Download February 6, 2015

Weekly Economic Review
February 6, 2015
US Treasury Yield Curve
5
4.5
4
3.5
“A lot of selling, especially the 30-year
sector, is unwinding the fear and
deflation premiums that had been
built into markets over the past few
months,”
3
2.5
2
1.5
1
0.5
0
1M
Feb-06
Feb-13
3M
6M
1Y
2Y
1m
3m
6m
0.01 0.02 0.07
0.02 0.01 0.07
3Y
5Y
1y
0.26
0.23
2y
0.65
0.66
Year
Month
Week
Present
7Y
3y
1.03
1.03
10Y
20Y
30Y
Eric Stein
Co-Director of Global Income
Eaton Vance Management
5y
10y 30y
1.48 1.95 2.51
1.53 2.02 2.63
Market Overview
The Standard and Poor’s 500 Index ended the week up 3%, closing at 2055. 60% of S&P 500 companies have
reported earnings, out of which 73% have reported performances above expectations, according to Thomson
Reuters. Earnings growth of 6.4% from the year prior is in line with average historical growth.
The Dow Jones Industrial Average also posted the largest weekly percentage gain in two years due to reports of
stronger-than-expected job creation data. Stronger job data, until recently, may have been seen as bad news by
the market as it would encourage the Fed to raise rates. The dollar rose against most of the major currencies,
leading to a widening trade deficit as exports decreased by 0.8% and imports increased.
The Stoxx Europe 600 closed 0.2% higher, largely due to positive payroll reports from the U.S. However, Greek
assets continued to face downward pressure; Athens stocks closing 2% lower on Friday, deepening Thursday’s
decline of more than 3%. The Athex Composite index has decreased 16% over the last quarter. Since the newly
elected Greek government is reluctant to implement austerity measures tied to the final $7 billion bailout
installment, Germany on Thursday dismissed Greece’s request for bridge funding that would give Greece three
months to negotiate new bailout terms. Greece’s current $271 billon bailout is set to expire at the end of the
month.
Twitter on Thursday reported its revenue that nearly doubled compared to the previous quarter, causing its stock
to jump 16% to $48.01. It also forecast its annual revenue to be $2.3 to $2.5 billon, above market expectations.
Verizon Communications confirmed its plan to sell a part of its wire line assets and towers that are expected to
bring in more than $15 billon. Its stock rose by 3%.
Macroeconomic Overview
omic Overview
The employment report showed continued job growth with more than 257,000 jobs created last month, easily
beating forecasts. The last three months saw an average of 336,000 jobs created, also the best in the last decade.
Payrolls have now risen by more than 200,000 for 11 successive months. Average hourly earnings rose 0.5 per cent
in January, after a modest contraction at the end of last year, taking annual wage growth to 2.2%, the most in five
months. Jobless rate had a moderate increase from 5.6% to 5.7%. Many analysts have attributed it to the growth
in the number of people seeking jobs.
The European Central Bank (ECB)’s move to ban the use of Greek debt for ECB’s cash diminished the positive
economic effects from the pay-roll reports in the U.S. and a decrease in reserve-requirement ratio in China. The
People’s Bank of China has injected a series of economic stimulants, including a reduction of the benchmark
interest rate last November and the decrease in reserve ratio. By increasing liquidity in the Chinese economy, the
central bank said it wants to see credit go to small companies, the countryside and irrigation construction projects.
Further interest rate cuts are possible, although these reductions have incentivized larger amounts of outflows to
the U.S. along with the expectation that the Fed will increase the rate this year.
Fixed Income Overview
US government bond prices fell sharply, pushing yields higher, as U.S. employment strengthened, reviving
speculation the Federal Reserve may increase interest rates as early as the first half of the year. Yields on both the
2 and 10-year Treasury leapt 12 basis points to 0.64% and 1.94% respectively. Both maturities were 16 basis points
higher over the week.
Futures contracts show a 27% chance the central bank will lift rates at its policy meeting in June, according to data
compiled by Bloomberg. The Federal Reserve Bank of Philadelphia President, Charles Plosser, said that due to
stronger U.S. economic data the time to raise interest rates may be now.
Transaction Highlights
omic Overview
Pfizer to buy Hospira with $17 Billion
Pfizer offers to buy Hospira on Thursday, for $90 per share in cash, or $17 billion including debt, a 39% premium to
Hospira’s closing stock price on Wednesday. It expects the deal to close later this year. Hospira stock increased by
35% to nearly $88 on Thursday, while Pfizer stock rose 2.7% to $32.93.
Hospira makes generic versions of injectable drugs which are widely used in hospitals. It also sells biosimilars,
which are generic drugs which seek to copy the more expensive and complex biotech drugs. As some of Pfizer’s
best selling drugs are losing patent soon, Pfizer is going to face the competition of cheaper generics and its profit is
expected to decline. Pfizer reported a 58% drop in net income last year. The deal is expected to make up for
Pfizer’s lost sales in the future. Both sterile injectables and biosimilars are large and growing categories. The global
marketplace value for generic sterile injectables is estimated to be $70 billion in 2020. The global marketplace for
biosimilars is estimated to be approximately $20 billion in 2020.
Currently, biosimilars are available in lots of other countries, including Europe, but not in the United States
because it was not approved by the Food and Drug Administration. However, an advisory panel recommended a
kind of biosimilars to the F.D.A. last month; if the agency approves the drug, then more biosimilar can be
introduced to the U.S. market.
Pfizer's financial advisers are Guggenheim Securities, J.P. Morgan and Lazard. Morgan Stanley is Hospira's financial
adviser.
Staples and Office Depot in advanced talks to merge
Staples is in advanced talks about a deal in which Staples would acquire Office Depot. Staples will pay $7.25 in
cash and 0.2188 of a share in Staples stock for each share of Office Depot. Staple’s shares dropped 12% while
Office Depot’s share rose 2.2%. Should a deal be announced, Staples and Office Depot would operate around 4400
stores and have a combined annual sales of about $34 billion.
Starboard Value, an activist hedge fund, which owns about 10$ of Office Depot and 6% of Staples, publicly called
on the companies to merge, so to better compete against rivals like Walmart and Amazon and to cut cost. The
hedge fund hinted that it would unseat Staple’s leadership if Staples doesn’t pursue a merger. Staples said the
deal would save it at least $1 billion through layoffs and combining purchasing and marketing costs.
The two companies tried to merge in 1997, but the deal was blocked by the Federal Trade Customers due to
antitrust concerns. Staples and Office Depot are the two largest office supplies chains, and the merger is likely to
draw close scrutiny from antitrust regulators again. However, things might have changed since 1997, as
competition from big brick-and-motar stores like Target and e-commerce companies like Amazon arises. Office
Depot’s annual revenue dropped 36% from 2007 to 2013. In 2013, the Federal Trade Customers approved Office
Depot’s purchase of the third biggest office supply chains, OfficeMax, and required no asset sales in approving
that deal. In reviewing this proposed merger, the FTC is like to look at whether prices have risen since Office Depot
bought OfficeMax.
Barclays is financial adviser to Staples, and Peter J. Solomon Co is financial adviser to Office Depot.
Data & Indicators
Date
10-Feb
10-Feb
11-Feb
11-Feb
11-Feb
12-Feb
12-Feb
12-Feb
12-Feb
12-Feb
12-Feb
13-Feb
13-Feb
13-Feb
13-Feb
Time (ET)
10:00 AM
10:00 AM
7:00 AM
10:30 AM
2:00 PM
8:30 AM
8:30 AM
8:30 AM
8:30 AM
10:00 AM
10:30 AM
8:30 AM
8:30 AM
9:55 AM
10:00 AM
Statistic
Wholesale Inventories
JOLTS - Job Openings
MBA Mortgage Index
Crude Inventories
Treasury Budget
Initial Claims
Continuing Claims
Retail Sales
Retail Sales ex-auto
Business Inventories
Natural Gas Inventories
Export Prices ex-ag.
Import Prices ex-oil
Mich Sentiment
Mich Sentiment
For
Dec
Dec
7-Feb
7-Feb
Jan
7-Feb
31-Jan
Jan
Jan
Dec
7-Feb
Jan
Jan
Feb
Feb
Actual
0.10%
5.028M
-9.00%
4.868M
-17.5B
304K
2354K
-0.80%
-0.90%
0.10%
-160 bcf
-1.00%
-0.70%
93.6
Market Data
Item
DJIA
S&P 500
EUR-USD
USD-JPY
Crude Oil (WTI)
Feb-02
17169.99
1996.67
1.1341
117.65
47.92
Feb-06
17824.29
2055.47
1.1316
119.05
51.69
% Change
3.81%
2.94%
(0.22%)
1.19%
7.87%
Market Expects
0.20%
NA
NA
NA
-$19.0B
285K
2395K
-0.40%
-0.40%
0.20%
NA
NA
NA
NA
98.3
Prior
0.80%
4.847M
1.30%
6.333M
-$10.3B
279K
2405K
-0.90%
-0.90%
0.20%
-115 bcf
-1.00%
-0.10%
98.1
98.1
Opinions
"Vix call options are a lot more expensive at the moment, which means investors are betting that volatility will rise
in the near future. The large spread between those has also been associated with pullbacks."
Randy Frederick
Managing Director
Schwab Center for Financial Research
"Banks at the core of our financial system seem less likely to experience stress should conditions in leveraged
lending deteriorate."
Jerome Powell
Governor
Federal Reserve
“As long as you don’t believe the downward tug on yields is driven by a meaningful deflation risk, low rates are
excellent for the economy and the stock market.”
David Donabedian
Chief Investment Officer
Atlantic Trust
“A lot of selling, especially the 30-year sector, is unwinding the fear and deflation premiums that had been built
into markets over the past few months,”
Eric Stein
Co-Director of Global Income
Eaton Vance Management