More Growth Moving Forward

U.S. Review

More Growth Moving Forward

The Chicago Fed National Activity Index and the Leading Economic Index, aggregators of already-released economic data, both sent positive signals for current and future growth.
Headline and core CPI advanced just 0.1 percent in September, leaving the year-ago rates unchanged at 1.7 percent.
Initial jobless claims increased this week, but the four-week moving average fell to a new cycle low.
Existing home sales perked up, while mortgage applications also increased, though the broader trend remains modest.

Inflationary Pressures Benign

Even with the dearth of data this week, the U.S. economy looks to be improving. The Chicago Fed National Activity Index confirmed that economic growth was above trend in September, while a solid gain in the Leading Economic Index suggests that there is more growth ahead. Prices remain fairly benign for the consumer, while the labor market continues to accelerate. Meanwhile, the housing market is making modest gains again after the mortgage rate correction that occurred last year.

With the four-week moving average for jobless claims falling to their lowest level since before the 2001 recession and nonfarm payrolls consistently adding more than 200,000 workers each month, the Fed’s mandate of full employment appears to be on the horizon. However, the Fed’s other mandate, low and stable inflation, could be further off. Core inflation held steady at 1.7 percent year over year, which remains comfortably lower than the 2.0 percent rate of inflation that the Fed is targeting.

Although most of the recent attention on prices has focused on the dramatic fall in oil, the rise in food prices presents an interesting trend. The cost of food at home, which is now 3.2 percent higher than a year ago, grew 0.3 percent in September. The cost of food away from home, which tends to absorb food price fluctuations, also advanced 0.3 percent. Although rising food costs are painful for consumers, the growing cost of food away from home may indicate that the consumer is stronger. Food inflation is likely to ease soon as lower corn and grain prices should alleviate price pressures on meats, poultry, fish & eggs. The easing in food prices along with falling oil prices should keep headline inflation low in the near term.

Housing Improvements Good, Not Great

The housing market continues to improve. Existing home sales rose to a 5.17 million unit annualized pace, with gains seen in the single-family and multifamily markets. For the third consecutive week, mortgage applications increased from the prior week and were up 11.6 percent for the week ended Oct. 17. Mortgage rates have been declining some recently, which could encourage would be buyers to begin the home search, and residential construction also improved modestly for September.

Better housing data are certainly welcome, but are far from any indication that the housing market is poised for a roaring return to its prerecession days. For one, existing home sales are still 1.7 percent from year-ago levels. The second is that nearly all of the gain seen in September can be attributed to investors and all cash buyers, meaning that traditional home buyers are still largely sitting on the sidelines. In addition, the first-time home buyer has also been very slow to come back to the market. Furthermore, mortgage applications are 9.9 percent lower than a year ago despite the sizable gains over the past few weeks.

The sluggish pace of the housing recovery can be blamed on low household formation. In addition, growing student debt burdens make saving for a down payment difficult. Finally, renting allows workers to be mobile while the labor market makes a full recovery.

Global Review

At the Final Turn, a Mixed Picture for Global Economy

Some countries have already begun reporting third-quarter GDP growth figures. In this week’s Global Review, we look at how these economies fare before coming into the home stretch in the final quarter of 2014.
The year-over-year rate of Chinese GDP growth slowed to 7.3 percent in the third quarter. While that represented the slowest annual growth rate since the global recession, it was still better than consensus expectations.
In the United Kingdom, real GDP grew at a 2.8 percent annualized pace, which was in line with expectations.

Slowest Growth in China Since 2009

The year-over-year rate of GDP growth in China slowed to 7.3 percent in the third quarter, marking the slowest annual growth rate since the global slowdown in 2009. The slower growth rate was not as weak as the consensus had feared, and there is some indication that prospects were brightening for the Chinese economy during the period.

For example, the year-over-year rate of industrial production growth increased to 8.0 percent in September compared to only 6.9 percent in August. The preliminary October estimate for the HSBC PMI remained in expansion territory at 50.4. While that is not overwhelming, it would mark the fifth straight month above 50 after being stuck in the 40s earlier this year.

Compared to many advanced economies where investment spending comprises only about a fifth of GDP, it accounts for almost half of GDP in China—and that has been a key source of recent weakness. We expect real GDP growth in China will slow from our estimate of 7.3 percent this year to 6.8 percent next year and to 6.5 percent in 2016. For more on China see our recent special report, titled “Chinese GDP Growth Slows Further in Q3.”

United Kingdom GDP Growth Slows Slightly in Q3

In the United Kingdom, real GDP grew 0.7 percent (not annualized) in the third quarter of the year. While that was in line with market expectations, it marks a slight slowing in the growth rate relative to the second quarter and it is a bit weaker than the 0.9 percent growth forecast by the Bank of England (BoE).

In the minutes of the most recent Monetary Policy Committee meeting released this week, two of the nine policymakers dissented on the decision to keep rates on hold, preferring to increase the target lending rate 25 bps. In this context, the modest slowing in GDP growth during the third quarter may diminish some of the eagerness to begin raising rates or at the margin it could push back the timing of eventual rate increases. A far more influential input for BoE policymakers is CPI inflation, which was unchanged in September and up only 1.2 percent on a year-over-year basis.

Eurozone PMIs: Not Great, but a Bit of Relief

Last week, we learned that industrial production in the Eurozone fell in August by the largest amount in a single month since 2009. Fear of a broader deterioration in Europe seized financial markets and speculation of eventual bond-buying by the ECB sparked buying of German Bunds, driving the yield to an all-time low.

Amid that reported weakness in output, markets were braced for more disappointment with this week’s release of October PMI data for the Eurozone. The consensus was looking for 49.9. So it came as a welcome surprise to learn that the manufacturing PMI actually improved slightly and the service sector PMI was unchanged. At 50.7, the manufacturing PMI is still on thin ice, but it was a respite from a run of weaker-than-expected economic reports and it turns down the pressure on the ECB to take action prior to its next scheduled meeting on Nov. 6.

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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.