Wells Fargo Research Team
Wells Fargo
U.S. Review
More Evidence of a Tightening Labor Market
While small business confidence dipped in June, the index remains above the range where it appeared to be stuck between 2011 and 2013.
Firms are still looking to hire, with the NFIB hiring plans index climbing 2 points and the JOLTS report showing job openings in May reaching the highest level since mid-2007.
Minutes from the June FOMC meeting showed a split among members over inflation, with some still worried about it running too low and others seeing upside risks. The FOMC also discussed the potential steps for policy normalization and preferred tools for eventually raising rates.
Small business confidence dipped in June, with the NFIB optimism index more than reversing last month’s gain. The downward reversion to first quarter GDP, which showed the economy contracting sharply, looks to have shaken small businesses as the net share of firms expecting conditions to improve over the next six months tumbled 10 points.
While optimism over the near-term path of the economy wavered in May, employers are not easing up on hiring. Plans for hiring among small businesses ticked up in June, matching the series post-recession high. Moreover, data from the JOLTS report show that job openings jumped in May and are now nearly on par with the highs reached over the past expansion. The number of workers quitting their jobs each month also continued to rise, indicating growing confidence in the labor market.
The FOMC’s June meeting minutes showed committee members noting further improvement in the labor market in recent months. However, the FOMC continues to underestimate how quickly the labor market is tightening. The number of unemployed persons per available job opening fell to 2.1 in May from 2.5 as recently as March. In addition, the share of small businesses reporting at least one hard to fill position rose to a seven-year high of 26 percent in June.
The strengthening of the labor market over the past few months suggests wage pressures should be intensifying. The share of small firms raising or planning to raise compensation continues to trend higher. However, many FOMC members continue to see slack in the labor market as elevated. Chair Yellen appears to be a part of this group, which is likely why she was rather dismissive of the recent pickup in inflation during her June press conference. The minutes, however, showed that members were split on the inflation outlook, with some participants still worried over persistently low inflation and others noting upside risk.
Heading for the Exits
Although concerns are growing that the Fed may be behind the curve on an eventual tightening in policy, the FOMC is at least beginning to discuss the order in which it will take steps to normalize policy. In contrast to the exit strategy laid out in June 2011, the Fed looks unlikely to end its practice of reinvesting maturing securities before it begins to raise rates. The hold-off likely stems from fear of inciting another move in the financial markets, similar to the taper tantrum last spring by appearing to tighten policy earlier than currently anticipated. Members were in agreement about the likelihood of completing QE by the end of this year, i.e., announcing to end tapering at the October meeting.
The minutes also shed light on what may be the Fed’s preferred tools when eventually raising the target rate. Interest paid on excess reserves will play a primary role in pushing the Fed’s key rate higher. In order to keep a floor under the effective rate in the market, overnight reverse repurchase agreements, which are already being tested, will play a “supporting” role in the Fed’s impending quest to raise the fed funds effective rate.
Global Review
The Global Economy Is Not Out of the Woods Yet
Weak economic numbers across the global economy continue to dampen the prospects for economic growth across the world. Although the U.S. economy is going to show a relatively strong recovery from its dismal performance during the first quarter of the 2014, the rest of the world does not seem to be taking notice of that improvement.
The United Kingdom joined Germany in reporting dismal industrial production numbers in May, underscoring the delicate state of growth in Europe at a time when geopolitical risks continue to threaten economic performance across the world.
Weak economic numbers across the global economy continue to dampen the prospects for economic growth across the world. Although the U.S. economy is going to show a relatively strong recovery from the dismal performance during the first quarter of the year, the rest of the world does not seem to be taking notice of that improvement. Even the United Kingdom, which has continued to surprise on the upside during this period of overall weak economic performance, surprised on the weak side this time around, posting a 0.7 percent drop in industrial production for May when markets were expecting a 0.3 percent improvement. This result was mostly the consequence of a large drop in manufacturing production, which tumbled 1.3 percent on a month-over-month basis while slowing down to 3.7 percent on a year-earlier basis compared to a downwardly revised 4.3 percent for the twelve months ending in April.
In Germany, the news was not much better than in the United Kingdom, with industrial production plunging 1.8 percent on a month-over-month basis in May after a downwardly revised print of -0.3 percent (from an originally reported number of 0.2 percent), which makes the 1.8 percent May drop much more concerning, especially because the German economy tends to drive the Eurozone’s economic growth. On a year-over-year basis, the index dropped to 1.2 percent in May from 1.4 percent in April. Thus, if the German economy is having problems then it means that the Eurozone’s economy is also going to underperform.
In Japan, the June preliminary machine tool order number was very strong, 34.2 percent, on a year-earlier basis, versus a 24.1 percent increase in May. However, May’s machine orders number was very weak, dropping 19.5 percent on a month-overmonth basis after decreasing 9.1 percent during the previous month. On a year-over-year basis, machine orders were down 14.3 percent after being up 17.6 percent for the year end in April. Machine orders tend to be very volatile; however, the two very large consecutive monthly drops in this measure should raise some eyebrows regarding the strength of this sector. The last time we experienced this scenario was in August and September of 2012. Furthermore, this was the first year-over-year decline in machine orders since April of 2013.
In Mexico, industrial production increased only 0.1 percent in May, after a downwardly revised 0.5 percent increase in April. On a year-over-year basis, industrial production inched up by only 1.6 percent after dropping a downwardly revised 0.8 percent in April. Manufacturing production saved the day for Mexican industrial production, as it grew a strong 3.6 percent on a yearearlier basis and by 0.4 percent compared to the previous month. All the other industrial sectors were weaker in May than in April, which points to the still difficult conditions of Mexican domestic demand versus the manufacturing sector, which continues to be driven by strong auto demand from the United States.
Stronger U.S. economic growth should benefit the world economy going forward but so far that growth has barely made a dent on global economic conditions.
Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.
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