarketsTom Stringfellow, Frost Investment Advisors

The first announcement last week came from Wal-Mart, followed closely by news of a pending deal for the striking port operators on the West Coast. The upshot of both announcements was that wages are moving up, possibly a courtesy of tighter labor pools. Wal-Mart unveiled preparations for pay increases for about one-third of the company’s workforce, with an initial move to $9.00 per hour beginning in April. Wages then rise to $10 per hour next year, with these hikes representing a cost to the company of roughly $1 billion in additional compensation expense if employment remains constant. By announcing boosts in employee pay, Wal-Mart is following in the footsteps of other companies such as Aetna, Starbucks, Panera Bread and the Gap.

Hiking compensation expenses is a new trend for U.S. corporations but with unemployment rates falling, and fewer qualified applicants vying for each job, diminishing slack in the job markets may now be the rule. Nowhere is this more visible than the just announced — and yet to be approved by the rank-and-file — settlement with the crane operators responsible for the recent slowdown in commercial container unloading activities, creating a bottleneck for all of the ports on the west coast. With an economic impact of roughly $2 billion per day, management blinked.

Nearly 90 percent of the S&P 500 companies have reported for the fourth quarter thus far, and the report card has been pretty positive — absent the weekly energy sector commentary, that is. Broadly speaking, 75 percent of the companies are reporting earnings above their five-year average, with actual earnings surpassing estimates by 3.7 percent. The blended expected growth rate for this past quarter is expected to come in at 3.5 percent — a sharp contrast to the 1.7 percent predicted at the end of December. Estimates for the first half are still rather dreary, with projections for the first half of 2015 still pessimistic, with commentary that is very energy-sector sensitive. Analysts continue to hold on to the idea of a strengthening second half for 2015 though, possibly the result of what they expect to be diminishing headwinds from the oil downturn, continued dollar strength and anemic global economic recovery. In the meantime, today’s forward 12 month price-to-earnings market multiple is now well above its five-, ten- and 15-year averages, reinforcing the need for continued good news.

Tom Stringfellow, is president and chief investment officer of Frost Investment Advisors, a San Antonio, Texas–based asset management firm.