THE BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Wednesday, July 21, 2010
From July 1 through July 8, 2010, Bloomberg News surveyed 52 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q3 2010 unemployment is 9.6%. The median forecast for the next three quarters are 9.45%, 9.3% and 9.2%.
June’s employment report showed a decline of 125K workers, most of which was due to the release of 225K temporary 2010 Census workers. Private employers added only 83K jobs, a much weaker than expected tally and one indicative of cautious businesses hoarding cash as they attempt to mitigate the perceived uncertainty of the future.
For the second consecutive month, the unemployment rate fell by 0.2 percentage points. In June it went from 9.7% to 9.5%. From the 64,000 ft level, that’s good news. Unfortunately, a closer examination reveals the lower rate was due not to people finding jobs, but instead to people leaving the workforce altogether; the overall labor force shrank by 652K in June after falling by 322K in May. The number of long-term unemployed (those out of work for 27 weeks or longer) was relatively unchanged from the prior month at 6.8 million, 45.5% of all unemployed.
The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) fell slightly from 16.6% to 16.5% in June, marking the first consecutive monthly decline in the U-6 measurement since March 2007. But, the fact that the gap between the official rate and the U-6 rate widened is a somewhat ominous sign for any near-term decline in the official rate. The diversion suggest many of those that left the labor force in June did so after giving up their searches with no success. The official rate, or U-3, is calculated with individuals who have actively searched for work in the previous four weeks, while U-6 expands its pool to those who are not working and not currently looking, but indicate a desire and willingness to work, if it were available. The jobless rate is expected to remain north of 9.0% now through most of 2011.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q3 2010 is +2.8%. The median forecast for the next three quarters are +2.8%, +2.7% and +2.85%.
Many economists feel that much of the growth in the first quarter was attributable to inventory rebuilding, an act only sustainable as long as demand for said products follows suit. Consumer demand began to wane in May though, as advance retail sales fell by 1.2%, followed by another 0.5% decline in June, indicating any recovery underway has tapped the brakes. The consumer will be the one to hit the accelerator on the economy, but unfortunately, like businesses, too much uncertainty on the horizon has a lot of people buckling down until things improve and more clarity is seen in their future; specifically, job security.
According to the government’s third and final estimate of economic growth, Q1 GDP grew at an annualized 2.7% pace, 0.3% lower than previously reported. First quarter growth, originally reported as 3.2% in April, was revised down last month to 3.0%. These downward revisions highlight the impact of restrained consumer spending and its effect on growth.
Going forward, the survey suggests growth will be understandably meek, as high unemployment persists and consumers remain wary of the future and an erratic recovery.
Consumer Prices - The median annualized consumer inflation forecast for Q3 2010 is +1.3%. The median forecast for the next three quarters are +1.0%, +1.1% and +1.65%.
June consumer prices (CPI) fell 0.1%, in line with expectations and the third consecutive month of declining prices. Year-over-year, headline CPI was higher by 1.1%. The core CPI (net of changes in costs to energy and food) rose by a tame, but slightly higher than expected, 0.2% for the month, the largest increase in 2010. On the year, core CPI rose a modest 0.9%.
Producer prices (PPI) fell for the fourth consecutive month, this time by 0.5%, primarily on declines in wholesale food and energy prices. Year-over-year, PPI was up 2.8%, while the core rate rose 1.3%.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q3 2010 is 0.25%. The MEDIAN forecast for the next four quarters are 0.25%, 0.25%, 0.75% and 1.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
At its last meeting, the FOMC reiterated that rates would remain “exceptionally low” for an “extended period” of time. As such, the Committee held its target rate for overnight funds in its range of 0% to 0.25%, making June the 18th consecutive month at such exceptional levels. Minutes from the meeting, released in July, suggest any change in policy may be some time away, as policy makers’ noted downside risks to growth have increased. According to the minutes, the “FOMC didn't see the need for additional policy accommodation” even though the outlook had softened “somewhat”.
Fast forward nearly one month however, and in testimony before the Senate Banking Committee on July 21st , Chairman Bernanke indicated the Fed “remained prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.” In other words, they are willing to inject more stimulus into the markets, but just what form of policy that stimulus would take is not yet known.
Two-year Treasury-note - The average 2-year yield forecast for Q3 2010 is 0.85%. The average yield forecast for the next four quarters are 1.05%, 1.29%, 1.58% and 2.00%. The current 2-year Treasury yield is 0.56%.
10-year Treasury-note - The average forecast for Q3 2010 is 3.18%. The average forecast for the next four quarters are 3.36%, 3.55%, 3.72% and 3.98%. The current 10-year yield is 2.89%.
MARKET INDICATIONS AS OF 3:00 P.M. CENTRAL TIME
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DOW
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Down 109 to 10,120
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NASDAQ
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Down 35 to 2,187
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S&P 500
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Down 14 to 1,065
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1-Yr T-bill
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current yield 0.23%; opening yield 0.24%
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2-Yr T-note
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current yield 0.55%; opening yield 0.58%
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5-Yr T-note
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current yield 1.63%; opening yield 1.69%
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10-Yr T-note
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current yield 2.86%; opening yield 2.95%
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30-Yr T-bond
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current yield 3.88%; opening yield 3.98%
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INFLATION, FOMC MINUTES, OTHER DATA
Friday, July 16, 2010
CPI, PPI SUPPORT LOW RATE SCENARIO
There is a lot to review today, so this may be a little longer than normal. First on the agenda is the inflation data. Yesterday’s release of June data on the producer price index showed that PPI fell 0.5% during the month and the core rate (excluding food and energy) rose a scant 0.1%. On a year-over-year basis, core PPI was up just 1.1%. Turning to consumer prices, it was reported today that CPI also fell in June, matching expectations for a 0.1% decline. The core rate came in at +0.2%, just above expectations of +0.1%. Year-over-year headline CPI is up 1.1% and the core rate is up 0.9%. According to Bloomberg News this was the smallest year-over-year increase since 1966. The kernel of good news to be found here is that, at least at the core level, prices do continue to rise, albeit ever so slightly. After a string of declining figures to start the year, June marked the third straight month that core CPI rose 0.9%, indicating stabilization and perhaps alleviating some of the deflation concerns that had been building. At this point though, inflation is not major concern for the markets.
FOMC MINUTES, REGIONAL MANUFACTURING INDICES
On Wednesday afternoon, the Fed released the minutes of the June 23rd FOMC. There wasn’t anything real shocking or surprising and in fact markets seemed to be a little disappointed that the FOMC did not make a more direct comment about the recent softening in economic data. The Fed did, however, lower their official inflation forecast for 2010 through 2012, and they raised their unemployment forecast for the same period. The Fed is now predicting an unemployment rate between 8.3% and 8.7% in 2011 and 7.1% to 7.5% for 2012. Core PCE (the Fed’s preferred inflation measure) is now projected at 0.9% to 1.3% in 2011 and 1.0% to 1.5% for 2012. It’s hard to imagine a Fed that will be raising rates anytime soon when they expect unemployment greater than 7% and inflation barely above 1%.
We frequently discuss the national ISM manufacturing survey. There are several similar surveys performed on a more regional basis, the most widely followed being the Chicago Purchasing Managers Index. Two others are the Empire Manufacturing Index, covering the New York region, and the Philadelphia Fed Index. Both of these came in well below expectations and served to reinforce the notion that the economy is slowing.
With so many negative reports emanating through the news on a daily basis, it’s no surprise consumer confidence is weakening too. The University of Michigan’s confidence survey, released this morning, came in at 66.5 versus 74 the week before.
OTHER NEWS - FIN REG, GOLDMAN SACHS, BP OIL LEAK, EARNINGS
Economic data wasn’t the only thing garnering lots of market attention in recent days. Yesterday the U.S. Senate gave final approval to the financial reform bill. I just finished reading the 2,300 pages and will have a full report later this afternoon. Yeah, right. Seriously though, the effects of this bill will take years to figure out as what it really does is put a lot more power in the hands of regulators who will no doubt write thousands more pages of rules and regulations for all of us to try and follow.
Just as the news on passage of Fin Reg was coming out we also got word that Goldman Sachs had settled its dispute with the SEC in a $550 million settlement. Then BP finally got some good news on the oil leak as the new seal seems to be working and the flow of oil into the Gulf has been stopped, at least for now. Today we have gotten corporate earnings announcements from Bank of America, Citigroup, and General Electric- all of which reported lower than expected profits and revenue. That has sent stocks down, erasing all of the week’s gains. Bonds have rallied with the 2-year sitting right around its all-time low.
All in all, it has not been a great week. Data has generally been weaker than expected and stocks have been unable to sustain any rally. Investors are starting to get used to the idea of an economy that is just plodding along. While things are clearly better than they were in the middle of the crisis 18 months ago, they are nowhere near as good as one might hope. The economy faces some very strong head winds, especially from housing and unemployment. Unfortunately, these issues are likely to take a long time to work out.
MARKET INDICATIONS AS OF 10:35 A.M. CENTRAL TIME
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DOW
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Down 189 to 10,170
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NASDAQ
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Down 45 to 2,204
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S&P 500
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Down 22 to 1,075
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1-Yr T-bill
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current yield 0.25%; opening yield 0.25%
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2-Yr T-note
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current yield 0.585%; opening yield 0.60%
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5-Yr T-note
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current yield 1.68%; opening yield 1.76%
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10-Yr T-note
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current yield 2.93%; opening yield 2.99%
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30-Yr T-bond
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current yield 3.94%; opening yield 3.99%
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ECO DATA CONTINUES TO DISAPPOINT
Wednesday, July 14, 2010
RETAIL SALES THE LATEST IN A STRING OF WEAKER DATA
Economic data has softened in recent weeks, highlighting the tentative nature of the recovery. Today’s retail sales data have continued the disappointing trend, falling a 0.5% in June, worse than the 0.3% decline economists were expecting. Weak auto sales and lower gas prices contributed to the decline, but even when those components are removed sales managed just a slight 0.1% increase for June. Revisions to prior months didn’t help. Although sales data for May was raised from -1.2% to -1.1%, data for April was lowered from a previously reported +0.6% to +0.3%. The bottom line is that retail sales have softened in the last couple of months as consumers seem to be pulling back.
MORTGAGE APPLICATIONS CRASH, IMPORT PRICES & INVENTORIES FALL
More minor data is also pointing to weakness. The Mortgage Bankers Association’s mortgage application index fell last week and is down a stunning 44% since the end of April. This is clearly a result of the expiration of tax incentives, which had pulled demand forward. But with 30-year mortgage rates at all-time lows one would think a few buyers would emerge. Unfortunately, the poor real estate market and high unemployment are more than offsetting the advantage offered by lower rates. The Associations purchase index fell to the lowest level since December 1996. This is not a good sign for the battered housing market.
In yet another sign that inflation is not a threat the import price index fell 1.3% in June, more than the 0.4% decline that was expected. Lower prices for oil and other commodities were cited as factors, but this only serves to highlight the root cause- weak demand. Don’t be surprised if you start hearing more people talk about the prospects for deflation.
Finally, inventories in the U.S. rose a scant 0.1% in May, the smallest gain so far this year. Inventory restocking had been credited with helping pull the economy out of recession, but as demand cools, companies will have less need to add to stockpiles and this will hurt growth.
In summary, the news from the economic data is not particularly good and that is leading economist to lower their projections for economic growth and delay their calls for interest rate hikes. Later today the Federal Reserve will release the minutes from the June 23rd FOMC meeting. While this may shed some light on the Fed’s thinking, I don’t expect any real surprises. Low interest rates should be with us for a while. The good news is that equity markets have rebounded in the first two weeks of July as strong corporate profit reports from the likes of Alcoa and Intel have helped to push stock prices higher.
MARKET INDICATIONS AS OF 9:58 A.M. CENTRAL TIME
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DOW
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Down 2 to 10,361
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NASDAQ
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Up 4 to 2,246
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S&P 500
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Down 2 to 1,093
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1-Yr T-bill
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current yield 0.28%; opening yield 0.29%
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2-Yr T-note
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current yield 0.62%; opening yield 0.66%
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5-Yr T-note
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current yield 1.85%; opening yield 1.89%
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10-Yr T-note
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current yield 3.09%; opening yield 3.12%
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30-Yr T-bond
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current yield 4.08%; opening yield 4.11%
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MARKETS WERE WELL PREPARED FOR THE BAD JUNE JOBS REPORT
Friday, July 2, 2010
As Expected, June Payrolls Weaken
In this morning’s edition of the Wall Street Journal, columnist Kelly Evans wrote “if there’s any potential upside to Friday’s jobs report, it may simply be that few expect a strong result.” The median Bloomberg forecast had been for a loss of 130k jobs in June with the unemployment rate edging up to 9.8%. The actual numbers were close – According to the Bureau of Labor Statistics, 125k jobs were lost last month while the unemployment rate slid from 9.7% to 9.5%. As a result of low expectations, the short end of the yield curve has barely budged, while stock futures are actually higher.
Analysts had anticipated that payrolls would shrink in June because as many as 300k census workers were expected to be laid-off. As it turned out, 225k of them were released during the month, leaving another 339k still working on the survey. Because the census has distorted the labor picture so much, it has become common practice to focus more on the growth of private sector payrolls. This number increased by 83k in June, well below the 110k average forecast. Private sector payrolls have risen by only 593k for all of 2010, an average of less than 100k. This leaves 7.9 million jobs still waiting to be replaced from the recessionary fallout. Since there are an estimated 150k workers entering the workforce every month, the paltry gains so far are particularly discouraging.
The drop in the June unemployment rate simply reflects another 652k people exiting the labor force. When labor conditions are perceived as poor (as they seem to be now) workers simply stop looking.
The number of long-term unemployed (27-weeks or more) remained at 6.8 million, or 45% of unemployed workers. The unemployment rate for woman fell to 7.8%, while all other worker groups showed little or no change. Those employed part-time for economic reasons was little changed in June at 8.6 million. Another 2.6 million were “marginally attached” to the labor force, meaning that they’d take a job if offered, but hadn’t actually looked for a job in the past four weeks. And 1.2 million were considered “discouraged”, meaning they’ve stopped looking because they don’t believe any jobs are available to them.
Other numbers in the labor report offered little consolation. Hourly earnings fell $0.02 to $22.53, while the average workweek decreased by 0.1 hour to 34.1. These suggest that the labor market weakness could continue.
The bottom line is that the Fed is firmly on hold. And although a small majority of economists are expecting the first rate hike to occur sometime in the second quarter of 2011, it isn’t clear at this point exactly what would prompt Fed officials to tighten credit and slow the economy.
The economy has taken a decidedly negative turn in the second quarter due to an abundance of bad news concentrated in a very short period of time – the Icelandic volcano, the BP oil spill, the mysterious “flash crash”, the sovereign debt crisis in Europe and yet another bear market correction in the stock market. All of this is wearing on consumer confidence. The Conference Board’s monthly measure fell nearly 10 full points in June from 62.7 to 52.9. According to economist David Rosenberg, this index averages 100 during expansions and 70 during recessions. On a related note, the Pew Research Center released a report on Wednesday finding that over half of all American adults think the economy is still in recession.
And on that note, have a happy and safe Fourth of July weekend.
MARKET INDICATIONS AS OF 8:50 A.M. CENTRAL TIME
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DOW
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UP 24 to 9,756
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NASDAQ
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UP 7 to 2,108
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S&P 500
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UP 4 to 1,032
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1-Yr T-bill
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current yield 0.31%; opening yield 0.31%
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2-Yr T-note
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current yield 0.64%; opening yield 0.65%
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5-Yr T-note
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current yield 1.83%; opening yield 1.80%
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10-Yr T-note
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current yield 2.98%; opening yield 2.95%
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30-Yr T-bond
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current yield 3.93%; opening yield 3.90%
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ALL'S QUIET AT THE JUNE FED MEETING
Wednesday, June 23, 2010
The Fed Holds Interest Rates Steady
To the surprise of no one, Fed officials maintained the overnight fed funds target at the stated range of zero to 0.25%. This emergency level has now been in effect since December 16, 2008. The official statement issued immediately after the fourth FOMC meeting of 2010, silenced any lingering notion that interest rates could move higher in 2010 as Fed officials reiterated their pledge to keep overnight borrowing rates extraordinarily low for an extended period. The vote tally was 9 to 1. The lone dissenter continued to be Kansas City Fed President Tom Hoenig, who disagreed with the other voting members for the fourth straight time.
The FOMC members today expressed concern over the European sovereign debt crisis for the first time, saying that “Financial conditions have become less supportive of economic growth, largely reflecting developments abroad.” (The series of events playing out in Europe have contributed to a much stronger dollar which will effectively increase the price of exported goods and decrease prices on the goods we import. A rise in export prices could curtail foreign demand and slow overall economic growth, while cheaper imports could make it harder for our domestic producers to compete and could nudge overall prices further downward.)
The Fed pointed to falling commodities prices and admitted that underlying inflation is already trending lower. (As long as price pressures are dropping, the Fed will be in no hurry to raise rates. If the most recent May CPI data is any indication, the Fed will be on hold for a long time – core CPI is increasing at a 0.9% rate, the smallest year-over-year gain since 1966.)
Members also mentioned that they thought the labor market was “improving gradually” and household spending was increasing, but remained constrained by high unemployment.” (Considering that only 41k private sector jobs were created during the month of May and the most recent Bloomberg average forecast for June payrolls is for a loss of 70k jobs, the FOMC may have been a little optimistic in their assessment.)
Finally, the Fed declared that housing starts remain depressed. (Today’s ugly May new home sales report more than supports this claim. New home sales plunged by 33% in May after gaining 29% in the previous two months combined. The new historical low of 300,000 annualized sales is more than 78% below the record high set during the peak of the housing boom in the summer of 2005. A drop was fully expected as the generous government tax credit had expired at the end of April, but the magnitude of the drop was a bit of a shock.)
The economy is digging itself out of a very deep hole. The fed knows this. It’ll be a while before they begin raising rates …which they would normally do in order to tighten credit and slow the economy.
Yields have actually ground themselves lower today. The five-year Treasury-note yield got down to 1.90% today. I can’t find a point in history when it’s traded at a lower yield.
MARKET INDICATIONS AS OF 3:00 P.M. CENTRAL TIME
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DOW
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UP 5 points to 10,298
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NASDAQ
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DOWN 8 to 2,254
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S&P 500
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DOWN 3 to 1,087
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1-Yr T-bill
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current yield 0.27%; opening yield 0.27%
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2-Yr T-note
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current yield 0.67%; opening yield 0.68%
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5-Yr T-note
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current yield 1.90%; opening yield 1.97%
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10-Yr T-note
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current yield 3.11%; opening yield 3.17%
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30-Yr T-bond
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current yield 4.05%; opening yield 4.10%
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THE BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Monday, June 21, 2010
From June 2 through June 8, 2010, Bloomberg News surveyed 65 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q2 2010 unemployment is 9.7%. The median forecast for the next three quarters are 9.55%, 9.4% and 9.2%.
With the exodus of 322K workers from the labor force, the unemployment rate fell in May from 9.9% to 9.7%. Interestingly, the opposite occurred in April when the unemployment rate actually climbed as a significant number of previously discouraged workers, many of whom encouraged by reports of an improving economy, resumed their search for employment. Even as many workers withdrew from their job searches in May, the headline nonfarm payrolls number grew by an impressive 431K, but was quickly dismissed as underwhelming given the heavy Census hiring (411K). That left a disappointing 41K increase in private-sector jobs.
The number of long-term unemployed (those out of work for 27 weeks or longer) was relatively unchanged from the prior month at 6.8 million, a staggeringly high 46% of the unemployed. The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) fell from 17.1% to 16.6% in May, the measurement’s first decline since January. Some of that drop can be attributed to the drop in the overall labor force, but it may also be a product of BLS data indicating fewer people were working part-time for economic reasons. Those with a tendency to view the glass half full might say more people have been hired into full-time positions, while the glass half empty crowd may say these formerly part-time employees have dropped out of the labor force all together. Realistically, it’s probably a combination of both full-time hires and attrition.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q2 2010 is +3.4%. The median forecast for the next three quarters are +3.0%, +2.8% and +2.8%.
According to the government’s second of three reports on economic growth, Q1 GDP grew at an annualized 3.0% pace, lower than Bloomberg survey results and lower than the initial report of 3.2%. The third and final report of Q1 growth is due to be released this week, and according to the survey, is expected to hold at 3.0%. Q2 GDP looks to be slightly better at 3.4%, according to the median estimate of economists surveyed. Those same economists further trimmed their expectations for growth in Q4 and the first half of 2011 to 2.8%.
Economic growth and our current recovery face a number of headwinds that threaten, at the very least, to maintain these sort of subdued GDP reports. In a speech to the Economic Club of Pittsburgh recently, Cleveland Fed president Sandra Pianalto addressed two such headwinds: prolonged unemployment and a heightened sense of caution on the part of consumers and businesspeople. On employment and growth, the speech points out the historic relationship between a 1% drop in GDP and resulting seven tenths increase in unemployment. During this recession though, that relationship has been turned upside down, with many more people being out of work for every percentage point of GDP lost. According to Ms. Pianalto, “In this recession, GDP fell by 4%, so you would expect unemployment to rise by a little less than three percentage points. Unfortunately, it shot up by more than five percentage points, which means an extra one-and-a-half million people lost their jobs compared with our historical experience.”
Ms. Pianalto also pointed out the harm done by the length of time people have been out of work, and as noted above, 6.8 million people have been out of work for at least six months. The longer people are out of work, the more likely they are to lose valuable skills related to their industry or trade, and if they do find a job, it may be in an industry they are not familiar with, “which means they and the companies they join may suffer some loss of productivity. Multiply this effect millions of times over, and it has the potential to dampen overall economic productivity for years.” With such high numbers of unemployed workers and limited or diminished opportunities available, her second headwind, a cautious consumer and business environment, seems very plausible.
Beyond labor and consumer/business spending, the housing market looks to provide some headwinds of its own. With the market plodding forward without the support of government stimulus, May’s new housing starts and new building permits were down from the previous month by 10% and 6% respectively, a signal that builders are preparing for a drawback in the coming months. One saving grace for the industry may be the exceptionally low mortgage rates currently offered. As recently as last week, Freddie Mac reported the average rate on a thirty-year mortgage was 4.75%, only slighter higher than the all-time low of 4.71% set in December 2009.
Consumer Prices - The median annualized consumer inflation forecast for Q2 2010 is +2.0%. The median forecast for the next three quarters are +1.5%, +1.3% and +1.55%.
May consumer prices (CPI) fell by 0.2%, in line with expectations and the second consecutive month of declining prices. Year-over-year, headline CPI was higher by 2.0%. The core CPI (net of changes in costs to energy and food) rose by 0.1% for the month and 0.9% on the year, both as expected.
Producer prices (PPI) fell for the third time in four months by 0.3%, a smaller decline than the -0.5% forecast by the last Bloomberg survey. Year-over-year, PPI was up 5.3%, while Core PPI rose 1.3% on the year.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q2 2010 is 0.25%. The MEDIAN forecast for the next four quarters are 0.25%, 0.25%, 0.50% and 1.00%. The current fed funds target rate is a range between 0.00% and 0.25%.
According to the survey, the first rate increase isn’t expected to occur until the first quarter of 2011. Given an unemployment rate hovering near 10%, tight credit conditions, the prospect of a weakening housing market and continued weakness and uncertainty in the Eurozone countries, several large financial organizations have again adjusted their outlook for the Fed’s next rate hike, and subsequently pushed it further into 2011. Bank of America-Merrill Lynch believes the hike will be closer to August 2011, while JPMorgan revised their revision from Q2 2011 back further still to Q4 2011.
Two-year Treasury-note - The average 2-year yield forecast for Q2 2010 is 0.91%. The average yield forecast for the next four quarters are 1.11%, 1.40%, 1.74% and 2.17%. The current 2-year Treasury yield is 0.71%.
10-year Treasury-note - The average forecast for Q2 2010 is 3.47%. The average forecast for the next four quarters are 3.64%, 3.85%, 4.06% and 4.27%. The current 10-year yield is 3.24%.
MARKET INDICATIONS AS OF 3:0 P.M. CENTRAL TIME
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DOW
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Up 36 to 10,487
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NASDAQ
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Down 6 to 2,304
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S&P 500
|
Up 4 to 1,115
|
|
1-Yr T-bill
|
current yield 0.27%; opening yield 0.28%
|
|
2-Yr T-note
|
current yield 0.71%; opening yield 0.74%
|
|
5-Yr T-note
|
current yield 2.03%; opening yield 2.08%
|
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10-Yr T-note
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current yield 3.24%; opening yield 3.30%
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30-Yr T-bond
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current yield 4.17%; opening yield 4.22%
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INFLATION REMAINS IN HIBERNATION
Thursday, June 17, 2010
PPI & CPI DECLINE
Inflation data continues to moderate as excess capacity and falling energy prices keep a lid on the cost of many goods and services. The producer price index fell 0.3% in May, the third decline in the last four months. Lower food and energy prices were cited as the main factors in the drop. Stripping out those ingredients, core PPI rose 0.2% last month but is up a mere 1.3% year-over-year. Turning to consumer prices the CPI for May fell for the second month in a row, dropping 0.2%. Consumer prices are up just 2.00% year-over-year. The core rate rose 0.1% in May and is up just 0.9% year-over-year.
OTHER DATA ALSO REFLECT RECENT WEAKNESS
Housing starts and building permits have tumbled with the expiration of tax credits for home buyers. Housing starts fell a larger than expected 10.0% in May to a seasonally adjusted 593k annual pace, the lowest level since December. Building permits fell 5.9% in May to the lowest levels since October. Initial jobless claims unexpectedly climbed to 472k and continuing claims rose to 4.57 million. Finally, the Philly Fed index dropped to a 10-month low.
There are some pockets of good news to be found, particularly in the manufacturing sector. Industrial production followed up a solid April gain of 0.7% with a 1.2% advance in May. The capacity utilization rate rose to 74.7%, bettering expectations and hitting the highest level since October 2008. As good as that may sound, the enthusiasm must be tempered by the realization that a more normal level would be around 80%. This helps explain the tame inflation readings and highlights why the Fed can maintain its ultra easy monetary policy.
Speaking of monetary policy, the expected date for the first rate hike by the Fed keeps getting pushed farther and farther out. The Wall Street Journal reported on Monday that the vast majority of respondents to a recent Citigroup survey didn’t expect the first increase until at least the first quarter of 2011 and roughly half didn’t see an increase until the second or third quarter of 2011. UBS recently gave up on their call for rate hikes in 2010. Bank of America Merrill Lynch doesn’t see a hike coming until August 2011.
Stocks have had a decent week but are lower this morning while Treasury prices have rallied on today’s weaker than expected economic data, pushing yields down even further. The two-year T-Note has traded below 0.70% and the ten-year below 3.20%.
MARKET INDICATIONS AS OF 10:15 A.M. CENTRAL TIME
|
DOW
|
Down 56 to 10, 353
|
|
NASDAQ
|
Down 9 to 2,297
|
|
S&P 500
|
Down 5 to 1,109
|
|
1-Yr T-bill
|
current yield 0.25%; opening yield 0.27%
|
|
2-Yr T-note
|
current yield 0.70%; opening yield 0.73%
|
|
5-Yr T-note
|
current yield 1.99%; opening yield 2.05%
|
|
10-Yr T-note
|
current yield 3.20%; opening yield 3.26%
|
|
30-Yr T-bond
|
current yield 4.13%; opening yield 4.18%
|
DOUBLE DIP UNLIKELY
Thursday, June 10, 2010
Lackluster Ahead
Former Treasury Secretary Robert Rubin, after seeing only 41k private sector jobs created during the month of May, declared that the U.S. was falling into a “double dip recession”. Although current Fed Chairman Ben Bernanke said just this week that a double dip can’t be entirely ruled out, a recent Wall Street Journal survey of 53 economists figures the odds at 19%. The term “double dip” has been floating around for a while and means that after a short period of recovery, the economy falls back into recession. This has only happened once, nearly 30 years ago when former Fed Chairman Paul Volker slashed the overnight funds rate from 17.5% to 9% to stimulate economic growth. This aggressive nine-month easing campaign did help pull the economy out of recession, but also reignited inflation, which he then battled by pushing rates up to 19%, thereby throwing the economy back into recession. The unemployment rate, which was 7.2% in early 1981, rose to 10.8% by late 1982.
This time is quite different. The overnight funds target rate has been in a range of 0.00% to 0.25% for 17 months and counting. And inflation isn’t a problem. In fact, deflation has become a new media catchphrase. Although the unemployment rate is 9.7%, it’s expected to gradually fall in the coming months. The U2 measure of unemployment, which includes only those who were laid-off or were fired, currently stands at 6%. Seven months ago, the U2 measure was 6.7%. The monthly Wall Street Journal survey, released this morning, showed that 53 economists, on average, expect 3% growth in the second half of the year, slightly below the most recent Fed forecast of 3.5%. The depth of this past recession was so severe that the U.S. economy will need to grow well above the 3% historical norm to replace the jobs lost. Still, the growth is positive.
The biggest downside risk to the economy, according to the Journal survey, is the ripple effect of the European debt crisis. This risk of contagion and fear of what might happen next, has pushed back the average forecasted date of the initial Fed rate hike to February 2011. A month ago, a majority of economists believed that the Fed would begin tightening in December of this year.
The next biggest downside risk cited by the surveyed economists is the anemic pace of job growth. The survey showed an average forecast of 2.2 million new jobs would be created over the next 12 months, and a future increase in hiring was considered to be the one development that could push economic growth forecasts higher. Unfortunately, it’s hard to imagine where these extra jobs would come from; probably not in the housing sector where recession-like conditions are expected to prevail for many more years. The Labor Department said in April that more than half the 15 million unemployed workers said they believed their layoff was permanent, a record high dating back to 1967. In previous periods, layoffs were usually temporary. So, although it’s unlikely the economy falls back into a double dip recession, it’s also unlikely that job creation will exceed mediocre forecasts. This suggests that economic growth could prove lackluster for months, or even years to come.
MARKET INDICATIONS AS OF 2:33 P.M. CENTRAL TIME
|
DOW
|
Up 214 to 10,113
|
|
NASDAQ
|
Up 44 to 2,203
|
|
S&P 500
|
Up 24 to 1,080
|
|
1-Yr T-bill
|
current yield 0.31%; opening yield 0.31%
|
|
2-Yr T-note
|
current yield 0.77%; opening yield 0.72%
|
|
5-Yr T-note
|
current yield 2.09%; opening yield 1.97%
|
|
10-Yr T-note
|
current yield 3.30%; opening yield 3.17%
|
|
30-Yr T-bond
|
current yield 4.22%; opening yield 4.11%
|
PAYROLLS DISAPPOINT
Friday, June 4, 2010
CENSUS HIRING DISTORTS HEADLINE
To the casual observer, the 431,000 increase in nonfarm payrolls during the month of May might look like a decent number. But as we have written here previously, the hiring of census workers was expected to inflate the headline by a fairly large factor and that is exactly what happened. Private-sector employment increased by a very disappointing 41 thousand. To make matters worse, net revisions to March and April subtracted 22k from those months. The federal government hired 411k temporary census workers and added 1k other jobs on top of that. State and local government payrolls declined by 22k, leaving a net change of plus 390k in government payrolls.
Private sector jobs are up just 495k since December, averaging less than 100k per month and well below the pace required to make any serious progress on the unemployment rate. Looking at the details the May weakness was widespread: construction fell by 35k after a combined 41k rise in March and April; the service sector added 37k following a 156k gain in April; retail jobs fell 7k; financial activities dropped 12k; professional & business services rose just 22k versus April’s 73k; and finally the goods sector rose by a mere 4k after a 62k gain in April. Manufacturing employment did increase 29k, but even that was less than April’s 40k.
The unemployment rate fell back to 9.7% from last month’s 9.9%. The decline was primarily the result of a 322k decrease in the labor force. This is essentially the opposite of what happened in April when the unemployment rate rose due to an increase in the labor force.
The only real bright spots in today’s report were in the average workweek and average hourly earnings data. The average workweek for all employees on private payrolls increased by 0.1 hour to 34.2 hours. This metric has been growing steadily from a low of 33.7 hours reached last October. The manufacturing workweek increased by 0.3 to 40.5 hours, reflecting the rebound we have seen in other manufacturing data. Average hourly earnings increased by 7 cents to $20.57 in May, a 1.9% increase over the last 12 months. Translation: those with jobs are working longer hours for slightly higher pay.
HUNGARY JOINS THE SOVEREIGN DEFAULT CLUB
While much attention has been placed on the debt problems of the so called PIIGS (Portugal, Ireland, Italy, Greece, Spain), other Euro zone countries are struggling as well. Today, a spokesman for Hungary’s Prime Minister said, “It’s clear the economy is in a very grave situation” and that “I don’t think it’s an exaggeration at all” to talk about default. Reading further into the story it appears that some of these comments were politically motivated. Hungary’s Finance Minister countered that Hungary was “in no way near default.” At this point, it doesn’t really matter, the damage is done. Investor confidence is already extremely low and just the hint of trouble will only make things worse. European stock markets were lower and the Euro currency has traded down to a four-year low just above $1.20.
U.S. STOCKS LOWER, BONDS RALLY
In what has become an all too familiar sight, my Bloomberg screen is covered in red numbers, and that’s a bad thing. The DJIA is down 184 points as I type with the S&P 500 off 18. The weak payroll data combined with more concern about the European situation seems to be the impetus today. As one would expect, weak economic data, falling stock prices, and global contagion has sent bond prices higher and yields lower.
Finally, just in case you missed it, the U.S. government’s total debt rose above $13,000,000,000,000 (that’s $13 TRILLION). I won’t even tell you about all the off-balance sheet items that figure excludes.
MARKET INDICATIONS AS OF 10:00 A.M. CENTRAL TIME
|
DOW
|
Down 188 to 10,067
|
|
NASDAQ
|
Down 35 to 2,268
|
|
S&P 500
|
Down 19 to 1,084
|
|
1-Yr T-bill
|
current yield 0.33%; opening yield 0.36%
|
|
2-Yr T-note
|
current yield 0.73%; opening yield 0.81%
|
|
5-Yr T-note
|
current yield 2.01%; opening yield 2.15%
|
|
10-Yr T-note
|
current yield 3.25%; opening yield 3.36%
|
|
30-Yr T-bond
|
current yield 4.17%; opening yield 4.27%
|
THE DAY BEFORE THE BIG EMPLOYMENT RELEASE
Thursday, June 3, 2010
Lofty Expectations
The May employment numbers will be released on Friday morning and job growth is expected to be significant – the 520k Bloomberg median forecast would represent the highest monthly number in 27 years. The problem with the huge projected increase in payrolls is that the majority of these new jobs are likely to be temporary Federal census workers. The important component to watch will be how many private sector jobs are created. But even if 200k to 300k private sector jobs were created, the hole is still very deep with an estimated 15 million people who would accept full-time employment if it were offered to them. Bloomberg News reported earlier this week that U.S. companies have released 8.5 million workers, or 7.4% of the work force since the recession began.
The unemployment rate, currently at 9.9%, is forecast to decline only to 9.8% in May despite the influx of new jobs. It is not unusual to see high rates of unemployment linger for many months after recovery has begun, as formerly discouraged workers reenter the workforce.
The point here is that we could witness the most significant job growth since the Reagan presidency and fully discount it away.
Bond market yields have crept higher in the past two weeks as the Europe-fueled flight-to-quality subsides a bit. Following the worst May performance in 70 years, the DOW began the month of June with a 2.2% increase. There is some support for a stock market rally – corporate profits have generally topped analyst forecasts, economic data has been better-than-expected …and people have to put their money somewhere. So far today, stocks are down. No reason in particular.
And a number of variables suggest a rocky road ahead of the economy. Although consumer spending, which is an essential component of recovery, has managed to unexpectedly rebound in recent months, it’s becoming more and more clear that this spending boomlette is baseless. The New York Times reported that the average mortgage borrower is now delinquent for 438 days before being evicted. The lengthy period without a mortgage payment has allowed millions of people to shift spending to other things. This explains in large part why retail sales have risen in the past several months, but it doesn’t bode well for the long-term. Many economists continue to push back their target date for the first Fed tightening move. Some of the gloomier outlooks position this date more than a year away.
Concerns over a double-dip recession have mostly faded in response to the improved 2010 economic data. Earlier this week, Bank of America reported that there had been only one early-cycle double dip in modern US history. This happened in 1981, just 12 months after the 1980 recession ended. However, this double-dip was orchestrated by Fed Chairman Paul Volcker who had to boost interest rates significantly to combat double-digit inflation.
MARKET INDICATIONS AS OF 11:30 A.M. CENTRAL TIME
|
DOW
|
Down 65 to 10,181
|
|
NASDAQ
|
Down 5 to 2,275
|
|
S&P 500
|
Down 2 to 1,094
|
|
1-Yr T-bill
|
current yield 0.36%; opening yield 0.32%
|
|
2-Yr T-note
|
current yield 0.79%; opening yield 0.81%
|
|
5-Yr T-note
|
current yield 2.12%; opening yield 2.13%
|
|
10-Yr T-note
|
current yield 3.38%; opening yield 3.34%
|
|
30-Yr T-bond
|
current yield 4.25%; opening yield 4.24%
|
LOTS OF DATA, LITTLE EFFECT
Friday, May 28, 2010
MARKETS BORED BY IMPROVING DATA, FOCUS ON OTHER ISSUES
The past week was a very busy one in terms of the sheer number of economic releases. Normally we would have been peppering your inbox with numerous summaries on the release and market reaction. But in what has become a pattern of late the markets don’t really seem to care too much about the actual data. While the trend of generally improving economic figures continues, the data doesn’t have the impact one might expect. The markets seem to be resigned to the fact that the economy is getting better, but the path remains an uphill trail on a slippery slope with the occasional rock slide pouring down from above. Progress is slow and plodding and no one expects a quick return to the summit. Headline risk and the constant drum beat about financial reforms and sovereign credit issues have taken the focus away from the data for the time being.
Nonetheless, the data does paint a fairly encouraging picture: Existing homes sales climbed 7.6% in March to a 5.77 million unit annual pace. New home sales rose 14.8% to a 504k annual pace. The nationwide S&P Case-Shiller home price index increased 1.99%. All three were higher than expected and obviously supported by the home buyer tax credit which expired at the end of April. The consumer confidence index rose from 57.9 in April to 63.3 in May, topping estimates for a reading of 58.5. While still low by historical standards, consumer confidence has now increased for three straight months. Durable goods orders for April increased 2.9%, bettering the 1.3% advance economists were expecting. Durable goods ex-transportation came in below estimates at -1.0% but March data was revised higher from an originally reported 2.8% gain to 4.8%, offsetting the current month’s weakness.
VOLATILE WEEK FOR FINANCIAL MARKETS
None of the economic data had much of an impact on the markets where the focus remained on other issues. The pending financial reform legislation, Euro zone debt problems, the sharp rise in 3-month LIBOR (which has climbed above 0.50%), and a report that China was reviewing its European holdings all led to a high degree of volatility. The Dow Jones Industrial Average had an up and down week but looks set to close the week little changed. The 2-year and 10-year Treasury notes look to mirror that pattern, closing the week very near last week’s closing levels.
I’d like to wish you all a Happy Memorial Day and remind you to take a moment to reflect on the sacrifices made by the men and women who have served this great country. It is those sacrifices that allow us to sit here in air conditioned comfort and wax poetic about economic data and financial markets. Thank a soldier this weekend.
MARKET INDICATIONS AS OF 2:15 P.M. CENTRAL TIME
|
DOW
|
Down 66 to 10,193
|
|
NASDAQ
|
Down 11 to 2,266
|
|
S&P 500
|
Down 7 to 1,096
|
|
1-Yr T-bill
|
current yield 0.31%; opening yield 0.34%
|
|
2-Yr T-note
|
current yield 0.77%; opening yield 0.88%
|
|
5-Yr T-note
|
current yield 2.09%; opening yield 2.19%
|
|
10-Yr T-note
|
current yield 3.30%; opening yield 3.36%
|
|
30-Yr T-bond
|
current yield 4.21%; opening yield 4.26%
|
IS DEFLATION ON THE HORIZON?
Wednesday, May 19, 2010
CPI Unexpectedly Drops in April
Headline Consumer Price Index (CPI) unexpectedly fell by 0.1% in April, the first outright decline in more than a year. A 1.4% drop in energy costs negated a 0.2% rise in food prices. If both food and energy prices are excluded from the calculation, core CPI was unchanged in April. On a year-over-year basis, core CPI has risen at only a 0.9% rate, the lowest since 1966. It’s hard to make a case that inflation is an imminent problem.
The most recent Business Week magazine included an article that suggested deflation was potentially a bigger concern in the current economic environment. The article reiterated the point shared by many experts that the high unemployment rate has played a significant role in keeping inflation low, and went on to mention that the core personal consumption expenditures (PCE) index (a Fed favorite) increased at an annualized rate of just 0.6% in the first quarter, the slowest since the series began more than 50 years ago.
Although the current disinflation (prices rising at a decreasing rate) is not actually deflation (a rare and prolonged decline in general price levels), we seem to be moving in that direction. Retailers are finding that they’ve lost a great deal of pricing power. Bloomberg recently reported that Walmart combated a 1.6% decline in first quarter store sales with price cuts on more than 10,000 items.
The problem with deflation is as goods prices fall, consumers attempt to delay their purchases until prices fall even more, which in turn reduces overall economic growth. Falling demand creates idle company capacity, so business investment drops, which further hurts economic growth. Experts refer to this as a “deflationary spiral” and presumably, it’s a tough cycle to break. One typical method of fighting deflation, is to cut interest rates, a plan that probably wouldn’t be quite as effective with interest rates already near zero. However, the current lack of price pressure strongly suggests that the Fed is likely to remain on hold for all of 2010.
The equity markets are continuing a rocky week. The latest concern is Germany’s ban on naked short sales of euro-denominated Government debt, shares in the 10 largest German financial institutions, and certain credit default swaps. In a nutshell, Germany does not want speculators placing bets on the failure of struggling sovereign nations and financial institutions unless investors own the bonds or shares and are trying to hedge their risk. Other European nations are reportedly considering a similar ban. It isn’t entirely clear why the equity markets are getting hammered. It’s been suggested that Germany’s action will fuel liquidity concerns, but most news articles are citing “uncertainly” as the primary culprit.
On an interesting side note, Columnist George Will, in a Washington Post Ed Op last week, mentioned that the gross domestic product (GDP) of Greece is below that of the Dallas-Fort Worth metropolitan area.
MARKET INDICATIONS AS OF 3:35 P.M. CENTRAL TIME
|
DOW
|
Down 66 to 10,444
|
|
NASDAQ
|
Down 18 to 2,298
|
|
S&P 500
|
Down 9 to 1,110
|
|
1-Yr T-bill
|
current yield 0.33%; opening yield 0.32%
|
|
2-Yr T-note
|
current yield 0.77%; opening yield 0.73%
|
|
5-Yr T-note
|
current yield 2.12%; opening yield 2.06%
|
|
10-Yr T-note
|
current yield 3.37%; opening yield 3.35%
|
|
30-Yr T-bond
|
current yield 4.24%; opening yield 4.23%
|
THE BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Wednesday, May 19, 2010
From April 29 through May 10, 2010, Bloomberg News surveyed 73 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
THE ECONOMIC FORECAST
Unemployment Rate - The median forecast for Q2 2010 unemployment is 9.7%. The median forecast for the next three quarters are 9.5%, 9.4% and 9.2%.
April’s monthly nonfarm payrolls report showed unemployment rising from 9.7% to 9.9%, despite the addition of 290K jobs; 231K of which were in the private sector. Revisions to March and February accounted for an additional 143K jobs and moved February’s report from negative territory to positive. The unfortunate rise in the unemployment rate was largely the product of 195K, previously “discouraged”, workers reentering the labor market as signs of the economy pointed towards improvement.
Ironically, despite a seemingly improving jobs picture and the reentrance of some workers to the market, the total number of long-term unemployed (those out of work for 27 weeks or longer) grew by 169K in April to more than 6.7 million, accounting for 45.9% of the total number of unemployed. The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) moved higher yet again to 17.1%, approaching the all time high of 17.4% set in October 2009.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q1 2010 is +3.0%. The median forecast for the next three quarters are +3.15%, +2.95% and +2.9%.
On the heels of an exceptional 5.6% annualized growth rate in Q4 2009, first quarter real GDP was a bit more subdued, but positive nonetheless. According to the government’s first of three reports on economic growth, Q1 GDP grew at an annualized 3.2% pace, in line with the forecast. The third-consecutive increase in GDP was largely the product of a 1.6% quarterly increase in consumer spending, and the replenishment of business inventories to the tune of $31.1 billion. Looking forward, the survey suggests a continued lukewarm, and perhaps susceptible, recovery as GDP is forecast to slow to 2.9% by Q4.
Given the large numbers of long-term unemployed and an stubbornly high U-6 unemployment rate, the support provided by the consumer spending component of GDP could falter in the months to come, causing the growth/recovery to slow further. Following the release of the April jobs report, David Rosenberg, chief economist at Gluskin Sheff (formerly of Merrill Lynch) released his analysis of the report. The main topic of Mr. Rosenberg’s analysis was the vast excess capacity in the labor market and the idea that wages would eventually come under attack from the downward pressure placed on them by excess supply (in this case available workers) over demand.
Separately, the threat of contagion from the EU sovereign debt crisis poses further risks to the U.S., as United States banks are estimated to have $3.6 trillion in exposure to European banks, according to the Bank for International Settlements. According to a New York Times article on the subject, that balance includes more than a trillion dollars in loans to France and Germany, and nearly $200 billion to Spain. Furthermore, ecological disasters such as the oil spill in the Gulf of Mexico, or disastrous floods in Tennessee, should not be dismissed as isolated incidents. Even without directly impacting the economy as a whole, the impact to those geographic areas can have a contagion effect of its own on nearby markets, both physical and financial ones.
Consumer Prices - The median annualized consumer inflation forecast for Q2 2010 was +2.2%. The median forecast for the next three quarters are +1.8%, +1.6% and +1.7%.
Producer prices (PPI) unexpectedly fell 0.1% in April, the second decline in the last three months. According to the survey, economists had expected a still subdued increase of 0.1% for the month. Year-over-year, PPI was higher by 5.5%. While the annual increase sounds very high, it is more a reflection of the severe weakness of a year ago and the subsequent strong rebound made in the price of oil. Core PPI (net of energy and food prices) rose 0.2% on the month and just 1.0% for the year, a reflection of the effect of oil on the headline number.
Consumer prices (CPI), released this morning by the Labor Department, indicated a cost of living on the decline. The overall CPI was negative for the first time since March 2009, dropping 0.1% in April, but grew 2.2% year-over-year. Like PPI, much of the annual increase of CPI was largely due to the bounce in fuel costs from the previous year. With food and energy stripped away, core CPI was flat on a month-over-month basis and up only 0.9% on the year.
THE INTEREST RATE FORECAST
Overnight Fed Funds - The MEDIAN fed funds forecast for Q2 2010 is 0.25%. The MEDIAN forecast for the next four quarters are 0.25%, 0.50%, 1.00% and 1.50%. The current fed funds target rate is a range between 0.00% and 0.25%.
Recently, a number of economists have reassessed their initial predictions of the FOMC raising rates in the latter part of 2010. Citing the uncertainty of the EU sovereign debt crisis and the likelihood of it reducing the risk of inflation, just this week Citigroup joined Morgan Stanley in revising their call for the first Fed rate hike, moving it back from Q4 2010 to the first half of 2011.
Fed Bank of Chicago President Charles Evans said last week that “very accommodative” rates are appropriate, though they will have to rise over time. “The risks, obviously, with the global situation make things a little bit more uncertain than we were expecting,” according to Mr. Evans.
Two-year Treasury-note - The average 2-year yield forecast for Q2 2010 is 1.14%. The average yield forecast for the next four quarters are 1.41%, 1.72%, 2.11% and 2.47%. The current 2-year Treasury yield is 0.73%.
Interestingly, there has been a great deal of volatility in the rate forecasts over the last few months. Looking back to the January Bloomberg survey, the forecasts for the two-year treasury-note were strikingly higher than their current surveyed levels. As of January 2010, the average yield forecast for Q2 2010 1.37%, Q3 was 1.66% and Q4 was 2.04%. Last month, those same forecast were higher still: Q2 1.23%, Q3 1.49% and Q4 2.24%.
10-year Treasury-note - The average forecast for Q2 2010 is 3.80%. The average forecast for the next four quarters are 3.93%, 4.07%, 4.25% and 4.39. The current 10-year yield is 3.33%.
MARKET INDICATIONS AS OF 10:15 A.M. CENTRAL TIME
|
DOW
|
Down 107 to 10,403
|
|
NASDAQ
|
Down 29 to 2,288
|
|
S&P 500
|
Down 9 to 1,109
|
|
1-Yr T-bill
|
current yield 0.32%; opening yield 0.33%
|
|
2-Yr T-note
|
current yield 0.73%; opening yield 0.77%
|
|
5-Yr T-note
|
current yield 2.07%; opening yield 2.11%
|
|
10-Yr T-note
|
current yield 3.33%; opening yield 3.38%
|
|
30-Yr T-bond
|
current yield 4.21%; opening yield 4.26%
|
APRIL JOB GAINS SHOW UNEXPECTED STRENTGH
May 7, 2010
Payrolls Jump but Unemployment Rises
Nonfarm payrolls surged by 290k in April, bettering the median forecast by 100k. Of the increase, 231k came from the private sector. Many skeptics had long speculated that job growth, when it eventually came, would appear stronger than it was, due largely to the hiring of government census workers, but in the April report only 65k new Federal government jobs were added. Eighty-thousand (80k) service sector jobs were created, the factory sector added 44k, retail added 12k and construction contributed 14k, while the number of state and local government jobs fell by 6k.
Prior month revisions made the report look even better. The March payroll number, originally reported up 162k, was revised to 230k, while February, originally reported down 36k, was revised up to 39k.
The unemployment rate, calculated through a separate household survey, rose from 9.7% to 9.9% in April. Although the rate was forecasted to remain at 9.7%, a significant increase in the number of people actively looking for work pushed it higher - the household survey showed that employment rose by 550k, while the labor force increased by a much larger 805k. A rise in the unemployment rate is a common occurrence when an economy begins showing signs of recovery as discouraged workers become optimistic about their job prospects and resume their search. In fact, the number of people counting themselves as unemployed rose from 15 million to 15.3 million during the month.
The job gains are welcome and most experts are admitting that the recovery has exceeded expectations. Six months ago, many were predicting that the recovery would essentially be a jobless one. After revisions, the business survey is now showing 573k jobs created so far in 2010, while the household survey shows an even healthier 1.7 million job gain year-to-date.
So far this morning, despite the strong data, yields have slipped a bit lower. Investors realize that the labor market recovery still has a long way to go with more than 15 million people out of work. As UT finance professor Sandy Leeds pointed out in his commentary this morning, the same number of people are working today as there were in 1999, while the population has grown by 28 million. If three million jobs were created per year, the unemployment rate won’t return to 5% for another 4.5 years.
In addition to the realization that the labor market is very gradually emerging from a very deep hole, the equity markets are still floundering after yesterday’s mysterious freefall, which makes the safety of the bond markets look particularly appealing. And the world economy is still teetering with Greece on center stage.
More on Yesterday’s Stock Market Plunge
The Wall Street Journal speculated this morning that high frequency computer trading and market shutdowns may have played a major role in the record drop. Bloomberg is reporting that stock market officials are reviewing all trades from yesterday afternoon. NASDAQ is canceling trades that were 60% or more down from the price recorded at 2:40 p.m.
The DOW was down 280 points this morning in early trading, but has subsequently gained some of the loss back. The extreme unexplained volatility of the past two days could hamper further bull market progress as rattled Main Street investors retreat back to the sideline. Up until this week, the stock market outlook appeared optimistic due to the vast majority of corporate earnings beating expectations and signs of a stronger-than-expected recovery.
MARKET INDICATIONS AS OF 9:55 A.M. CENTRAL TIME
|
DOW
|
DOWN 147 to 10,373
|
|
NASDAQ
|
DOWN 49 to 2,270
|
|
S&P 500
|
DOWN 19 to 1,103
|
|
1-Yr T-bill
|
current yield 0.34%; opening yield 0.35%
|
|
2-Yr T-note
|
current yield 0.78%; opening yield 0.79%
|
|
5-Yr T-note
|
current yield 2.13%; opening yield 2.16%
|
|
10-Yr T-note
|
current yield 3.36%; opening yield 3.40%
|
|
30-Yr T-bond
|
current yield 4.17%; opening yield 4.20%
|
A WILD DAY ON WALL STREET
Thursday, May 6, 2010
DOW plunges 998 points before recovering
This afternoon, in a frightening 5-minute span, the DOW plunged by 573 points. At one point, the DOW was down 998 points to 9,869, the lowest point of the year. But within minutes, rapid recovery was at hand and the DOW quite shockingly closed down only 347 points to 10,530. The cause of the brief, but dramatic freefall was thought to be sparked by the escalating crisis in Greece and fueled by technical system trading, which explains why the equity markets snapped back shortly afterwards. The Greek debt crisis has been news for many months, but has reached a panic state in recent weeks. The Greek budget deficit-to GDP ratio is 13.6%. The primary concern is that Greece, saddled with obligations it likely can’t pay, will begin defaulting on its debt, an event that has happened with regularity throughout history. The bigger concern is that other countries, heaped with their own mountains of debt, will follow a similar path.
Greece was thrown a $140 billion life line by fellow Euro Zone members and the International Monetary Fund (IMF) earlier this week. In return for these emergency loans, Greece had to agree to impose severe austerity cuts. (Austerity refers to reductions in government spending and increases in taxes with the intention of paying back debts.) These hugely unpopular measures would slash generous government pensions and current worker pay while raising taxes. Since the public sector accounts for about 40% of Greek GDP, the cuts would have a particularly profound effect on the economy and is likely to throw Greece back into a more severe recession. While the Greek parliament voted 172-121 today to approve the austerity measures, civil workers staged another massive protest. All of the civil unrest has suggested to some that the current political leaders may eventually be voted out of office in favor of others in support of default over belt-tightening.
Greece has gotten much of the attention, but budget deficit-to-GDP ratios in other countries are also flashing red, with Ireland at 14.3%, the UK at 11.5%, Spain at 11.2% and Portugal at 9.4%.
The extent of the problem is so far reaching that some expect the Europe Union to reenter recession in the near-future. The U.S. is in a similar situation. According to www.usgovernmentspending.com, the deficit-to-GDP ratio of the United States has reached 10.6%. As recently as 2007, it was 1.1%.
The DOW was already floundering, having dropped more than 100 points in early trading, but started a rapid acceleration in the early afternoon. The exact reasons for this are unclear. Initially, it appeared as though the markets were reacting in full panic mode to possible Greek default and fear of contagion (spillover) to other debt-bloated countries. Later, “technical trading” was blamed for much of the crash. Then a rumor surfaced that European banks were refusing to lend to each other, suggesting a credit market freeze-up eerily similar to what happened in the fall of 2008. And then shockingly, CNN reported that an error in a stock quote for Proctor and Gamble was to blame. This so-called "fat finger mistake" allegedly caused Proctor and Gamble stock to plunge from $62 in 12 minutes to $39 before regaining almost its entire loss just 6 minutes later. Citigroup, the firm thought to have the fat finger, denied that any input errors had been made.
MSNBC reported that the 998 point intraday drop in the DOW was the largest ever. It’s probably safe to say that investors have never been so relieved to end the day down only 347 points.
Bonds rallied in a flight-to-quality. The 10-year yield is now at the lowest point this year.
Tomorrow morning, the April labor market report will be released. The excitement surrounding this release seems to have diminished somewhat as the market catches its collective breath.
MARKET INDICATIONS AS OF 4:05 P.M. CENTRAL TIME
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DOW
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DOWN 347 to 10,520
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NASDAQ
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DOWN 82 to 2,319
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S&P 500
|
DOWN 6 to 1,116
|
|
1-Yr T-bill
|
current yield 0.35%; opening yield 0.37%
|
|
2-Yr T-note
|
current yield 0.78%; opening yield 0.86%
|
|
5-Yr T-note
|
current yield 2.15%; opening yield 2.29%
|
|
10-Yr T-note
|
current yield 3.40%; opening yield 3.54%
|
|
30-Yr T-bond
|
current yield 4.20%; opening yield 4.38%
|
ECONOMIC REPORT CARD Q1
Friday, April 30, 2010
GDP Growth is Slightly Below Forecast
The initial reading of economic growth for the first quarter of 2010 turned out to be a bit lower than expected, but there were reasons for optimism. Gross Domestic Product (GDP) grew at a 3.2% annualized rate in Q1. This falls slightly below the Bloomberg average forecast of 3.3%, and is a fairly significant decline from the robust 5.6% growth rate of the fourth quarter. The good news was that the U.S. consumer made a 3.6% contribution to growth in Q1, the most in three years. This was well above the 1.6% contribution that consumers made in the final quarter of last year. Another big positive came from purchases of business equipment, which surged 13.4% for the second straight double-digit increase. Apparently, shoppers and businesses are feeling more optimistic. Inventories, which added 3.8 percentage points to prior quarter GDP, added only 1.6 percentage points in the most recent period. Ironically, inventory volume actually rose for the first time in two years, while in the prior quarter inventories shrunk …but at a decreasing rate.
Much of the weakness in the Q1 GDP report was concentrated in real estate. Residential investment unexpectedly fell by 10.9% while non-residential investment in structures fell 14%. Another negative surprise was that government spending dropped. This seems counter-intuitive given the rising deficits, but digging a bit deeper shows that federal spending did actually increase by 1.4%, while state and local government spending dropped 3.8%, posting its fifth straight quarterly decline. The decrease in net government spending suggests that the private sector is now towing the line.
Remember that GDP data is subject to revisions in each of the next two months before becoming final.
Another Quiet Fed Meeting
Fed officials met earlier this week in a very quiet FOMC meeting. Few expected any change in monetary policy or in the official statement, and expectations were fully realized as the Fed reiterated that they expected to maintain the overnight target within the zero to 0.25% range for an “extended period”. The Fed cut the funds target to the current record low more than 16 months ago. A number of economists are now predicting that the historically low overnight rate target could be extended into 2011.
The bottom line (at present time) is that recovery is afoot, but there’s still is a long way to go. Since support to the housing market has expired, and inventory levels appear to be restored, economic growth going forward will be at a disadvantage to the past several reports. The Fed recognizes this and will likely maintain an accommodative stance to allow fledgling growth to better establish itself.
MARKET INDICATIONS AS OF 10:15 A.M. CENTRAL TIME
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DOW
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DOWN 11 to 11,156
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|
NASDAQ
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DOWN 12 to 2,500
|
|
S&P 500
|
DOWN 5 to 1,200
|
|
1-Yr T-bill
|
current yield 0.37%; opening yield 0.38%
|
|
2-Yr T-note
|
current yield 0.97%; opening yield 1.00%
|
|
5-Yr T-note
|
current yield 2.44%; opening yield 2.48%
|
|
10-Yr T-note
|
current yield 3.69%; opening yield 3.73%
|
|
30-Yr T-bond
|
current yield 4.56%; opening yield 4.59%
|
U.S. STOCKS HAMMERED, BONDS RALLY ON SOVEREIGN DOWNGRADES
Tuesday, April 27, 2010
SOVEREIGN DEBT DOWNGRADES
Standard & Poor’s lowered the credit rating on Greece’s sovereign debt from BBB+ to BB+, taking them down to junk status, and warned that investors might recover as little as 30% of their investment. That should not come as a shock to anyone who has been following the financial news lately as Greece’s problems have been widely reported. Despite a number of rescue plans and announcements from other Euro zone partners, the markets never seemed to believe that Greece could work its way out of the mess. What did seem to catch the markets a little off guard was the downgrade of Portugal to A- from A+. Again, Portugal’s debt problems have been widely reported, but the issue didn’t seem to be as critical as that of Greece. That has now changed. Unfortunately, one has to wonder if the other countries that make up the so called PIIGS are next (Ireland, Italy and Spain).
Aside from the obvious problems of too much debt, many of the countries are also suffering from a crisis of confidence. Once the market believes they are in trouble, then they are. Investors rush for the exists, selling begets more selling, the cost to issue new debt becomes prohibitive and the problem just feeds on itself. Just as we saw with some of our own financial institutions, when the liquidity dries up, you’re done. In the U.S., the government stepped in to provide a backstop and emergency liquidity to the financial institutions. That action halted the crisis and allowed the markets to regain their confidence. The European Union, and even the IMF, have been attempting to do the same thing for Greece. But so far, their actions have been too timid or contingent on other things to restore the market’s confidence.
U.S. STOCKS PLUMMET, BONDS RALLY
U.S. stock markets sold off sharply in the wake of today’s news. After reaching the highest levels since September 2008 yesterday, the Dow Jones Industrial Average fell more than 200 points and closed below 11,000 today. Bonds benefitted from a flight to quality rally with the two-year Treasury note yield declining 10 bps to 0.95% and the 10-Year T-Note yield dropping almost 12 bps to 3.69%. Gold and the U.S. dollar also rallied, while the Euro fell.
MARKET INDICATIONS AS OF 4:15 P.M. CENTRAL TIME
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DOW
|
Down 213 to close at 10,992
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|
NASDAQ
|
Down 51 to close at 2,471
|
|
S&P 500
|
Down 28 to close at 1,184
|
|
1-Yr T-bill
|
current yield 0.375%; opening yield 0.42%
|
|
2-Yr T-note
|
current yield 0.95%; opening yield 1.05%
|
|
5-Yr T-note
|
current yield 2.42%; opening yield 2.56%
|
|
10-Yr T-note
|
current yield 3.69%; opening yield 3.81%
|
|
30-Yr T-bond
|
current yield 4.57%; opening yield 4.67%
|
THE BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Friday, April 16, 2010
From April 1 through April 8, 2010, Bloomberg News surveyed 46 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q2 2010 unemployment is 9.60%. The median forecast for the next three quarters are 9.5%, 9.4% and 9.2%.
Nonfarm payrolls increased by 162K in March, the strongest job growth in three years. Upward revisions to both January and February added 62K jobs combined, and actually pushed January into positive territory (+14K). With the addition of 48K temporary census takers, total government payrolls grew by 39K for the month. Private payrolls, a more important barometer of overall economic health, increased by 123K, fueling greater optimism for a sustainable labor market recovery on the horizon.
The unemployment rate remained at 9.7%, in line with expectations. The rate held steady for the third consecutive month despite the addition of previously discouraged workers, likely encouraged to resume their job searches by a seemingly improving economy.
Despite the improving signs, more people were considered long-term unemployed (those out of work for 27 weeks or longer) in March, as the total number increased to more than 6.5 million, accounting for 44% of the total unemployed figure. The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) ticked up for the second month in a row to 16.9%.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q2 2010 is +2.80%. The median forecast for the next three quarters are +2.75%, +2.85% and +2.8%.
The government’s third and final reading of fourth quarter GDP showed an annualized growth rate of 5.6%, slightly lower than the previous reading of 5.9%, but still the highest rate since the third quarter of 2003. The final quarter of 2009 saw businesses depleting inventories at a significantly lesser pace and replacing fixed assets, correcting what many have deemed an overreaction to the recession. Inventories still fell by $19.7 billion over the quarter, but with a backdrop of three consecutive quarters of $100 billion in declining inventories (the overreaction), the change in inventories was still the impetus for two-thirds of the quarter’s growth, accounting for 3.8 percentage points. Consumer spending managed to contribute 1.2 percentage points to Q4 GDP.
Later in the year, economists are forecasting a slowdown, with first quarter GDP dropping to 2.8%and holding there for the rest of 2010. Continued meek consumer spending in the face of high unemployment, and slower turning of business inventories should prove to dampen the breakneck pace of growth.
The initial release of first quarter GDP is due from the Commerce Department on April 30th.
Consumer Prices - The median annualized consumer inflation forecast for Q2 2010 was +2.30%. The median forecast for the next three quarters are +1.85%, +1.65 and +1.7%.
March consumer prices (CPI) were virtually unchanged for the month, mildly rising by only 0.1%. Year-over-over CPI grew by 2.3%, as energy costs remain elevated relative to their March 2009 levels. Excluding food and those volatile energy costs, core CPI was flat (0.0%) in March and up only 1.1% on the year.
On the heels of February’s producer prices (PPI) falling 0.6%, economists in the survey anticipate month-over-month headline PPI to rise 0.5%. Year-over-year, however, the survey suggests producer prices will grow by 6.1%. Given a forecasted Core PPI (net of energy and food prices) of 0.9%, one could surmise that the vast majority of the increase is the product of the higher energy prices mentioned above. The average price for a barrel of oil in March a year ago was $57, versus the March 2010 average of nearly $82.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q2 2010 is 0.25%. The MEDIAN forecast for the next four quarters are 0.25%, 0.75%, 1.00% and 1.50%. The current fed funds target rate is a range between 0.00% and 0.25%.
At its last meeting, the FOMC cited continued slack resource utilization, a weak housing market and subdued and stable inflation trends as its basis for holding the target rate in its range of 0% to 0.25%, the same level it has been at since December 2008.
According to minutes released from the Fed’s most recent meeting, the policy makers decision to raise rates at some point in the future was “explicitly contingent on the evolution of the economy, rather than on the passage of any fixed amount of time.” As such, the use of the “extended period” language would not inhibit the Fed’s ability “to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably.”
The minutes continued with several officials (unidentified) suggesting “the risks of an early start to policy tightening exceeded those associated with a later start”, as the Committee has the latitude to respond swiftly and aggressively in response to changing economic conditions.
Two-year Treasury-note - The average 2-year yield forecast for Q2 2010 is 1.23%. The average yield forecast for the next four quarters are 1.49%, 1.85%, 2.24% and 2.63%. The current 2-year Treasury yield is 0.97%.
10-year Treasury-note - The average forecast for Q2 2010 is 3.98%. The average forecast for the next four quarters are 4.09%, 4.25%, 4.43% and 4.6%. The current 10-year yield is 3.79%.
MARKET INDICATIONS AS OF 11:10 P.M. CENTRAL TIME
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DOW
|
Down 131 to 11,013
|
|
NASDAQ
|
Down 29 to 2,475
|
|
S&P 500
|
Down 21 to 1,186
|
|
1-Yr T-bill
|
current yield 0.38%; opening yield 0.39%
|
|
2-Yr T-note
|
current yield 0.95%; opening yield 0.99%
|
|
5-Yr T-note
|
current yield 2.47%; opening yield 2.52%
|
|
10-Yr T-note
|
current yield 3.77%; opening yield 3.81%
|
|
30-Yr T-bond
|
current yield 4.67%; opening yield 4.71%
|
RETAIL SALES SURGE AS CORE INFLATION RECEDES
Wednesday, April 14, 2010
Consumer Spending Jumps
Retail sales rose by 1.6% in March, bettering expectations for a 1.2% increase. On a year-over-year basis, retail sales are now up 10%, the biggest annual gain since August 1999. Although this is huge, the level of sales remains below the 2007 peak. It’s tough to put gains in perspective when the recession bottom was so low. Nevertheless, March spending was better-than-expected and certainly moving in the right direction. Eleven of 13 major categories increased during the month, with sales at auto dealerships up 6.7%, building materials up 3.1%, clothing up 3.1% and sporting goods up 2.3%.
Consumer Inflation is Well-Contained
The overall consumer price index (CPI) rose by a tiny 0.1% in March, while the core rate was unchanged. Energy prices held steady, food prices were up 0.2%, vehicle prices increased by 0.2%, medical care rose 0.3% and owners-equivalent rent (making up 32% of the index) fell by 0.1%. On a year-over-year basis, overall CPI is now up 2.3%, while core CPI is rising at a 1.1% pace, equaling the lowest in 44 years.
Normally, a big jump in retail sales would signal strength in the economy, which in turn would suggest that inflation could rise, pushing bond yields higher. But so far today that hasn’t happened, mainly because the actual March inflation numbers are so benign. Most Fed officials had already determined price pressures were well-contained. The CPI report was confirmation. As long as inflation stays low, the Fed is under little pressure to raise interest rates.
Bond yields are virtually unchanged from opening levels. The DOW closed above the 11,000 mark on Monday for the first time since September 2008 and is up again today. Recent data has been relatively good and pessimism has stepped to the sidelines for the time being.
But the economy is far from recovered.
MARKET INDICATIONS AS OF 9:35 A.M. CENTRAL TIME
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DOW
|
UP 38 to 11,057
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|
NASDAQ
|
Up 17 to 1,197
|
|
S&P 500
|
Up 4 to 2,483
|
|
1-Yr T-bill
|
current yield 0.43%; opening yield 0.43%
|
|
2-Yr T-note
|
current yield 1.06%; opening yield 1.05%
|
|
5-Yr T-note
|
current yield 2.59%; opening yield 2.58%
|
|
10-Yr T-note
|
current yield 3.85%; opening yield 3.82%
|
|
30-Yr T-bond
|
current yield 4.72%; opening yield 4.68%
|
FED OFFICIALS WEIGH IN AFTER LABOR REPORT
Thursday, April 8, 2010
Recent Fed Speeches Quiet Tightening Chatter
After what most considered a fairly strong March employment report, the market signaled that it expected the Fed to begin raising rates sooner rather than later. Apparently, this thought may have been a bit premature as Fed officials have clearly stated otherwise.
In Dallas yesterday, Chairman Bernanke said that "the economy has stabilized and is growing again, although we can hardly be satisfied when 1 out of every 10 U.S. workers is unemployed and family finances remain under great stress." He went on to say that he was “particularly concerned” about the number of people out of work for six months or more, and voiced concern over the fragile housing market, the rising number of home foreclosures and the “troubled” commercial real estate market.
That same day, Vice Chairman William Dudley was even more direct about interest rates and employment, telling his New York audience that “we would like to see employment gains much more substantial than what we’ve gotten. What that tells us is that monetary policy needs to be on a very easy setting.”
On Tuesday, the minutes to the March FOMC meeting were released. Although there were no real surprises, the Committee did address the “extended period” question saying that any change in monetary policy would depend on the health of the economy “rather than on the passage of any fixed amount of calendar time.” Fed officials went on to say that they could tighten “promptly” if evidence suggested the economy was accelerating or inflation was rising notably, or could maintain monetary policy at current levels “for quite some time” and could even keep rates low for an increased time if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.
A number of economists expect that the “extended period” language will be dropped from the official statement within the next couple of meetings, but St. Louis Fed President James Bullard, also an FOMC voting member, recently cautioned that “a change in the extended period language will not mean tighten soon”.
Kansas City Fed President Thomas Hoenig, who has been a vocal opponent of the “extended period” language, spoke in Santa Fe on Wednesday saying that he believes the Fed should raise the overnight funds rate to about 1% “sometime soon” to prevent asset bubbles from emerging. He believes 1% would still be highly accommodative, but his opinion apparently stands alone amongst FOMC members.
The Fed has amassed a security portfolio valued at $2 trillion, consisting primarily of long-term mortgage-backed assets. As interest rates rise, the value of this portfolio will fall, potentially resulting in large losses. From this standpoint, it behooves the Fed to jawbone rates lower. From an even broader standpoint, as long as the U.S. is issuing massive debt, lower rates are much preferred. But rates can only stay low if inflation remains contained. So far, it has.
A substantial component of core consumer inflation is “owner-occupied rent”, which is a measure of housing costs. Ironically, continued problems in the housing market could actually help the Fed by keeping inflation under control.
MARKET INDICATIONS AS OF 11:00 A.M. CENTRAL TIME
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DOW
|
down 9 to 10,899
|
|
NASDAQ
|
down 3 to 2,428
|
|
S&P 500
|
down 2 to 1,177
|
|
1-Yr T-bill
|
current yield 0.44%; opening yield 0.44%
|
|
2-Yr T-note
|
current yield 1.05%; opening yield 1.05%
|
|
5-Yr T-note
|
current yield 2.60%; opening yield 2.60%
|
|
10-Yr T-note
|
current yield 3.86%; opening yield 3.86%
|
|
30-Yr T-bond
|
current yield 4.75%; opening yield 4.74%
|
MARCH LABOR REPORT PROVES HEALTHY
Friday April 2, 2010
Non-Farm Payrolls Rise in Cautious Recovery
Economists and traders have been forecasting that business payrolls would turn positive for months. Although a later revision quietly boosted the November 2009 number into positive territory, it had been more than two years since the Labor Department released a report that showed actual job creation, and during that awful period more than 8 million workers received pink slips. In March, the bleeding finally stopped as non-farm payrolls increased by 162k. The markets were expecting gains of closer to 180k, so there was an initial sense of disappointment, but digging a bit deeper into the report shows that an additional 62k jobs were added to January and February, which in a sense makes the March company survey, on the whole, quite respectable.
Another positive note is that census workers weren’t as big a part of the March report as some had suspected. Only 48k census employees were hired during the month, while private sector jobs, which are permanent and presumably higher paying, rose by 123k. Gains were widespread as the health care sector added 27k jobs, manufacturing +17k, retail +15K and construction +15K. The new construction hires are particularly encouraging since that sector had lost 850k jobs in the previous 12 months. State and local government job growth was unchanged in March, while the hobbled financial sector shed 21k jobs.
The unemployment rate remained at 9.7% for the third straight month as the household survey job count rose by 264k, the third straight increase of 250k or more. The reason the rate didn’t decline along with the March job creation is that a large number of formerly discouraged unemployed workers resumed their job hunts.
The total number of unemployed remains at 15 million. Unfortunately, there are approximately 2.5 million available jobs. The number of people without a job for 27-weeks or more, rose to 6.5 million or 44%, a record high. The number working part-time (not because they want to, but because they have to), rose to 9.1 million. Another 2.3 million people hadn’t looked for work in the past 4 weeks and were considered “marginally attached” – they’d take a job if offered, but were either too discouraged or had family or health issues that caused them to abandon the search. The unemployment breakdown remained steady with adult men checking in at 10%, adult woman at 8%, and teenagers at 26.1%.
Several of the lesser numbers within the report support job growth going forward – The average workweek, manufacturing overtime and factory overtime all increased in March. Temporary help services rose by 40k and have risen by more than 300k since September – the significance here is that cautious companies usually hire temp workers early in a recovery before switching to full-time employees later.
In a nutshell, the March report wasn’t a game-changer, but it was actually better-than-expected. The census workers that were expected to goose the overall number haven’t shown up in mass yet, but will later this year. The March gains were higher quality private sector jobs, suggestion a better foundation has been set. The Fed is unlikely to change their stance on monetary policy as a result of today’s number, but they’ll probably be pleased with the forward progress. The most likely date for the first fed funds target increase is still September 21st. An interesting side note is that late last night, the Fed announced it would be holding a closed door meeting of the Board of Governors on Monday to review the discount rate, which is the rate the Fed charges member banks for emergency borrowings.
The stock market is closed today, but the bond market is open for half a day. Equity futures have risen after favorable digestion of the March employment data. This suggest that stock prices could open higher on Monday morning. Bond prices have generally fallen after the data release, pushing yields higher. The reason for this is that investors are now anticipating a slightly stronger recovery in the months to come.
MARKET INDICATIONS AS OF 9:30 A.M. CENTRAL TIME
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DOW
|
Futures up 35
|
|
NASDAQ
|
Futures up 10
|
|
S&P 500
|
Futures up 4
|
|
1-Yr T-bill
|
current yield 0.41%; opening yield 0.39x%
|
|
2-Yr T-note
|
current yield 1.09%; opening yield 1.06%
|
|
5-Yr T-note
|
current yield 2.65%; opening yield 2.59%
|
|
10-Yr T-note
|
current yield 3.94%; opening yield 3.87%
|
|
30-Yr T-bond
|
current yield 4.80%; opening yield 4.73%
|
LABOR REPORT TOMORROW! (ISM TODAY)
April 1, 2010
A Smattering of Good Data in Front of the March Employment Report
The really big news is due to be released tomorrow morning, as the March labor market is widely expected to show the most job creation in three years. The median Bloomberg forecast is for non-farm payroll gains of 182k, but several economists are predicting more than 300k. Much of this increase will be due to census worker hiring, while some of the increase will represent a snapback from the poor weather conditions that depressed the February labor data. If the March payroll number comes in higher than the median forecast, yields would be expected to rise. A really strong payroll number could potentially push yields to their highest levels of the year. Although 300k new jobs would certainly be a psychological boost, 8.4 million jobs were lost over the past two years, so the path to full employment is very long.
This morning, the March ISM factory index was released. Any number above 50 indicates expansion in the factory sector, and by proxy the broader economy. The March number, expected to rise from 56.5 to 57, instead jumped to 59.6, the highest in 5½ years. By contrast, in December 2008, the index had plunged to 32.5, the lowest in 28 years. Manufacturing is gaining momentum. Business inventories are lean and being restocked. This is good news.
The weekly initial jobless claims report, also released this morning was slightly better-than-expected as the number of people filing for first-time unemployment benefits last week fell from 442k to 439k, matching the lowest level since August 2008. Continuing claims also fell, although this number has to be taken with a grain of salt since it often represents the exhaustion of benefits and not evidence that new jobs are being found.
Earlier this week, Bloomberg reported that the slide in state tax collections may be coming to a halt as the 15 most populated states are now forecasting a 3.9% gain in tax revenue in 2011. All 50 U.S. states are expected to increase collections by a combined 3.5%.
The initial indications are that first quarter economic growth, although expected to slow from the rapid pace of the fourth quarter, will be a bit stronger than most had predicted earlier in the year. The lingering question is whether this growth will be sustainable throughout 2010.
Yields are higher this morning in early trading. The general consensus seems to be that yields will trend higher in 2010. The median forecast is still for Fed tightening to begin on September 21st, but tomorrow’s number is capable of changing some minds.
MARKET INDICATIONS AS OF 9:40 A.M. CENTRAL TIME
|
DOW
|
Up 83 to 10,940
|
|
NASDAQ
|
Up 17 to 2,415
|
|
S&P 500
|
Up 9 to 1,174
|
|
1-Yr T-bill
|
current yield 0.38%; opening yield 0.38%
|
|
2-Yr T-note
|
current yield 1.03%; opening yield 1.02%
|
|
5-Yr T-note
|
current yield 2.59%; opening yield 2.54%
|
|
10-Yr T-note
|
current yield 3.87%; opening yield 3.83%
|
|
30-Yr T-bond
|
current yield 4.75%; opening yield 4.71%
|
YIELDS MOVE HIGHER AFTER POOR AUCTIONS
Thursday, March 25, 2010
WEAK TREASURY AUCTIONS PUSH YIELDS HIGHER
The massive amount of government borrowing may finally be having an effect on bond yields. On March 1st, the two-year Treasury yield stood at 0.80% and the 10-year was at 3.61%. Today, those yields were as much as 30 bps higher with the two-year topping 1.10% and the 10-year over 3.90% in trading earlier today. There are a number of factors at play, not the least of which is the size of recent auctions. Just this week the U.S. Treasury has auctioned $44 billion in 2-year notes, $42 billion in 5-year notes, and $32 billion in 7-year notes. Investor interest seems to be waning. Other factors contributing to the rise in yields include positioning ahead of next-weeks quarter-end and statements by PIMCO boss Bill Gross. During an interview this morning on Bloomberg Radio Gross said, “Bonds have seen their best days.” He went on to say, “Real interest rates are moving higher. That’s the main bear element in the bond market.”
The problem of sovereign debt is playing a role as well. Investors do not view the fiscal problems in Greece as an isolated case. Other Euro-zone economies are in bad shape and the debt situation in the U.S. is starting to garner market attention. The U.S. national debt now tops $12.6 trillion with average annual budget deficits projected to add another $1 trillion per year for the next decade. If you want to see a really depressing picture of just how bad the fiscal situation is take a look at
http://usdebtclock.org/ The belief that the recently passed healthcare legislation will add to the massive budget deficit may also be playing a role in the recent run up in rates.
PAYROLL REPORT AND THE END TO FED PURCHASES
As if all that wasn’t enough to push rates higher, market participants also must factor in the end to some of the Fed programs that have been supporting the markets. Namely the purchase of agency debt and mortgage-backed securities. Both of these programs are due to wind up this month. Then we have next week’s payroll report. Following a better than expected but still negative print in February, economists are forecasting an increase in non-farm payrolls for March. The Bloomberg survey median estimate currently forecasts a gain of 187k. All but two of the 30 economists in the survey are predicting gains and a couple of notable economists have estimates of 300k or higher. The data will be released on April 2nd, Good Friday. Fixed income markets would normally be closed on Good Friday, but due to the scheduled data release, SIFMA has recommended markets remain open with an early 12:00 noon EDT close.
Bonds have recovered some of the lost ground in late afternoon trading today, but the trend towards higher yields remains firmly in place.
MARKET INDICATIONS AS OF 3:00 P.M. CENTRAL TIME
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DOW
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UP 5 to 10,841
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NASDAQ
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DOWN 1 to 2,397
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S&P 500
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DOWN 2 to 1,166
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1-Yr T-bill
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current yield 0.40%; opening yield 0.40%
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2-Yr T-note
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current yield 1.09%; opening yield 1.09%
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5-Yr T-note
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current yield 2.59%; opening yield 2.64%
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10-Yr T-note
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current yield 3.88%; opening yield 3.85%
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30-Yr T-bond
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current yield 4.76%; opening yield 4.73%
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