Home
Home

About Asset Management

Since 1991, FirstSouthwest Asset Management has worked closely with governmental entities nationwide to deliver expertise across two primary areas:

  • Investment Management
  • Arbitrage Rebate Compliance Services

As public sector investment officers are asked to do more with fewer resources, our professionals are partnering closely with each client to ease this burden while delivering the benefits of our knowledge and experience.  

 

Advisory services offered through First Southwest Asset Management Inc., a SEC-registered investment advisor.

Economic Insights


BOND YIELDS PLUNGE ON GLOBAL WEAKNESS


Wednesday, October 15, 2014

RETAIL SALES DECLINE, PRODUCER PRICES FALL
Retail sales fell by 0.3% in September after an unrevised 0.6% increase in August. The result was short of expectations for a more modest 0.1% decline. Sales ex-autos and gas fell by 0.1% while the so called control group slid 0.2%, versus expectations for a +0.4% gain in both. Details within the report were weak with sales falling in 8 of the 13 major categories. The biggest plus was in electronics which were up 3.4%, reflecting the new iPhone release.

The producer price index fell for the first time in a year, dropping 0.1% in September on falling fuel costs. The core rate, which excludes food and energy, was unchanged. On a year-over-year basis PPI is up 1.6%, well below the 2.1% pace reached in April.

Adding to the gloomy data today was the Empire State Manufacturing index. This survey of New York manufacturing executives produced by the New York Federal Reserve unexpectedly fell from 27.54 in September to 6.17 in October. While not normally a major market mover, the release was one more piece of bad news for a market that desperately needs something positive to latch onto. 

MARKETS IN PANIC MODE
It’s hard to pinpoint exactly what caused the sharp reversal in sentiment that has taken place over the last couple of weeks. Global weakness has certainly been a contributing factor. While Europe’s problems are well known, the previously healthy Germany seems to have caught the cold as recent data indicate its economy may be headed for recession. Throw in sputtering Japan, a never ending stream of geopolitical issues, and a dose of Ebola fears and the rout is on. 

Stock and bond markets are in full on panic mode. At one point this morning the Dow Jones Industrial Average had fallen 369 points and was below 16,000. It has since recovered some of that loss. It’s hard to believe that it was just a month ago that we were staring at record highs on the Dow and the S&P 500. As of this writing, the Dow is down 6% and the S&P 500 nearly 8% from their mid-September highs.

Bonds have staged a massive rally pushing prices higher and yields lower. The 2-year Treasury note, which peaked at 0.59% on September 30th, traded as low as 0.24% this morning. The 10-year Treasury note traded as low as 1.86% while at one point earlier this morning the 30-year Treasury bond price had increased nearly six full points to print a low yield of 2.67%! When the year began the market was convinced that an end to QE and a Fed on the path toward tighter policy meant higher interest rates were on tap. So far, that has certainly not turned out to be the case. In fact, as of today, the entire yield curve is lower than when 2014 began. Prospects for rate hikes in mid-2015, a virtual certainty a few short weeks ago, are being called into question as talk of global currency wars and deflation are heating up.  

MARKET INDICATIONS AS OF 9:40 A.M. CENTRAL TIME 

DOW

DOWN 182 to 16,134 (Down 6.6% from high of 17,280)

NASDAQ

DOWN 32 to 4,195 (Down 8.8% from high of 4,598

S&P 500

DOWN 15 to 1,863 (Down 7.4% from high of 2,011)

1-Yr T-bill

current yield 0.06%; opening yield 0.06% (Low for 2014)

2-Yr T-note

current yield 0.28%; opening yield 0.37% (Low for 2014)

5-Yr T-note

current yield 1.27%; opening yield 1.44% (Low for 2014)

10-Yr T-note

current yield 2.20%; opening yield 2.05% (Low for 2014)

30-Yr T-bond

current yield 2.84%; opening yield 2.95% (Low for 2014)



(YESTERDAY) BOND YIELDS TUMBLE ON TROUBLING OUTLOOK

Thursday, October 9, 2014

FOMC MINUTES REVEAL FED CONCERN  
On Wednesday afternoon, the minutes from the September FOMC were released, and the unexpectedly dovish tone took the market by surprise. In particular, committee members thought the strengthening U.S. dollar and deteriorating economic growth in Europe could have adverse effects on the U.S. economy. Several members thought slowing growth in Japan and China and events in Ukraine and the Middle East could hold similar risks.  

A stronger dollar makes U.S. exports more expensive and import prices cheaper. As a result, U.S. companies become less competitive both in the foreign and domestic markets. This would be expected to slow GDP growth going forward while further reducing inflation. With inflationary pressures already below Fed targets, the idea of raising interest rates next summer seems less likely. Keep in mind that the Fed would theoretically raise rates to slow economic growth and keep inflation in check …but the global economy is already doing that. 

Fed insider Jon Hilsenrath wrote that “the collective worry is added reason for the Fed to hold short-term interest rates near zero, even as the economy improves.”  

On Tuesday, the International Monetary Fund (IMF) downgraded its global growth forecasts for 2014 and 2015, while Germany (traditionally the strongest Eurozone economy) reported that its industrial output had dropped 4% in August. A day earlier, German factory orders experienced their biggest decline since the 2009 financial crisis. 

The September minutes effectively told the financial markets that the Fed is less likely to begin tightening next summer.  In response, bond yields rose sharply and stocks soared on Wednesday afternoon.   

Note that this morning, yesterday’s 275 point gain in the DOW has been effectively wiped out. The DOW is down 233 points at the moment, presumably on global growth concerns. Bond yield have moved very little. 

The long bond is at its lowest yield since May 2013 …seven months before the Fed began tapering.   

MARKET INDICATIONS AS OF 11:00 A.M. CENTRAL TIME 

DOW

DOWN 233 to 16,761

NASDAQ

DOWN 55 to 4,413

S&P 500

DOWN 25 to 1,944

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.44%; opening yield 0.45%

5-Yr T-note

current yield 1.57%; opening yield 1.55%

10-Yr T-note

current yield 2.32%;opening yield 2.32%

30-Yr T-bond

current yield 3.07%; opening yield 3.06%



JOB GAINS ACCELERATE IN SEPTEMBER

Friday, October 3, 2014

HIRING IMPROVES AND UNEMPLOYMENT CONTINUES TO FALL
U.S. businesses added 248k new jobs to company payrolls during the month of September, easily topping the median forecast of 215k. Perhaps more significant were upward revisions to the previous two months. August payroll gains, originally reported at a lackluster 142k, were revised up to 180k, while July's payrolls were raised from 212k to 243k.  So far in 2014, company job creation has averaged 227k per month, well above the 194k average in 2013.  

Sectors creating jobs in September included business services (+81k), retail (+35k), leisure and hospitality (+33k) and education and healthcare (+32k). Goods producing employment increased by 29k, with construction (+16k), mining (+9k) and manufacturing (+4k) all making contributions.

The unemployment rate (calculated from a separate household survey) slipped from 6.1% to 5.9% in September as 232k new jobs were reported. Surprisingly, another 97k Americans reportedly exited the labor force during the month, pulling the participation rate down a notch to 62.7%, the lowest since February 1978. 

The U6 or “underemployment rate,” which includes all unemployed, able-bodied, working-age Americans, who would (in theory) accept a suitable full-time job if one were offered, declined from 12% to 11.8%. This broader measure was 17.2% as recently as April 2010.
    
The average workweek ticked up by 0.1 to 34.6 hours. UBS analysts reported this increase was roughly equivalent to 300k additional workers. Perhaps the only downside to the September report was that average hourly earnings were unchanged, lowering year-over-year wage gains from 2.1% to 2.0%.

Of course, economic data seldom moves in a straight line, but hiring has been fairly consistent this year, and unemployment has now moved well below the 6.5% level that the Fed once considered its threshold for tightening monetary policy. At the moment, it still appears as though the Fed will begin to boost short term rates at some point next summer. 
   
Although the report was solid across the board, it wasn’t too far from expectations, so the bond market movement has been somewhat subdued.      

MARKET INDICATIONS AS OF 9:20 A.M. CENTRAL TIME 

DOW

UP 145 to 16,946

NASDAQ

UP 42 to 4,472

S&P 500

UP 20 to 1,966

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.57%; opening yield 0.53%

5-Yr T-note

current yield 1.76%; opening yield 1.69%

10-Yr T-note

current yield 2.47%;opening yield 2.43%

30-Yr T-bond

current yield 3.16%; opening yield 3.14%



STOCKS AND BOND YIELDS FALL ON GLOBAL WORRIES, SOFTER ISM


Thursday, October 2, 2014

SOFTER ISM, AUTO SALES ARE LATEST WORRY
A stream of weaker economic data released on Wednesday sent equity markets reeling and sparked a rally in bond markets. The ISM manufacturing index fell shy of lofty expectations for a 58.5 reading, slipping to 56.6 in September from 59.0 in August. But before we get too dour let’s remember that any reading above 50 indicates expansion in the manufacturing sector and September’s 56.6 is still the third strongest reading this year. Auto sales retreated from their lofty perch as well, falling from August’s 8½ year high 17.45 million unit annual rate to 16.34 million in September. August sales were boosted by incentives to clear out last year’s models, so September sales were weaker as the inventory cleared and incentives expired. Other weak data including a 0.8% decline in construction spending, which prompted Morgan Stanley to reduce their Q3 GDP forecast from 3.3% to 3.1%, as well as weak manufacturing PMI’s in Europe, the U.K., and China.  

STOCKS SWOON WHILE BOND RALLY 
The end result of all this was a sharp sell-off in U.S. stock markets and a rally in bonds. The Dow Jones Industrial Average shed 238 points or 1.4% yesterday, while the S&P 500 lost 1.3%. The S&P 500 is now off 3% from its mid-September highs. The broader Russell 2000 index is down 10% from its July peak. Bonds staged another rally, taking the 10-year Treasury note yield as low as 2.38%, just above its 2.34% year-to-date low point. The yield on the 30-year Treasury bond traded as low as 3.09%, less than 2 basis points away from its low for the year. At the short end of the curve the two-year T-note closed at 0.52%.

This morning, stocks are little changed while bonds have given up some of yesterday’s gains. Attention will now turn to tomorrow’s release of the September employment report. The Bloomberg median forecast calls for a gain of 215k and a steady 6.1% unemployment rate. A stronger print will relieve some of the concerns raised following last month’s disappointing 142k jobs gain, while a weaker number could set off alarm bells about the economy’s health and raise doubts about the future course of monetary policy. 

MARKET INDICATIONS AS OF 8:48 A.M. CENTRAL TIME 

DOW

DOWN 23 to 16,783

NASDAQ

UP 2 to 4,424

S&P 500

DOWN 1 to 1,945

1-Yr T-bill

current yield 0.08%; opening yield 0.09%

2-Yr T-note

current yield 0.52%; opening yield 0.52%

5-Yr T-note

current yield 1.68%; opening yield 1.67%

10-Yr T-note

current yield 2.41%; opening yield 2.39%

30-Yr T-bond

current yield 3.14%; opening yield 3.09%



HOME SALES MOSTLY IMPROVED IN AUGUST

Thursday, September 25, 2014

LEAN HOME INVENTORIES POINT TO FUTURE GROWTH
Existing home sales unexpectedly fell by 1.8% in August to a 5.05 million unit annual pace. On a year-over-year basis, existing home sales have now declined in each of the past 10 months. On a bright note, the clean-up seems to be nearing completion as investor purchases dropped from 16% to 12% of the total sales, while distressed sales represented just 8% of total purchases, the fewest since the recovery began. Available supply remained at a relatively lean 5.5 months. 

By contrast, new home sales (which represent less than 10% of all home sales) surged +18.0% in August to a 504k annual pace, well above the median forecast estimate of 430k. It was the biggest single month percentage gain since January 1992 and the highest level of the recovery cycle. The median price for a new home declined for the third straight month, tumbling from $280k to $276k in August, while the available supply dropped to 4.8 months, the lowest in more than a year. The low inventory levels suggest housing starts could increase in coming months.   

The housing market has been particularly price sensitive. The slight drop in new home prices has probably had a positive influence on recent sales …as have mortgage lending rates, which have been anchored at approximately 4.30% (MBS 30-year index) for the last five months. The MBS 30-year average was 4.72% in early January. 

FED PRESIDENTS FEAR PREMATURE RATE HIKES COULD STIFLE GROWTH  
There is some recent concern among Fed presidents that premature tightening might derail the recovery before it gains adequate momentum. Chicago Fed President Charles Evans, speaking in Washington D.C. yesterday, said the FOMC “…should be exceptionally patient in adjusting the stance of U.S. monetary policy - even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.” 

New York Fed President Bill Dudley and Minneapolis Fed President Narayana Kocherlakota have also cautioned that the Fed needs to make sure the economy can withstand higher lending rates. Both men pointed to 1937 as an example of when the Fed inadvertently snuffed out a fragile recovery by raising interest rates too early. There’s also a related school of thought that allowing accommodation to remain in place a little longer would nudge inflation closer to the Fed’s target. 

DURABLE GOODS ARE HEALTHIER THAN THE HEADLINE SUGGESTS 
This morning, durable goods orders (orders for big ticket items expected to last for three years or more), fell by 18.2% in August, just below the -18.0% median forecast, while July orders were revised slightly downward from +22.6% to +22.5%. Obviously, this is a VERY volatile series. Aircraft orders plunged 74.5% in August, after surging 315.6% in July.  When the transportation component is factored out, ex-transportation orders rose by +0.7% in August following a revised -0.5% decline in July. Apparently, this is good. In a nutshell, analysts have determined that capital spending has been strong in the third quarter. Overall GDP growth in Q3 is now expected to fall somewhere the +3.0% to +3.5% range.   
        
Stocks are taking a beating this morning, although the reasons aren’t apparent. 

Bond yields are lower …although not as much as I’d have guessed given a 200+ point drop in the DOW.   

MARKET INDICATIONS AS OF 10:25 A.M. CENTRAL TIME 

DOW

DOWN 223 to 16,987

NASDAQ

DOWN 78 to 4,477

S&P 500

DOWN 24 to 1,967

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.57%; opening yield 0.59%

5-Yr T-note

current yield 1.77%; opening yield 1.80%

10-Yr T-note

current yield 2.52%; opening yield 2.56%

30-Yr T-bond

current yield 3.23%; opening yield 3.28%



BOND YIELDS RISE ON SOLID SPENDING REPORT

September 12, 2014


CONSUMER SPENDING IS BACK ON TRACK
The consumer apparently woke up last month as retail sales rose by a respectable 0.6% in August, exactly matching the median Bloomberg forecast with the biggest increase in four months. August sales were broad-based with rises in 11 of 13 categories. Health and personal care led the way with a 0.6% gain for the month and a +6.4% year-over-year increase. Building materials rose by 1.4%, after falling in July. Vehicle and part sales, which make up 20% of the total, increased by 1.5% and contributed roughly half of the month’s total percentage increase.

The lowest gasoline prices in six months put more dollars into consumer’s pockets and probably contributed to the solid report, but gasoline receipts (unadjusted for lower pump prices) prompted a 0.8% decline in the service station category.  

Further bolstering this morning’s report, July retail sales, originally reported as unchanged, were revised upward to +0.3%.

Analysts had attributed the past several months of anemic spending to a lack of wage gains, but for whatever reason, consumer credit expanded significantly in July, meaning that shoppers were willing to borrow to make purchases, something they’ve been reluctant to do in recent years.  

The overall economic data is improving, but continues to be somewhat mixed. This morning’s retail sales data showed a respectable gain, but if wages continue to languish, it’s hard to imagine the consumer will be able to fund future purchases with additional borrowings.

Bond yields are up this morning and stocks are down in early trading with the expectation that a revived consumer will further boost economic growth, and may force the Fed to raise interest rates a bit sooner than previously thought. The near-term economic outlook appears fairly bright, with the most recent Bloomberg economist survey calling for +2.9% to +3.0% annualized GDP growth ..for the next seven quarters.      

MARKET INDICATIONS AS OF 9:50 A.M. CENTRAL TIME 

DOW

DOWN 31 to 17,017

NASDAQ

DOWN 15 to 4,577

S&P 500

DOWN 6 to 1,983

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.57%; opening yield 0.56%

5-Yr T-note

current yield 1.81%; opening yield 1.79%

10-Yr T-note

current yield 2.60%; opening yield 2.55%

30-Yr T-bond

current yield 3.33%; opening yield 3.28%

 


SURPRISING WEAK LABOR REPORT NUDGES YIELDS LOWER


Friday, September 5, 2014

THE PACE OF PAYROLL GAINS DROPS SHARPLY
For six straight months, more than +200k jobs had been added to U.S. business payrolls. Falling benefit claims, rising job postings, and indications of intent to hire had suggested that the August payroll numbers would be solid.  The median forecast was +230k, and the “whispered number” was closer to +250k. 

This morning, the BLS reported that nonfarm payrolls grew by just +142k in August, while revisions to the previous two months pulled June and July job growth down by a combined 28k. Suddenly, the three-month average for nonfarm payrolls has decreased from a robust +267k in June to …a less robust +207k in August. Much of the current upbeat economic outlook has been based on positive momentum in the labor market, so the unexpected deceleration has analysts rethinking the timing of Fed tightening. Again. Of course, economic data is subject to revisions, sometimes quite significant, so today’s data will have to stand the test of time.      

Although the most recent ISM report suggested factory hiring was imminent, manufacturing jobs were unchanged in August. There were +20k construction jobs added during the month, while healthcare added +34k. Interestingly, 8k retail jobs disappeared in August, perhaps reflecting the recent string of poor retail sales reports.    

In the separate household survey, the unemployment rate decreased from 6.2% to 6.1%, although the underlying reasons defied the headline. The survey showed only +16k new jobs were added during the month.   Basically, there were fewer people looking for work. The labor market participation rate dropped back to 62.8%, matching the lowest level since 1978. There are now 92.3 million Americans not currently included in the labor force, an all-time high. Clearly, the degree of slack that Yellen frequently refers to is still evident. 

This slack is keeping wage pressures low. Average hourly earnings rose by +0.2% in August and +2.1% year-over-year, exactly matching expectations, while the average workweek was unchanged at 34.5 hours. 

Bond yields are lower in early trading with the realization that Fed rate hikes may be a bit further down the line than most had anticipated before the data release.       

MARKET INDICATIONS AS OF 8:50 A.M. CENTRAL TIME 

DOW

UP 20 to 17,050

NASDAQ

UP 1 to 4,561

S&P 500

UP 5 to 1,992

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.50%; opening yield 0.53%

5-Yr T-note

current yield 1.65%; opening yield 1.71%

10-Yr T-note

current yield 2.41%; opening yield 2.45%

30-Yr T-bond

current yield 3.19%; opening yield 3.21%



PLENTY OF STRENGTH IN FRONT OF TOMORROW'S EMPLOYMENT RELEASE

Thursday, September 4, 2014


MANUFACTURERS OUTLOOK BRIGHTENS
On the Tuesday after Labor Day, the closely-watched ISM manufacturing index rose to a lofty 59.0, bettering the median forecast by two full points and reaching the second highest level since 2004, while the new orders index jumped to 66.7, the highest since 2004. The ISM employment index edged a bit lower from 58.2 to 58.1, but in all fairness, this labor measure remained near four-year highs. 

This morning, the ISM nonmanufacturing (service sector) index for August increased to 59.6, the highest level in nine years, as the key business activity index reached its highest point since 2004. 

Yesterday, the release of the “Beige Book” showed growth in all 12 of the Fed regions, with New York, Chicago, Dallas, San Francisco, Cleveland and Minneapolis characterizing growth as “moderate.” Growth in other regions was either “modest” or simply “improving.” 
 
Admittedly, these are all just surveys, but at this point, the third quarter GDP outlook seems to be strengthening. More concrete evidence of this strength was found in the auto sector as U.S. vehicle sales rose by 6.4% in August to an annualized 17.45 million unit pace, the highest in 8½ years. Although this was well above expectations, the 11.4-year average life of all cars and light trucks on U.S. roads suggests continued brisk sales ahead, laying a nice manufacturing foundation for the near future.   

Speaking of manufacturing, U.S. factory orders jumped 10.5% in July, the biggest single month increase in the history of the series (going back to 1992). Unfortunately, the strong growth was due entirely to a surge in the volatile commercial aircraft orders category. If the transportation component is excluded, orders actually fell by 0.8%. Still, it’s not entirely fair to discount the surge in airline orders. Overall, the factory data is quite positive.    

So, the U.S. economy seems to be doing fine, although the level of growth has yet to ignite any significant inflationary pressure, and wage gains are marginal at best. 

By contrast, the broad European economy is struggling mightily and deflation is a big concern. As a result, the European Central Bank (ECB) unexpectedly announced this morning that it would reduce all three of its key interest rates by 10 bps in efforts to sidestep recession and stave off the growing threat of deflation. The benchmark rate was lowered to 0.05% and the marginal lending facility rate was reduced to 0.30%, while the reserve deposit rate is now a negative 0.20%. The ECB also announced some details of a QE-like asset-purchase plan, although complete details are still being developed by Blackrock, the hired consultant. 

The significance of the latest ECB accommodation is likely downward pressure on U.S. bond rates, as global investors seek higher yields in the safe haven of U.S. markets.  

The Fed stance on monetary policy hasn’t changed. U.S. asset purchases should wrap up in October, and most believe tightening will begin roughly a year from now.  Having said that, the domestic recovery has been uneven. We’re on an upswing now; in six months, the outlook could be quite different. 

The median forecast for employment Friday is a +230k gain in August nonfarm payrolls with the unemployment rate ticking back down to 6.1%.  If the actual numbers prove significantly stronger, expected timing for initial rate hikes could move forward, giving a boost to yields along the curve.

MARKET INDICATIONS AS OF 11:30 A.M. CENTRAL TIME 

DOW

UP 37 to 17,115

NASDAQ

UP 13 to 4,585

S&P 500

UP 6 to 2,005 (NEW HIGH)

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.53%; opening yield 0.52%

5-Yr T-note

current yield 1.71%; opening yield 1.67%

10-Yr T-note

current yield 2.44%; opening yield 2.40%

30-Yr T-bond

current yield 3.20%; opening yield 3.14%



Q2 GDP REVISED HIGHER, BUT INCOME/SPENDING DATA ARE WEAK

Friday, August 29, 2014

THE GOOD…
For financial markets, the week before Labor Day is traditionally the last week of summer and a time when many market participants are on vacation. That typically means a relatively quiet week with low trading volumes. This past week was no exception and so market reaction to economic data was generally muted. We had previously written about the stellar durable goods report and surging consumer confidence. Yesterday, more good news was reported as the first revision to Q2 GDP data brought an upward revision from the initial +4.0% estimate to +4.2%. The composition of growth improved as business fixed investment was revised up from +5.5% to +8.4%, and final sales from +2.3% to +2.8%, while inventory growth was trimmed from +1.7% to +1.4%. The revisions imply better momentum in Q2 and less need for inventory reduction in Q3. Meanwhile, inflation remains well contained as the Fed’s preferred measure, the core personal consumption expenditures index, rose just 0.1% in July and is up 1.5% year-over-year. That is still well shy of the Fed’s stated 2.0% target.

…THE BAD…
The lack of wage growth that has recently become a focus of Fed policy makers was on display once again as personal income rose just 0.2% in July, less than the 0.3% consensus estimate and the smallest gain of the year. On the flip side, personal spending fell -0.1% in July, the first decline since January on broad based weakness. The poor showing in this report negated the strong durable goods report and has negative implications for Q3 GDP. Morgan Stanley trimmed their Q3 GDP tracking estimate from +3.2% to +2.6% on the news.

…AND THE UGLY
Geopolitical issues remain a large concern and rising tensions surrounding the Russia/Ukraine conflict garnered the markets’ attention as the week came to a close. The conflict threatens further damage to an already weak European economy and brought renewed discussions about possible action by the ECB, including some form of quantitative easing. The problem for the ECB is there are no unified debt obligations to buy, raising questions about how a QE program could be implemented. The speculation has combined with weak data to send yields on Euro sovereign debt to record lows. German bonds trade at negative yields out through three-years and the 10-year Bund currently yields just 0.88%. 

On a related note, reports surfaced last week that Belgium is now the third largest foreign holder of U.S. Treasury obligations, behind only China and Japan, with their holdings more than doubling over the past year to $364.1 billion. There is speculation that’s actually the result of the ECB buying U.S. bonds in an effort to weaken the Euro currency and thereby stimulate demand for European exports. A sort of backdoor QE. 

STOCKS AT/NEAR RECORD HIGHS WHILE BOND YIELDS FALL
The mixed economic data did little to slow down U.S. stock markets as the S&P 500 set another record and closed above 2,000 on Wednesday. Thursday and Friday’s softer data teamed up with the geopolitical issues to send U.S. bond yields to new lows for the year. The 10-year Treasury yield reached 2.33% and the 30-year 3.07% on Friday morning.

MARKET INDICATIONS AS OF 10:36 A.M. CENTRAL TIME 

DOW

UP 17 to 17,097 (Record high set Jul-16 at 17,138)

NASDAQ

UP 20 to 4,578

S&P 500

UP 3 to 2,000 (record high set Aug-27 at 2,000.12)

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.49%; opening yield 0.50%

5-Yr T-note

current yield 1.63%; opening yield 1.63%

10-Yr T-note

current yield 2.34%; opening yield 2.34%

30-Yr T-bond

current yield 3.07%; opening yield 3.08%



SOARING DURABLE GOODS, CONSUMER CONFIDENCE PROPEL STOCKS TO RECORD HIGHS

Tuesday, August 26, 2014

DURABLE GOODS FLYING HIGH ON AIRCRAFT ORDERS 
Orders for durable goods took off in July, soaring 22.6%, the biggest monthly gain on record, as orders for commercial aircraft jumped 318%. The strength in that headline was the result of Boeing receiving orders for 324 planes at the Farnborough Airshow. Aircraft orders have very long lead times so the benefits of these orders will develop over several years, but this is good news no matter how you slice it. Motor vehicle orders were very strong as well, rising the most since August 2009. Stripping out those often volatile transportation categories, the orders ex-transportation figure slid -0.8%, below the +0.5% economists had expected. However, upward revisions for June completely offset that apparent negative as the previously reported +0.8% gain was revised to a solid +3.0% gain. Non-defense capital goods orders ex-aircraft, which feeds into the GDP calculations, slipped -0.5% in July, but again upward revisions offset that as June’s previously reported +1.4% was pumped up to +5.4%. The durable goods data is notoriously volatile, subject to large revisions, and confusing to understand. The key take away from today’s report is that durable goods orders were much stronger than economists had expected in June, so the modest pull back in July data is not a concern. The report suggests good momentum as Q3 begins and led several economists to raise their estimates for Q3 GDP.

CONSUMER CONFIDENCE RIDES THE STOCK MARKET WAVE
The Conference Board’s consumer confidence index rose another 2 points in August to 92.4. That was the highest level since October 2007, just as confidence was beginning to crash from the July 2007 pre-recession high of 111.9 to a February 2009 low of 25.3. Perhaps improving labor market conditions are finally translating into better feelings and more confidence amongst consumers. 

A surging stock market is no doubt contributing to this as well. The DJIA traded into record territory today before settling back to close about 32 points below the record closing high. The S&P 500 set a new record high and closed above the 2,000 level for the first time ever. Bond yields haven’t moved as much as one might have expected given then purported strength in the economic data. Despite a lot of volatility in between, yields inside of five years are virtually unchanged versus one month-ago levels, while yields beyond five years are within 7 basis points of month-ago levels. 

MARKET INDICATIONS AS OF 4:35 P.M. CENTRAL TIME

DOW

UP 30 to 17,107

NASDAQ

UP 13 to 4,570

S&P 500

UP 2 to 2,000.02 (record high)

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.49%; opening yield 0.50%

5-Yr T-note

current yield 1.66%; opening yield 1.67%

10-Yr T-note

current yield 2.40%; opening yield 2.38%

30-Yr T-bond

current yield 3.16%; opening yield 3.13%



EASING INFLATIONARY PRESSURE PROVIDES FED COVER

Tuesday, August 19, 2014

CONSUMER PRICES SLOW 
This morning, both the overall consumer price index (CPI) and core CPI rose by just +0.1% for the month of July. On a  year-over-year basis, headline CPI is now increasing at a +2.0% pace, while core CPI is increasing at an annual rate of +1.9%. One of the recent concerns for Fed officials had been an apparent upward trend in price pressures during the spring months. This had suggested the Fed might already be behind the curve, and as a result should consider raising rates sooner rather than later. In particular, CPI had been increasing by much larger increments, averaging nearly +0.3% during the past three months. The slight +0.1% headline gain in July was the smallest in nine months, and the +0.1% core increase was the smallest in seven months. 

The July producer price index (PPI), released last week, also showed that spring price pressures might be dissipating. Prices for final demand goods rose by just +0.1% in July, down from the +0.4% June increase. On a year-over-year basis, headline PPI dipped from +1.9% to +1.7%, while core PPI eased back from a +1.8% pace to +1.6%. 

The most recent measure of core personal consumption expenditures (PCE) showed PCE core increasing at a comfortable +1.5% rate.  This preferred inflation measure of the Fed is increasing at approximately the same rate as its six-year average.      

The Fed’s supposed target rate for inflation is around +2.0%, so by most measures, price pressures are actually below Fed preference. In theory, if the Fed wanted to lower inflation, it would attempt to slow economic growth and reduce demand relative to supply. Recent reports certainly won’t force the Fed’s hand. 

HOUSING MEASURES IMPROVE  
Also this morning, housing starts surged by +15.7% in July to a 1093k annual pace from a revised 945k rate in the previous month. Building permits also increased nicely, rising by a solid +8.1% to a 1052k annual pace.  These better-than-expected numbers support the idea that the housing market is especially rate sensitive. Since mortgage rates spiked last summer, home sales have disappointed, but the 30-year fixed rate index is down approximately 40 bps since the year began, and 20 bps in the past two months. Recent declines in general market rates should continue to provide accommodation to home buyers.  

MARKET INDICATIONS AS OF 9:50 A.M. CENTRAL TIME 

DOW

UP 67 to 16,905

NASDAQ

UP 12 to 4,520

S&P 500

UP 7 to 1,974

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.41%; opening yield 0.41%

5-Yr T-note

current yield 1.56%; opening yield 1.58%

10-Yr T-note

current yield 2.38%; opening yield 2.39%

30-Yr T-bond

current yield 3.20%; opening yield 3.20%



CONSUMER SPENDING SLOWS AS Q3 BEGINS

Wednesday, August 13, 2014

RETAIL SALES ARE FLAT IN JULY
After a surprisingly strong 4% annualized GDP gain in the second quarter, a number of economists had found themselves a bit more optimistic about the U.S. economy going forward. This morning’s July retail sales report suggested that current quarter growth is shaping up to be significantly less robust. 

Advance retail sales were unchanged during the first month of the third quarter, the slowest pace in six months, and below the +0.2% median forecast. Analysts have blamed the poor summer spending on anemic wage gains, which are a reflection of continued slack in the labor market. Bloomberg News recently reported that inflation-adjusted average weekly earnings fell 0.2% year-over-year in June.

Core retail sales, which exclude the volatile automobile, gasoline station and building materials components, rose by just 0.1% in July. Core sales are important because they’re used to calculate GDP. 

Sales of automobiles and auto parts, which make up 20% of the overall retail sales number, fell by 0.2% in July after a 0.3% decline in June. Despite the recent decline, sales of cars and light trucks are in the midst of their best year since 2006.

In other news, weekly mortgage applications dropped another 2.7% in the week ending August 8th.  Applications for new purchases fell by 1.0%, and applications to refinance existing loans dropped 4.0% during the week. Clearly, higher lending rates are taking a toll on home buyers. Since the low point in mortgage rates last May, purchase applications are down 25%, while refi apps have fallen by a whopping 75%. 

All in all, the recovery forecasts may have gotten a bit ahead of themselves. The economy is likely to struggle a bit as the stimulus is gradually removed. Recovery seldom moves in a straight line. 

Bond yields are generally lower in early trading. The 2-year Treasury-note yield is now at a nine-week low of 0.41%, while the 10-year Treasury is within 2 bps of its’ 14-month low. Stocks are up early with the expectation that the Fed will remain accommodative for a longer period to feed the economy. 

MARKET INDICATIONS AS OF 9:30 A.M. CENTRAL TIME 

DOW

UP 31 to 16,592

NASDAQ

UP 27 to 4,416

S&P 500

UP 5 to 1,936

1-Yr T-bill

current yield 0.08%; opening yield 0.09%

2-Yr T-note

current yield 0.41%; opening yield 0.45%

5-Yr T-note

current yield 1.58%; opening yield 1.62%

10-Yr T-note

current yield 2.42%; opening yield 2.45%

30-Yr T-bond

current yield 3.26%; opening yield 3.28%



GLOBAL EVENTS MAKE FOR ROCKY WEEK

Friday, August 8, 2014

ISM NON-MANUFACTURING INDEX REACHES 9-YEAR HIGH
Heading into last week, markets were still digesting the prior week’s big dose of economic data: pondering a good but not great employment report (+209k jobs and a 6.2% unemployment rate), a stronger than expected initial estimate on Q2 GDP (up +4.0%), upward revisions to Q1 GDP (from -2.9% to -2.1%), and a very strong ISM manufacturing index (57.1). With very little on the data calendar last week, investors were looking forward to a quiet late summer week. Alas, that was not to be the case as geopolitical events have once again reared their ugly heads.

Looking at the key data releases, on Tuesday, the ISM non-manufacturing (service sector) index for July jumped to 58.7 from 56.0 in June. That was well above expectations of 56.5 and the highest level since December 2005. Components within the report validated the headline: the business activity index expanded to 62.4 from 57.5 as 13 of the 14 industries surveyed reported increased activity; the new orders index rose from 61.2 to 64.9, suggesting further strength on the horizon; and the employment index climbed to 56.0 from June’s 54.4. Initial jobless claims fell to 289k while the four-week moving average dropped to 294k versus 312k a month ago. While the downward trend in claims is encouraging, it appears to have been exaggerated by seasonal factors as auto manufacturers, amidst very strong sales, have not implemented their normal summer shut-downs for plant retooling. There were a handful of other minor indicators which had no discernable impact on markets or the economic outlook.

GEOPOLITICAL EVENTS DOMINATE 
What is having an impact, however, is the news flow about conflicts and war. Europe, already saddled with a very weak economy, is now dealing with an escalating confrontation along the Russia/Ukrainian border. Sanctions and trade embargoes will further damage the already fragile European economy. Italy is now officially in recession after reporting a second straight quarter of negative GDP growth, and other weak data releases in Germany and France added to the list of worries. The ECB has been saber rattling about large-scale asset purchases, better known as QE. As a result, bond yields across Europe are trading to new lows. The German 2-year note has traded at negative yields while the 10-year German Bund reached a record low 1.05%. 

After a short ceasefire, fighting between Israel and Hamas has resumed, with no end in sight. Meanwhile, Islamic militants seized Iraq’s largest hydro-electric dam as they take over vast areas the country. Thousands of refugees have fled their homes amid death threats and other atrocities. Fears of a burgeoning crisis have prompted President Obama to authorize military airstrikes as well as airdrops of humanitarian aid. Not surprisingly, all of this has prompted an all too familiar risk off, flight to safety trade. The yield on the 10-year U.S. Treasury note traded as low as 2.35% in the early morning hours on Friday. The 2-year T-note has traded as low as 0.41%. Bond investors should exercise caution here, as this trade could reverse as quickly as it appeared. Indeed, much of the rally was reversed late this afternoon on signs that Russia may be looking to deescalate tensions. Stocks have managed to stage a large rally this afternoon and are poised to close higher for the week. 

The questions now become: How long will all of this go on; will it cause any lasting damage to the U.S. economy; and will it force the Fed to reconsider its path for monetary policy? At this stage, it’s much too early to tell, but over the course of the last several years there have been numerous times when such geopolitical events have temporarily blown us off course. There was the Greek debt restructuring, the European banking crisis, the Arab Spring and of course the U.S. debt ceiling battle and government shut-down. While all of those things eventually passed, they did cause a great deal of consternation along the way.

MARKET INDICATIONS AS OF 2:57 P.M. CENTRAL TIME 

DOW

UP 184 to 16,552

NASDAQ

UP 37 to 4,372

S&P 500

UP 21 to 1,930

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.44%; opening yield 0.43%

5-Yr T-note

current yield 1.62%; opening yield 1.60%

10-Yr T-note

current yield 2.42%; opening yield 2.41%

30-Yr T-bond

current yield 3.23%; opening yield 3.22%



BOND YIELDS LOWER ON MODERATE JULY JOB GAINS

Friday, August 1, 2014

JOB CREATION CONTINUES WITH NO WAGE GAINS IN JULY
The July labor market report was not quite as strong as experts were anticipating, and wage gains were virtually non-existent during the month. Nonfarm payrolls rose by 209k, falling just short of the 230k median forecast. Part of the shortfall was made up in upward revisions to previous months as May job gains were rewritten from +224k to +229k and June from +288k to +298k. Payrolls have now been above the 200k mark for six straight months, the longest such streak in 17 years. Over the past 12 months, U.S. companies have increased payrolls by an average of 209k. Not bad. 

July job gains were concentrated in professional and business services (+47k), manufacturing (+28k), retail (+27k), construction (+22k), leisure and hospitality (+21k), health and education (+17k) and state and local government (+11k). Generally speaking, the quality of jobs seems to be improving.    

The unemployment rate, calculated from a separate survey of U.S. households, actually rose from 6.1% to 6.2% during the month as 329k Americans reentered the workforce.  In contrast to the company survey, the household report showed just 131k newly-employed Americans and 197k additional unemployed job-seekers.  The hopeful job-hunters nudged the labor market participation rate up from a 36-year low of 62.8% to 62.9%. 

The broader U6 measure of unemployment, frequently referred to as the “underemployment rate, measuring all those who would accept a suitable full-time job if it were offered, rose from 12.1% to 12.2%.    
   
Usually, wage gains are a secondary number within the monthly employment report, but this morning they assumed a more prominent spot. Average hourly earnings were unchanged for the month of July. This is significant because just yesterday, the second quarter Employment Cost Index unexpectedly rose from +0.3% to a six-year high of +0.7%.  Fears that diminishing labor market slack would push wage pressures higher and force the Fed to hike rates earlier, overwhelmed a solid earnings season and sparked a 317 point drop in Dow, erasing the entire years’ worth of market gains in a single day. 

Bond have rallied in early trading, pushing yields down a bit after yesterday’s sell-off. The reaction suggests that investors believe the Fed is breathing easier after today’s data release, and will continue down a more gradual path. 

Stock futures were down big before the report, but premarket losses mostly evaporated prior to opening bell.         

INFLATION RATE REMAINS LOW
In other news from this morning, the Fed’s favorite inflation measure, the Personal Consumption Expenditures (PCE) Index, showed that price pressures continue to be relatively well behaved. The PCE core rate rose by just 0.1% in July and is up 1.5% year-over-year.  

Earlier this week, the Conference Board’s measure of consumer confidence increased for the third straight month, rising from 86.4 to 90.9 in July to the highest level since October 2007. This measure, to a large degree, reflects an improving labor market and what had been five straight months of positive movement in the Dow. However, rising confidence in labor market conditions didn't translate into higher spending plans as the percentage of July respondees planning to buy a car, a house, or a major appliance within the next six months all dropped.  

MARKET INDICATIONS AS OF 8:50 A.M. CENTRAL TIME 

DOW

DOWN 7 to 16,556

NASDAQ

UP 7 to 4,376

S&P 500

UP 1 to 1,931

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.49%; opening yield 0.53%

5-Yr T-note

current yield 1.71%; opening yield 1.75%

10-Yr T-note

current yield 2.53%; opening yield 2.56%

30-Yr T-bond

current yield 3.33%; opening yield 3.32%



YIELDS RISE ON STRONG HEADLINE GDP GROWTH

Wednesday, July 30, 2014

GDP GROWTH AT A SOLID 4% for Q2
Annualized GDP growth in the second quarter reached 4% for only the third time in the last eight years. Economists had forecasted a lesser 3% gain following the previous quarter’s unexpected contraction. In fact, that first quarter -2.9% decline was actually revised upward this morning to just -2.1%. …So, for the first half of the year, the U.S. economy expanded at slightly above a +1.0% pace. Relatively speaking, this isn’t bad, as most thought the first half would show virtually no growth at all.  

Within the report, there were obviously some positive surprises. Government spending climbed +1.6% with increases concentrated at the state and local level. Residential investment (housing) rose +7.5% despite apparent weakness in home sales and housing starts experienced during the quarter. Business investment increased +5.5% as spending on new equipment climbed +7.0%, while durable goods jumped 14%, primarily on the strength of auto sales. 

One important consideration is that business inventories swelled by an unexpected $93 billion, contributing 1.7 percentage points to the 4.0% overall number. Inventories are the wild card in the deck. If future sales turn out to be less than anticipated, inventory build-up will be corrected in subsequent quarters. Although the overall Q2 GDP growth is impressive, the unexpectedly large inventory contribution could hinder second half growth.         

Final sales, which exclude inventories, increased by +2.3% in Q2 after a -1.0% decline in Q1. This probably paints a more accurate picture of the current economy.     

One number in the GDP report that won’t make many headlines (but is still quite important) is the core Personal Consumption Expenditures (PCE) index which rose from +1.2% to +2.0% during the quarter. This is an inflation measure that the Fed follows closely, and it had not been at +2.0% or above since Q1 2012. Inflation hawks could point to this particular number as reason for the Fed to continue tapering and perhaps tighten short rates a bit sooner. The bond market is reflecting this thought as yields have drifted higher. 

Stocks initially traded up after the release, but quickly reversed course with the realization that a less accommodative Fed generally isn’t good for equities.         

FED ANNOUNCEMENT THIS AFTERNOON 
The FOMC will wrap up its July meeting this afternoon, and is expected to announce that monthly asset purchases under “QE3” will be tapered back by another $10 billion to $25 billion. Fed officials are also expected to reduce scheduled purchases at both the September 17th and October 29th FOMC meetings, thereby concluding the program.  

And finally, the ADP employment report was released this morning. Private sector payrolls rose by 218k during the month of July, down from 288k in June, but averaging a solid 218k over the past six months. The ADP report has become of good indicator of non-farm payrolls, which are scheduled for release on Friday.   

MARKET INDICATIONS AS OF 10:05 A.M. CENTRAL TIME 

DOW

DOWN 84 to 16,828 

NASDAQ

UP 5 to 4,448

S&P 500

DOWN 3 to 1,967

1-Yr T-bill

current yield 0.11%; opening yield 0.10%

2-Yr T-note

current yield 0.57%; opening yield 0.54%

5-Yr T-note

current yield 1.77%; opening yield 1.69%

10-Yr T-note

current yield 2.52%; opening yield 2.46%

30-Yr T-bond

current yield 3.27%; opening yield 3.23%



A CRAZY WEEK

Friday, July 18, 2014

ECONOMIC DATA GENERALLY STRONG… 
This week was jam packed full of data, news, and events, all of which had the potential to move markets. Starting with the economic data, headline retail sales grew a scant +0.2% in June, well below the +0.6% expected. However, underlying details were better than the headline suggested as both April and May were revised higher (April from +0.5% to +0.6% and May from +0.3% to +0.5%), and the retail sales control group, which strips out the volatile categories of automobiles, gasoline, and building materials advanced a solid 0.65%. The control group figure feeds into GDP calculations, so the better result there is good news for Q2 GDP. Other positive data on the week included the New York Fed’s Empire State Manufacturing survey, which surged to 25.6, the highest level since April 2010. In housing news, the National Association of Home Builders sentiment index reached a six-month high, climbing to 53 in July from 49 last month. The index measures builder sentiment regarding sales and buyer traffic and is considered a good leading indicator of home building activity. Readings above 50 mean more respondents said conditions were good. Housing starts, on the other hand, plunged 9.3% in June, an odd result considering the aforementioned gain in builder sentiment. The producer price index reversed May’s -0.2% decline by rising 0.4% in June and is up 1.9% year-over-year. It would appear the Fed has successfully quelled deflationary risks as most inflation data has firmed over the last several months. Employment indicators have been improving as well and this week was no exception as initial jobless claims fell by 3,000 in the week ended July 12th to 302,000. The four-week moving average dropped to 309,000, a seven-year low. That bodes well for the July employment report. 

…BUT OTHER NEWS OVERSHADOWS DATA
Turning our attention to other news, Federal Reserve Chair Janet Yellen struck a balanced tone in her congressional testimony this week and didn’t stray from the Fed’s charted course. She pointed to “significant slack” in the labor market and reiterated that a “high degree of monetary policy accommodation is still appropriate.” Nevertheless, with employment conditions improving faster than the Fed anticipated and inflation trending higher, the data dependent FOMC has begun laying the groundwork for an eventual shift in monetary policy. Dallas Fed President Richard Fisher laid out the case in a highly entertaining speech last week. 

The SEC appears poised to finally vote on the long-awaited money market reform proposals as they announced last week that the Commission will consider action at its July 23rd meeting.

Market attention quickly shifted Thursday as Israeli ground forces moved into the Gaza strip, and then especially Thursday afternoon with news of the downing of a civilian passenger jet over disputed Ukrainian territory. Markets reacted with a predictable flight to safety that took the yield on the two-year Treasury note down to 0.45% and the 10-year yield down to 2.44%. The 30-year Treasury bond traded at its lowest yield in over a year at 3.26% while the 10-year German Bund traded to its lowest yield ever at 1.14%. Meanwhile, after setting another record high on Wednesday the Dow gave up some ground on Thursday’s news, but managed to recover on Friday. There seems to be a general consensus on Wall Street that the stock market is overvalued, but thus far nothing has been able to seriously slow its advance. 

MARKET INDICATIONS AS OF 2:15 P.M. CENTRAL TIME 

DOW

UP 124 to 17,101 (Record set on Wednesday at 17,138)

NASDAQ

UP 67 to 4,431

S&P 500

UP 19 to 1,977 (Record set July 3rd at 1,985)

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.48%; opening yield 0.45%

5-Yr T-note

current yield 1.67%; opening yield 1.62%

10-Yr T-note

current yield 2.48%; opening yield 2.45%

30-Yr T-bond

current yield 3.29%; opening yield 3.27%



RETAIL SALES FALL SHORT YET AGAIN

Tuesday, July 15, 2014

CONSUMERS ARE STILL A BIT CHILLY
If there’s an economic consensus, it’s that GDP growth will bounce back from the shocking 2.9% contraction experienced in the first quarter. And although the initial Q2 GDP report won’t be released for another two weeks, it’s clear that a sizable rebound did indeed occur. Unfortunately, it doesn’t seem to be quite as strong as many had predicted. In a consumer-driven economy, spending is key, and the monthly retail sales report is the most closely-watched of the consumer spending data releases. This morning, June retail sales rose by just +0.2%, falling well below the +0.6% median forecast. The good news is that the overall report wasn’t quite as bad as the headline suggests. Auto sales and building materials showed big declines, but both are excluded from the official GDP calculation. Core retail sales, which ignore the volatile auto, gasoline and building materials categories were up by a more solid 0.65%.     
        
ALL EARS ON JANET YELLEN
Fed Chair Janet Yellen testified in front of the Senate Banking Committee this morning, providing the Central Bank’s semi-annual assessment of the economy. Her well-scripted remarks didn’t seem to stray from the Fed’s charted course. She pointed to “significant slack” in the labor market and reiterated that a “high degree of monetary policy accommodation is still appropriate.”  Although the Central Bank expects to wrap up its monthly asset purchases under the “QE3” program as soon as October, short-term rates will likely remain low for a “considerable period” after bond purchases end. The length of this undefined period will  be data-dependent. 

Normally, benign comments suggesting an accommodative Fed would be positive for stocks, but early gains quickly turned to losses when the full policy report was digested. Written remarks cautioned that "valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year." As expected, the social media and biotech-laden NASDAQ has taken the biggest beating of the three major indexes. 

Bond market prices are a bit lower on the day, nudging yields higher.      
    
MARKET INDICATIONS AS OF 10:00 A.M. CENTRAL TIME 

DOW

DOWN 13 to 17,042

NASDAQ

DOWN 34 to 4,406

S&P 500

DOWN 6 to 1,965

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.48%; opening yield 0.46%

5-Yr T-note

current yield 1.70%; opening yield 1.67%

10-Yr T-note

current yield 2.57%; opening yield 2.55%

30-Yr T-bond

current yield 3.39%; opening yield 3.37%



STRONG EMPLOYMENT - PAYROLLS JUMP IN JUNE

Friday, July 3, 2014

HIRING FAR EXCEEDS FORECASTS
Yesterday’s unexpectedly strong ADP employment report put investors on alert that the monthly payroll report was likely to exceed the median forecast for 215k new jobs, as the “whispered number” crept above the 250k mark. This morning, the labor market report showed that 288k jobs were created last month, while upward revisions to the two previous months added another 29k. Over the last three months, U.S. companies have added 816k new jobs, and on a year-over-year basis, the monthly average now sits at 208k, the highest in eight years.

The breakdown suggests that employment growth was widespread. According to the Bureau of Labor Statistics (BLS), the lion’s share of new jobs were concentrated in business and professional services (+67k), retail (+40k), food services and drinking establishments (+33k), healthcare (+21k), transportation and warehousing (+17k), manufacturing (+16k) and construction (+6k). The BLS report didn’t report any major labor sectors that shed jobs during the month.

In the household survey, the unemployment rate dropped from 6.3% to 6.1% as 407k Americans found work and 81k entered (or reentered) the labor force. Over the past year, the unemployment rate has declined by 1.4 percentage points to the lowest level since September 2008, while the official number of unemployed people has dropped by 2.3 million to 9.5 million. One particularly disappointing and surprising component of the household survey was that the number of Americans holding part-time jobs soared by 799k while the number holding full-time jobs plunged by 523k.

The unemployment rate for adult woman declined to 5.3%, while the rate for adult men was unchanged at 5.7%. Teenage unemployment drifted higher at 21.0%.

Average hourly earnings rose by 0.2%, while the year-over-year wage increase held at 2.0%. Average hours worked was also unchanged at 34.5 per week.

After shifting through stacks of BLS numbers, there really aren’t too many negatives to report. The June data was solid across the board.

The market’s reaction is a little puzzling. In theory, strong job should signal that the Fed will tighten monetary policy earlier rather than later. Higher rates would then slow the economy, having a negative effect on company revenues and profits. The suggests a negative equity market response ..but stocks are actually up in early trading. In fact, the DOW has crested the 17,000 mark and is now in new record territory ….as is the S&P 500 as it pushes toward 2,000.

Bond yields are only slightly higher, reflecting the notion that the Fed will continue on its tapering path, and could raise the overnight target rate sooner than previously thought.

Recent labor data is indeed very good, but the economy contracted in the first three months of the year, so much of the strength is being used to dig out of the hole.

Have a safe 4th of July.

MARKET INDICATIONS AS OF 9:05 A.M. CENTRAL TIME

DOW

UP 66 to 17,042

NASDAQ

UP 14 to 4,472

S&P 500

UP 5 to 1,973

1-Yr T-bill

current yield 0.11%; opening yield 0.10%

2-Yr T-note

current yield 0.52%; opening yield 0.48%

5-Yr T-note

current yield 1.76%; opening yield 1.71%

10-Yr T-note

current yield 2.67%; opening yield 2.63%

30-Yr T-bond

current yield 3.49%; opening yield 3.46%


SMOOTH SAILING FOR ISM MANUFACTURING INDEX

Tuesday, July 1, 2014

ISM REFLECTS HEALTHY MANUFACTURING SECTOR 
The ISM Manufacturing Index nudged lower in June to 55.3 from 55.4 last month. The result was only marginally below the consensus forecast for 55.9, so markets are taking the result in stride. Underlying details showed strength as the new orders index rose from 56.9 to a six-month high of 58.9. The production gauge dipped to 61.0 from 60.0, but remains at a very strong level. The employment index held steady at 52.8. A couple of items worth watching are export orders, which fell two points to 54.5, and import orders, which climbed from 54.5 to 57.0. Perhaps this is a signal revealing economic strength domestically, but weakness abroad. That could have implications for the trade balance where an increase in imports and/or a decrease in exports would detract from GDP. Nevertheless, today’s ISM report shows steady growth in the manufacturing sector. 

Bond markets are stable following this morning’s release with the two-year Treasury note currently yielding 0.47% and the 10-year at 2.55%, up slightly on the day. The major stock indices are venturing back into record high territory with the Dow closing in on 17,000.

EMPLOYMENT REPORT WILL COME A DAY EARLY
The most anticipated economic report is typically released on the first Friday of every month, but due to the fourth of July holiday falling on that first Friday this month, the official release of the employment report will come this Thursday instead. The Bloomberg median forecast calls for a gain of 215k and a steady 6.3% unemployment rate, nearly matching last month’s 217k and 6.3% print. Tomorrow’s ADP employment figures will give us an early glimpse into labor market conditions.
 
MARKET INDICATIONS AS OF 11:30 A.M. CENTRAL TIME 

DOW

UP 134 to 16,961

NASDAQ

UP 52 to 4,460

S&P 500

UP 13 to 1,973

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.47%; opening yield 0.46%

5-Yr T-note

current yield 1.65%; opening yield 1.63%

10-Yr T-note

current yield 2.55%; opening yield 2.53%

30-Yr T-bond

current yield 3.38%; opening yield 3.36%



Q1 GDP WORST SINCE 2009, HOUSING DATA IMPROVES

Wednesday, June 25, 2014

Q1 GDP LOOKS LIKE RECESSION
We all know that first quarter economic growth was negatively impacted by bad weather but the final revision to Q1 GDP was much worse than expected, falling well short of even the lowest forecast in Bloomberg’s economist survey and suggesting there was much more than bad weather at play. The original estimate for Q1 GDP came in at +0.1%. That figure was subsequently revised to a -1.0% reading. Today’s final revision was expected to lower that figure to -1.8%. The actual result was -2.9%, the worst reading since the first quarter of 2009 when we were in the midst of recession. It also marked the biggest downward revision from previous estimates since record keeping began in 1976 and calls into question the voracity of the data and the estimation process. Consumer spending was revised down from 3.1% to just 1.0% in the first quarter, the weakest pace in five years and a massive revision that reflected an inaccurate estimate of healthcare spending in the wake of the Affordable Care Act implementation. As we had written previously, the Bureau of Economic Analysis grossly overestimated consumer outlays for healthcare spending, which subtracted 0.16 percentage points from GDP, rather than adding the 1 percentage point they had initially estimated. Inventory growth slowed sharply, subtracting 1.7 percentage points from growth in Q1 as the prior quarter’s inventory overhang was quickly corrected. Final sales, which exclude inventories, decreased 1.3% compared to a previously estimated increase of 0.6%. The Q1 data was so bad it calls into question the strength of data in the second half of 2013 as well as the rebound in the current quarter. 

Speaking of the current quarter, other news released today included durable goods orders for May, which fell 1.0% following a 0.8% gain in April. Ex-transportation orders were fell 0.1%. Both results were below forecasts. Looking at the details for the important non-defense capital goods excluding aircraft category reveals that orders, an indicator of business investment, rose +0.7% from a -1.1% in April. Meanwhile shipments, the metric used for GDP calculations, rose +0.4% in May following April’s -0.4%. In the first two months of Q2 neither orders nor shipments managed to log an increase. So much for the Q2 rebound in capital spending.

HOUSING HAS SPRING IN ITS STEP
On a brighter note, the housing data released over the past two days has been very positive. Existing home sales climbed 4.9% in May to the highest rate since October at a 4.89 million unit annual pace. On a year-over-year basis, sales of existing homes are still down 5.1%, reflecting the rise in borrowing costs that began in the middle of 2013 following then Fed Chair Bernanke’s QE tapering revelation. However, the rebound from winter weather and a recent decline in mortgage rates have boosted sales in the last two months. Not to be outdone, new home sales also improved, surging 18.6% in May to a 504k annual rate, the fastest pace since May 2008, although that figure is still less than half the pre-recession peak. Prices have continued their upward trek, but at a much slower pace. The S&P/Case-Shiller 20-city home price index is up 10.8% year-over-year with just a 0.2% gain in April. The slower price appreciation may actually be helping as the rapid rise in home prices and mortgage rates had negatively impacted affordability. 

Finally, consumers seem to be in better spirits as the Conference Board’s consumer confidence index jumped 3 points in June to a six-year high of 85.2

Bond market reaction to all this data has been fairly muted as yields remain well within the recent ranges. Data on durable goods, housing and consumer confidence are rarely enough to move the needle. The GDP data is in the rearview mirror and the revisions were so large that investors seem to be dismissing much of it as unreliable and focusing their attention on more important indicators, particularly the employment reports, which have been solid so far this year. Geopolitical concerns surrounding Iraq and mixed messages from Fed speakers reinforce the tight trading ranges for bonds, at least for now.

MARKET INDICATIONS AS OF 10:50 A.M. CENTRAL TIME 

DOW

UP 35 to 16,853

NASDAQ

UP 7 to 4,357

S&P 500

UP 5 to 1,955

1-Yr T-bill

current yield 0.10%; opening yield 0.08%

2-Yr T-note

current yield 0.48%; opening yield 0.46%

5-Yr T-note

current yield 1.64%; opening yield 1.67%

10-Yr T-note

current yield 2.54%; opening yield 2.58%

30-Yr T-bond

current yield 3.37%; opening yield 3.40%



FED MEETING IS MOSTLY A NON-EVENT

Wednesday, June 18, 2014

FOMC CONTINUES TAPER
The official statement from the June Fed meeting looked an awful lot like the statement from the April meeting. As expected, committee members shaved another $10 billion from the scheduled monthly QE purchases, bringing the total down to $35 billion. The committee acknowledged the second quarter rebound, but did not mention the recent pick-up in inflationary pressure. It was probably this point that prompted the positive market reaction. Had the Fed appeared concerned about recent price pressures, it might have implied earlier and more aggressive monetary tightening.

The committee’s median overnight rate target forecast for the end of 2015 crept higher from 1.00% to 1.125% and from 2.25% to 2.5% by the end of 2016. Interestingly enough, the committee’s long-term median overnight rate declined from 4.0% to 3.75%.

There were three new members at the June meeting, including Vice Chairman Stanley Fischer.
The bond market’s reaction thus far, has been positive with bond prices up and yields slightly lower. Stocks also rose after the announcement.

MARKET INDICATIONS AS OF 2:10 P.M. CENTRAL TIME

DOW

UP 64 to 16,872

NASDAQ

UP 16 to 4,353

S&P 500

UP 9 to 1,942

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.47%; opening yield 0.48%

5-Yr T-note

current yield 1.71%; opening yield 1.75%

10-Yr T-note

current yield 2.61%; opening yield 2.65%

30-Yr T-bond

current yield 3.43%; opening yield 3.44%



INFLATION UPDATES

Tuesday, June 17, 2014

INFLATION DATA IS MIXED IN MAY
Since the April inflation numbers contained unexpected price pressure, the May data took on a bit more importance. Last week, the May producer price index (PPI) showed that producer prices had eased during the month. Headline PPI, up a surprisingly large 0.6% in April, actually reversed course and fell by 0.2% last month. On a year-over-year basis, overall PPI was rising at a 2.0% rate in May, a slight decline from the previous period, and right in line with the Fed’s likely target rate. Core PPI, which strips out volatile food and energy prices, fell by 0.1% in May after gaining 0.5% in the prior month.

This morning, the consumer price index (CPI) surprised the experts by accelerating to an even faster rate of advance. Headline CPI rose by 0.4%, the biggest gain since February 2013, following a 0.3% gain in the previous month. Core CPI rose by 0.3% in May, the biggest gain in nearly three years. On a year-over-year basis, overall CPI rose by 2.1%, the most since October 2012, while core CPI is increasing at a 2.0% rate, the most since Feb 2013.

All these inflation numbers will be considered by Fed members at the two-day FOMC meeting that begins today. Keeping inflation at bay is one of three Fed directives (full employment, low inflation and financial stability), and the notion that consumer inflation seems to be creeping higher could conceivably prompt the Fed to raise short term rates sooner rather than later. Of course, a clear upward trend has yet to be established, and deflation is taking root in many European countries, so the Fed is unlikely to move so much as acknowledge the recent pressure.

The bond market has sold off across the board in early trading, continuing an uptrend in yields that began about three weeks ago. Some might argue that the rise is long overdue, as yields had been grinding lower despite the Fed’s tapering moves that began six months ago.

HOUSING STARTS FALL IN MAY
Higher lending rates have had a negative impact on housing since late last summer, and further increases are likely to restrain growth in the future. This morning, housing starts fell by 6.5% in May following a huge 12.7% snapback gain in April. Building permits, a precursor of future starts, fell by 6.4% in May.

Stocks are up in early trading …not sure why.

MARKET INDICATIONS AS OF 9:30 A.M. CENTRAL TIME

DOW

UP 12 to 16,793

NASDAQ

UP 18 to 4,339

S&P 500

UP 2 to 1,940

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.48%; opening yield 0.47%

5-Yr T-note

current yield 1.75%; opening yield 1.70%

10-Yr T-note

current yield 2.62%; opening yield 2.60%

30-Yr T-bond

current yield 3.43%; opening yield 3.40%



RETAIL SALES FALL SHORT IN MAY

Thursday, June 12, 2014

SHOPPERS TAKE A BREATHER
Retail sales rose by just 0.3% in May, well below the +0.6% median forecast. As expected, vehicle sales were the strongest category of the month, up a solid +1.4% in May. On a year-over-year basis, car and truck sales, along with vehicle parts, are up 10.6%. Sales ex-autos rose by just 0.1% in May, while sales ex-auto and gasoline were unchanged. The good news in this morning’s report was found in the prior month revision as the April overall number was boosted from +0.1% to +0.5%. Core numbers showed similar increases. The bottom line on this morning’s data is that May weakness was largely offset by the upward revisions to April, but few had anticipated the first two months of what was largely expected to be a brisk spending quarter would be so …marginal.

FIRST QUARTER GDP GROWTH NOW APPEARS SUBSTANTIALLY WEAKER
According to Census Bureau data, the Bureau of Economic Analysis (BEA) significantly overestimated first quarter healthcare spending, which had been the largest contributor to a really weak quarter. In the first Q1 GDP revision, the BEA had estimated an annualized healthcare consumption increase of 9.7%, while the Census Bureau numbers now show a 4.1% decline in healthcare and social assistance industry revenues. The BEA had also estimated an 11% increase in hospital and nursing home services revenue, compared to the Census Bureau’s 5% decline, and a 9% increase in physician services, compared to a 2% Census Bureau decrease.

Needless to say, the much reduced spending will have a significant negative effect on economic growth in the first three months of the year. In fact, UBS has already revised its forecast on the final Q1 GDP reading down to -2.0%, while Morgan Stanley is now calling for a -2.1% revised annualized growth number. Certainly, growth has already picked up in Q2, and will likely strengthen in the second half of the year, but it’s hard to make a really strong case for an accelerating economy when it has recently contracted by such a significant margin.

Last six quarters:
Q4 2012 + 0.1%
Q1 2013 + 1.1%
Q2 2013 + 2.5%
Q3 2013 + 4.1%
Q4 2013 + 2.6%
Q1 2014(e) – 2.0%

Keep in mind that the reason the Fed would tighten monetary policy is to slow the economy and in theory, keep inflation and inflation expectations from rising.

The DOW and the S&P both reached new record highs earlier in the week, but have since fallen. Bond yields are down slightly in early trading. Oil and gold are both higher.

MARKET INDICATIONS AS OF 10:00 A.M. CENTRAL TIME

DOW

DOWN 69 to 16,775

NASDAQ

DOWN 20 to 4,311

S&P 500

DOWN 9 to 1,927

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.43%; opening yield 0.43%

5-Yr T-note

current yield 1.67%; opening yield 1.70%

10-Yr T-note

current yield 2.62%; opening yield 2.64%

30-Yr T-bond

current yield 3.45%; opening yield 3.47%



MAY LABOR NUMBERS PROVE SOLID

Friday, June 6, 2014

PAYROLL GAINS ENCOURAGING
Nonfarm payrolls rose by 217k during the month of May, slightly above the Bloomberg median forecast of 215k, while April payrolls were revised marginally lower from 288k to 282k. It was the fourth straight month of job creation above 200k - the last time this happened was 14 years ago. And, as most news stories have already pointed out, U.S. payrolls are have now exceeded their pre-recession peak.

Virtually all of the new May jobs were in the private sector, as government positions rose by just 1k. Most of last month’s gains were concentrated in healthcare (+55k), business services (+55k), and leisure and hospitality (+39k). Fewer jobs were created in retail (+13k), manufacturing (+10k) and construction (+6k).

The unemployment rate held steady at a six-year low of at 6.3% as the number of Americans reentering the workforce nearly equaled the number of new jobs created. The U6 unemployment rate fell from 12.3% to 12.2%. This “underemployment rate,” which represents everyone who would accept a suitable fulltime position if one were offered, dropped to the lowest level since October 2008.

There are indications that job growth is nudging wages slightly higher as hourly earnings rose by 0.2% in May. Over the past three months, year-over-year wage gains have now risen from 1.9% to 2.0% to 2.1%.

The bond market’s reaction to the May employment report has been fairly muted as the actual data was so close to expectations. With a significant percentage of recent payroll gains thought to represent weather-related snapback, the next several months will be watched carefully.

MARKET INDICATIONS AS OF 9:15 A.M. CENTRAL TIME

DOW

Up 66 to 16,902

NASDAQ

Up 14 to 4,310

S&P 500

Up 6 to 1,947

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.39%; opening yield 0.38%

5-Yr T-note

current yield 1.62%; opening yield 1.62%

10-Yr T-note

current yield 2.55%; opening yield 2.58%

30-Yr T-bond

current yield 3.40%; opening yield 3.43%



U.S. DATA LOOKS POSITIVE, ECB GOES NEGATIVE

Thursday, June 5, 2014

ECB ESTABLISHES NEGATIVE DEPOSIT RATE
Over the last few weeks there has been a great deal of speculation about what actions the European Central Bank (ECB) might take to fight off deflation and add a spark to the moribund Euro-zone economy. This morning’s ECB announcement did not deviate from expectations and if anything, markets were a tad disappointed that the ECB was not more aggressive. The ECB cut its key refinancing rate (think fed funds rate) from 0.25% to 0.15% and more importantly, at least from a symbolic perspective, took the rate it pays on reserve deposits from zero into negative territory at -0.10%. For those unfamiliar with bank operations, banks are generally required to hold a certain percentage of their customers’ deposits in reserves at the central bank, be it the Federal Reserve here in the U.S. or the ECB in Europe. In addition, banks frequently keep additional funds, commonly called excess reserves, at the central bank. In the U.S., the Federal Reserve currently pays banks interest at a rate of 0.25% on those excess reserves. With the fed funds rate and short-term investment rates on T-bills and other instruments below 0.10% it doesn’t take a genius to figure out that a 0.25% rate on a risk free investment is a pretty good option. So banks just take all their excess cash and deposit it with the Fed. They can pay their own depositors nothing and then just deposit those funds at the Fed and earn 0.25%.

By implementing a negative deposit rate, the ECB is now saying that not only will they not pay banks interest on reserves, they will in fact charge the bank a 0.10% fee to hold their money. This should provide a pretty strong incentive for European banks to do something else with their money. The ECB is of course hoping that banks will put the funds to more productive uses, such as lending to businesses and consumers. The problem is that without sufficient loan demand, credit worthy borrowers, or adequate capital, banks may not be able to lend the funds out anyway. Nonetheless, with the Euro-zone economy going nowhere, the ECB obviously felt it had to do something. In addition to these steps, the ECB is also preparing additional measures, including an asset purchase program. Some will liken this to our own QE, but it’s more difficult in Europe because they do not have a common Euro-wide government bond to buy, nor an equivalent of our own agency mortgage-backed securities market.

We are spending time on this today because the ECB actions have implications for our own markets. For one, more stimulus in Europe should be a positive for U.S. exports and by extension our own economy. In recent weeks, it has also been a factor in lower bond yields here in the U.S. The table below compares yields on government bonds in several major countries. As you can see, yields are lower in other parts of the world, which is putting downward pressure on U.S. bond yields.
Term
Country 2-Year 3-Year 5-Year 7-Year 10-Year
United States 0.38% 0.80% 1.62% 2.17% 2.59%
Canada 1.05% 1.59% 2.33%
United Kingdom 0.67% 1.07% 1.93% 2.31% 2.68%
Germany 0.04% 0.09% 0.42% 0.81% 1.41%
France 0.16% 0.21% 0.65% 1.09% 1.80%
Italy 0.61% 0.97% 1.59% 2.29% 2.93%
Spain 0.59% 0.89% 1.45% 2.05% 2.82%
Sweden 0.52% 1.09% 1.90%
Japan 0.08% 0.09% 0.17% 0.32% 0.61%
Source: Bloomberg, L.P. - June 5, 2014

ISM SERVICES INDEX AT NINE-MONTH HIGH
Turning to other news, yesterday the ISM released the results of its non-manufacturing survey for May, which surged to 56.3 from 55.2 in April. That was the highest level since last August and topped forecasts for a smaller increase to 55.5. The survey covers an array of industries that make up roughly 90% of the economy, including utilities, retailing, health care, finance, construction, mining and agriculture. Details within the report were strong as well with 17 of the 18 industries surveyed showing improvement, while new orders rose to the highest level since January 2011; business activity reached more than a two-year high; and the employment gauge climbed.

ADP’s report on private payrolls fell short of expectations with the smallest gain in four months, as just 179k workers were added to private payrolls last month. First time claims for unemployment benefits rose slightly last week to 312k from an upwardly revised 304k in the prior week. The four-week moving average fell to 310k in the period ended May 31st, the lowest since June 2007. The hope is that falling unemployment claims are a signal that hiring and wages will improve further in the months ahead.

Focus now shifts to tomorrow’s official Bureau of Labor Statistics employment report. Following last April’s 288k new jobs, the Bloomberg median estimate for May calls for a gain of 215k jobs and a slight tick up in the unemployment rate to 6.4% from 6.3%. We’ll be back with those details tomorrow morning. In the meantime stocks are once again surging to new record highs while bond yields are lower on the day.

MARKET INDICATIONS AS OF 11:10 A.M. CENTRAL TIME

DOW

Up 100 to 16,838

NASDAQ

Up 37 to 4,289

S&P 500

Up 9 to 1,937

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.38%; opening yield 0.39%

5-Yr T-note

current yield 1.62%; opening yield 1.64%

10-Yr T-note

current yield 2.58%; opening yield 2.60%

30-Yr T-bond

current yield 3.43%; opening yield 3.44%



ISM ERRORS ADD TO CONFUSION

Monday, June 2, 2014

REVISED DATA IN LINE WITH ESTIMATES
The initial release of the ISM Manufacturing index for May showed a decline to 53.2 from last April’s four-month high of 54.9. Details within that initial release were disappointing as well with the new orders index slipping from 55.1 to 53.3, production falling from 55.7 to 55.2, orders backlog dropping from 55.5 to 52.5 and the employment index skidding to 51.9 from 54.7. The 53.2 initially reported was well below the Bloomberg median forecast for a reading of 55.5 and sent stocks lower in early trading. However, about an hour and a half after the release an ISM official acknowledged an error in the calculation of their figure during an interview, saying they had incorrectly applied April’s seasonal adjustment factor to the May data and raising the figure to 56. A short time later the data was revised a second time to 55.4. Although the revised figure is more in line with both expectations and other data points, the errors have created a confusing mess in the markets.

With the second revision, the aforementioned weakness in many of the underlying details has turned into strength. New orders actually increased to 56.9, production jumped to 61.0, and employment only slid to 52.8 instead of collapsing to 51.9. The end result is an ISM report that was in line with expectations and reflective of a reasonably healthy and growing manufacturing sector.

STOCKS REBOUND WHILE BONDS SLIDE
The major stock indices fell in the immediate aftermath of the incorrect ISM data release but have recovered following the revisions. Both the Dow Jones Industrial Average and the S&P 500 are sitting at record highs as of this writing. Bond prices have fallen as last week’s rally seems to have lost some steam. There are a number of important data and news releases on tap for this week, punctuated by Thursday’s announcement from the European Central Bank, where additional easing measures, including a negative deposit rate, are widely expected, and Friday’s employment report.

MARKET INDICATIONS AS OF 2:10 P.M. CENTRAL TIME

DOW

Up 20 to 16,737

NASDAQ

Down 9 to 4,233

S&P 500

Up 1 to 1,925

1-Yr T-bill

current yield 0.10%; opening yield 0.09%

2-Yr T-note

current yield 0.39%; opening yield 0.37%

5-Yr T-note

current yield 1.60%; opening yield 1.54%

10-Yr T-note

current yield 2.48%; opening yield 2.53%

30-Yr T-bond

current yield 3.37%; opening yield 3.33%



FIRST QUARTER ECONOMIC GROWTH IS NEGATIVE

Thursday, May 29, 2014

THE ECONOMY CONTRACTS IN Q1
The first of two revisions to first quarter GDP showed much more weakness than expected as the U.S. economy contracted by an annualized 1.0% during the quarter. The original estimate from last month had showed very meager economic growth of +0.1%, but a negative print on the revision was largely expected. Bloomberg forecasts ranged from +0.7% to -0.9%, and the median was -0.5%. The biggest contributor to poor growth (besides the weather) was a $38 billion revision to business inventories which subtracted 1.6 percentage points from GDP. The consumer’s contribution actually held up fairly well, as personal consumption was revised up from +3.0% to +3.1%.

Without getting into the nitty-gritty, there are a number of points worth making. The first is that the first quarter ended two months ago, so the data series is stale. Other considerations are that weather clearly distorted the economic picture in Q1, and growth is widely expected to reassert itself in Q2. However, it is apparently quite rare to have an economic contraction of this magnitude in the midst of an economic expansion cycle, and having two 1% quarterly declines during a single expansion cycle (Q1 2011 was -1.3%) has now occurred for the first time ever. What makes this even more surprising is that the contractions occurred despite significant government support and Fed accommodation.

It’s doubtful that any credible economist will see this Q1 data and anticipate a recession is on the near horizon, but by the same token, it’s hard to look at the negative print and believe the U.S. economy is anywhere close to overheating. The Fed is unlikely to alter its tapering plans, but neither is it likely to push short term rates higher anytime soon. If second quarter GDP expands in the expected range of 3% to 4%, the 2014 first half average will still fall between 1.0% and 1.5%. This sub-par rate of economic growth hardly suggests a yield spike in the coming months.

In other news, pending home sales rose by 0.4% in April, after a 3.4% March increase. This is good news, but the two straight months of gains follow eight months of decline, and on a year-over-year basis, pending sales are still down 9.2%. The housing sector has made a major shift in recent years. Bank of America research shows that since 2007, the number of renters in the US has increased by 5.5 million while the number of home owners has declined by 1.5 million. Much of the rebound in housing over the past several years is a result of investor purchases of properties with intent to rent.

The May employment report isn’t due until next Friday, but most of the data, including weekly initial jobless claims, hint at another month of payroll gains above 200k.

The 10-year Treasury-note yield is now at the lowest level since July 2, 2013, five months before the Fed began tapering.

MARKET INDICATIONS AS OF 9:55 A.M. CENTRAL TIME

DOW

UP  16,648

NASDAQ

UP 12 to 4,237

S&P 500

UP 2 to 1912

1-Yr T-bill

current yield 0.09%; opening yield 0.07%

2-Yr T-note

current yield 0.35%; opening yield 0.37%

5-Yr T-note

current yield 1.47%; opening yield 1.48%

10-Yr T-note

current yield 2.41%; opening yield 2.44%

30-Yr T-bond

current yield 3.27%; opening yield 3.29%



BOND RALLY PROVES IMPERVIOUS TO DATA

Friday, May 16, 2014

A BUSY WEEK OF MIXED DATA
There are a number of certainties about the U.S. economy so far in 2014. The first is that severe weather conditions put a damper on consumer spending during the winter months. The second is that when the temperatures finally warmed up in March, pent-up demand provided a huge spending boost. Going forward, a more accurate picture was expected to emerge. On Tuesday, the April retail sales number proved disappointing as shoppers took a breather. Overall sales rose by just 0.1% during the month of April, well below the median +0.4% forecast. This was a huge drop from the revised +1.5% March gain, and suggests that after playing catch-up in the early spring, consumers might not be poised for a continuation of brisk spending going forward. In particular, the auto component slowed significantly, from a 3.6% increase in March to just +0.6% in April. The core retail sales control group, which excludes auto sales, sales at gasoline stations and home improvement stores actually fell by 0.1% after gaining 1.3% in the previous month. This is important because the control group number is used to calculate quarterly GDP, and consumer spending is the single largest component of economic growth.

This past week brought a plethora of minor indicators with mixed results. The Empire Manufacturing index, a gauge of manufacturing activity in the New York region, surged from 1 to 19, the highest level since June 2010. Initial jobless claims fell to 297k, the lowest since May 2007. Industrial production declined by 0.6% in April following an upwardly revised 0.9% increase the prior month, while capacity utilization slid from 79.2% to 78.6%. The National Association of Homebuilders’ sentiment index slid from 47 to 45, well below the median forecast for 49. Readings below 50 mean fewer respondents report good market conditions. That report was contradicted by April housing starts which surged 13.2% to a 1.072 million unit annual pace, the second highest pace of the last six years, behind only last November. Building permits jumped 8.0% to a 1.08 million unit pace, the highest level since June 2008. The one downside to both housing figures is that the strength has been driven by multi-family rather than single family. Versus a year ago, multi-family starts are up 64.6%, while single family starts gained just 9.8%.

INFLATION HEATING UP
On the inflation front, there was a significant jump in the producer price index in April. Overall PPI rose by 0.6%, the biggest monthly increase in almost a year-and-a-half. The 2.1% year-over-year reading was the fastest pace since July 2013. Much of the increase was a result of higher meat prices, as food prices rose by the most in three years. The rising cost of gasoline also contributed to the gain, as did hotel and airline prices. The consumer price index was better behaved in April but is certainly firming. Headline CPI rose 0.3% for the month, driven by food and energy, which were up 0.4% and 0.3% respectively. Droughts and disease have disrupted supply and contributed to outsized gains in food prices which have logged three straight months of 0.4% gains. Consumer prices are now running at a 2.0% year-over-year pace, a sharp increase from last month’s 1.5% rate. Excluding food and energy, the core rate climbed 0.2% in April and is up 1.8% over the last year. One big contributor to the gain in core prices was rent, which is up 3.1% over the past year, the largest year-over-year advance in five years.

The price increases may become disconcerting for consumers as wages have failed to keep pace. Real hourly earnings fell 0.3% in April and are down 0.1% over the past 12 months. With costs for housing, food, and gasoline all rising, consumers are feeling pinched. That may be one explanation for the weaker than expected retail sales report, as well as struggles in single family housing, and is not a good sign for the economy.

Market reaction to the week’s data was perplexing. Although some of the data leaned to the weak side, on balance the data was better than expected and inflation readings are picking up, particularly PPI. That should reinforce the view that the economy is picking up steam and will certainly keep the Fed tapering QE. With higher than expected inflation one would typically expect bonds to sell off and yields to rise. Not so this time, however, as bond markets extended the year’s surprising rally. The 10-year Treasury note closed at 2.49% on Thursday, a 10-month low and down more than 50 basis points since 2014 began. The 2-year Treasury note fell to 0.35%, its lowest point since early March. Reasons for the rally in bonds cover a lot of territory, including: short covering; a weakening economic picture in China; lower than expected growth in the Eurozone where the European GDP was up only 0.8%, leading to expectations for additional easing from the ECB; and better value relative to other sovereign debt. As an example of that last point, the German 10-year Bund yields only 1.30%, roughly half the yield available in U.S. 10-year T-notes. Regardless of the reasons, the rally has caught many fixed income investors off balance as the nearly universal expectation had been for a stronger economy and higher interest rates, not lower. Caution is the word of the day, though, as positive data surprises or hawkish Fed-speak could reverse the rally quickly.

MARKET INDICATIONS AS OF 11:15 A.M. CENTRAL TIME 

DOW

UP 5 TO 16,452 (Hit a record high on Tuesday at 16,715)

NASDAQ

DOWN 6 TO 4,063

S&P 500

UP 1 to 1,872 (Hit a record high on Tuesday at 1,897)

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.36%; opening yield 0.35%

5-Yr T-note

current yield 1.54%; opening yield 1.52%

10-Yr T-note

current yield 2.50%; opening yield 2.49%

30-Yr T-bond

current yield 3.33%; opening yield 3.33%




RETAIL SALES UNEXPECTEDLY SLOWS IN APRIL

Tuesday, May 13, 2014

SPENDING SLOWS AFTER SNAPBACK
Overall retail sales rose by just 0.1% during the month of April, well below the median +0.4% forecast. This was a huge drop from the revised +1.5% March gain, and suggests that after playing catch-up in the early spring, consumers might not be poised for a continuation of brisk spending going forward. In particular, the auto component slowed significantly, from a 3.6% increase in March to just +0.6% in April. The core retail sales control group, which excludes auto sales, sales at gasoline stations and home improvement stores actually fell by 0.1% after gaining 1.3% in the previous month. This is important because the control group number is used to calculate quarterly GDP, and consumer spending is the single largest component of economic growth.

There’s little question that economic growth has picked up in the spring months, but some of the recent data hints at a less robust pace than the more optimistic forecasts. Slower growth could translate into a longer period of Fed accommodation.

MARKET INDICATIONS AS OF 11:05 A.M. CENTRAL TIME 

DOW

UP 19 TO 16,715

NASDAQ

DOWN 12 TO 4,132

S&P 500

UP 1 to 1,898

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.39%; opening yield 0.40%

5-Yr T-note

current yield 1.62%; opening yield 1.66%

10-Yr T-note

current yield 2.62%; opening yield 2.66%

30-Yr T-bond

current yield 3.46%; opening yield 3.50%




JOB GAINS IN APRIL ARE THE BIGGEST IN TWO YEARS

Friday, May 2, 2014

COMPANY HIRING WAKES
Suddenly, the job market looks quite solid. April nonfarm payrolls grew by 288k, handily beating the median forecast of 218k. The biggest monthly gain in over two years brought the three-month average up to an impressive 238k. By contrast, December and January averaged just 114k. In theory, the economy needs to produce somewhere around 200k jobs just to absorb new workers entering the labor force. It’s been a while since we’ve seen that degree of sustained growth. In fact, payrolls increased by an average of 186k in 2012 and 194k in 2013.

The majority of April job gains were concentrated in business and professional services (+75k …24k of these were temporary positions), retail (+35k), food services (+33k), construction (+32k), healthcare (+19k), local government (+17k) and manufacturing (+12k). You have to dip into the subsets to find job losses – within the retail category, electronics and appliance stores lost 11k.

The household survey also produced a strong headline number as the unemployment rate fell from 6.7% to a 5½-year low of 6.3% (6.275%), although much of this decline was due to a drop in the number of persons looking for work. The number of Americans in the labor force plunged by 806k, the largest monthly decline in history, bringing the participation rate back down to 62.8%, equaling the lowest since 1978. There’s plenty of speculation about why this is occurring. Demographics certainly play a role, as 10,000 Americans will supposedly reach retirement age every day for the next 15 years, but survey after survey indicate that only a small percentage have enough savings to quit working.

Hourly earnings were flat, and are now up just 1.9% year-over-year. The average workweek held steady at 34.5 hours. So, despite increased job creation, there remains considerable labor market slack. This thought has probably tempered market reaction this morning.

There are now officially 9.7 million unemployed workers, but these are only Americans who have actively sought work in the past 4 weeks. There are currently 7.5 million working part-time for economic reasons and another 2.2 million who are available for work, and have looked for work at some point in the past 12 months, just not in the past four weeks. The labor market is healing …but not healed.

The bottom line on the April labor report is good. It won’t change the Fed’s set course, simply because the Fed was counting on renewed hiring all along. Bond yields have drifted higher this morning, but not nearly as much as we’d have guessed based on the strong headline numbers. Short yields have barely budged. The equity markets are up in early trading, but part of this has to do with better than anticipated earnings.

MARKET INDICATIONS AS OF 5:30 P.M. CENTRAL TIME 

DOW

UP 26 TO 16,585

NASDAQ

UP 1 TO 4,126

S&P 500

UP 5 to 1,889

1-Yr T-bill

current yield 0.11%; opening yield 0.10%

2-Yr T-note

current yield 0.42%; opening yield 0.41%

5-Yr T-note

current yield 1.71%; opening yield 1.66%

10-Yr T-note

current yield 2.65%; opening yield 2.61%

30-Yr T-bond

current yield 3.43%; opening yield 3.41%

 


BONDS RALLY ON MIXED DATA

Thursday, May 1, 2014


MIXED DATA, SHORT COVERING
It’s getting more and more difficult to read the tea leaves these days. Financial markets managed to shrug off and largely ignore yesterday’s weak 0.1% Q1 GDP reading. Today brought a bevy of indicators and the mixed results seem to have sparked a short covering rally as investors sought to square positions ahead of tomorrow’s payroll report. In other words, those that have been betting on stronger data and higher interest rates are reducing those bets in the face of mixed data and the uncertainty of tomorrow.

First time claims for unemployment rose to the highest level in nine weeks at 344k, which served to temper expectations about tomorrow’s employment report. April vehicle sales fell just short of lofty expectations, declining to a 15.98 million unit annual pace, versus the 16.2 million forecast and last month’s 16.33 million. Although markets read this negatively, auto sales are running at a very healthy pace. Construction spending gained 0.2% in March, well below the 0.5% markets were looking for. The April ISM Manufacturing index rose to 54.9, topping the 54.3 median estimate in Bloomberg’s survey. One key for financial markets was the prices paid index which fell from 59.0 to 56.5, hinting that price pressures are easing and helping to fuel the bond rally. March personal income increased 0.5% and personal spending rose by the most since August 2009, advancing a very strong 0.9% on strength in purchases of durable goods. Finally the PCE price index gained 0.2% at both the headline and the core in March. That pushed the headline PCE up to 1.1% year-over-year, from 0.9%, while the core is now up 1.2%.

In summary, initial jobless claims, vehicle sales, and construction spending were all on the weak side of expectations. Those were offset by positive results on the ISM survey, as well as personal income and spending. With so much data to digest, markets seemed more inclined to focus on tomorrow’s employment report. After hitting a record high yesterday the Dow was off a modest 0.1%. Bonds have staged a somewhat surprising rally, which has taken the 30-year Treasury bond to a 10-month low at 3.41%. The 10-year T-note closed at 2.61%, the lowest level since early March, while the two–year T-note fell to 0.41%. It was 0.44% a week ago.

FRIDAY’S EMPLOYMENT REPORT IS THE MAIN EVENT
We’ll leave it at that as all eyes now turn to Friday morning’s employment report. The median forecast calls for a gain of 218k in non-farm payrolls and for the unemployment rate to fall a tenth to 6.6%. A weak number will reinforce the recent rally in bonds, while a strong number will likely spark a sell-off. Hold on to your hats, it could be a bumpy ride.

MARKET INDICATIONS AS OF 5:30 P.M. CENTRAL TIME

DOW

DOWN 22 TO 16,559

NASDAQ

UP 13 TO 4,127

S&P 500

Unchanged at 1,884

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.41%; opening yield 0.41%

5-Yr T-note

current yield 1.66%; opening yield 1.68%

10-Yr T-note

current yield 2.61%; opening yield 2.65%

30-Yr T-bond

current yield 3.41%; opening yield 3.46%

 


HEADLINE GDP PLUNGES IN Q1

April 30, 2014


COLD WEATHER ISN’T THE ONLY FACTOR IN ECONOMIC GROWTH DECLINE
This morning, the Commerce Department reported the initial reading of first quarter annualized GDP growth at a surprisingly weak +0.1%. This was well below the median forecast of +1.2%, and suggests that cold winter weather crushed economic growth in the first three months of the year. The detail was interesting in that the personal spending component (at least on the surface) appeared solid at +3.0%. This would normally be seen as being quite positive except that the spending gains were concentrated in services rather than goods, with the majority in utilities and healthcare. In fact, healthcare purchases due largely to the initiation of the Affordable Care Act jumped $43.3 billion last quarter to an annual pace of $1.85 trillion, the most since record keeping began in 1947, while goods purchases rose at just a 0.4% pace, the smallest gain in nearly two years.  

Big negative contributions were concentrated in business investment, which dropped by an annualized 2.8%, the worst showing since Q4 2009. Slower growth in business inventory accumulation shaved 0.6 percentage point from the overall GDP number, and exports fell by 7.6%, subtracting another 0.8 from GDP. Government spending also dropped as well as residential investment. 

The bond market has mostly ignored the extremely weak data, blaming it on weather. But, there’s more going on here. Business investment has now been negative for four straight quarters, and residential investment (housing) has been sluggish since last summer. The Fed, which is meeting today, will probably taper its planned asset purchases by another $10 billion, but the economy is clearly not in acceleration mode. Economic growth was +2.8% in 2012, +1.9% in 2013 …and +0.1% so far in 2014. Granted, the Q1 data is already stale, subject to revision, and likely sets the table for a significant rebound in the current quarter, but any time growth is so close to negative, it should raise some eyebrows at the Fed. In theory, when the Fed raises interest rates, it does so to slow the economy and prevent it from overheating. Right now, this doesn’t appear to be a concern. 

MARKET INDICATIONS AS OF 9:45 A.M. CENTRAL TIME

DOW

UP 15 TO 16,549

NASDAQ

DOWN 3 TO 4,100

S&P 500

UP 1 to 1,872

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.42%; opening yield 0.44%

5-Yr T-note

current yield 1.69%; opening yield 1.74%

10-Yr T-note

current yield 2.67%; opening yield 2.69%

30-Yr T-bond

current yield 3.48%; opening yield 3.49%



RECENT DATA IS MIXED IN FRONT OF NEXT WEEK'S FED MEETING

April 24, 2014


HOUSING CONTINUES TO STUMBLE
Higher interest rates and increased home prices continue to put a damper on the housing market. On Tuesday, existing home sales for the month of March fell another 0.2% to a 4.59 million annual unit pace, the lowest level since June 2012, and nearly a 15% decline from the recovery high point of 5.38 million in July. Much of the drop can be attributed to dwindling affordability. Mortgage rates are roughly a percentage point above the low point from last year, and home prices continue to rise. The median price for a new home jumped 12.6% on a year-over-year basis to a record $290,000, while the median price of an existing home climbed 7.9% year-over-year to $198,500. By contrast, household wages are rising at a measly 2% pace.

Yesterday, new home sales plunged 14.5% in March from a 449,000 annualized unit pace to 384,000. It would be easy to blame a lack of inventory, but the number of new homes offered for sale actually climbed from 187,000 to 193,000, the highest level since November 2010. This increase, combined with the sharply lower sales pace, pushed the months' supply up from 5 months to 6, the highest inventory-to-sales ratio since November 2010.  

Although home sales have been decidedly weak, other economic data releases seem to be following the expected spring recovery path. This morning, durable goods orders were reported up 2.6% in March, easily beating the 2.0% median forecast increase. When the volatile aircraft and defense components are excluded, orders rise by 1.0%. This particular number is a proxy for the business investment component in the GDP report, and suggests that business spending will enter the second quarter on a high note.

INFLATION UPDATE
The Fed had recently expressed concerns over a lack of price pressure, so the March inflation data was more important than usual. Last week, both the overall and core consumer price index (CPI) rose by 0.2% for the month, boosting the year-over-year increases to 1.5% and 1.7% respectively.  Two-thirds of the monthly increase was attributed to “owners-equivalent rent,” which interestingly is defined as "the implicit rent that owner occupants would have to pay if they were renting their homes." This vaguely defined housing component makes up roughly 25% of overall CPI. Despite the March increase, there is little underlying reason to suggest a significant upward trend in the inflation data. For one, the slow pace of U.S. wage growth won’t allow consumers to pay the higher prices …at least not for long.

Fed speakers have been quiet in front of the April FOMC meeting, scheduled for next Tuesday and Wednesday. There isn’t much expectation beyond the announcement of another $10 billion taper which would bring scheduled asset purchases down to $45 billion per month. Fed officials have made it quite clear that "an extraordinary commitment (to policy accommodation) is still needed and will be for some time," and the minutes to the March FOMC meeting revealed that Fed members seem fully committed to keeping short-term rates near zero for an extended period. Nothing has transpired since that time to alter this commitment.    

On Monday, a Wall Street Journal story described the disappointing 58-month economic recovery thus far as “nasty, brutish and long,” as well as “one of the most lackluster in modern times.” During this period, GDP has grown by an average of just 1.8% annually ... half the pace of the last three expansions, while the 6.7% unemployment rate is the highest recorded at this stage in post war expansions. This all sounds trivial, but the Fed is in the process of removing accommodation, which could actually slow the economy further. There seems to be enough pent-up demand to anticipate improved growth for the next several quarters, but the prolonged weakness of the government-supported recovery evokes the question of how well the economy will do without the government’s help. 

MARKET INDICATIONS AS OF 3:45 P.M. CENTRAL TIME

DOW

Unchanged 16,502

NASDAQ

UP 21 TO 4,148

S&P 500

UP 3 to 1,879

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.44%; opening yield 0.44%

5-Yr T-note

current yield 1.74%; opening yield 1.73%

10-Yr T-note

current yield 2.68%; opening yield 2.70%

30-Yr T-bond

current yield 3.46%; opening yield 3.48%

 


RETAIL SALES SURGE WITH WARM WEATHER

Monday, April 14, 2014   


CONSUMER SPENDING THAWS

Fed officials had figured weak retail sales data over the past several months was simply a result of severe winter weather and would snap back in the spring. This was indeed the case in March as sales rose by 1.1%, the most since September 2012. The auto category led the increase with its biggest gain in 18 months. Department store sales racked up their biggest increase since March 2007. And icing on the cake was a substantial revision to the previous month as the February overall gain was boosted from +0.3% to +0.7%.

Retail sales are an important indicator in the consumer-driven U.S. economy. Very simply, when consumers spend money, the economy grows. Of course, at the end of the day, Americans are limited by how much they earn, and earnings growth has been uneven and mostly anemic post-recession.

Market reaction so far this morning is limited. Stocks are up and bonds are mostly flat. The data was good, but there’s still some question as to whether we’re witnessing a snap-back or an upward trend.   

MARKET INDICATIONS AS OF 8:45 A.M. CENTRAL TIME

DOW

UP 80 TO 16,107

NASDAQ

UP 23 TO 4,023

S&P 500

UP 9 to 1,821

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.36%; opening yield 0.36%

5-Yr T-note

current yield 1.59%; opening yield 1.58%

10-Yr T-note

current yield 2.63%; opening yield 2.63%

30-Yr T-bond

current yield 3.48%; opening yield 3.48%

 


LABOR REPORT PROVES LUKEWARM AT BEST

Friday, April 4, 2014


MARCH EMPLOYMENT MEETS EXPECTATIONS BUT MISSES WHISPER
The range of economist forecasts for March payroll gains ranged from +150,000 to +275,000, with a median forecast of +200,000. There were however, whispered numbers of 300,000+ as a few analysts thought the snapback from inclement winter weather would be significantly large. As it turned out, the actual job gains for March were +192,000, while another 37,000 were added in revisions to prior months. Private payrolls were responsible for the entire March gain as net government payrolls added nothing to the total.

For the first three months of 2014, payroll gains have now averaged +177,000. For all of 2013, company payrolls grew by an average of 194,000. According to a Bloomberg News story, the economy has now recovered all but 437,000 of the 8.7 million jobs lost during the recent recession. Of course, this doesn’t consider population growth during that time period.   

According to the Bureau of Labor Statistics, March job gains were concentrated in professional and business services (+57k), food services and drinking establishments (+30k), construction (+19k) and healthcare (+19k). It’s worth noting that more than half of the business and professional services total was in lower paying temporary help services.

This is probably a good spot to mention some findings from a 2012 report by the National Employment Law Project - During the recession, 60% of job losses fell into the middle-wage category, paying between $13.83 and $21.13 per hour, while 21% of recession losses were in the lower-wage category, paying between $7.69 and $13.83. During “the recovery,” only 22% of the new jobs were considered middle-wage, while 58% were lower-wage. These numbers are pretty stale, but the trend seems to be continuing. Average hourly earnings were essentially unchanged in March, while year-over-year earnings growth fell from 2.2% to 2.1%. This goes a long way in explaining why the recovery has been so lackluster thus far.

Back to the employment report …the official unemployment rate held at 6.7%. This has little meaning now that the Fed has taken away the 6.5% threshold below which they’d consider raising the overnight funds rate. There are still 10.5 million Americans actively searching for work, another 2.2 million not being counted because they haven’t looked for work in the past four weeks, and approximately 8 million  involuntary part-time workers, nearly double the number before the recession. The broader U6 measure of unemployment, which considers everyone who would accept a full-time position if one were available, drifted up from 12.6% to 12.7% last month.  

So, the March report generally met low expectations, but fell short of loftier hopes. As a result, the Fed is unlikely to alter its tapering schedule, and the timing of an initial overnight rate hike is still probably at least 18 months away. Stocks are up in early trading and bond yields are slightly lower across the curve.

MARKET INDICATIONS AS OF 9:25 A.M. CENTRAL TIME

DOW

UP 31 TO 16,603

NASDAQ

DOWN 19 TO 4,218

S&P 500

UP 8 to 1,897 

1-Yr T-bill

current yield 0.10%; opening yield 0.11%

2-Yr T-note

current yield 0.42%; opening yield 0.45%

5-Yr T-note

current yield 1.72%; opening yield 1.80%

10-Yr T-note

current yield 2.75%; opening yield 2.80%

30-Yr T-bond

current yield 3.60%; opening yield 3.63%

 


BETTER DATA, COMMENTS FROM YELLEN WARM THE MARKET

Tuesday, April 01, 2014


SPRING THAW
Today’s results from the ISM manufacturing index reveal what we expect (hope) will be the start of a trend, a thawing in the economy. As we have written throughout the last few months, much of the economic data has been depressed by an unusually cold winter. Economists have been forecasting better data as the weather begins to warm up. The first sign of a spring thaw was found in the March ISM manufacturing gauge, which rose a half point to 53.7 from 53.2. While that is still well below the 57.0 reached in November, it is much improved from the 51.3 reading in January. Sub-components were mixed, with new orders, production, and backlog of orders all rising, while inventories, delivery times, and prices paid all declined. The employment component fell from 52.3 to 51.1 and considering the importance of employment data (more on that in a moment), this is worth paying attention to. The bottom line is that manufacturing did improve a bit in March and while we are headed in the right direction, activity remains subdued when compared to the pre-winter and pre-taper levels of last year.

Another sign of the thaw came in the just released auto sales data for March as total vehicle sales climbed to a 16.3 million unit annual pace, from 15.3 million in February. That is the highest annual rate of sales since December 2006 and miles above the September 2009 recession low of 9.36 million.

YELLEN BACK PEDALS
Two weeks ago, Federal Reserve Chair Janet Yellen inadvertently caused a bit of a stir in financial markets when she suggested that rate hikes could begin as early as six months after the conclusion of QE3, which markets interpreted as meaning that rate hikes could start in mid-2015. Yesterday, Yellen sought to reestablish her dovish credentials in a speech in Chicago. Yellen pushed back against that mid-2015 time table, making extensive comments about the slack in the labor market, the lack of wage growth, and the absence of inflationary pressures. She emphasized that "this extraordinary commitment (to policy accommodation) is still needed and will be for some time." An opinion which, she noted, "is widely shared by my fellow policymakers at the Fed." Markets seemed to get the message as Treasury yields from two- to five-years fell by 3-5 basis points yesterday before giving back some ground following today’s solid economic data.

Yellen’s comments serve to highlight, once again, the importance of the monthly employment data. Not just the number of jobs created or the unemployment rate, but the entire employment picture, including wages, turn-over rates, long-term unemployment, labor force participation and a myriad of other indicators of the overall health of the job market. Other data, while important, will pale in comparison. A strong ISM manufacturing report, surging retail sales, or improving home sales will be meaningless unless they are accompanied by improving employment trends. The next read on the job market comes tomorrow with the ADP employment report, and then the official BLS employment report on Friday. 

MARKET INDICATIONS AS OF 3:00 P.M. CENTRAL TIME

DOW

UP 75 TO 16,533

NASDAQ

UP 68 TO 4,267

S&P 500

UP 11 to 1,883 (Record High)

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.43%; opening yield 0.42%

5-Yr T-note

current yield 1.74%; opening yield 1.72%

10-Yr T-note

current yield 2.76%; opening yield 2.72%

30-Yr T-bond

current yield 3.61%; opening yield 3.56%

 


DATA THIS WEEK WAS MIXED


Friday, March 28, 2014


CONSUMER CONFIDENCE CLIMBS TO A SIX-YEAR HIGH
Most of the economic data released this week was mixed, although the ever-important consumer appears to be in pretty good shape. On Tuesday, the Conference Board’s measure of consumer confidence rose to a post-recession high of 82.3 in March. All of the increase was attributed to a jump in future expectations, as a 7 point rise in March more than reversed a 4 point February drop. The current conditions index retreated by half a point in March after reaching a six-year high in February. Digging deeper, the percentage of survey respondents believing jobs were "plentiful" dropped from 13.4% to 13.1% in March, while the percentage thinking jobs were "hard to get" climbed from 32.4% to 33.0%. The percentage of responders expecting to buy homes or automobiles in the next six months declined, while the percentage anticipating a major appliance purchase rose. 

On Wednesday, the February durable goods number flashed headline strength, but underlying weakness. Headline durable goods orders increased by a bigger than expected 2.2%, but most of the increase was in the volatile defense category, which jumped by 13.5%. The ex-defense/ex-aircraft orders, a reliable gauge of future business investment, actually fell by 1.3%. This particular series advanced by a mere 0.8% in January and fell by 1.6% in December. So, for whatever reason, the near-term outlook for future business investment is weak.  

On Thursday, the final fourth quarter GDP revision boosted economic growth upward from 2.4% to 2.6% on the strength of better consumer spending. Although the data from the last three months of 2013 is now stale, it does suggest that the economy may be in better shape to withstand the ongoing withdrawal of QE3 accommodation by the Fed. Another positive is that the Q4 inventory buildup was insignificant, meaning that inventories are probably in line despite poor sales in Q1. Also on Thursday, initial claims for the week ending March 22
nd fell to 311k, the lowest level in 25 weeks. This is an apparent positive for employment. And finally, pending home sales fell by 10.2% year-over-year and 0.8% in February, the 8th straight monthly decline. Clearly, higher lending rates are taking a toll on housing.

FED CHATTER
Charles Evans, the Chicago Fed President and a non-voting member of the FOMC this year, spoke on Bloomberg TV this morning, saying he favored an unemployment threshold of 5.5% and that inflation would be the primary reason for the Fed to raise rates in the second half of 2015, although if it were up to him, he’d wait a little bit longer.  As far as inflation is concerned, the Fed’s favorite measure, core Personal Consumption Expenditures (PCE) rose by just 0.1% in February and 1.1% year-over-year.  If the Fed is concerned about the economy overheating and inflation rising above 2%, it has a long way to go.

The general expectation is clearly that the economy will pick up in the spring months, and as a result, price pressures will increase, thereby forcing the Fed to try and slow the economy to keep a lid on prices.  However, fueled by unprecedented stimulus for five years, economic performance has been mediocre at best. It remains to be seen whether the economy will flourish after the stimulus is withdrawn.

MARKET INDICATIONS AS OF 2:00 P.M. CENTRAL TIME

DOW

UP 38 TO 16,302

NASDAQ

UP 3 TO 4,154

S&P 500

UP 6 to 1,855

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.45%; opening yield 0.45%

5-Yr T-note

current yield 1.74%; opening yield 1.72%

10-Yr T-note

current yield 2.71%; opening yield 2.68%

30-Yr T-bond

current yield 3.54%; opening yield 3.53%

 


YIELDS HIGHER AFTER FED ANNOUNCEMENT

Wednesday, March 19, 2014


FED CONTINUES TO TAPER AND DROPS THE 6.50% EMPLOYMENT THRESHOLD
Fed meetings have gotten quite a bit more interesting in recent months as Fed members decide the timing of stimulus unwind. This afternoon, at the conclusion of the second FOMC meeting of the year and first with Janet Yellen leading, Fed officials announced that they would continue to taper back on QE3 bond purchases. The largely expected reduction of $10 billion at the third straight FOMC meeting brought scheduled purchases down to $55 billion per month. The move was justified by an “improvement in the outlook for labor market conditions,” as well as perceived “sufficient underlying strength in the broader economy.”

The Committee also (as expected) dropped the 6.5% unemployment threshold below which they had pledged to consider raising short term rates. With the unemployment rate dipping to 6.6% in January before drifting back up to 6.7% in February, that threshold level was in danger of being breached, although employment conditions remain historically weak. Instead, FOMC members pledged to consider a vague “wide range of information.”  

The official statement showed the Fed expects to keep the overnight funds rate near zero for a “considerable time" following the conclusion of QE3, which at the current pace should conclude by the end of this year. The Committee reiterated that economic conditions could warrant maintaining the overnight rate target “below levels viewed as normal in the longer run."  

The assessment of appropriate monetary policy showed that just one of 16 committee members thought rate increases should begin in 2014, 13 thought 2015 was most appropriate, while two believed 2016. The individual projections showed that committee members expected tightening to be fairly significant once it began, with only six FOMC members expecting overnight rates to be below the 1.00% mark at the end of 2015.

The housing and equity markets have thrived in the low rate environment. Many wonder whether the current moderate rate of economic growth can be sustained as the stimulus is reeled in.

Small stock market gains reversed themselves after the announcement, although deterioration has been limited. Bond prices have fallen, pushing yields higher, although this move was also limited.

The Fed is steadfast in its determination …which isn’t a bad thing. The markets seem to have confidence in the actions of the Yellen Fed.    

MARKET INDICATIONS AS OF 2:05 P.M. CENTRAL TIME

DOW

DOWN 53 TO 16,284

NASDAQ

DOWN 15 TO 4,318

S&P 500

DOWN 5 to 1,867

1-Yr T-bill

current yield 0.13%; opening yield 0.12%

2-Yr T-note

current yield 0.42%; opening yield 0.35%

5-Yr T-note

current yield 1.70%; opening yield 1.55%

10-Yr T-note

current yield 2.77%; opening yield 2.67%

30-Yr T-bond

current yield 3.66%; opening yield 3.61%


POCKETS OF STRENGTH

Thursday, March 13, 2014


JOBLESS CLAIMS DECLINE WHILE RETAIL SALES CREEP HIGHER
This morning, first-time filings for unemployment benefits fell from 324k to 315k, the lowest level since September. The weekly jobless claims number is an important piece of the labor market puzzle and would seem to suggest that employment conditions are stronger than the last three monthly BLS reports have indicated. 
Also this morning, February retail sales rose by 0.3%, the first positive number since November. There was a 0.3% rise in building materials, which bodes well for housing, and vehicle sales also increased by a respectable 0.3%. Before getting too excited about the apparent sales upturn (which may fully materialize when the weather warms), it should be noted that the February increase was almost entirely a result of downward revisions to the previous two months, as the January decline was lowered from -0.4% to -0.6% and December from -0.1% to -0.3%.

The markets are still in a wait-and-see mode. Severe weather conditions have dealt a blow to the December, January and February economic data, but no one really knows whether the declines can be fully blamed on cold temperatures and heavy snowfall, or whether storms are masking some underlying weakness.

The Fed meets on Tuesday and Wednesday of next week. It is most likely that the FOMC announces another $10 billion taper in the pace of asset purchases, bringing the monthly buy amount down to $55 billion. 

The equity markets were up in early trading, but are now down.  Bonds are flat. The numbers were good this morning, but the picture is still far from clear.

MARKET INDICATIONS AS OF 10:00 A.M. CENTRAL TIME

DOW

DOWN 43 TO 16,297

NASDAQ

DOWN 14 TO 4,310

S&P 500

DOWN 2 to 1,866

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.37%; opening yield 0.36%

5-Yr T-note

current yield 1.59%; opening yield 1.59%

10-Yr T-note

current yield 2.72%; opening yield 2.73%

30-Yr T-bond

current yield 3.65%; opening yield 3.67%

 


LABOR SURPRISE PUSHES YIELDS HIGHER


Friday, March 7, 2014


BUSINESSES HIRE DESPITE BITTER WEATHER CONDITIONS
The economic question of the quarter is …to what extent can the current economic slowing be blamed on the weather?  Both the December and January nonfarm payroll reports had fallen well below analyst’s forecasts. The February report promised more of the same, especially since the particular survey week was one in which snow and ice covered grounds of 49 of the 50 U.S. states. The ADP employment report, released earlier in the week, showed a below-forecast 139k new jobs added in February and a huge downward revision to January, while the ISM employment index showed the first sub-50 reading in 3½ years, suggesting that employers were not expected to hire in the near-term.

Analysts were generally forecasting a weak February nonfarm payroll number at around 149k.
But, it didn’t happen. 

This morning. nonfarm payrolls actually grew by 175k in February, while January job growth was revised upward from 113k to 129k and December from 75k to 84k. These are, by no means, stunning numbers. After all, the three-month average, now at a meager 129k, is still a far cry from the solid 225k three-month average the Fed had considered before announcing the start of its taper in December. But, the February jobs number surprised to the upside and supports the notion that Fed tapering will continue at the March 18-19 FOMC meeting. As a result, bonds have sold off in early trading, driving yields higher.

In the separate household survey, the unemployment rate actually climbed from 6.6% to 6.7% as just 42k Americans found new jobs during the month while the labor force grew by 264k. One wrinkle in the unemployment calculation is that a reported 601k workers were unable to report for work due to inclement weather, about double the norm. As weather conditions improve (all else being equal) the unemployment rate would be expected to recede.

Average hourly earnings rose by 0.4% in February, the biggest gain since June, boosting year-over-year growth to 2.2%. Earnings growth has averaged 2.0% for the previous two years. Some might argue that wage inflation is brewing and use this notion as a basis for the Fed to tighten monetary policy sooner-rather-than-later, but in all likelihood, the wage growth volatility pattern will continue, and the Fed will hold short rates low for at least another 18 months.

At the end of the day, the February labor data was better-than-expected, but not particularly good. The take away is that businesses still hired at a decent pace,
despite the weather, and would probably have hired more workers if the ground wasn’t covered in ice. Time will tell.

The back-up in bond yields reflects the expectation that the Fed will announce another $10 billion cut in its monthly asset purchase program 12 days from now.  

MARKET INDICATIONS AS OF 9:00 A.M. CENTRAL TIME

DOW

UP 77 TO 16,499

NASDAQ

DOWN 7 TO 4,345

S&P 500

DOWN 1 to 1,876

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.37%; opening yield 0.34%

5-Yr T-note

current yield 1.64%; opening yield 1.57%

10-Yr T-note

current yield 2.80%; opening yield 2.74%

30-Yr T-bond

current yield 3.74%; opening yield 3.69%

 


UNEVEN ISM DATA AS EMPLOYMENT FRIDAY APPROACHES


Wednesday, March 5, 2014

PURCHASING MANAGERS’ SURVEYS CONTRADICT

On Monday, as another wave of arctic air blasted the Northern part of the nation, the ISM manufacturing index for February showed signs of warming up. The closely watched composite climbed from 51.3 to 53.2, above the median Bloomberg forecast, but well below the 56.2 average during the final six months of 2013. Recall that any number above the 50 mark indicates expansion; below 50 indicates contraction.

The negative impact of freezing temperatures pushed the supplier delivery times index back from 54.3 to a three-year high of 58.5. High energy prices, also related to cold weather, kept the ISM prices-paid index at an elevated level of 60.0 following a 60.5 reading in January.

This morning, the ISM nonmanufacturing (service sector) index unexpectedly dropped from 54 to 51.6, a four year low. The median forecast was for a much smaller drop to 53.5. The decline in the non-manufacturing index was particularly puzzling since the service sector isn’t affected by weather quite as much as the manufacturing sector. Within the February data, the new orders index rose from 50.9 to 51.3. Unfortunately, the closely watched employment index plunged from 56.4 to 47.5, reinforcing the notion that the labor market may be floundering.

WEAK ADP EMPLOYMENT NUMBER IS A BAD SIGN FOR FRIDAY’S BLS REPORT
Also released this morning, the ADP employment report fell short of expectations as private sector payrolls grew by a lackluster 139k in February, while the January number was revised sharply downward from 175k to 127k. The ADP data is affected less by weather than the closely watched report from the Bureau of Labor Statistics (BLS) since the ADP counts everyone on company payrolls, while the BLS only counts workers who were paid at least one day during the survey period.

Friday morning is the scheduled release for the monthly BLS employment report and the expectation is that the large storm that hit the Northeast and shut down the Federal government during the survey week, will contribute to the third straight month of sub-par payroll growth. The question on everyone’s mind is exactly how much of the weakness is due to weather and can be expected to reverse itself in the coming months. The Fed has been optimistic enough to continue on its tapering path, but with the March FOMC meeting less than two weeks away, a possible pause can’t be ignored.  

MARKET INDICATIONS AS OF 10:10 A.M. CENTRAL TIME

DOW

UP 14 TO 16,382

NASDAQ

UP 3 TO 4,359

S&P 500

UP 1 to 1,875

1-Yr T-bill

current yield 0.12%; opening yield 0.11%

2-Yr T-note

current yield 0.32%; opening yield 0.33%

5-Yr T-note

current yield 1.53%; opening yield 1.54%

10-Yr T-note

current yield 2.68%; opening yield 2.70%

30-Yr T-bond

current yield 3.63%; opening yield 3.65%

 


FROZEN CONDITIONS CHILL ECONOMIC GROWTH

February 28, 2014

ECONOMIC GROWTH IN Q4 IS SLOWER THAN ORIGINALLY THOUGHT

The Commerce Department reported that the first scheduled revision of Q4 GDP lowered annualized economic growth in the final quarter of last year from a solid 3.2% to a sub-par 2.4%. A decline had been largely expected as analysts factored in deteriorating weather conditions late in the year. Personal consumption, the biggest component of GDP, accounted for 0.53% of the overall revision as it slipped from 3.3% to 2.6%. The inventory contribution turned out to be significantly less than previously thought, contributing 0.14% to overall GDP instead of 0.42%.

Government spending continued to get squeezed, tumbling 5.6% and subtracting a full percentage from overall GDP. For all of 2013, government spending fell by 5.2%, the biggest decline since 1971. The housing sector contribution weakened further as residential investment declined 8.7% after producing double digit growth in seven out of the last eight quarters.

The likelihood is that Q1 2014 growth will prove to be even weaker than Q4 2013 as weather conditions across the Northwest and Midwest have been among the worst in recorded history. The equity markets are up in early trading this morning probably based on the notion that economic growth seems to be much slower than the Fed was anticipating when it began tapering in mid-December.

Next Friday, the February employment data will be released. After two months of unexpectedly weak payroll growth, most analysts are bracing for yet another chilled employment report. A number of economists now believe the Fed could pause its tapering at the March meeting to reassess the underlying strength of the economy. In theory, this would be positive for both stocks and bonds …at least for a while.  

MARKET INDICATIONS AS OF 9:55 A.M. CENTRAL TIME

DOW

UP 94 TO 16,366

NASDAQ

UP 17 TO 4,336

S&P 500

UP 11 to 1,866

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.32%; opening yield 0.34%

5-Yr T-note

current yield 1.54%; opening yield 1.48%

10-Yr T-note

current yield 2.69%; opening yield 2.64%

30-Yr T-bond

current yield 3.62%; opening yield 3.59%

         


RETAIL SALES IN DEEP FREEZE


Thursday, February 13, 2014

WINTER PUTS THE CHILL ON RETAIL SALES
Severe winter weather across much of the country is once again being blamed for a chilly economic report. January retail sales were put on ice, falling 0.4% from a downwardly revised -0.1% in December (previously reported as +0.2%), as 9 of the 13 major categories declined. November data, which had originally been reported as a gain of 0.7% and already revised lower to +0.4%, was reduced even further to +0.3%. The median forecast in Bloomberg’s survey was for January sales to be unchanged with no revisions to prior months. Today’s data fell well short of those expectations and is made even worse by the downward revisions to prior months. Sales ex-autos were unchanged while sales ex-autos and gas fell 0.2%. The retail sales control group, which feeds into GDP calculations, was -0.3%, versus a forecast of +0.2%, and both November and December were revised lower. On a year-over-year basis, headline retail sales are growing at a scant 2.6%, the slowest pace since late 2009. This was a rotten report and has economists lowering their estimates for Q4-2013 GDP as well as Q1-2014 GDP. The initial Commerce Department estimate pegged Q4-2013 GDP at +3.2%, but downward revisions are expected to lower this figure and this morning I am seeing estimates as low as +2.3%. Looking at Q1-2014, Credit Suisse cut its forecast to +1.6% while Morgan Stanley has lowered their forecast to +0.9%.

If there is any good news to be found it is in the hope that the poor sales data is entirely due to inclement weather rather than weak fundamentals. According to a Bloomberg report, December was the coldest since 2009 while January was the coldest in three years and brought four times the normal amount of snowfall. Anecdotally, even Austin, Texas (our home) has experienced a very cold winter. Sleet and freezing rain, or at least the threat of it, has shut down schools, government offices and some business on three separate occasions this year. The hope is that better weather in the months ahead will bring a sharp rebound.

CONGRESS SUSPENDS DEBT CEILING
On the bright side, the forecast for a winter storm was one factor that prompted lawmakers in Washington, D.C. to hurry up and pass a debt-ceiling bill. In somewhat of a surprise, Republicans in the House of Representatives advanced a bill to suspend the debt-ceiling for another year without any conditions. The Senate managed to overcome procedural moves by Senator Cruz to block its passage. The bill passed late yesterday and is expected to be signed into law by the President as soon as today. That eliminates the threat of another government shut-down or possible default, removing a key risk for financial markets and the economy as a whole.

U.S. equity markets are little changed on the day but up for the week, having already staged a strong rally following news of the debt-ceiling deal earlier in the week. Bond markets have rallied today, sending yields lower on the weak retail sales report. Expectations for Fed policy have not changed as the Fed is widely expected to continue tapering its asset purchase program, despite the recent string of weather related weakness. The Fed, and the rest of us for that matter, will likely have to wait a couple of months before we get a clear picture of the economy’s health outside of weather related influences.

MARKET INDICATIONS AS OF 11:17 A.M. CENTRAL TIME

DOW

UP 11 TO 15,976

NASDAQ

UP 17 TO 4,218

S&P 500

UP 3 to 1,822

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.32%; opening yield 0.34%

5-Yr T-note

current yield 1.50%; opening yield 1.56%

10-Yr T-note

current yield 2.74%; opening yield 2.76%

30-Yr T-bond

current yield 3.69%; opening yield 3.72%


PAYROLLS DISAPPOINT (AGAIN) ... BUT BAD WEATHER'S A FACTOR

Friday, February 7

NONFARM PAYROLLS WEAK, BUT UNEMPLOYMENT FALLS

The labor market report is always the most anticipated data release of any month, and today’s January employment report release is no exception. However, the numbers are highly suspect due to poor weather conditions across the nation, as well as the large post-holiday adjustment factor. According to CNBC, January weather for the entire U.S. was (arguably) the worst since 1977.

The Bureau of Labor Statistics (BLS) announced 113k new jobs were added to company payrolls in January, well below the +180k Bloomberg median forecast, and an increase from the (revised) 75k gain in December.

November payrolls were revised upward by 33k to +274k. Recall that the Fed made the decision to begin tapering after seeing the November jobs report. Since then, job growth has apparently slowed markedly. In October and November, payroll gains averaged +255k, but in December and January, the average was only +94k. Obviously, the recent drop in job creation has sparked discussion on the true health of the economy and exactly how aggressive the Fed should be in withdrawing stimulus.

Within the business survey, job growth was found in construction (+48k), business and professional services (+36k), leisure and hospitality (+24k) and manufacturing (+21k). Jobs in the healthcare field, a long standing area of growth, were flat in January. Declines were concentrated in government (-29k) and retail (-13k).

The unemployment rate, calculated from a separate household survey, showed unemployment dropping from 6.7% to 6.6%, due to estimated job growth of +638k and a +523k increase in the labor force. For those keeping score, the unemployment rate for adult men is now 6.2%, adult woman 5.9%, and teenagers 20.7%. In the past three months, a surprisingly robust 1.7 million jobs have been added in the lessor-watched survey. A divergence this wide is unusual and has added to the noise. The bottom line is, most experts aren’t placing a whole lot of emphasis on the past two months labor numbers.

There’s little point in running down all the minor numbers. The U6 rate, sometimes referred to as the underemployment rate, which includes everyone who would accept a full-time job if given the opportunity, fell from 13.1% to 12.7%. At its peak in April 2010, this number was 17.2%.

The January labor report also included the annual benchmark revision, which aligns payroll data with corporate tax records. This revision showed that payrolls had actually grown by an additional +347k from April 2012 to March 2013. The markets don’t care too much about stale numbers, but the revisions actually boosted average 2013 payroll growth up to +194k.

When the January numbers hit the tape, market reaction was harsh. DOW futures were down 188 points within minutes, but as analysts shifted through the data, market reaction turned around. At present, stock are up.  

Bond prices are generally flat …to UP. Given the ugly print, this is surprising.

At the end of the day, there is far too much uncertainty associated with the December and January reports to change market thinking. The Fed is still on course to continue its gradual tapering and is still unlikely to raise the overnight rate before late 2015.     

MARKET INDICATIONS AS OF 9:10 A.M. CENTRAL TIME

DOW

UP 54TO 15,682

NASDAQ

UP 28TO 4,085

S&P 500

UP 11 to 1,784

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.30%; opening yield 0.32%

5-Yr T-note

current yield 1.47%; opening yield 1.52%

10-Yr T-note

current yield 2.67%; opening yield 2.70%

30-Yr T-bond

current yield 3.66%; opening yield 3.67%


FEBRUARY OFF TO A POOR START

Monday, February 3, 2014


ISM MANUFACTURING INDEX TUMBLES
February did not get off to a good start. The ISM manufacturing index tumbled to 51.3 from 56.5 last month, reaching the lowest level since last May’s 50.0. The Bloomberg median forecast had called for a more modest decline to 56.0. Many of the sub-components within the index were weak too, with new orders falling from 64.4 to 51.2, production from 61.7 to 54.8, inventories from 50.5 to 44, employment from 55.8 to 52.3, and orders backlog from 51.5 to 48.0. The only component to rise was prices paid, which jumped from 53.5 to 60.5. The report suggests slowing growth in manufacturing and it appears that manufacturers and their customers are scaling back after a big buildup in inventories at the end of last year. You may recall that inventory accumulation was a major contributor to GDP growth in both the third and fourth quarters of 2013. The ISM noted that weather was one factor in the declines, but it’s not clear that weather could account for all of it.

Elsewhere, total vehicle sales declined in January to a 15.16 million unit annual pace, below forecasts for 15.7 million. GM and Ford blamed cold weather and winter storms for keeping customers out of showrooms.

STOCKS EXTEND LOSING STREAK
Stocks extended their recent skid with the S&P 500 losing 2.3%, closing at the lowest level since October, and reportedly breaking through a key technical support level. The DOW was off 326 points, led by a 4.1% decline in AT&T shares. Bonds are rallying on the soft economic data and a flight to safety trade. As the week progresses, investor focus will shift to Friday’s employment report. Recall that the December report, released in early January, showed an increase of just 74k jobs and kicked off the recent string of softer economic data. Let’s hope a better January report gets things back on the right track.

MARKET INDICATIONS AS OF 9:20 A.M. CENTRAL TIME

DOW

DOWN 326 TO 15,373

NASDAQ

DOWN 107 TO 3,997

S&P 500

DOWN 41 to 1,742

1-Yr T-bill

current yield 0.086%; opening yield 0.086%

2-Yr T-note

current yield 0.29%; opening yield 0.33%

5-Yr T-note

current yield 1.43%; opening yield 1.49%

10-Yr T-note

current yield 2.57%; opening yield 2.64%

30-Yr T-bond

current yield 3.52%; opening yield 3.60%


FED TAPERS BY ANOTHER $10 BILLION

Wednesday, January 29, 2014

FOMC STICKS TO PLAN

At the final FOMC meeting for Ben Bernanke, the policy making committee voted to taper by another $10 billion, meaning that monthly Fed purchases will now be $65 billion.

After an unexpectedly weak December employment report, a sharp reversal in December durable goods orders and a troubling sell-off in both the global and domestic equity markets, a number of analysts figured the Fed might opt to skip any January taper. However, with a Fed portfolio value likely to reach $4.5 trillion before year end, time isn’t a luxury. The Fed has to stop buying securities eventually. So, the weak December data can probably be attributed to the cold weather.

Interestingly, the U.S. bond market has rallied after the announcement. The 10-year yield is now at the lowest point since November 18th. A couple of possible reasons for this come to mind. The first is an obvious flight-to-quality with the stock market selling off almost 200 points. Another reason may be a vote of confidence in the new Fed.

As expected, the Fed maintained the overnight rate target at 0.00% to 0.25%. 

MARKET INDICATIONS AS OF 11:20 A.M. CENTRAL TIME

DOW

DOWN 200 to 15,729

NASDAQ

DOWN 49 to 4,079

S&P 500

DOWN 21 to 1,771

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.35%; opening yield 0.34%

5-Yr T-note

current yield 1.49%; opening yield 1.56%

10-Yr T-note

current yield 2.67%; opening yield 2.75%

30-Yr T-bond

current yield 3.61%; opening yield 3.67%

 


WEAK DURABLES ADDS UNCERTAINTY TO TOMORROW'S FOMC DECISION

Tuesday, January 28, 2014

DURABLE GOODS SLUMP IN DECEMBER

Orders for goods expected to last for three years or more, unexpectedly fell in December by the most in five months. The 4.3% drop in durable goods orders, which followed a 2.6% revised gain in November, was below the most pessimistic of 82 economists in the most recent Bloomberg survey. When the volatile transportation component is excluded, December orders fell by 1.6%, the biggest decline in nine months. Without going into more detail, suffice it to say, the report was weak. Bad weather was probably a contributing factor, but considering the poor December employment report and the fact that Fed officials are currently in the midst of the January FOMC meeting, it is no longer entirely certain that Fed officials will announce additional tapering tomorrow afternoon.

Compounding this decision is the recent drop in the global equity markets, which themselves are responding to problems in emerging markets …which are reacting negatively to expected Fed tapering. All three of the Fed’s quantitative easing programs should have benefited emerging markets. Record low U.S. bond yields encouraged many global investors to seek higher yielding investments in growth market economies. As it became clear that U.S. interest rates would be allowed to rise, the dollar gained strength and currencies of the smaller countries got hammered. A report last week showing a dip in Chinese manufacturing activity was the linchpin to the most recent crash.

Also this morning, the Conference Board’s measure of U.S. consumer confidence rose from 77.5 to 80.7. Because the survey period ended on January 16th, the recent stock market sell-off was not a consideration. 

HOUSING NUMBERS TRAIL-OFF AS YEAR CLOSES
Yesterday, the Commerce Department announced new home sales had fallen by 7% in December to a 414k annualized pace. The severity of the drop was unexpected. Some of the decline can probably be blamed on the coldest December in four years, but in all likelihood rising interest rates and higher home values played significant roles as well. Despite declining in the final two months, new home sales rose a huge 16.4% in 2013 to 428k (subject to revision.) The median price of a new home rose by 4.6% year-over-year to $270,200.

Existing home sales, released last week, appeared to be relatively solid in December. According to the National Association of Realtors, sales of previously owned home rose by 1% last month to a 4.87 million unit annual pace. Unfortunately, the increase was only made possible by a downward revision to the prior month. The sales pace declined by 10.6% during the July to November period, curtailing what had been shaping up as a banner year. Despite the drop-off, 5.1 million previously owned homes were sold in 2013, up 9.2% from 2012 and nearly 20% from 2011. When new and existing home sales are combined, 2013 sales of 5.52 million were the strongest since 2006. The big question is, how robust sales will be going forward if home prices and interest rates continue to climb?   

MARKET INDICATIONS AS OF 11:20 A.M. CENTRAL TIME

DOW

UP 67 TO 15,905

NASDAQ

DOWN 7 to 4,076

S&P 500

UP 1 to 1,788

1-Yr T-bill

current yield 0.10%; opening yield 0.11%

2-Yr T-note

current yield 0.34%; opening yield 0.34%

5-Yr T-note

current yield 1.57%; opening yield 1.57%

10-Yr T-note

current yield 2.76%; opening yield 2.75%

30-Yr T-bond

current yield 3.69%; opening yield 3.67%


DISAPPOINTING DECEMBER PAYROLLS COULD GIVE FED PAUSE


Friday, January 10, 2014

JOB CREATION UNEXPECTEDLY STALLS
No one saw this coming. In fact, after Wednesday’s stronger-than-expected ADP number, there was some upside bias to the median forecast for 197k new jobs.  The reality was that nonfarm payrolls grew by just 74k in December, which brought the 3-month average down from 193k to 172k. Needless to say, this is an ugly surprise.The Fed taper in December was predicated on a strengthening labor market. With the next FOMC  meeting scheduled for January 28-29, it isn’t clear that additional tapering will take place at that time. The Fed has promised that its “measured steps,” will be “data dependent” and this particular piece of critical data is weak.

 

Two of the sectors expected to contribute growth were government and construction, but government jobs fell by 13k and construction employment decreased by 16k. Health services fell by 6k after averaging +18k per month in 2013. Retail jobs increased by 55k, but these are typically less desirable and lower paying positions. Manufacturing jobs rose by 13k on the strength of the auto sector. Business and professional services rose by 19k, but the breakdown of this number showed an increase of 40k in temporary help and a decrease of 25k in accounting and bookkeeping services.                 

 

In the separate household survey the official unemployment rate fell from 7.0% to 6.7%. There was an increase of +143k newly employed workers, but another 525k exited the labor force dragging the participation rate back down to a 35-year low of 62.8%  Weather played a role here as the BLS reported 273k Americans were unable to work due to bad weather, the most in 36 years.  

 

Most of the minor numbers were also weak. The average workweek fell, and average hourly earnings rose by just 0.1%, bringing year-over-year wage gains down from +2.0% to +1.8%.

 

It’s hard to figure out exactly what this report should be telling us. The talking heads caution that there are frequently significant seasonal distortions in the December data, and the weather certainly played a role. It’s always possible that future revisions provide a completely different picture than we’re seeing this morning. Stay tuned. On the other hand, the Fed is watching employment carefully, and today’s numbers were entirely unexpected. The bottom line is that what we all thought to be certain, isn’t as certain as it was.     

The DOW was up …and it’s now down. A bad employment report isn’t necessarily bad for stocks since in theory, the Fed is likely to be more accommodative for a longer period than we’d thought …just yesterday. Bond yields are lower for the same reason.


MARKET INDICATIONS AS OF 9:20 A.M. CENTRAL TIME

DOW

DOWN 39 to 16,405

NASDAQ

DOWN 7 to 4,149

S&P 500

UP 1 to 1,839

1-Yr T-bill

current yield 0.12%; opening yield 0.13%

2-Yr T-note

current yield 0.38%; opening yield 0.43%

5-Yr T-note

current yield 1.64%; opening yield 1.75%

10-Yr T-note

current yield 2.88%; opening yield 2.97%

30-Yr T-bond

current yield 3.82%; opening yield 3.88%


2014: OFF AND RUNNING

Friday, January 3, 2014

LOOKING AHEAD TO A NEW YEAR

2014 begins with quite a bit more optimism than 2013.  Last year at this time, the U.S. had just stepped away from the “fiscal cliff,” with a great deal of fiscal belt-tightening ahead. Most economists expected economic growth would suffer accordingly, and in the first half of the year, it did exactly that. However, the economy made great strides in the second half, and is now poised for what most expect will be a better overall year in 2014. Much of the rebound was consumer-driven, and the consumer’s ability to spend was fueled by increases in net worth, which can be largely attributed to increases in both home prices and stock values. U.S. stocks had their best year since 1995. The NASDAQ index rose over 40% for the year, while the S&P 500 was up nearly 30% to 1,848. The DOW rose 26.5% in 2013 and reached its 52nd record high on December 31st, finishing the year at 16,445. The equity outlook for 2014 is cautiously optimistic. The average 2014 year-end forecast for the S&P 500 from 10 major Wall Street investment banks was 1,952, an increase of 5.6% (MarketWatch).

 

THE FACTORY AND HOUSING OUTLOOK IS BRIGHT

There wasn’t too much data released during the abbreviated holiday week. One piece of data worth mentioning is the ISM manufacturing index. The 57.0 December reading was the second highest since April 2011, trailing only the 57.3 from the previous month. Any number above 50 is consistent with expansion in the factory sector. Another important number was the October S&P Case-Shiller 20-city home price index, which showed a better-than-expected 13.6% year-over-year price increase. This indicates a healthy housing market, and most analysts expect further increases in residential construction in the new year as home inventory levels are relatively lean.  

  

Strong economic data would presumably cause the Fed to taper back on asset purchases at a quicker pace, which in theory would push market yields higher in anticipation. Interestingly, as the U.S. contemplates the winding down of its quantitative easing program, Japan is charging forward. The Bank of Japan announced yesterday that it would continue its enormous asset purchase plan as long as it takes to drive inflation up to 2.0%. By the end of this year, the Japanese Central Bank portfolio is projected to grow to 54% of GDP, equivalent to a Fed balance sheet of around $9 trillion. For the time being, this is highly supportive for the Japanese stock market, which enjoyed an eye-popping 60% gain in 2013.


MARKET INDICATIONS AS OF 2:25 P.M. CENTRAL TIME

DOW

UP 71 to 16,512

NASDAQ

DOWN 1 to 4,142

S&P 500

UP 5 to 1,831

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.40%; opening yield 0.38%

5-Yr T-note

current yield 1.73%; opening yield 1.72%

10-Yr T-note

current yield 2.99%; opening yield 2.99%

30-Yr T-bond

current yield 3.93%; opening yield 3.92%



HOUSING CONTINUES TO MEND IN FRONT OF FOMC ANNOUNCEMENT


Wednesday, December 18, 2013

The FOMC will release its Official Statement at 1:00 (Central) this afternoon. It is widely expected that they will further clarify their intent to taper asset purchases, so there is a possibility of significant financial market movement …one way or another, following the announcement.  The markets seem jittery in front of the Fed release. At the very least, Fed officials are likely to acknowledge recent strengthening of economic data. This type of statement would suggest less accommodation is required.  

HOUSING STARTS SHOW UNEXPECTED STRENGTH    

This morning, housing starts rose to their highest level in nearly six years, increasing by 22.7% to a 1.09 million annualized pace in November, well above the 955k median forecast. The single month gain was the biggest since January 1990.

 

In April 2009, in the midst of the recession, annualized starts bottomed out at a 478k pace. In early 2006, at the housing bubble peak, starts had soared to a 2.276 million unit pace.    

 

Single family permits jumped 20.8% in November to the highest level in 5½ years, while multi-family starts rose 26.8%. In recent years, the population has been shifting into multi-unit dwellings. This trend seems to be slowing.  By contrast, building permits declined 3.1% to a 1007k annualized pace. This is still a brisk pace for permits, which are a more forward looking indicator.

 

The stronger housing data defies higher mortgage lending rates. A number of economists have speculated higher borrowing costs would crimp demand. After reaching the 2013 low point of 3.59% in early May, the Mortgage Bankers Association (MBA) 30-year mortgage rate index climbed to a 4.80% average in early September, and recently averaged 4.62% for the week ending December 13th.  A 100 basis point increase on a $150,000 loan adds less than $100 to the monthly payment, which apparently isn’t fazing borrowers one bit.             


FANNIE AND FREDDIE TO RAISE FEES

Fannie Mae and Freddie Mac announced yesterday they expect to increase certain fees beginning in March. Specifically, borrowers who do not make at least a 20% down payment and/or have credit scores below 680 would pay a guarantee fee averaging about 11 bps higher. If this plan is implemented next year, owning a home would become a little less affordable for some, but a strengthening economy that creates much needed jobs would be an effective counter.         

 

The Federal Housing Finance Authority (FHFA), Fannie and Freddie’s regulator, also announced that it planned to lower the conforming loan limit from $417,000 to $400,000. This change would not take effect until October.

MARKET INDICATIONS AS OF 11:10 A.M. CENTRAL TIME

DOW

UP 24 to 15,890

NASDAQ

DOWN 16 to 4,007

S&P 500

DOWN 2 to 1,779

1-Yr T-bill

current yield 0.13%; opening yield 0.13%

2-Yr T-note

current yield 0.35%; opening yield 0.32%

5-Yr T-note

current yield 1.56%; opening yield 1.50%

10-Yr T-note

current yield 2.89%; opening yield 2.84%

30-Yr T-bond

current yield 3.91%; opening yield 3.87%


FED TAPERS ... A LITTLE BIT - STOCKS RALLY

 
Thursday, December 18, 2013

SOME SURPRISES
The FOMC announced the beginning of the much-anticipated taper of its $85 billion monthly asset purchase program this afternoon. A few weeks ago, this would have been a huge surprise, as a majority believed the taper wouldn’t begin until Janet Yellen’s first meeting as Fed Chair in March. A flurry of strong data, including significant payroll gains, have altered the course.

The taper plan is for a reduction of just $10 billion per month effective January 1st, split evenly between Treasury and MBS purchases. In the future, reductions will likely come in “measured steps."  This suggests a very gradual tapering process.

“The Committee also anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.50% percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.” This statement reaffirms that the Fed expects to hold the overnight funds target low for a considerable period.

Bond prices are higher along with stocks. Although the tapering has begun, it appears the Fed will remain very accommodative for some time.

MARKET INDICATIONS AS OF 1:20 P.M. CENTRAL TIME

DOW
UP 150 TO 16,025
NASDAQ
UP 8 TO 4,032
S&P 500
UP 13 TO 1,794
1-Yr T-bill
current yield 0.13%; opening yield 0.13%
2-Yr T-note
current yield 0.33%; opening yield 0.32%
5-Yr T-note
current yield 1.49%; opening yield 1.50%
10-Yr T-note
current yield 2.83%; opening yield 2.84%
30-Yr T-bond
current yield 3.85%; opening yield 3.87%

 


YIELDS DRIFT HIGHER ON SOLID RETAIL SALES DATA

 
Thursday, December 12, 2013
 
Q4 CONSUMER SPENDING MUCH IMPROVED
The consumer’s contribution to GDP in the third quarter was the smallest in four years. So far this quarter, the U.S. consumer is spending at a surprisingly improved pace. The reasons behind this are legitimate given deeply discounted holiday sales pricing, lower gasoline prices, record stock market gains, improved labor conditions and rising home values. Retail sales surged +0.7% in November, topping the +0.6% median forecast estimate. The lion’s share of the November increase came from autos and building materials. Retail sales in October, which were already solid, were revised upward from +0.4% to +0.6%.   
 
Sales, excluding auto dealers, gasoline, food services and hardware stores (the number used for the actual GDP calculation) rose by +0.5%. This gain followed +0.7% growth in the previous month, which was the biggest increase in this important category since July 2012.
 
This morning’s report fits the economic improvement trend that has asserted itself over the past couple of months, and suggests to some that the Fed could begin tapering before the March FOMC meeting. This thought has caused bond yields to drift higher in anticipation.
 
In other news, weekly jobless claims, which had fallen below the 300k mark two weeks ago for only the second time in 6½ years, snapped back in the week ending December 7th, from a (revised) 300k to 368k. Analysts cautioned that seasonal adjustments related to the Thanksgiving holiday had distorted first-time unemployment filings, and suggested the 4-week moving average of 329k was a more accurate assessment.
 
Bond yields are higher in early trading, while stocks are generally down.           
 
MARKET INDICATIONS AS OF 10:00 A.M. CENTRAL TIME
DOW
DOWN 68 to 15,774
NASDAQ
UP 7 to 4,010
S&P 500
DOWN 3 to 1,771
1-Yr T-bill
current yield 0.14%; opening yield 0.13%
2-Yr T-note
current yield 0.33%; opening yield 0.31%
5-Yr T-note
current yield 1.54%; opening yield 1.50%
10-Yr T-note
current yield 2.88%; opening yield 2.85%
30-Yr T-bond
current yield 3.89%; opening yield 3.89%
 

A STRONG LABOR REPORT DRIVES STOCKS HIGHER; BONDS LITTLE CHANGED

Friday, December 6, 2013

JOB GAINS FIND CONSISTENCY AT RESPECTABLE LEVELS
U.S. companies added 203k workers to payrolls in November, and revisions added another 8k to the previous two months. The Bloomberg median forecast had called for 185k new jobs in November. For all of 2013, nonfarm payrolls have increased by an average 189k. By comparison, payroll gains averaged 183k and 175k in the previous two years.  

 

November job gains were concentrated in transportation and warehousing (+31k), healthcare (+30k), manufacturing (+27k), retail (+22k), food services and drinking establishments (+18k) and construction (+17k).  State and local governments hired 14k workers during the month, while the federal government shed another 7k. One wrinkle this time of year is accurately measuring the impact of temporary retail workers. This number totaled +471k.   

The unemployment rate, calculated from a separate survey of U.S. households, fell from 7.3% to 7.0%, the lowest in five years. There are 10.9 million officially unemployed. The number who have been unemployed for 27 weeks or more, at 4.1 million, accounted for 37.3% of the total, but has fallen by 718k over the past year.

The number of people officially in the labor force actually increased by 455k in November, after a drop of 720k in October. This drove the participation rate up from a 35-year low of 62.8 to 63.0. The household survey showed an increase of 818k jobs in November, after a decline of 735k in the previous month. The huge volatility reflects federal employees being furloughed in October and then going back to work.

Digging a bit deeper into the November data shows the number of involuntary part-time workers fell 331k to 7.7 million. The number of workers considered “marginally attached” to the labor force (meaning they were available to work, had looked in the past 12 months, but had not actively searched in the 4 weeks leading up to the survey) totaled 2.1 million, down by 409k from a year earlier. Among the marginally attached, there were 762k discouraged workers, 217k less than last year at this time.

Average hourly earnings increased by $0.05 to $24.15, but year-over-year earnings growth fell from 2.2% to 2.0%. The average workweek rose by 0.1 to 34.5, while total hours worked rose by 0.5%.

The bond market reaction is unusual. The post-number chatter is that the Fed may be more likely to announce tapering at the January meeting, but so far bond yields aren’t validating this opinion. Yields are generally flat, with the 7-year Treasury unchanged and the 10- and 30-year Treasury yields actually down from opening levels. Stocks are rallying big in early trading, choosing to focus on economic strength rather than the possibility that the Fed will withdraw stimulus.       

MARKET INDICATIONS AS OF 9:00 A.M. CENTRAL TIME
 
DOW
UP 136 TO 15,958
NASDAQ
UP 29 TO 4,062
S&P 500
UP 14 TO 1,799
1-Yr T-bill
current yield 0.12%; opening yield 0.12%
2-Yr T-note
current yield 0.30%; opening yield 0.30%
5-Yr T-note
current yield 1.49%; opening yield 1.49%
10-Yr T-note
current yield 2.86%; opening yield 2.87%
30-Yr T-bond
current yield 3.90%; opening yield 3.91%


Wednesday, December 5, 2013

 
HEADLINE GDP RISES AS BUSINESS INVENTORIES JUMP
Economic growth was revised upward this morning as third quarter GDP was unexpectedly boosted from 2.8% to 3.6%. The average annualized economic growth rate in the U.S. over the past seven decades is just over 3%, so 3.6% is a pleasant surprise. However, economists are cautioning that inventory build-up was unusually high, accounting for 1.68 percentage points. This surprising contribution doubles the advance estimate and accounts for the entire upward revision. Final sales (which exclude inventories) was actually revised downward from +2.0% to 1.9%.  FTN analysts pointed out that “In the past decade, any time the ratio of GDP to final sales was as high as it was in the third quarter, inventory cuts followed.”
 
There have been plenty of strong numbers released during the past month, but last quarter’s GDP isn’t one of them. However, the weekly initial claims number could arguably fall into the strong category. First-time filings for unemployment benefits declined from 321k to 298k during the last week in November. This is only the second time in the past 340 weeks that claims have fallen below the 300k mark. Apparently, holidays make claims calculations tricky, but this is still another indication that employment conditions are firming. And employment is the foundation to sustainable recovery.
 
Longer bond yields rose early this morning, but are settling down as it becomes clear that third quarter GDP borrowed heavily from future periods. Stocks are in the process of falling for the fifth straight day from record highs, although in all fairness, the declines have been very limited so far.
 
The economic temperature is warming. Economists are generally predicting improvement in 2014 relative to 2013. This will allow for QE3 tapering to begin at a gradual pace sometime within the next four to five months. In theory, this suggests higher interest rates on the longer end of the curve. However, rates on the extreme short end will likely remain anchored, along with the overnight funds target, until mid-2015.   
 
Employment report tomorrow.             

MARKET INDICATIONS AS OF 10:05 A.M. CENTRAL TIME
 
DOW
DOWN 58 from 15,831
NASDAQ
DOWN 6 from 4,031
S&P 500
DOWN 6 to 1,786
1-Yr T-bill
current yield 0.12%; opening yield 0.12%
2-Yr T-note
current yield 0.30%; opening yield 0.29%
5-Yr T-note
current yield 1.47%; opening yield 1.44%
10-Yr T-note
current yield 2.86%; opening yield 2.83%
30-Yr T-bond
current yield 3.91%; opening yield 3.90%
 

MARKET YIELDS CREEP HIGHER ON SOLID DATA
 
Wednesday, December 4, 2013
 
NEW HOME SALES REBOUND
Sales of new homes rose by 25.4% from a 354k annualized pace in September to a 444k pace in October. Several news stories this morning heralded the biggest monthly gain in three decades. And while this appears to be true, sales were at higher levels as recently as June. Higher mortgage rates and the recent government shutdown were factors that drove sales temporarily lower in late summer and early fall.  Total sales for 2013 are currently on a 426k pace, well above the 368k pace of 2012. The median sales price fell by 4.5% to $245,800 in October, with 12% of new homes selling for more than $500,000.     
 
The October rebound has chipped away at new home inventory levels, bringing the available supply down from 6.4 to 4.9 months. Bloomberg reported that the median number of months between completion and sale, at 2.6 months, is the lowest on record.
 
All in all, the resiliency in the housing market is encouraging. It suggests that slightly higher interest rates will not significantly harm economic growth.     
 
THE SERVICE SECTOR ISN’T AS STRONG AS THE FATORY SECTOR  
The non-manufacturing (service sector) ISM, also released this morning, wasn’t quite so encouraging. The composite index unexpectedly slipped from 55.4 to 53.9 in October. Although still in expansion territory, the decline was in contrast to the healthier ISM manufacturing index released on Monday. The employment component of the service sector index dropped from 56.2 to 52.5, suggesting a bit of downward bias to Friday’s much anticipated November employment report.
 
Stocks were down in early trading as the stronger housing data hinted that the Fed would be tapering sooner, but optimism that congressional leaders could actually strike a budget compromise in the coming weeks has reversed the slide.
 
Bond prices are down a bit, pushing yields on the long end slightly higher. The move is in anticipation that stronger economic data will allow the Fed to cut back on its asset purchases beginning in the first quarter of 2014. The final FOMC meeting of the year is scheduled for December 17-18, although no change in Fed policy is expected at that time.  
 
MARKET INDICATIONS AS OF 10:30 A.M. CENTRAL TIME
DOW
UP 5 to 15,919
NASDAQ
UP 4 to 4,041
S&P 500
UP 1 to 1,796
1-Yr T-bill
current yield 0.12%; opening yield 0.12%
2-Yr T-note
current yield 0.29%; opening yield 0.29%
5-Yr T-note
current yield 1.45%; opening yield 1.40%
10-Yr T-note
current yield 2.84%; opening yield 2.78%
30-Yr T-bond
current yield 3.90%; opening yield 3.85%
 

GOOD NEWS - ISM MANUFACTURING INDEX SIGNALS STRENGTH
 
Monday, December 2, 2013
 
U.S. FACTORY MANAGERS ARE OPTIMISTIC
The ISM composite factory index unexpectedly rose to its highest level in 31 months, increasing from 56.4 to 57.3 in November. The Bloomberg median forecast had suggested a slight decrease to 55.1, but after reaching a post-recession low of 49 in May, the index has now risen in each of the last six months. Recall that in this series, any number above 50 indicates factory expansion.
 
Following the release, Morgan Stanley analysts pointed out that “a 57.3 ISM reading has historically been accompanied by strong growth in the overall economy, and a rebound as large as 8.3 points over a six-month period has been strongly associated with a meaningful inflection in the growth trajectory for the overall economy. Several economists have credited recent improvement in China and Europe as a foundation for the upbeat U.S. factory readings and expect the positive trend to continue.”      

Within the November survey, the new orders index increased by 3 percentage points to 63.6%, while the production index rose by 2 to 62.8%. But possibly the survey’s most important indicator was the employment index which increased by 3.3 percentage points to 56.5 percent, the highest level in 18 months.  
 
The prospect of better economic growth ahead suggests that the Fed may not have to be quite as accommodative with its monetary policy. Although the strong November ISM data is hardly a game changer, it does support an earlier QE3 tapering case. As a result, bond yields are backing up in anticipation with the 10-year Treasury note moving from 2.75% to 2.80%.  
 
This week is chock-full of economic data, with the ISM non-manufacturing survey, auto sales, new home sales and Q3 GDP, to be followed by the always important monthly employment report. The tone seems to be positive, and the economic numbers on the near horizon are likely to be enhanced with the political shenanigans of October resolved for the time being.         
 
MARKET INDICATIONS AS OF 11:00 A.M. CENTRAL TIME
DOW
DOWN 1 to 16,086
NASDAQ
DOWN 1 to 4,058
S&P 500
UP 1 to 1,807
1-Yr T-bill
current yield 0.12%; opening yield 0.12%
2-Yr T-note
current yield 0.29%; opening yield 0.28%
5-Yr T-note
current yield 1.43%; opening yield 1.37%
10-Yr T-note
current yield 2.80%; opening yield 2.75%
30-Yr T-bond
current yield 3.86%; opening yield 3.81%
 

GOVERNMENT SHUTDOWN DIDN'T AFFECT SHOPPERS
 
November 20, 2013
 
RETAIL SALES PROVE RESILIENT IN OCTOBER
There were several important economic data releases this morning, starting with an important measure of consumer spending. The October retail sales report was considerably better than expected, with the headline number rising 0.4%, well above the 0.1% median Bloomberg forecast. Analysts seemed to be excited about the biggest monthly increase in four months happening despite October’s Federal government shutdown. However, a case can be made that government workers were on a paid vacation during those 16 days and had extra shopping time. Other reasons for the better sales numbers include lower gasoline prices and the “wealth effect” created by record stock prices and increasing home valuations. With all of the positives, it seems more surprising that the monthly retail sales number wasn’t stronger.
    
CONSUMER PRICES CONTINUE TO RETREAT    
The consumer price index (CPI) actually fell by 0.1% during the month of October, and is now increasing at a benign 1.0% annual rate, the lowest in four years. A good portion of the decline can be attributed to the drop in gasoline prices, which are down 10% from a year ago.  Another falling component was the cost of monthly housing, which declined to a 10-month low. When volatile food and energy prices are removed from the equation, core CPI rose by just 0.1% in October and is up 1.7% year-over-year. The bottom line on inflation is that the Fed needs inflation to stay low in order to continue its accommodative interest rate policy. Nearly all price measures seemed to be well contained. Thus, no worries for the Fed. 
       
HOME SALES FALL AMID LIGHT SUPPLY    
Existing home sales fell by a larger than expected 3.2% in October to an annualized rate of 5.12 million units. On a year-over-year basis, the average price for an existing home increased by 12.8% to $199,500.  There were 2.13 million existing homes listed for sale in October, down from 2.17 million in the previous month. The month’s supply at the current sales pace was a relatively lean 5.0 months, up slightly from 4.9 in September. Some real estate agents feel the lack of market supply is restraining sales. The housing outlook remains positive despite higher mortgage rates.   
 
The bond market hasn’t moved much from opening levels. Any upward movement in yields that may have resulted from the better retail sales was nullified by the benign inflation readings, and frankly, the housing number was close enough to expectations to be a non-event. Stock prices are up again this morning.   
 
MARKET INDICATIONS AS OF 11:10 A.M. CENTRAL TIME
DOW
UP 23 to 15,990 (NEW RECORD HIGH)
NASDAQ
UP 17 to 3,948
S&P 500
UP 3 to 1,791
1-Yr T-bill
current yield 0.12%; opening yield 0.13%
2-Yr T-note
current yield 0.28%; opening yield 0.29%
5-Yr T-note
current yield 1.33%; opening yield 1.35%
10-Yr T-note
current yield 2.71%; opening yield 2.71%
30-Yr T-bond
current yield 3.81%; opening yield 3.80%
 
 

NOVEMBER 2013 BLOOMBERG INTEREST RATE AND CONOMIC SURVEYS
 
Tuesday, November 18, 2013
 
From November 8 to November 13, 2013, Bloomberg News surveyed approximately 70 of the nation’s top economists for their most recent opinions on the U.S. economy and interest rates. The following are the results of their responses:
 
The Interest Rate Forecast
 
Overnight Fed Funds - The MEDIAN fed funds forecast for Q4 2013 is 0.25%. The MEDIAN forecast for the next six quarters are 0.25%, 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
 
The confirmation hearing of Janet Yellen in front of the Senate Banking Committee went as well as could be expected. She is likely to be approved by vote of the full Senate this week, and would begin her first four-year term as Fed Chairman immediately after Bernanke’s term ends at the end of January 2014. Yellen adheres to the same general principles as Bernanke, and in fact, may be even more accommodative in terms of monetary policy. The initial FOMC meeting for Yellen as the Fed leader is March 18-19.  This is when most now expect the Committee to announce the first step in what is likely to be a gradual QE3 tapering process. The overnight fed funds target, which has been anchored at 0.00% to 0.25% since December 2008, is unlikely to be increased until QE3 is fully extinguished. Most experts now see the overnight funds target remaining at record lows at least until mid-2015, perhaps later.    
 
2-year Treasury-note - The average 2-year yield forecast for Q4 2013 is 0.40%. The average yield forecast for the next six quarters are 0.48%, 0.60%, 0.74%, 0.90%, 0.99% and 1.15%. The current 2-yr Treasury yield is 0.28%.
 
 
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Current Survey
(November 2013)
0.40%
0.48%
0.60%
0.74%
0.90%
0.99%
1.15%
Prior Survey
(October 2013)
0.42%
0.51%
0.60%
0.74%
0.87%
0.89%
1.03%
One Year Prior
(November 2012)
0.50%
0.55%
0.65%
N/A
N/A
N/A
N/A
 
10-year Treasury-note - The average 10-year yield forecast for Q4 2013 is 2.73%. The average forecast for the next six quarters are 2.89%, 3.04%, 3.20%, 3.36%, 3.43% and 3.59%.  The current 10-year yield is 2.68%.
 
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Current Survey
(November 2013)
2.73%
2.89%
3.04%
3.20%
3.36%
3.43%
3.59%
Prior Survey
(October 2013)
2.82%
2.95%
3.08%
3.22%
3.24%
3.33%
3.39%
One Year Prior
(November 2012)
2.27%
2.43%
2.59%
N/A
N/A
N/A
N/A
 
30-year Treasury-bond - The average 30-year yield forecast for Q4 2013 is 3.78%. The average forecast for the next six quarters are 3.92%, 4.04%, 4.15%, 4.26%, 4.31% and 4.47%. The current 30-year yield is 3.77%.
 
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Current Survey
(November 2013)
3.78%
3.92%
4.04%
4.15%
4.26%
4.31%
4.47%
Prior Survey
(October 2013)
3.82%
3.95%
4.06%
4.18%
4.26%
4.28%
4.40%
One Year Prior
(November 2012)
3.36%
3.54%
3.66%
N/A
N/A
N/A
N/A
 
 
The Economic Forecast
 
Unemployment Rate - The median forecast for Q4 2013 unemployment is 7.2%. The median forecast for the next five quarters are 7.1%, 6.9%, 6.8%, 6.6% and 6.5%.
 
The household survey of the October employment report was negatively affected by the government shutdown, although not as much as many had thought. In the most recent survey, furloughed government workers were considered to be unemployed. As a result, there were 735k job losses measured during the month and the unemployment rate climbed from 7.2% to 7.3%. The increase would have been more dramatic if another 720,000 Americans hadn’t inexplicably exited the labor force in October, bringing the participation rate from 63.2% to a new 35-year low of 62.8%.       
 
Real GDP (annualized economic growth) - The median GDP growth forecast for Q4 2013 is +1.85.  The median forecast for the next five quarters are +2.6%, +2.85, +2.9%, +2.9% and +3.0%.
 
Although the +2.8% headline third quarter GDP increase was much better than the Bloomberg median forecast of +2.0%, the breakdown suggests a weaker number. In particular, the inventory component added 0.86% to the headline. In theory, if future sales aren’t as brisk as anticipated, the inventory contribution could be less or even negative in subsequent quarters. Personal consumption, the most important contributor to GDP, rose by a disappointing 1.5%. For the first three quarters of the year, the economy has now grown at a 2.2% annualized rate, not bad considering the government cutbacks that have taken place, but still well below the 3.2% GDP average over the last seven decades. Part of the slower growth may be that consumers are saving more, as the savings rate rose from 4.5% to 4.7% during the quarter. Many economists believe consumers are in much better position to spend in the coming months as a result of the deleveraging that has taken place over the past four years - The level of household liabilities to disposable income, which peaked at a record 1.35 in December 2007, has shrunk to 1.09 at last measure. However, it’s possible that today’s consumers are more cautious, and like businesses, have adjusted to leaner overhead, which might suggest more moderate spending in the coming years.     
  
Consumer Prices - The median annualized consumer inflation forecast for Q4 2013 is +1.5%. The median forecast for the next five quarters are +1.55%, +2.0%, +1.9%, +2.0% and 2.1%. 
 
The Personal Consumption Expenditures (PCE) deflator, which is considered the Fed’s favorite inflation measure, climbed by just 0.1% in both the overall and core measures in October, pushing the year-over-year numbers down to 0.9% and 1.2% respectively. Ideally, the Fed would prefer to see price pressure at around 2%. Thus, there is still plenty of latitude for the Fed to continue being accommodative.  Right now, inflation across virtually all measures seems to be very well contained.  

MARKET INDICATIONS AS OF 3:30 P.M. CENTRAL TIME
DOW
UP 14 to 15,976
NASDAQ
DOWN 37 to 3,949
S&P 500
DOWN 7 to 1,791
1-Yr T-bill
current yield 0.13%; opening yield 0.12%
2-Yr T-note
current yield 0.28%; opening yield 0.29%
5-Yr T-note
current yield 1.31%; opening yield 1.34%
10-Yr T-note
current yield 2.67%; opening yield 2.70%
30-Yr T-bond
current yield 3.76%; opening yield 3.80%
 

UNEXPECTED LABOR STRENGTH IN OCTOBER STUMPS ANALYSTS
 
Friday, November 8, 2013
 
BUSINESSES SHAKE OFF UNCERTAINTY AND HIRE NEW WORKERS
It’s rare when the economists agree, and for the most part they were all anticipating an ugly employment number for the month of October. After all, during the survey week, the Federal government was closed and there was a threat (albeit minor) of a technical default on U.S. debt. As it turned out, U.S. businesses decided to hire in October anyway, and surprisingly, the number of jobs created exceeded all forecasts. Bloomberg survey estimates of nonfarm payrolls ranged from +50k to +175k, and the median forecast was +120k. The actual number was +204k, and revisions to the two previous months added another +60k.
 
Just like that, the picture has shifted again. Before this morning, company payrolls were thought to be averaging a sub-par 144k over the most recent three-month period. The latest numbers boosted the three-month average up over 200k, and the 2013 monthly average to 186k.   
 
Job growth was concentrated in the (low paying) leisure and hospitality sector (+53k), the (low paying) retail sector (+44k), professional and technical services (+21k), the factory sector (+19k) and health care (+15k).   
 
It wasn’t clear before the release, but in the business survey furloughed government workers were considered to be employed, so the company payroll numbers are probably clean. The unemployment data, which is calculated through a household survey, is distorted. In this survey, furloughed workers were considered to be unemployed. As a result, there were 735k job losses measured during the month, and the unemployment rate climbed from 7.2% to 7.3%.
 
The increase would have been more dramatic if the participation rate hadn’t fallen so much. In fact, it’s shocking to realize that the percentage of working-age Americans currently employed or considered to be looking for work, dropped even further from a 35-year low of 63.2% to 62.8% as another 720,000 Americans exited the labor force. According to the Bureau of Labor Statistics, September marked the first time in history that more than 90 million Americans in ages ranging from 16 to 64, fell outside the labor force.
 
The markets aren’t entirely sure what to make of the October report. Bond prices have traded off (prices down/yields up) with the thought that QE tapering could potentially begin before March 2014, while equities are up in early trading under the belief that the economy is stronger than previously thought. Of course, stocks could have just as easily dropped for the same reasons that bonds have traded off. Mark Zandi of Moody’s described the payroll growth this morning as “bizarre,” although some of the other talking heads on CNBC seemed to accept it based on the notion that the economy “is simply in better shape than we’re giving it credit for.”
 
Take all of this with a grain of salt (…and let me know if you have a less worn cliché for future writings). The labor market is not in good shape, regardless of the occasionally upbeat monthly reports. And for the most part, consumers only spend money when they have a source of income.                        

MARKET INDICATIONS AS OF 9:10 A.M. CENTRAL TIME
DOW
UP 37 to 15,630
NASDAQ
UP 29 to 3,886
S&P 500
UP 3 to 1,750
1-Yr T-bill
current yield 0.11%; opening yield 0.10%
2-Yr T-note
current yield 0.31%; opening yield 0.28%
5-Yr T-note
current yield 1.42%; opening yield 1.30%
10-Yr T-note
current yield 2.74%; opening yield 2.60%
30-Yr T-bond
current yield 3.83%; opening yield 3.71%
 

UPBEAT HEADLINE GDP MASKS UNDERLYING WEAKNESS
 
Thursday, November 7, 2013
 
GDP NOT QUITE AS IMPRESSIVE AS IT APPEARS
This morning, the initial reading of the third quarter GDP was released. The headline increase at +2.8% was much better than the Bloomberg median forecast of +2.0%, but the breakdown suggests an even weaker number. In particular, the inventory component added a whopping 0.86% to the headline. If future sales aren’t as brisk as anticipated, the inventory contribution would be less, or even negative, in subsequent quarters. Personal consumption, the most important contributor to GDP, rose by a disappointing 1.5%. For the first three quarters of the year, the U.S. economy has grown at a 2.2% annualized rate, not bad considering the government cutbacks that have taken place, but still well below the 3.2% GDP average over the last seven decades. Part of the slower growth may be that consumers are saving more, as the savings rate rose from 4.5% to 4.7% during the quarter.
 
Many economists believe consumers are in much better position to spend in the coming months as a result of the deleveraging that has taken place over the past five years - The level of household liabilities to disposable income, which peaked at a record 1.35 in December 2007, has shrunk to 1.09 at last measure. However, it’s possible that today’s consumers are more cautious, and like U.S. businesses, have adjusted to leaner overhead, which might suggest a more moderate level of spending in the coming years. 
    
On Friday, the October employment report will be released. The market is already bracing itself for an ugly number. However, the data is expected to be tainted by the 16-day government shutdown, and should be taken with a grain of salt. The unemployment rate is forecasted to jump from 7.2% to 7.4%, while payroll gains are expected to be around 120k, well below the 177k average gain so far in 2013.
 
THE ISM SURVEYS PAINT A ROSIER PICTURE
Yesterday, the ISM non-manufacturing index for October rose from 54.3 to 55.4. The report was quite strong, easily topping the Bloomberg median forecast of 54.0. The non-manufacturing, or service sector index, represents roughly 90% of all jobs in the U.S., so an upbeat reading was an unexpected surprise, suggesting a stronger economic outlook. Last week, the ISM manufacturing index also surprised to the upside, climbing from 56.2 to 56.4. Recall that any number above the 50 mark indicates expansion. Most experts are anticipating that the government shutdown and latest debt ceiling debacle will have a measurable negative effect on the economy in the final quarter of the year, but these two private sector surveys suggest the effect may be minimal.
 
None of this a data will any prompt any change in Fed policy.   

MARKET INDICATIONS AS OF 9:30 A.M. CENTRAL TIME
DOW
DOWN 9 to 15,737
NASDAQ
DOWN 38 to 3,899
S&P 500
DOWN 5 to 1,766
1-Yr T-bill
current yield 0.09%; opening yield 0.09%
2-Yr T-note
current yield 0.28%; opening yield 0.28%
5-Yr T-note
current yield 1.31%; opening yield 1.33%
10-Yr T-note
current yield 2.63%; opening yield 2.64%
30-Yr T-bond
current yield 3.75%; opening yield 3.77%
 

WEAK RETAIL SALES IN FRONT OF OCTOBER FED MEETING
 
Tuesday, October 29, 2013
 
CONSUMERS SLOW SPENDING IN SEPTEMBER
The retail sales numbers for September were calculated before the government shutdown, but the signs of weakness were already in place. The Commerce Department reported this morning that retail sales fell by 0.1% during the month of September, a drop from the small 0.2% gain registered in August and below the 0.0% Bloomberg median forecast. Auto and clothing sales were two of the main contributors to the September decline as the traditional back-to-school spending spree fell short of expectations, and auto dealers reported their worst sales numbers in almost a year.
 
Also reported this morning was the Producer Price Index (PPI) for September. Recall that in order for the Fed to maintain its accommodative stance, inflation needs to remain in check. Although PPI isn’t one of the primary inflation measures the Fed considers, it does present a picture of price pressure at the wholesale level, which presumably will have an impact on the price of final goods. Like retail sales, headline PPI was unexpectedly negative in September. The -0.1% reading was below the median forecast for a 0.1% gain. The PPI core rate, which excludes food and energy prices, rose by 0.1%. On a year-over-year basis, headline PPI is increasing at a pedestrian 0.3% pace, while core PPI is rising at a 1.2% annual rate.
 
The bottom line on this morning’s data is both series support further accommodation by the Fed. The FOMC meets today and tomorrow. Unlike at the September meeting, few anticipate Fed officials will announce plans to taper back on its QE3 purchases. In fact, a majority of Primary Dealers now expect the Fed will wait until the March 2014 meeting before announcing any reduction in its $85 billion in monthly asset purchases.
 
Tapering is only the first step in reeling in accommodative policy. Eventually, the asset purchases will be stopped all together, but it is unlikely the overnight funds target will be lifted before this occurs. Thus, most economists believe short-term rates will continue to trade near record lows well into 2015.
 
MARKET INDICATIONS AS OF 9:15 A.M. CENTRAL TIME
DOW
UP 37 to 15,606
NASDAQ
UP 2 to 3,942
S&P 500
UP 3 to 1,765
1-Yr T-bill
current yield 0.10%; opening yield 0.10%
2-Yr T-note
current yield 0.32%; opening yield 0.31%
5-Yr T-note
current yield 1.28%; opening yield 1.29%
10-Yr T-note
current yield 2.52%; opening yield 2.52%
30-Yr T-bond
current yield 3.62%; opening yield 3.62%
 

OCTOBER 2013 BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
 
Tuesday, October 22, 2013
 
From October 4 to October 9, 2013, Bloomberg News surveyed approximately 70 of the nation’s top economists for their most recent opinions on the U.S. economy and interest rates. The following are the results of their responses:
 
THE INTEREST RATE FORECAST
 
Overnight Fed Funds - The MEDIAN fed funds forecast for Q4 2013 is 0.25%. The MEDIAN forecast for the next six quarters are 0.25%, 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
 
At present time, the Fed is squarely on hold. At the September FOMC meeting, most market participants believed the Fed would announce a small reduction in their $85 billion monthly asset purchase program, thereby beginning the much-anticipated QE3 taper. They did not. Since that time, a 16-day government shutdown has robbed the Fed of the data it needs to properly evaluate the economy, and by some estimates has slowed Q4 GDP growth by as much as half a percentage point. Another important consideration is the pending appointment of the dovish Janet Yellen to replace Ben Bernanke as Fed Chairman. Yellen is expected to be every bit as accommodative as Bernanke. As a result of these developments, Fed officials are likely to further delay tapering into early 2014. Likewise, any change in the overnight funds target, which has now stood at 0.00% to 0.25% since December 2008, will probably be pushed back into the middle part of 2015 or beyond.
 
2-year Treasury-note - The average 2-year yield forecast for Q4 2013 is 0.42%. The average yield forecast for the next six quarters are 0.51%, 0.60%, 0.74%, 0.87%, 0.89% and 1.03%. The current 2-yr Treasury yield is 0.30%.
 
 
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Current Survey
(October 2013)
0.42%
0.51%
0.60%
0.74%
0.87%
0.89%
1.03%
Prior Survey
(September 2013)
0.47%
0.56%
0.67%
0.81%
0.97%
1.12%
N/A
One Year Prior
(October 2012)
0.59%
0.71%
0.85%
N/A
N/A
N/A
N/A
 
10-year Treasury-note - The average 10-year yield forecast for Q4 2013 is 2.82%. The average forecast for the next six quarters are 2.95%, 3.08%, 3.22%, 3.24%, 3.33% and 3.39%.  The current 10-year yield is 2.52%.
 
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Current Survey
(October 2013)
2.82%
2.95%
3.08%
3.22%
3.24%
3.33%
3.39%
Prior Survey
(September 2013)
2.84%
2.96%
3.09%
3.24%
3.37%
3.50%
N/A
One Year Prior
(October 2012)
2.34%
2.47%
2.61%
N/A
N/A
N/A
N/A
 
30-year Treasury-bond - The average 30-year yield forecast for Q4 2013 is 3.82%. The average forecast for the next six quarters are 3.95%, 4.06%, 4.18%, 4.26%, 4.28% and 4.40%. The current 30-year yield is 3.62%.
 
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Current Survey
(October 2013)
3.82%
3.95%
4.06%
4.18%
4.26%
4.28%
4.40%
Prior Survey
(September 2013)
3.85%
3.96%
4.07%
4.19%
4.31%
4.41%
N/A
One Year Prior
(October 2012)
3.45%
3.59%
3.72%
N/A
N/A
N/A
N/A
 
 
THE ECONOMIC FORECAST
 
Unemployment Rate - The median forecast for Q4 2013 unemployment is 7.3%. The median forecast for the next five quarters are 7.2%, 7.1%, 7.0%, 6.8% and 6.7%.
 
The official unemployment rate dipped down to 7.2% in September, the lowest level in nearly five years. But once again, the driving force hasn’t been job creation; it’s an ever-shrinking labor force. The labor force participation rate fell to 63.2% in August and remained at that 35-year low point in September. If the participation rate were at early 2008 levels, unemployment would be around 11.5%.       
 
Real GDP (annualized economic growth) - The median GDP growth forecast for Q4 2013 is +1.9. The median forecast for the next five quarters are +2.4%, +2.6%, +2.8%, +2.9% and +3.0%.
 
Second quarter (annualized) GDP came in at 2.5%, while the preliminary third quarter GDP estimate is around 2.0%.  Fourth quarter growth will be tempered by the government shutdown, and is currently estimated to be just under 2.0%.  The average economic growth rate in the U.S. over the past 65 years is 3.2%, so whenever the Fed does begin tightening monetary policy, it will be further slowing economic growth from what is already a sub-par pace. This suggests when the Fed does begin hiking short rates, it should be a very gradual process.    
 
Consumer Prices - The median annualized consumer inflation forecast for Q4 2013 is +1.6%. The median forecast for the next five quarters are +1.5%, +1.5%, +1.9%, +1.9% and 2.0%. 
 
Low levels of inflation allow the Fed to continue providing a high level of economic stimulus. Right now, inflation across virtually all measures seems to be well contained. Ideally, the Fed would prefer to see price pressure at around 2%. Thus, there is still plenty of latitude for the Fed to continue being accommodative.  
 
MARKET INDICATIONS AS OF 1:20 P.M. CENTRAL TIME
 
DOW
UP 62 to 15,542
NASDAQ
UP 4 to 3,923
S&P 500
UP 12 to 1,750 (new record high)
1-Yr T-bill
current yield 0.10%; opening yield 0.11%
2-Yr T-note
current yield 0.30%; opening yield 0.31%
5-Yr T-note
current yield 1.29%; opening yield 1.35%
10-Yr T-note
current yield 2.51%; opening yield 2.60%
30-Yr T-bond
current yield 3.61%; opening yield 3.67%

 
BONDS RALLY ON WEAK EMPLOYMENT
 
Tuesday, Oct 22, 2013
 
DELAYED SEPTEMBER JOBS REPORT DISAPPOINTS
It was delayed by more than two weeks as a result of the 16-day government shutdown, but when the September employment report was finally released, it continued the recent trend of weakening data. Nonfarm payrolls climbed by just 148k during the month, well below the Bloomberg median forecast for 180k jobs. July was revised downward by 15k to 89k, while August was revised up by 27k to 193k for a two month net revision of +9k.
 
Although a monthly average of 177k jobs have been added to company payrolls since the year began, the past three months have averaged a paltry 143k. The general rule of thumb is that 150k new jobs are needed every month to simply absorb new entrants into the labor market. Normally, job creation would have to be well above the 150k mark in order to drive down the unemployment rate. Of course, what makes today different is that the number of people entering the workforce is actually shrinking. The participation rate, according to the Bureau of Labor Statistics, held steady in September at a 35-year low of 63.2%. Thus, the number of people finding work relative to the number actively searching, has been steadily falling.
 
The super-low participation rate combined with the admittedly slow job growth to push the unemployment rate down to 7.2%, the lowest official level in nearly five years. Take this with a grain of salt. The U6 measure of unemployment, which includes everyone who would accept a fulltime position if one were offered, is still at a lofty 13.6%, well above the 8.4% rate recorded in November 2007, the month before the recession began.
          
Job growth was created last month primarily in state and local governments (+28k), transportation and warehousing (+23k), retail (+21k), construction (+20k), ), health and education (+14k) and manufacturing (+2k). Job declines were found in the federal government sector (-6k) as well as food service and drinking establishments (-7k).
 
Average hourly earnings rose by $0.03, or 0.1% to $24.09 in September, but this rather small increase pulled down the year-over-year average earnings rate from 2.3% to 2.1%.
 
All in all, the September employment report supports the generally held idea that the Fed will not announce tapering plans at the October or December FOMC meetings. In fact, with Janet Yellen taking over as Fed Chairman, there is no clear starting point, although presumably the Fed will have to ease back on its massive $85 billion in monthly asset purchasers sometime in early 2014. By contrast, the overnight funds target will likely remain near zero until sometime in 2015, although many now see the Fed on hold for a much longer period.    
 
The bond market has rallied this morning, with the 10-year Treasury note yield down to 2.52%, nearly half a point below the recent peak of 3.00% on September 5th.  The five-year Treasury yield, which reached 1.87% on that same date, has dropped all the way to 1.29%.
 
The idea that the Fed will continue on its accommodative path has fueled stocks to big gains in early trading.     
 
MARKET INDICATIONS AS OF 9:25 A.M. CENTRAL TIME
DOW
UP 115 to 15,508
NASDAQ
Up 22 to 3,942
S&P 500
Up 13 to 1,757
1-Yr T-bill
current yield 0.10%; opening yield 0.11%
2-Yr T-note
current yield 0.30%; opening yield 0.31%
5-Yr T-note
current yield 1.29%; opening yield 1.35%
10-Yr T-note
current yield 2.52%; opening yield 2.60%
30-Yr T-bond
current yield 3.62%; opening yield 3.67%

 


MARKETS SHOWING SIGNS OF WASHINGTON STRESS
 
Tuesday, October 8, 2013
 
POLITICAL POISON AFFECTING MARKETS
Financial markets are beginning to show signs of stress from the political nonsense infecting our nation’s capital. Stock markets endured a second straight day of large losses with the Dow falling 160 points, after yesterday’s 136 point decline. From its post-FOMC peak on September 18th, the Dow is down 900 points, having lost 5.7%. The S&P 500 has lost 70 points for a 4% decline. The two benchmarks have fallen on 11 of the last 14 trading sessions.
 
Bond markets are feeling the pain as well, as investor concern about defaults, technical or otherwise, begins to grow. Today, China and Japan, which together own more than $2.4 trillion of U.S. debt, issued warnings about the consequences of a default. Most of the so called experts seem to believe the chances of the U.S. actually defaulting on its debt are nil, apparently believing that the consequences would be so catastrophic as to make it an impossibility. Investors, however, are starting to worry. Today’s auction of 4-week T-bills came at 0.35%. Until recently, similar T-bills have been trading in the low single digits. Investors don’t want to be stuck holding onto T-bills that mature around the time the government runs out of cash. Other T-bills maturing in late October and early November have seen their yields climb, too. Issues maturing later in November and beyond don’t seem to be affected yet, the theory being that any breach of the debt ceiling and potential default would be short lived. However, the fallout is beginning to spill over into some of the longer maturities. Over the last three days the yield on the two-year T-note has gone from 0.31% to 0.38%. These movements do not appear to be due to the Fed or strengthening economic data. Rather, it is concern about the debt ceiling. The rhetoric out of Washington certainly hasn’t provided any comfort to investors.
The good news hidden within the market’s reaction is that perhaps this will generate enough heat to force the nation’s leaders to do something besides point their fingers at the other side. The closer to the edge the politicians push us, the more dislocated and worried markets will become.

MARKET INDICATIONS AS OF 4:45 P.M. CENTRAL TIME
DOW
Down 160 to 14,777
NASDAQ
Down 76 to 3,695
S&P 500
Down 21 to 1,655
1-Yr T-bill
current yield 0.13%; opening yield 0.10%
2-Yr T-note
current yield 0.38%; opening yield 0.34%
5-Yr T-note
current yield 1.42%; opening yield 1.40%
10-Yr T-note
current yield 2.63%; opening yield 2.63%
30-Yr T-bond
current yield 3.69%; opening yield 3.69%
 

FINANCIAL MARKETS TAKE SHUTDOWN IN STRIDE...FOR NOW
 
Tuesday, October 1, 2013
 
GOVERNMENT SHUTS DOWN
There was no last minute continuing resolution to fund the government, and at midnight, an estimated 800,000 non-essential Federal government workers were furloughed. Essential workers will work without pay until Congress agrees on a new budget. Military workers will be paid.
 
The impasse was a simple one, but apparently insurmountable. The GOP-controlled House will only pass a budget if Obamacare is postponed, but the Senate, under Democratic leadership, refuses any change in the healthcare plan or its implementation.
 
The shutdown isn’t expected to last. With Congressional approval ratings near an all-time low of 10%, no one stands to benefit from a lengthy showdown. Analysts generally expect that 0.15% will be extracted from GDP each week that the government remains closed.   
 
The last time the government closed its doors was in December 1995. House Speaker Newt Gingrich eventually lost his job when the public lost its patience after 21 days of bickering. This time, the GOP is again taking most of the blame. What complicates things is that the GOP is so fragmented that finding a unified party front might be an even tougher battle than negotiating with the Democrats.
 
Right now, the public isn’t too concerned. The stock markets have been up all day, so any flight-to-quality expected to drive bond yields lower has yet to happen. Bond yields are actually a bit higher.
 
The bigger problem is 16 days away when the debt ceiling is reached. The possibility of default is extremely unlikely, but today’s surprising one-month bill auction suggests otherwise as the auction yield ballooned to 0.12% from 0.02%. The thought is that this particular bill could end up in technical default if no resolution has been reached by its maturity date.   
 
In other news, the ISM manufacturing index for September topped the median Bloomberg forecast and reached a two-year high of 56.2. Recall, any number above 50 indicates factory sector expansion, while below 50 indicates contraction. The employment index climbed to its highest level in 18 months at 56.2 after posting a solid 55.7 in the prior month, while the new orders index slipped a bit, but remained in very healthy territory at 60.5.           
 
The monthly employment report is scheduled for Friday, but would not be released if the Federal government remains closed.     
 
MARKET INDICATIONS AS OF 2:15 P.M. CENTRAL TIME
DOW
UP 25 to 15,154
NASDAQ
UP 33 to 3,804
S&P 500
UP 10 to 1,692
1-Yr T-bill
current yield 0.09%; opening yield 0.09%
2-Yr T-note
current yield 0.33%; opening yield 0.32%
5-Yr T-note
current yield 1.42%; opening yield 1.38%
10-Yr T-note
current yield 2.64%; opening yield 2.61%
30-Yr T-bond
current yield 3.71%; opening yield 3.69%

 


MARKETS RALLY ON SUMMERS WITHDRAWAL

Monday, September 16, 2013
 
SUMMERS WITHDRAWS FROM CONSIDERATION FOR FED CHAIR
After weeks of speculation it was widely reported last week that President Obama would nominate former Treasury Secretary Lawrence Summers to succeed Ben Bernanke as chairman of the Federal Reserve. Both stock and bond markets had been selling off on the thought that a Fed led by Larry Summers would be less accommodative, perhaps ending QE3 more quickly and raising the overnight fed funds rate sooner than had been expected. On Sunday, Summers abruptly withdrew from consideration after several Democratic Senators indicated they would not support a Summers nomination. Summers stated that he had “reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery.”
 
Current Vice Chair Janet Yellen likely now resumes her role as front-runner, but the Wall Street Journal reports that President Obama has been annoyed by the public lobbying on her behalf. That opens the door for other candidates.
 
STOCK AND BOND MARKETS UP SHARPLY
Both stock and bond markets have rallied sharply in the wake of the Summers withdrawal. The Dow has opened up more than 150 points while the S&P 500 is up 16. The two-year Treasury note, which traded as high as 0.53% two weeks ago, has fallen from 0.43% on Friday to 0.38% this morning. Over that same time span, the 10-year T-note has gone from 3.00% down to 2.79%. Attention now turns to this week’s FOMC meeting and the question of whether or not the Fed will announce a plan to taper QE, and if so, by how much.

MARKET INDICATIONS AS OF 8:50 A.M. CENTRAL TIME

DOW
Up 153 to 15,529
NASDAQ
Up 22 to 3,744
S&P 500
Up 16 to 1,703
1-Yr T-bill
current yield 0.10%; opening yield 0.11%
2-Yr T-note
current yield 0.38%; opening yield 0.43%
5-Yr T-note
current yield 1.56%; opening yield 1.69%
10-Yr T-note
current yield 2.79%; opening yield 2.89%
30-Yr T-bond
current yield 3.79%; opening yield 3.83%

 

 

SEPTEMBER 2013 BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
 
Monday, September 16, 2013
 
From September 6 to September 11, 2013, Bloomberg News surveyed approximately 80 of the nation’s top economists for their most recent opinions on the U.S. economy and interest rates. The following are the results of their responses:
 
THE INTEREST RATE FORECAST
 
Overnight Fed Funds - The MEDIAN fed funds forecast for Q3 2013 is 0.25%. The MEDIAN forecast for the next six quarters are 0.25%, 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
 
The Fed is largely expected to wrap up its latest round of quantitative easing with a taper beginning sometime in the final quarter of the year. However, reeling in QE3 shouldn’t imply that the Fed has drawn any closer to tightening monetary policy. The overnight fed funds target rate of 0.00% to 0.25% has been entrenched since December 2008. Virtually all of the words coming from the mouths of Fed officials in recent months regarding the funds rate suggest that tightening will not begin before 2015. Provided inflation remains in check, the Fed would only boost the funds rate if the economy were moving forward at better than a moderate pace. Ending the massive quantitative easing program is expected to keep upward pressure on intermediate and long rates, which in turn should have a detrimental effect on economic growth. As a result, the end of QE3 actually makes a stronger case to keep short rates low.              
 
2-year Treasury-note - The average 2-year yield forecast for Q3 2013 is 0.41%. The average yield forecast for the next six quarters are 0.47%, 0.56%, 0.67%, 0.81%, 0.97% and 1.12%. The current 2-yr Treasury yield is 0.38%.
 
 
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Current Survey
(September 2013)
0.41%
0.47%
0.56%
0.67%
0.81%
0.97%
1.12%
Prior Survey
(August 2013)
0.36%
0.44%
0.53%
0.64%
0.73%
0.85%
0.99%
One Year Prior
(September 2012)
0.63%
0.76%
0.96%
N/A
N/A
N/A
N/A
 
10-year Treasury-note - The average 10-year yield forecast for Q3 2013 is 2.74%. The average forecast for the next six quarters are 2.84%, 2.96%, 3.09%, 3.24%, 3.37% and 3.50%.  The current 10-year yield is 2.83%.
 
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Current Survey
(September 2013)
2.74%
2.84%
2.96%
3.09%
3.24%
3.37%
3.50%
Prior Survey
(August 2013)
2.62%
2.73%
2.87%
3.00%
3.14%
3.24%
3.31%
One Year Prior
(September 2012)
2.99%
3.18%
3.35%
N/A
N/A
N/A
N/A
 
30-year Treasury-bond - The average 30-year yield forecast for Q3 2013 is 3.75%. The average forecast for the next six quarters are 3.85%, 3.96%, 4.07%, 4.19%, 4.31 and 4.41%. The current 30-year yield is 3.84%.
 
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Current Survey
(September 2013)
3.75%
3.85%
3.96%
4.07%
4.19%
4.31%
4.41%
Prior Survey
(August 2013)
3.70%
3.76%
3.90%
4.01%
4.12%
4.18%
4.20%
One Year Prior
(September 2012)
4.16%
4.35%
4.61%
N/A
N/A
N/A
N/A
 
 
THE ECONOMIC FORECAST
 
Unemployment Rate - The median forecast for Q3 2013 unemployment is 7.4%. The median forecast for the next five quarters are 7.2%, 7.1%, 7.0%, 6.9% and 6.7%.
 
The primary reason why the markets began anticipating a near-term tapering of Fed asset purchases in early May was the unexpected strength of the April employment report. At that time, nonfarm payrolls were seen growing at a relatively healthy three-month average pace of 212k. This, despite the much ballyhooed budget sequestration and a return to higher payroll taxes. The recently released August payroll report showed a gain of just 169k new jobs as well as downward revisions to prior months that combined to push the three-month average to a less robust 148k. The official unemployment rate declined to 7.3% in August, the lowest level since December 2008. Unfortunately, this upbeat number is misleading as the unemployment rate only considers Americans who are actively seeking employment, and frankly, fewer and fewer have been looking. The labor force participation rate fell to a 35-year low of 63.2% in August. If the participation rate had simply remained at the same level as the beginning of 2008, unemployment would be a staggering 11.5%.       
 
Real GDP (annualized economic growth) - The median GDP growth forecast for Q3 2013 is +2.1%. The median forecast for the next five quarters are +2.5%, +2.7%, +2.8%, +2.95% and +3.0%.
 
The first revision to second quarter (annualized) GDP boosted economic growth from +1.8% to 2.5%. However, the positive revision was due entirely to a change in the trade deficit numbers which is not likely to carry forward into the third quarter. The recent slide in consumer spending is hinting at downside bias to third quarter growth, even though forecasted GDP is still well below the historical norm. The average economic growth rate in the U.S. over the past 65 years is 3.2%, so stimulus-fueled growth in the neighborhood of 2.0% to 2.5% is nothing to crow at.     
 
Consumer Prices - The median annualized consumer inflation forecast for Q3 2013 is +1.6%. The median forecast for the next five quarters are +1.6%, +1.7%, +2.0%, +2.0% and 2.0%. 
 
The inflation data is important primarily because low price pressure allows the Fed to continue providing a high level of economic stimulus. As of this writing, core PPI and core CPI are rising at year-over-year rates of 1.3% and 1.7% respectively, while the Fed’s preferred inflation measure, the PCE deflator, is rising at a 1.4% annual rate through the second quarter. Generally speaking, the Fed would like to see a moderate amount of inflation, believed to be something around 2.0%.  Thus, current rates of inflation are considered to be quite low. 
 
MARKET INDICATIONS AS OF 11:38 A.M. CENTRAL TIME
 
DOW
UP 165 to 15,542
NASDAQ
UP 12 to 3,734
S&P 500
UP 17 to 1,705
1-Yr T-bill
current yield 0.10%; opening yield 0.11%
2-Yr T-note
current yield 0.34%; opening yield 0.43%
5-Yr T-note
current yield 1.59%; opening yield 1.69%
10-Yr T-note
current yield 2.83%; opening yield 2.89%
30-Yr T-bond
current yield 3.84%; opening yield 3.83%

 


CONSUMER SPENDING PROVES TEPID IN FRONT OF NEXT WEEK'S CRITICAL FOMC MEETING

Friday, September 13, 2013
 
DISAPPOINTING RETAIL SALES ADD TO A GROWING PILE OF WEAK DATA
This morning, the closely watched retail sales report suggested that consumers are feeling the pinch of higher taxes, lower wages and higher borrowing costs. The 0.2% increase in August was the smallest gain in four months and at the low end of analyst estimates. Since the energy impact was neutral in August, this morning’s numbers are fairly representative of the consumer’s actual contribution to economic growth. In fact, purchases excluding autos, gasoline and building materials (the number used to calculate GDP) rose by the same trivial 0.2%.
 
Also this morning, the University of Michigan consumer sentiment index fell from 82.1 to a four-month low of 76.8 in the initial September reading.  Rising interest rates, higher gasoline prices, diminished job prospects, possible military action in Syria and a struggling stock market dampened consumer outlooks during the survey period. 
 
In economic news from earlier in the week, the Job Openings and Labor Turnover (JOLT) survey for July showed a significant decline in job postings, as the number of positions waiting to be filled fell by 180k to the lowest level in six months. This is another indication that employment conditions may not be improving as much as generally assumed.  The Mortgage Bankers Association applications index fell by 13.5% during the week of September 6th.  Most of this decline was due to a 28% plunge in the refinancing index; however, the new applications index has been falling steadily for months.  It’s no surprise that increasing interest rates have had a negative effect on the housing market. Although home sales remain quite brisk in many parts of the country, the increase in mortgage costs is squeezing out the marginal buyers.
 
CRITICAL TWO-DAY FOMC MEETING SLATED FOR NEXT WEEK
The upcoming FOMC meeting, scheduled for September 17-18, is a particularly important meeting because the Fed is largely expected to announce the beginning of a taper in their “QE3” asset purchase plan. Perhaps more importantly, they are expected to provide clarity as to how much they’ll be cutting back on their $85 billion in monthly purchases.  The bond market began a de facto tapering in early May in anticipation of Fed action. On the afternoon of September 18th, the markets will receive confirmation. By some estimates, a $15 billion to $20 billion reduction (based on what was then strengthening economic data) has already been priced in.  If the Fed announces a significantly smaller amount, many experts predict bonds could rally.
      
Not all Fed officials are on the September tapering page. Atlanta Fed president Dennis Lockhart recently told an audience that the tapering decision, “…whether in September, October, or December, ought to be thought of as a cautious first step.” Following the weak August employment report, Chicago Fed President Charles Evens said he would go into the FOMC meeting with an open mind and “could be persuaded.”  And, Minneapolis Fed President Narayana Kocherlakota believes the FOMC should be providing more stimulus; not less.

MARKET INDICATIONS AS OF 10:35 A.M. CENTRAL TIME

DOW
UP 67 to 15,368
NASDAQ
DOWN 1 to 3,715
S&P 500
UP 2 to 1,680
1-Yr T-bill
current yield 0.11%; opening yield 0.11%
2-Yr T-note
current yield 0.44%; opening yield 0.43%
5-Yr T-note
current yield 1.69%; opening yield 1.70%
10-Yr T-note
current yield 2.89%; opening yield 2.91%
30-Yr T-bond
current yield 3.83%; opening yield 3.85%

 


EMPLOYMENT REPORT ADDS TO UNCERTAINTY

Friday, September 06, 2013
 
EMPLOYMENT REPORT WEAKER THAN HEADLINE
The headlines for the August employment report will show that the economy created 169k new jobs last month and the unemployment rate declined from 7.4% to 7.3%. Those figures are not too far away from the consensus estimates for a gain of 180k jobs and an unchanged 7.4% unemployment rate. But beyond the headlines the details in today’s report were tepid. Net revisions to prior months’ data subtracted 74k jobs as June was revised from +188k to +172k and July was cut from +162k to +104k. If we consider those revisions, today’s report added just 95k new jobs. Over the last three months the economy has created an average of 148k jobs per month. Not bad, but nothing to jump up and down about either. At 7.3%, the unemployment rate has reached the lowest level since December 2008 and has fallen almost a full point from 8.1% a year ago. Unfortunately, much of that improvement is the result of a falling participation rate. The official unemployment rate only captures those individuals who wanted and were available for work, and had searched for work in the 4 weeks preceding the survey. If you don’t meet those conditions, you don’t get counted as part of the labor force and you don’t get included in the tally of unemployed. The labor force participation rate fell to a 35-year low at 63.2% in August, the lowest level since August 1978. That is a concern for the Fed, who would much rather see a falling unemployment rate amid a rising participation rate.
 
Officially, there are 11.3 million unemployed people in the U.S. and another 2.3 million who are “marginally attached to the labor force.” That means they would like a job, but hadn’t searched in the last four weeks. An additional 7.9 million persons are employed part time for economic reasons, meaning they were working part time because their hours had been cut back or they were unable to find a full time job. Taking all these groups into consideration, the broader U-6 unemployment measure was 13.7%.

ISM DATA TOPS FORECASTS
A couple of other data points to catch up on include the August ISM manufacturing index, which rose to 55.7 from 55.4 in July. This was the highest level since June 2011, and well above the median forecast calling for a slight drop to 54. Recall that 50 is the dividing line between contraction and expansion, so the headline suggests that the factory sector is relatively healthy and gaining momentum. The headline number was driven by the new orders component, which jumped from 58.3 to 63.2. The ISM non-manufacturing (service sector) index for August also surprised to the upside, rising from 56.0 to 58.6, the highest in eight years. The new orders index rose from 57.7 to 60.5, and the employment index from 53.2 to 57.0, the highest since February.  Finally, vehicle sales for August climbed to a 16.02 million unit annual pace, the highest since November 2007.
 
On balance, today’s employment report was a little soft, but that is counter-balanced by the strength shown in other data this week. Employment is a lagging indicator and with other data picking up, employment gains would normally be expected to follow. Most forecasts still call for the Fed to announce a reduction in the size of its monthly QE purchases following the conclusion of the FOMC meeting on September 18th. However, today’s data does further complicate the picture and could give the Fed an opening to postpone its tapering plans. The bond market sell off that had accelerated this week has at least been temporarily interrupted. The two-year Treasury note, which started the week yielding 0.40% and peaked at 0.53% intra-day on Thursday, has rallied back down to 0.45% currently. The 10-Year T-note briefly traded above 3% Thursday and now stands at 2.92%. Stock markets were little changed on the news but have since dropped sharply on Syria news.

MARKET INDICATIONS AS OF 9:15 A.M. CENTRAL TIME

DOW
Down 105 to 14,833
NASDAQ
Down 21 to 3,637
S&P 500
Down 8 to 1,647
1-Yr T-bill
current yield 0.12%; opening yield 0.14%
2-Yr T-note
current yield 0.45%; opening yield 0.52%
5-Yr T-note
current yield 1.73%; opening yield 1.85%
10-Yr T-note
current yield 2.90%; opening yield 3.00%
30-Yr T-bond
current yield 3.82%; opening yield 3.89%

 


FED CONSIDERS DATA IN FRONT OF SEPT FOMC MEETING

Friday, August 30, 2013
 
HIGHER RATES MAY BE A MOMENTUM KILLER
 The big question that few are talking about is whether the sharp rise in interest rates will push the economic recovery off its tracks. Last week’s 13.4% decline in July new home sales was a sign that higher rates were already having a negative effect on housing. Monday’s July durable goods number signaled that U.S. companies might be feeling the pinch as well. Headline durables fell by 7.3%. A drop was largely expected, just not this big. The median forecast was for a smaller 4.0% decline. When volatile transportation orders are excluded, orders fell by 0.6%.  The median forecast here was for a 0.5% increase. Capital goods orders, excluding defense and aircraft, dropped by 3.3%, well short of the forecasted 0.5% gain. When all of these numbers are tallied, it appears as though third quarter economic growth is losing momentum.
 
The first revision to second quarter GDP (released yesterday) brought the prior quarter’s economic growth figure up from 1.8% to 2.5%. The positive revision was entirely expected and due to a change in the trade deficit data, which is not likely to carry into the third quarter. Within the deficit number, imports were revised downward from 9.5% to 7.0%, while exports were revised upward from 5.4% to 8.6%.  As a result, net exports were flat in the first revision, thus negating the 0.8% by which net exports had reduced GDP in the initial reading.
 
This morning, personal spending and personal income came in below forecast. Both income and spending rose by just 0.1% in July, missing expectations for gains of 0.2% and 0.3%. Analysts have suggested that even though job creation has picked up in recent months, many of these jobs are of the low paying variety, which doesn’t support robust spending.
Also released this morning was the Personal Consumption Expenditures (PCE) deflator, which is the inflation number Fed officials watch most closely. The PCE number was up just 0.1% for the month of July, while the year-over-year inflation rate rose by 1.4%, exactly matching expectations. This is still well below the Fed’s target inflation rate of 2.0%.    
 
IMPORTANT FED MEETING ON TAP
The next FOMC meeting is scheduled for September 17th and 18th, and the general expectation is that Fed officials will announce some type of QE3 tapering plan at the conclusion. Most market analysts are calling for a purchase reduction in the range of $10 to $15 billion per month. It appears the bond market has already factored in a considerably larger QE3 reduction on its own, which may open the door for some amount of correction if the Fed’s stance doesn’t match market expectations.
Much of the recent economic data has been on the softer side, suggesting that the Fed could possibly delay the start of any taper until the late October meeting. However, the FOMC’s ultimate decision at the September meeting will rely heavily on the August employment report, which is scheduled for release on September 6th

MARKET INDICATIONS AS OF 9:45 A.M. CENTRAL TIME

DOW
DOWN 42 to 14,798
NASDAQ
DOWN 25 to 3,595
S&P 500
DOWN 2 to 1,636
1-Yr T-bill
current yield 0.12%; opening yield 0.12%
2-Yr T-note
current yield 0.39%; opening yield 0.39%
5-Yr T-note
current yield 1.59%; opening yield 1.60%
10-Yr T-note
current yield 2.75%; opening yield 2.76%
30-Yr T-bond
current yield 3.70%; opening yield 3.72%

 


HOUSING, INTEREST RATES AND THE FED

Friday, August 23, 2013
 
DEBATE OVER NEW FED CHAIR RILES MARKETS
It’s been a light week in terms of economic data, and up until this morning, the bond market has primarily sold off.  Much of the recent negative market movement may have been driven by the debate over who will replace Ben Bernanke as Fed Chairman next January. The early favorite had been Vice Chair Janet Yellen. The prevailing thought had been that Yellen would be as accommodative, if not more accommodative than Bernanke. The new favorite is Larry Summers. Although he has served as U.S. Treasury Secretary, Harvard University President and White House Economic Council under President Obama, he’s proven to be a rather  unpopular choice. Critics have focused on his role in the 1999 repeal of the Glass-Steagall Act as well as his support for deregulating the derivatives market, widely considered to be underlying contributors to the “great recession.” Summers would also be less likely to continue down the super-accommodative monetary policy path that Bernanke has blazed. In recent days, trail balloons on other possible replacements have been floated, the most interesting being Tim Geithner.
 
HIGHER MORTGAGE RATES IMPACT HOME SALES
Earlier this week, existing home sales jumped by 6.5% in July to an annualized unit pace of 5.39 million. Although this was significantly above the median forecast and the highest level of home sales in almost four years, a number of experts suspect the pace may be unsustainable. The belief is that July sales represent a mad rush to take advantage of lower borrowing costs before the Fed begins tapering. Of course, a de facto taper has already begun and actually gained momentum last week as longer-term interest rates rose to their highest levels in two years.
 
The 30-year fixed-rate mortgage loan average matched its highest level in 25 months last week at 4.68% (MBA weekly index). As recently as early May, the average 30-year rate had been 3.59%. It appears as though higher lending rates may already be affecting new home sales, which are tallied at the time purchase contracts are signed, instead of at closing. This morning, new home sales unexpectedly fell in July by the most in three years. The 13.4% drop brought annualized sales down from a revised 455k pace to 394k, the weakest since October. As the sales rate slowed, new home inventory levels shot up from a 4.3 month supply to 5.2. It’s hard to say whether the July decline will have a significant effect on new construction, as builder confidence actually stands at its highest level in nearly eight years.              
 
FOMC MINUTES SUGGEST A MORE PATIENT FED
Fed minutes from the July FOMC meeting, which were released Wednesday, showed that a number of participants “were somewhat less confident about a near-term pickup in economic growth than they had been in June...” Committee members also expressed concern that higher interest rates could hold back future spending and economic growth. (Since the July meeting, the 10-year Treasury yield is higher by 30 bps and stocks are down 4%.) Much to the chagrin of investors, there was no clear consensus on tapering as a few members believed it was time to begin cutting back on asset purchases while others believed the committee should remain patient. Yet again, Fed members said any action will be “data dependent.”
 
This morning, St. Louis Fed President James Bullard noted that the economy isn’t doing nearly as well as the market is indicating. He pointed out that over the past year both GDP and inflation have actually declined, while the unemployment rate has dropped primarily due to the way it’s being calculated. Bullard told his audience that the Fed “doesn’t need to be in a hurry.” This is a mantra that most Fed officials would like to embrace.
 
There does seem to be a growing consensus that the taper, when it does occur, will be somewhat smaller than originally thought. The most recent Bloomberg economist survey, completed on August 13th, shows that although 65% of economists expect the Fed to begin tapering in September, the reduction is only expected reduce monthly asset purchases from $85 billion to $75 billion.
 
MARKET INDICATIONS AS OF 10:55 A.M. CENTRAL TIME

DOW
UP 12 to 14,976
NASDAQ
UP 11 to 3,649
S&P 500
UP 2 to 1,659
1-Yr T-bill
current yield 0.13%; opening yield 0.13%
2-Yr T-note
current yield 0.37%; opening yield 0.39%
5-Yr T-note
current yield 1.63%; opening yield 1.68%
10-Yr T-note
current yield 2.83%; opening yield 2.89%
30-Yr T-bond
current yield 3.81%; opening yield 3.87%

 


AUGUST 2013 BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS

Thursday, August 15, 2013
 
From August 2 to August 6, 2013, Bloomberg News surveyed approximately 70 of the nation’s top economists for their most recent opinions on the U.S. economy and interest rates. The following are the results of their responses:
 
THE INTEREST RATE FORECAST
 
Overnight Fed Funds - The MEDIAN fed funds forecast for Q3 2013 is 0.25%. The MEDIAN forecast for the next six quarters are 0.25%, 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
 
Despite a high likelihood that the Fed will begin reducing the amount of asset purchases under the QE3 program as soon as next month, the overnight fed funds target is expected to remain wedged in the current 0.00% to 0.25% range until sometime in mid-2015. This suggests that yields on short securities, as well as daily rates on money market funds and investment pools, will remain at, or near current levels throughout the remainder of 2013 and 2014. QE3 tapering will affect the long end of the curve, as a decrease in Fed bond purchases will reduce overall demand relative to market supply …although the market supply of new Treasuries is actually shrinking right along with the much-improved Federal deficit picture. The Treasury simply doesn’t need to borrow as much.  This should have buffered the effect of any taper.    
 
2-year Treasury-note - The average 2-year yield forecast for Q3 2013 is 0.36%. The average yield forecast for the next six quarters are 0.44%, 0.53%, 0.64%, 0.73%, 0.85% and 0.99%. The current 2-yr Treasury yield is 0.35%.
 
 
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Current Survey
(August 2013)
0.36%
0.44%
0.53%
0.64%
0.73%
0.85%
0.99%
Prior Survey
(July 2013)
0.37%
0.45%
0.54%
0.65%
0.77%
0.89%
1.07%
One Year Prior
(August 2012)
0.61%
0.74%
0.99%
N/A
N/A
N/A
N/A
 
10-year Treasury-note - The average 10-year yield forecast for Q3 2013 is 2.62%. The average forecast for the next six quarters are 2.73%, 2.87%, 3.00%, 3.14%, 3.24% and 3.31%.  The current 10-year yield is 2.79%.
 
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Current Survey
(August 2013)
2.62%
2.73%
2.87%
3.00%
3.14%
3.24%
3.31%
Prior Survey
(July 2013)
2.50%
2.62%
2.78%
2.90%
3.03%
3.15%
3.27%
One Year Prior
(August 2012)
2.29%
2.46%
2.75%
N/A
N/A
N/A
N/A
 
30-year Treasury-bond - The average 30-year yield forecast for Q3 2013 is 3.70%. The average forecast for the next six quarters are 3.76%, 3.90%, 4.01%, 4.12%, 4.18% and 4.20%. The current 30-year yield is 3.80%.
 
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Current Survey
(August 2013)
3.70%
3.76%
3.90%
4.01%
4.12%
4.18%
4.20%
Prior Survey
(July 2013)
3.58%
3.67%
3.81%
3.93%
4.02%
4.13%
4.22%
One Year Prior
(August 2012)
3.33%
3.51%
3.76%
N/A
N/A
N/A
N/A
 
 
THE ECONOMIC FORECAST
 
Unemployment Rate - The median forecast for Q3 2013 unemployment is 7.4%. The median forecast for the next five quarters are 7.3%, 7.2%, 7.0%, 6.9% and 6.8%.
 
The Fed has indicated that its primary focus is the labor market. If employment conditions continue to improve, it will be justified in reducing the amount of stimulus it has been providing. For this reason, the monthly labor report has assumed an even higher degree of importance as a tool to predict Fed action. But, based on recent data, employment conditions are far from robust. July non-farm payrolls rose by only 162k in July, below both the median forecast for 185k new jobs and the 188k average of the previous three months. Despite mediocre payroll gains, the unemployment rate actually drifted down from 7.6% to 7.4%. This was the combined result of 227k new jobs showing up in the household survey and another 37k people exiting the labor force. The total number of officially unemployed American workers is now 11.5 million, down from 12.7 million a year ago. Of these, 37% have been unemployed for 27-weeks or more. There are also 8.2 million “involuntary part-time workers,” and another 2.4 million not technically considered among the unemployed because they haven’t looked for work in the past four weeks. The broader U6 measure of unemployment, which includes everyone who would accept a fulltime job if one were offered, declined a bit in July from 14.3 to 14.0%. This morning, weekly initial claims (first time filings for unemployment benefits) reached a six-year low of 320k. On the surface, this suggests a more stable work environment; but in all fairness, company employment is so lean these days that there are simply fewer workers around to fire.    
 
Real GDP (annualized economic growth) - The median GDP growth forecast for Q2 2013 is +1.2%. The median forecast for the next five quarters are +2.3%, +2.6%, +2.7%, +2.8% and +3.0%.
 
The initial second quarter (annualized) GDP reading was +1.7%, well above the +1.0% median forecast. However, the better-than-expected number came at the expense of the prior quarter, which was revised downward from +1.8% to +1.1%. There will be two more revisions to the second quarter data, and although this survey suggests a downward revision may be in the cards, vastly improved trade deficit numbers, released after the survey period, suggest otherwise. Having said that, third quarter economic growth appears to be trending quite a bit higher as a result of the improved trade deficit and better consumer spending reports. Recall that the historical average economic growth rate in the U.S. over the past 65 years is 3.2%, so even when supported by a massive amount of stimulus, GDP is still floundering below par.    
 
Consumer Prices - The median annualized consumer inflation forecast for Q3 2013 is +1.6%. The median forecast for the next five quarters are +1.5%, +1.6%, +1.60%, +2.0% and 1.9%. 
 
In theory, if inflationary pressure remains low, the Fed has the latitude to keep interest rates at current levels. That doesn’t mean they will.  This morning, July headline CPI rose by 0.16%, while core rose by 0.15%; both were rounded up to 0.2%, which then matched expectations. On a year-over-year basis, CPI crept up from +1.8% to +2.0% in July, while the core rate rose from +1.6% to +1.7%. These are still quite low on a historical basis. The Fed’s preferred inflation measure, the PCE deflator, is rising at a 1.3% annual rate through the second quarter, while core PCE is up 0.8%. Inflation expectations among economists in the survey have declined slightly from the previous period.        
 
MARKET INDICATIONS AS OF 12:10 P.M. CENTRAL TIME

DOW
DOWN 208 to 15,129
NASDAQ
DOWN 56 to 3,613
S&P 500
DOWN 20 to 1,665
1-Yr T-bill
current yield 0.11%; opening yield 0.11%
2-Yr T-note
current yield 0.34%; opening yield 0.33%
5-Yr T-note
current yield 1.52%; opening yield 1.48%
10-Yr T-note
current yield 2.77%; opening yield 2.71%
30-Yr T-bond
current yield 3.81%; opening yield 3.75%

 


JULY RETAIL SALES SUGGEST STRONGER Q3 CONSUMPTION

Tuesday, August 13, 2013
 
UNDERLYING CONSUMER NUMBERS SURPRISE
On the surface, the July retail sales data appeared a bit disappointing as the headline number rose +0.2%, falling just below the +0.3 median forecast. However, there were a number of important core readings that told analysts the consumer has ramped up spending at the beginning of the third quarter. Vehicle sales declined by 1%, which had a pronounced negative effect on the overall number. When the volatile auto component is factored out, ex-auto sales rose by 0.5%. If autos, building materials and gas station sales are excluded, the “control group” also rose by 0.5%. This was the biggest increase of 2013 in the number used to calculate GDP. As a result, many experts are now boosting their third quarter forecasts based on a more vigorous consumer. Morgan Stanley analysts are now expecting a +3.0% economic growth pace for the current quarter. This would seemingly support a September Fed taper.
 
The bond market has backed up in early trading (prices down/yields up). Stocks are also selling off, presumably because Fed stimulus will likely be reduced in the coming months, …although the same prospect of strong economic growth could easily have made a case for an equity rally.
 
In other news, the National Federation of Independent Business optimism index rose from 93.5 to 94.1 in July, the second highest reading this year. This is mostly a trivial data series; the markets aren’t likely to respond directly. And finally, in the ongoing Fannie Mae/Freddie Mac debate, Senate Majority Leader Harry Reid told NPR listeners that he is “not comfortable” getting rid of the two mortgage giants. He’d simply prefer to “revise” or “revamp” the existing structures. As much as anything, this confirms that the GSE debate is just beginning.  
   
MARKET INDICATIONS AS OF 10:30 A.M. CENTRAL TIME

DOW
DOWN 25 to 15,394
NASDAQ
DOWN 3 to 3,667
S&P 500
DOWN 3 to 1,686
1-Yr T-bill
current yield 0.11%; opening yield 0.11%
2-Yr T-note
current yield 0.33%; opening yield 0.31%
5-Yr T-note
current yield 1.47%; opening yield 1.39%
10-Yr T-note
current yield 2.71%; opening yield 2.62%
30-Yr T-bond
current yield 3.75%; opening yield 3.68%

 


JULY EMPLOYMENT DATA FALLS SHORT

Friday, August 2, 2013
 
LABOR MARKET STRENGTH DIMINISHES
Nonfarm payrolls rose by only 162k in July, below both the median forecast for 185k new jobs and the 188k average of the previous three months. May and June payrolls were revised downward by a total of 26k. Within the July data, the number of retail jobs rose by 47k, while jobs in food service and drinking places grew by 38k. The significance of the job growth in these particular sectors is that both seem to be generally transitioning from full-time to less desirable part-time employment. Higher paying jobs in business and professional services rose by 36k, while health care payrolls were essentially unchanged on the month. The number of factory jobs increased by just 6k, while construction fell by 6k.
 
The unemployment rate actually drifted down from 7.6% to 7.4%. This was the combined result of 227k new jobs showing up in the household survey and 37k people exiting the labor force. For anyone keeping score, the unemployment rate for adult men is 7%, woman 6.5% and teenagers 23.7%. The total number officially unemployed is now 11.5 million, down from 12.7 million a year ago. Of these, 37% have been unemployed for 27 weeks or more. There are also 8.2 million “involuntary part-time workers,” and another 2.4 million not technically considered among the unemployed because they haven’t looked for work within the past four weeks. The broader U6 measure of unemployment, which includes everyone who would accept a fulltime job if one were offered, fell a bit in July from 14.3 to 14%.
 
Some of the minor numbers were also a bit discouraging with the average workweek falling by 0.3% to 34.4 hours, and hourly earnings declining by 0.1% to $23.98. These support the full- to part-time transition idea.
 
The release of the monthly employment report is always a highly anticipated event, but lately it’s taken on added importance because Fed officials have decided that jobs data will determine the degree of accommodation. Based largely on what were relatively strong April and June labor reports, the bond market believed the Fed would begin tapering its QE3 program as soon as September. This might still be the case, but today’s weaker-than-expected numbers suggest that the start could be delayed, or the amount of taper could be less. Bonds have rallied in response.

MARKET INDICATIONS AS OF 8:55 A.M. CENTRAL TIME

DOW
DOWN 58 to 15,569
NASDAQ
DOWN 7 to 3,669
S&P 500
DOWN 5 to 1,701
1-Yr T-bill
current yield 0.11%; opening yield 0.11%
2-Yr T-note
current yield 0.31%; opening yield 0.33%
5-Yr T-note
current yield 1.39%; opening yield 1.49%
10-Yr T-note
current yield 2.63%; opening yield 2.71%
30-Yr T-bond
current yield 3.71%; opening yield 3.76%

 

 


 

Disclosure:  These statements are intended for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product.  The information provided within was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute FirstSouthwest views as of the date of the report and are subject to change without notice. These statements represent historical information only and are not an indication of future performance.

Training Calendar

The Texas Public Funds Investment Act requires treasurers, chief financial officers, and investment officers of local governments, including all political subdivisions (excluding certain water districts), to receive 10 hours of training on topics pertaining to the Act within the first 12 months after assuming duties and every two years thereafter. For state agencies and institutions of higher education (including community colleges), investment officers are required to attend one training session within six months of assuming duties and every two years thereafter.


The Center for Public Management (CPM) at the University of North Texas offers several programs designed to meet the training requirements of the Public Funds Investment Act and the needs of trainees. To view a calendar of upcoming training workshops, visit the CPM website.
 

Economic Graphs

 

ASSET MANAGEMENT MAILING LIST

Join our monthly email distribution list.

EmployeeSearch

  • David Medanich
  • Vice Chairman
  • 817.332.9710
  • Read Bio
Search