BAD WEATHER MAY MASK FEBRUARY EMPLOYMENT GAINS
Friday, March 5, 2010
FEBRUARY EMPLOYMENT PROVES BETTER THAN DIM FORECASTS
The blizzard-like conditions in the eastern section of the U.S. were expected to contribute to a weaker-than-expected non-farm payroll report. Business payrolls did indeed shed jobs in February, but the losses weren’t quite as severe. Although the Bureau of Labor Statistics (BLS) wrote on its website that it wasn’t possible to quantify precisely the net impact on the winter storms of the data, non-farm payrolls fell by only 36k last month, bettering the median Bloomberg forecast for a 68k loss. In addition, payroll numbers for December and January were revised to show 35k fewer job losses.
Predictably, construction led the February losses as another 64k jobs disappeared. Federal government employment declined by 18k in February despite the hiring of 15k census workers, while state and local government employees received 25k pink slips.
In the hiring category, factory jobs increased by 1k while service industries added 24k workers. Another bright spot was in the continued hiring of temporary workers as another 48k jobs were added. Since the low point in September 2009, temporary help services has risen by 284k - this is considered a leading indicator as employers typically hire temp workers before committing to permanent positions. Two other leading indicators, the average workweek and factory overtime, both decreased during the month, but the declines were very likely impacted by the weather.
In the household survey, the unemployment rate remained at 9.7% (9.68%), a better number than the 9.8% median forecast. Unemployment rates for men (10%), woman (8%) and teenagers (25%) remained virtually unchanged from January. According to the BLS, unemployed workers totaled 14.9 million in February, while the number of long-term unemployed (27-weeks and longer) remained at 6.1 million, steady since December. One million Americans represented in the household survey said that weather conditions prevented them from getting to work during the survey week. Historically, this number is closer to 300k during the month of February, suggesting that last month’s data was severely impacted and could snap back in March.
The key to sustainable economic recovery continues to be the labor market. A total of 8.4 million workers have lost jobs since the recession began, with many of these losses concentrated in the previously over-inflated financial and housing-related sectors of the economy, making them less likely to return anytime soon. Yesterday, in efforts to bolster jobs, the House of Representatives moved a $15 billion labor bill closer to passage. The bill would grant employers who hire workers who have been unemployed for 60-days or more an exemption from paying the 6.2% federal payroll tax for the remainder of 2010. If that employee is still working at the end of the year, the employer would be given an additional $1,000 tax credit. The Wall Street Journal reported this morning that some targeted companies consider the jobs measure underwhelming and do not expect it will lead them to increase hiring by a significant amount. The bill is expected to have a primary impact on small businesses, which according to the Small Business Administration (SBA) are responsible for 60% of all hires in the U.S.
Overall, the February report was good. Given the weather conditions, a terrible report would not have been a surprise. Stocks opened higher on the better-than-expected data and the bond market sold off (yields slightly higher). The financial markets are trading as if the Fed is now likely to raise rates a bit sooner, but Fed officials have been steadfast in their expectations for keeping rates low. According to Bloomberg, Chicago Fed President Charles Evans told reporters yesterday that he wanted to see signs of “highly sustainable” growth before supporting rate increases, while St. Louis Fed President James Bullard said that policy makers want to stay “very accommodative” during the early stages of recovery.
MARKET INDICATIONS AS OF 9:15 A.M. CENTRAL TIME
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DOW
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Up 77 points to 10,522
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NASDAQ
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Up 22 points to 2,314
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S&P 500
|
Up 8 points to 1,130
|
|
1-Yr T-bill
|
current yield 0.34%; opening yield 0.31%
|
|
2-Yr T-note
|
current yield 0.91%; opening yield 0.86%
|
|
5-Yr T-note
|
current yield 2.34%; opening yield 2.27%
|
|
10-Yr T-note
|
current yield 3.68%; opening yield 3.60%
|
|
30-Yr T-bond
|
current yield 4.63%; opening yield 4.56%
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CONFIDENCE FALLING LIKE THE SNOW IN AUSTIN
Tuesday, February 23, 2010
CONSUMER CONFIDENCE PLUNGES
The Conference Board’s index of consumer confidence plunged more than 10 point in February to 46, from a revised 56.5 in January. That was well below the Bloomberg survey’s forecast for a slight decline to 55. This is a volatile series which tends to be heavily influenced by stock prices and employment conditions, but the sharp decline highlights the challenges still facing the broader economy and U.S. consumers. Details within the series paint a troubling picture as the current conditions index fell to a 27-year low at 19.4 and the gauge of expectations for the next six months reached the lowest point since last July at 63.8. Consumers’ assessment of the labor market was especially dour as the percentage of those saying jobs are hard to get climbed to 47.7% while only 3.6% believed jobs were plentiful. The U.S. economy needs consumers in order to flourish, but the consumers need jobs. For now, we’re stuck in a Catch-22 waiting for something to lead us out of this quagmire.
HOME PRICES STABILIZING
The S&P/Case Shiller Home Price Index is one of the more difficult data series to figure out. For starters there are actually several indexes. There is a nationwide series released quarterly and a monthly index that covers 20-cities which is released both seasonally adjusted and not seasonally adjusted. So as we read the stories on this the data frequently seems to conflict. Boiling it down, the commonly used index is the monthly 20-city version. Looking at the data on a non-seasonally adjusted basis the index declined slightly in December to 145.9, a 3.1% drop from December 2008. The good news is that the index has stabilized around the 146 mark, hovering near this level since last July. The bad news of course is that there is as yet no sign of price appreciation as foreclosures and supply continue to weigh on home prices. To put it in perspective the index is down nearly 30% from its July 2006 peak of 206.52.
FDIC’S PROBLEM BANK LIST GROWS
The FDIC reported today that its confidential watch list of problem banks has grown to 702 with $402.8 billion in assets. FDIC Chairman Sheila Bair said, “The growth in the number and assets of institutions on the problem list points to a likely rise in the number of failures.” She went on to suggest that the pace of bank closings would pick up and she expects closings this year to exceed the 140 institutions regulators shut down in 2009. Banking problems are just another on a long list of headwinds that this economy must overcome.
Stock markets have been beaten down by today’s gloomy news while bond markets have staged a rally, recovering the ground lost following last week’s action by the Fed to increase the discount rate, and easily digesting the record-tying $44 billion auction of two-year notes.
And yes, it has been snowing here in Austin, Texas today. It’s melting almost as fast as it hits the ground, but nonetheless, we have had white flakes falling from the sky.
MARKET INDICATIONS AS OF 2:40 P.M. CENTRAL TIME
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DOW
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Down 81 to 10,303
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|
NASDAQ
|
Down 24 to 2,218
|
|
S&P 500
|
Down 11 to 1,097
|
|
1-Yr T-bill
|
current yield 0.33%; opening yield 0.33%
|
|
2-Yr T-note
|
current yield 0.83%; opening yield 0.88%
|
|
5-Yr T-note
|
current yield 2.34%; opening yield 2.44%
|
|
10-Yr T-note
|
current yield 3.68%; opening yield 3.80%
|
|
30-Yr T-bond
|
current yield 4.63%; opening yield 4.73%
|
THE BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Monday, February 22, 2010
From February 4 through February 9, 2010, Bloomberg News surveyed 54 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 Q1 2010 unemployment is 9.90%. The median forecast for the next three quarters are 9.8%, 9.7% and 9.5%.
The January employment report was a mixed bag of unexpectedly “good news”, coupled with some not so good news. First, the good: the unemployment rate fell from above 10% to 9.7%, the rate’s first trek below 10% since October 2009. According to the survey, the downward trend should continue quarter-over-quarter, but unemployment will remain high at 9.5% at year’s end. While the unemployment decline surprised most everyone, nonfarm payrolls disappointed. Instead of 15K jobs added back to the economy, as had been widely forecast at the lowest end of expectations, we saw yet another reduction of 20K workers. This is smaller than December’s 85K, but a contraction nevertheless, suggesting continued widespread weakness in the labor market.
The number of long-term unemployed (those out of work for 27 weeks or longer) rose again, this time by 183K to 6.3 million, maintaining its highest level since record-keeping began in 1948. As a percentage of total unemployed, those considered long-term now account for 42% of those looking for work, up from 35% in September 2009.
The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) fell in January to 16.5% from 17.3% the month before.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q1 2010 is +2.85%. The median forecast for the next three quarters are +2.8%, +2.8% and +2.85%.
GDP grew 5.7% in the fourth quarter of 2009, marking the largest gain in six-years. As we’ve seen in the not so distant past, this advance reading is subject to change as revisions are made in the coming months. Regardless of the changes likely to come, 5.7% growth was a very welcome sign of an economy on the mend. Unfortunately, despite second half growth, the economy did contract 2.4% for all of 2009, the largest calendar-year contraction since the country was ratcheting down manufacturing on the heels of WWII. Consumer spending increased at a 2% annual rate in the fourth quarter, down from 2.9% over the previous quarter. January 2010 started out well though, as retail sales climbed more than expected at 0.5%. With consumers now more likely to save than take on new debt, retailers have had to use discounts to lure shoppers into the stores. Wal-Mart, for instance, recently reported fourth quarter same store sales declined 1.6% in the U.S. market, despite deep discounts on much of their merchandise. This marks the first time in its history that Wal-Mart stores open for more than one year experienced a decline in year-over-year sales.
Replenishment of business inventories in the fourth quarter contributed 3.5 percentage points to total GDP, making it the largest single contributor. Many economists are skeptical that businesses will maintain such an aggressive inventory rebuild into 2010. According to the survey, 2010 quarterly growth should be much more subdued than that of the final quarter of 2009, restrained in large part by slower restocking of inventories and a personal savings rate that, according to the Commerce Dept., continues to climb (4.6% in Q4 vs. 4.5% in Q3).
Consumer Prices - The median annualized consumer inflation forecast for Q1 2010 was +2.6%. The median forecast for the next three quarters are +2.4%, +2.05% and +1.7%.
January consumer prices (CPI) rose by a less than expected 0.2%, after a moderate 0.1% increase in December. Year-over-year, CPI was up 2.6%, also slightly lower than expectations. Core CPI fell by 0.1% for the month and was 1.6% higher for the year. In each case, the CPI readings were below expectations.
The opposite can be said for producer prices (PPI). As energy prices peaked from their lows the year before, January wholesale prices rose 1.4% from December and 4.6% for the year. The core PPI, prices paid excluding the cost for energy, increased a more tepid 0.3% and 1.0% over the same periods. In each instance, the actual reading was higher than participants of the survey expected. The question remains whether businesses will be able to pass on their higher expenses to the consumer, or if they’ll simply have to eat the added costs. Given the exceptionally high levels of unemployment and continued belt tightening by consumers, the answer would appear the latter.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q1 2010 is 0.25%. The MEDIAN forecast for the next four quarters are 0.25%, 0.25%, 0.75% and 1.00%. The current fed funds target rate is a range between 0.00% and 0.25%.
With capacity utilization still at some of the lowest levels since 1983, unemployment still high despite its latest decline, and weak consumer inflation, the Fed should still have the ability to maintain the overnight rate at exceptionally low levels for its “extended period of time”.
Release of the most recent Fed minutes did indicate the intent to unwind some of the Feds support of the economy. Most notably, consideration was given to the notion of raising the discount rate, the rate charged to banks for emergency loans from the Fed. The next day, they raised the rate 25 bps, from 0.50% to 0.75%.
Two-year Treasury-note - The average 2-year yield forecast for Q1 2010 is 1.03% The average yield forecast for the next four quarters are 1.24%, 1.55%, 1.90% and 2.26%. The current 2-year Treasury yield is 0.89%.
10-year Treasury-note - The average forecast for Q1 2010 is 3.66%. The average forecast for the next four quarters are 3.78%, 3.96%, 4.14% and 4.35%. The current 10-year yield is 3.79%.
MARKET INDICATIONS AS OF 11:38 A.M. CENTRAL TIME
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DOW
|
Down 4 to 10,398
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|
NASDAQ
|
Down 1.20 to 2,243
|
|
S&P 500
|
Down 1 to 1,105
|
|
1-Yr T-bill
|
current yield 0.34%; opening yield 0.35%
|
|
2-Yr T-note
|
current yield 0.89%; opening yield 0.90%
|
|
5-Yr T-note
|
current yield 2.45%; opening yield 2.45%
|
|
10-Yr T-note
|
current yield 3.79%; opening yield 3.79%
|
|
30-Yr T-bond
|
current yield 4.73%; opening yield 4.73%
|
FED RAISES DISCOUNT RATE (BUT NOT FUNDS RATE)
Thursday, February 18, 2010
FOMC RAISES DISCOUNT RATE
The Federal Reserve raised the discount rate by 25 basis points to 0.75% today. The discount rate, which is distinct from the fed funds rate, is the rate charged to banks who borrow funds directly from the Fed. While this action will garner a lot of headlines it is important to note that very few banks utilize this facility, as they can generally borrow from other sources at the lower fed funds rate. It is also important to realize that the Fed did not raise the fed funds rate and is not altering monetary policy. In fact they even restated the now familiar “extended period” language. The Fed’s statement said in part:
“Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Although the timing of the announcement was bit surprising, the action was anticipated as Chairman Bernanke had discussed it in a speech last week. The Fed also announced some changes to other emergency liquidity facilities, including a reduction in the maximum term of primary credit loans from 30-days to overnight. The complete statement can be found here:
http://www.federalreserve.gov/newsevents/press/monetary/20100218a.htm
BONDS YIELDS RISE IN WAKE OF ANNOUNCEMENT
Despite the Fed’s assurances that this action does not signal a change in monetary policy, markets see this as yet another sign that the Fed will eventually begin to tighten policy. The announcement came after the close of stock markets, but stock futures are lower. Bond prices have fallen, pushing yields a bit higher.
MARKET INDICATIONS AS OF 4:30 P.M. CENTRAL TIME
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DOW
|
Closed at 10,393 – Futures down 50
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|
NASDAQ
|
Closed at 2,242 – Futures down 11
|
|
S&P 500
|
Closed at 1,107 – Futures down 8
|
|
1-Yr T-bill
|
current yield 0.38%; opening yield 0.34%
|
|
2-Yr T-note
|
current yield 0.92%; opening yield 0.84%
|
|
5-Yr T-note
|
current yield 2.47%; opening yield 2.38%
|
|
10-Yr T-note
|
current yield 3.80%; opening yield 3.73%
|
|
30-Yr T-bond
|
current yield 4.73%; opening yield 4.70%
|
MARKETS CONFUSED BY CONFLICTING DATA
Thursday, February 18, 2010
BIG WEEK FOR ECONOMIC DATA
This has been a very busy week in terms of economic data. Most of the data released early in the week would normally be considered minor, while data released today and tomorrow should garner more attention. As in the last few months the trend has been for generally improving figures. However, we also continue to see hiccups in the positive trend which highlight the tentative nature of the recovery and the fact that many headwinds remain. Let’s start with the more minor data. On Monday, the Empire State Manufacturing index came in above expectations, climbing to 24.91 from January’s 15.92. That was followed up by today’s Philadelphia Fed regional index which rose to 17.6 from 15.2. As with January’s ISM manufacturing index, these two regional indicators point to an improving manufacturing sector which is apparently being driven by inventory rebuilding. The improvement in this sector was also reflected in January’s 0.9% rise in industrial production and an increase in the capacity utilization rate which rose to 72.6% from December’s 72%. The index of leading economic indicators rose by 0.3% in January, marking its tenth straight monthly gain.
On the inflation front, today’s release of the producer price index showed a month-over-month gain of 1.4%, well above the forecast for a 0.8% increase. On a year-over-year basis headline PPI is up 4.6%. This is a somewhat worrisome print, even though much of the increase was attributed to higher gasoline prices which pushed the energy component up 5.1% in January. Excluding food and energy the core PPI was up a more subdued 0.3% for the month and 1.0% year-over-year. Tomorrow will bring data on consumer prices which are forecast to increase 2.8% for the headline and 1.8% for the core rate versus last year.
So where is the offsetting negative data you ask? Well, that would be in employment of course, probably the most important indicator of all. Initial jobless claims rose to 473k in the week ending February 13th. The jobless claims data had been falling steadily, hitting a low of 432k in late December. Since then, claims have flattened out in a range between 442k and 483k, but with a tendency towards the higher end of that channel. Weather and seasonal adjustment factors may be playing a role, but the lack of continued improvement in this series is disappointing.
Markets were also given some concerning news by the world’s largest retailer. Wal-Mart reported fourth-quarter sales that fell below its projections and predicted a “challenging” first quarter. Sales at U.S. stores open at least a year were down 1.6% and Wal-Mart cited lower prices as hurting sales. It will be interesting to see if those lower prices are reflected in tomorrow’s consumer price data.
FOMC MINUTES REVEAL NO SURPRISES
Minutes of the Fed’s January FOMC meeting were released yesterday but shed no new light on their plans. We already knew that Kansas City Fed President Thomas Hoenig dissented due to his objection to the “extended period” language. The FOMC also discussed the unwinding of emergency liquidity facilities, which has been previously discussed by various Fed leaders.
Financial markets have been stuck in a holding pattern of sorts as any positive economic news seems to be offset by other negatives. Concerns about sovereign credit and the fiscal situation in several countries, including the U.S., seem to be weighing on confidence. This has left both stock and bond markets stuck in fairly narrow ranges. However, bonds have come under selling pressure today as the yield curve steepened to an all time high. The difference between the yield on two-year and 10-year Treasury notes reached 293 basis points. The short-end remains tied to the fed funds rate, while the long-end is feeling the pressures from signs of inflation and an ever increasing supply of debt.
MARKET INDICATIONS AS OF 12:23 P.M. CENTRAL TIME
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DOW
|
UP 24 to 10,333
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|
NASDAQ
|
UP 3 to 2,229
|
|
S&P 500
|
UP 2 to 1,101
|
|
1-Yr T-bill
|
current yield 0.34%; opening yield 0.33%
|
|
2-Yr T-note
|
current yield 0.88%; opening yield 0.84%
|
|
5-Yr T-note
|
current yield 2.44%; opening yield 2.38%
|
|
10-Yr T-note
|
current yield 3.80%; opening yield 3.73%
|
|
30-Yr T-bond
|
current yield 4.76%; opening yield 4.70%
|
Chinese Rate Tightening Negates Better U.S. Retail Sales
Friday, February 12, 2010
RETAIL SALES START 2010 ON A HIGH NOTE
As most market participants know, consumer spending has traditionally contributed about 2/3rds of U.S. economic growth, while retail sales make up roughly half of all consumer spending. For this reason, the retail sales data is closely followed as an indication of economic well-being. This morning, the Commerce Department reported that January retail sales were up a solid 0.5%, bettering expectations for a lesser 0.3% rise. On a year-over-year basis, sales are up a respectable 3.2%. Growth was widespread with nine of 13 categories showing increases, led by gains in the general merchandise, food and beverage and electronics sectors. Predictably, building materials and furniture sales both fell, reflecting continued housing woes.
CHINA PUTS THE BRAKES ON ECONOMIC GROWTH
Unfortunately, the relative strength shown by the U.S. consumer isn’t being reflected in the equity markets, because yet again the focus is on events overseas. Earlier this week, Greece took center stage. This morning, China is garnering most of the world’s attention.
The Greek drama centers on the country’s massive debt burden and the possibility of default. Yesterday, according to a front page Wall Street Journal story, European Union leaders pledged unprecedented support saying that it would take “determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole”. Because there were no specific bailout plan details, the euro fell sharply, while Greek bonds rallied to their highest level in a month.
Last night, China unexpectedly raised its bank reserve requirement by 0.50% for the second time this year to 16% for big banks and 14% for smaller ones. (By comparison, the U.S. reserve requirements are 10% for transaction accounts over $55 million.)
The rate hike is intended to cool the fastest growing major economy in the world. According to Business Week, total January new loan growth in China exceeded that of the entire fourth quarter, while the Chinese M1 money supply rose 39%, the fastest pace in a decade. Chinese economic growth in the fourth quarter has now climbed to an annualized rate of 10.7%. Much of the increase appears to be concentrated in the housing sector - The WSJ reported that China’s property prices rose 11.3% year-over-year in January.
China’s unexpected rate increase and attempts to reel in loose credit and cool its economy at a time when the rest of the world is still on shaky ground, could have an adverse effect on the global economy.
The DOW is down more than 100 points in early trading and equity futures markets around the world are signaling declines. The U.S. bond market has rallied (price up/yields down) as cautious investors sell stocks and move into the safer government bond sector.
MARKET INDICATIONS AS OF 9:55 A.M. CENTRAL TIME
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DOW
|
DOWN 127 to 10,017
|
|
NASDAQ
|
DOWN 18 to 2,159
|
|
S&P 500
|
DOWN 13 to 1,064
|
|
1-Yr T-bill
|
current yield 0.33%; opening yield 0.36%
|
|
2-Yr T-note
|
current yield 0.82%; opening yield 0.87%
|
|
5-Yr T-note
|
current yield 2.32%; opening yield 2.37%
|
|
10-Yr T-note
|
current yield 3.68%; opening yield 3.72%
|
|
30-Yr T-bond
|
current yield 4.64%; opening yield 4.67%
|
LITTLE IS NEW IN BERNANKE TESTIMONY
Wednesday February 10, 2010
Fed Chairman Reiterates Familiar Policy Points
The stock markets were poised for a respectable opening after the Wall Street Journal reported this morning that the German government was considering a plan to offer Greece and other troubled euro-zone partners loan guarantees in order to calm market fears of default. In fact, the DOW was up 21 points early, but has since slipped presumably based on the text of a Bernanke speech presented to the House Financial Services Committee this morning.
In his testimony, Bernanke trotted out the now too familiar language, “the FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period” and added that “In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures.” None of this was a surprise. One thing that may have been a bit unexpected was Bernanke’s comment that the Fed might raise the discount rate “before long” as part of the “normalization” of Fed lending, a move that the Chairman said shouldn’t signal any change in monetary policy. Apparently, the financial markets believe otherwise as bond yields have risen and stock prices have dropped in response.
Much of what market participants were anticipating had to do with how the Fed intended to unwind the hugely accommodative policy it currently has in place. The Fed is currently holding a $2 trillion portfolio of securities. When it bought these securities, the Treasury in essence printed money to pay for them, thereby injecting huge amounts of liquidity into the financial system. The question everyone has at this point is …how will the Fed unwind their massive balance sheet?
In the long run, they’ll continue allowing securities to simply mature (agencies) or be paid-down (mortgage-backed securities). Treasuries are currently being rolled-over, but may be allowed to roll-off in the future.
Actual selling of portfolio holdings could swamp the bond market with supply and drive prices lower and yields higher, in the process generating balance sheet losses for the Fed, but Bernanke specifically testified that the Fed did not intend to sell anything in the near term. In the short-term, the Fed can enter into reverse repos, whereby they lend securities to banks in exchange for cash, or offer term deposits (like a “Fed CD”) to drain cash from the system. But nothing major is likely to happen anytime soon.
At one point, the DOW was down 97 points to 9,962, but has since recovered and is up 3 points to 10,062.
OTHER NEWS WORTH MENTIONING -
According to the latest Jobs Openings and Labor Turnover Survey (JOLTS), the number of available jobs rose by 2.6% during December to a total of 2.5 million total. But, as Bank of America pointed out, this still represents about 6 unemployed workers for every job opening - near a record high. The survey also showed the latest “quit rate” in which workers leave their jobs for better opportunities. In December, this rate fell from 1.5% to a record low of 1.3%. These numbers suggest that the job market is still in terrible shape.
MARKET INDICATIONS AS OF 1:18 P.M. CENTRAL TIME
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DOW
|
Up 3 to 10,062
|
|
NASDAQ
|
Up 1 to 2,152
|
|
S&P 500
|
Up 4 to 1,067
|
|
1-Yr T-bill
|
current yield 0.36%; opening yield 0.30%
|
|
2-Yr T-note
|
current yield 0.87%; opening yield 0.83%
|
|
5-Yr T-note
|
current yield 2.36%; opening yield 2.32%
|
|
10-Yr T-note
|
current yield 3.69%; opening yield 3.65%
|
|
30-Yr T-bond
|
current yield 4.63%; opening yield 4.59%
|
Continued Job Losses Mask Improved January Labor Report
Friday, February 5, 2010
Expected Job Gains Still Haven’t Arrived
Experts were generally expecting that company payrolls would turn slightly positive in January. They didn’t. Instead, another 20,000 jobs were lost last month. Last year at this time, 741,000 jobs had disappeared from business payrolls, so it’s all a matter of perspective. Things are improving.
Job gains showed up in the factory sector for the first time in 36 months, Federal employment rose by 33k as the census hiring began, and service industry jobs rebounded from a 96k loss in December to rise by 40k in January. On the other side of the ledger, construction jobs tumbled 75k while state and local government jobs fell by 41k.
The unemployment rate actually fell from 10% to 9.7% to the lowest level since August. From a psychological standpoint, this is a positive. Digging deeper, there’s considerable improvement in the lesser known numbers as well. The broader U6 measure of unemployment, which considers those discouraged workers who have left the workforce and those working part-time who would prefer to have a full-time job, fell to 16.5% from 17.3% - According to the BLS, the number of part-time workers (for economic reasons) dropped from 9.2 million to 8.3 million.
The number of people unemployed because they lost their jobs fell by 378k to 9.3 million. The number of temporary hires rose by 52k, while overtime hours, the average workweek and even hourly wages crept higher as employers filled labor gaps by increasing the hours of existing workers and hiring temp workers. This was an expected first step in the labor recovery process.
Worth mentioning (although the news is far too stale to have an effect on the markets) is that the annual 12-month payroll revision through March 2009, pushed total company payrolls down by an additional 930k, bringing the recessionary job loss total to 8.4 million. Although this was the largest annual revision on record, it’s old news.
All in all, this report was probably better than it appeared on the surface, and generally in line with the slow recovery scenario that most are predicting. Stock market futures were initially down after the labor report release, and it looked like a rough morning was in store. But oddly enough, the equity markets rose …before falling below 10,000 for the first time since early November.
Global Stock Markets Tumble Overnight
Concern over the swelling debt levels around the world continue to hammer the global equity markets, sparing none. Although Greece, Spain and Portugal have taken the brunt of this week’s beatings. Last night, the major Japanese, Chinese and Korean stock markets all fell roughly 3%, India dropped by 2.7% and aggregate Europe was off by 2.3%.
MARKET INDICATIONS AS OF 8:35 A.M. CENTRAL TIME
|
DOW
|
DOWN 14 to 9,988
|
|
NASDAQ
|
UP 5 to 2,130
|
|
S&P 500
|
DOWN 3 to 1,059
|
|
1-Yr T-bill
|
current yield 0.28%; opening yield 0.28%
|
|
2-Yr T-note
|
current yield 0.79%; opening yield 0.81%
|
|
5-Yr T-note
|
current yield 2.28%; opening yield 2.30%
|
|
10-Yr T-note
|
current yield 3.61%; opening yield 3.65%
|
|
30-Yr T-bond
|
current yield 4.56%; opening yield 4.55%
|
ECONOMY GAINING STEAM
Monday, February 1, 2010
ISM STRONGEST SINCE 2004
The Institute for Supply Management’s factory index climbed to 58.4 in January, topping even the most optimistic of Bloomberg’s surveyed economists who had a median forecast of 55.5 and a high of 58. The 58.4 reading was well above December’s 54.9 figure and the highest level since August 2004. Underlying details of the report were also quite strong as the production index rose from 59.7 to 66.2; the new orders index climbed to 65.9; export orders rode a weak dollar, surging to 58.5; and the employment index reached 53.3, the highest level since April 2006.
Today’s report is a very bullish sign that the inventory rebuilding many have been anticipating has finally begun. Coming on the heels of 5.7% growth in Q4 GDP, today’s figure is an indication that the economy is starting 2010 with a fair amount of momentum. And it’s not just in the United States as Merrill Lynch reported today that 90% of the 24 countries they track are showing expansion in manufacturing activity.
CONSUMER SPENDING GAINS FOR THIRD STRAIGHT MONTH
Consumer spending gained 0.2% in December, following an upwardly revised 0.7% in November. December’s gain was slightly below expectations, but the November data was revised higher by 0.2% from the previously reported 0.5% gain. This marks the third consecutive monthly gain in consumer spending and is another sign of an economy on the mend. Personal income rose 0.4% in December for a sixth straight gain
It’s getting harder and harder to reconcile current interest rate levels with the economic data. We have had two straight quarters of positive GDP with the most recent topping 5%. The ISM data is clearly in expansion territory. Consumer spending is growing. Housing and construction are still struggling but at the very least seem to be showing signs of improvement. Employment has always been a lagging indicator but even there we are getting close to printing positive numbers. Meanwhile the government deficit has exploded and the Treasury is issuing massive amounts of debt to finance it. Yet despite all this, the Fed intends to maintain current policy “for an extended period” and the yield on the two-year Treasury note remains well below 1%. Go figure.
MARKET INDICATIONS AS OF 10:35 A.M. CENTRAL TIME
|
DOW
|
Up 100 to 10,167
|
|
NASDAQ
|
Up 14 to 2,161
|
|
S&P 500
|
Up 12 to 1,086
|
|
1-Yr T-bill
|
current yield 0.30%%; opening yield 0.27%
|
|
2-Yr T-note
|
current yield 0.87%; opening yield 0.81%
|
|
5-Yr T-note
|
current yield 2.38%; opening yield 2.32%
|
|
10-Yr T-note
|
current yield 3.66%; opening yield 3.58%
|
|
30-Yr T-bond
|
current yield 4.57%; opening yield 4.49%
|
GDP Growth is the Fastest in 6 Years
January 29, 2010
The experts were calling for a significant increase in the pace of economic growth in the fourth quarter from the revised 2.2% rate in the third. The thought was that business inventories were extremely lean, and the necessary restocking during the quarter would add at least two to three percentage points. If the October and November retail sales numbers were any indication, the consumer was also expected to make a respectable showing. As it turned out, overall GDP increased at a annualized rate of 5.7%, the highest since September 2003, and well above the most recent Bloomberg survey calling for a median increase of 4.8%.
The inventory component did contribute 3.4 percentage points to the bottom line, but interestingly enough, inventory levels didn’t actually rise. Instead they fell by another $33.5 billion, which was significantly less than the $139 billion third quarter drop, and the record $160 billion plunge in the second quarter. Very soon, actual accumulation should begin which should continue to goose GDP growth in future periods. Although many have discounted the inventory component as not representing sustainable growth, the restocking of shelves should help boost the labor market in the coming months. And labor growth is the critical ingredient to sustainability.
Consumer spending increased by 2.0%, topping the Bloomberg median forecast of 1.8%. When the quarter began, many suspected spending growth could be negative because the cash-for-clunkers program was thought to have pulled future auto sales forward. The reality was that auto sales were better than expected in the final quarter after car dealerships restocked depleted lots.
Business investment increased by 3.5% in the fourth quarter and residential construction rose by 5.7%. Although the housing number is well below the huge 18.9% increase recorded in the previous quarter, home construction had been in a steady decline for 3½ years prior to the third quarter surge, so the second straight quarter of growth is starting to look like a trend.
Government spending fell by 0.2%. Although this seems a bit odd given the size of the current deficit, stimulus dollars are actually filtering through into other component numbers.
All in all, it was a very hopeful GDP report, and there is little to suggest growth will not continue into 2010. If job growth soon follows the rise in economic growth, the markets may begin to question the wisdom of the Fed keeping overnight rates at zero for the “extended period” – especially given that Bernanke has been hammered in recent weeks over the Fed’s enabler role in the housing boom and subsequent crash.
Bernanke to Serve Another Four Years
Yesterday, the U.S. Senate confirmed Time Magazine’s 2009 Person of the Year, Ben Bernanke, by a 70 to 30 vote to serve a second four-year term as Chairman of the Fed. Last week, the DOW took a beating, partially because Bernanke’s confirmation appeared to be on shaky ground, and although some believe Bernanke may have shown monetary irresponsibility during the recent economic crisis, the notion of an unknown commodity replacing him as Chairman was a bit too unsettling.
The stock markets are up in early trading while the bond markets have traded off a bit.
MARKET INDICATIONS AS OF 9:20 A.M. CENTRAL TIME
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DOW
|
Up 95 to 10,216
|
|
NASDAQ
|
Up 21 to 2,200
|
|
S&P 500
|
Up 8 to 1,088
|
|
1-Yr T-bill
|
current yield 0.28%; opening yield 0.28%
|
|
2-Yr T-note
|
current yield 0.88%; opening yield 0.86%
|
|
5-Yr T-note
|
current yield 2.42%; opening yield 2.39%
|
|
10-Yr T-note
|
current yield 3.67%; opening yield 3.64%
|
|
30-Yr T-bond
|
current yield 4.57%; opening yield 4.55%
|
STEADY AS SHE GOES
Wednesday, January 27, 2010
NO SURPRISES FROM FED
As expected by everyone the Federal Reserve’s FOMC voted today to maintain the current stance of monetary policy with the target fed funds rate set at a range from 0 to 0.25%. Just as importantly the FOMC left intact the most critical parts of the statement, “The Committee… continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” This language should sound familiar by now. The Fed went on to discuss the winding down of some of the emergency liquidity measures and the pending end to purchases of agency mortgage-backed securities. The statement also highlighted the general improvement in market and economic conditions but they expect progress to be gradual. The full text of the statement can be found here:
http://www.federalreserve.gov/newsevents/press/monetary/20100127a.htm
Today’s vote was not unanimous. Thomas M. Hoenig dissented, saying he “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”
WASHINGTON TAKES THE SPOTLIGHT
Recent economic data has generally been weaker than expected but the data has been somewhat overlooked in the last week or two as events in Washington seem to be taking precedence. Last Tuesday’s Republican victory in the Massachusetts Senate election quickly changed the political landscape and sent market participants scrambling to calculate the implications. That was followed up Wednesday by news from the White House that it intends to limit the risks that banks are allowed to take. The White House press release stated that they intend to work with Congress to limit proprietary trading by banks, as well as the size of liabilities and deposits that banks can have in an effort to prevent any institution from becoming “too big to fail.” This move comes on the tail of the announcement of a TBTF tax on the largest 50 financial institutions, intended to repay the government for the cost of the TARP. Those announcements sent stock markets into a tailspin with the DJIA falling more than 500 points from last Tuesday’s close.
As if that wasn’t enough, on Friday Barney Frank, chairman of the House Financial Services Committee, said “The Committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance.” Any legislation is probably still months away, but obviously this is a development public investors will want to watch closely.
Investors have gotten some good news as it appears likely that Chairman Bernanke’s nomination for a second term will be confirmed. But that hasn’t stopped Congress from grilling him and Treasury Secretary Timothy Geithner over their roles in the various crises and bailouts. Wouldn’t it be fun to turn the tables and drag Congress in front of the cameras to grill them for their role in all that has gone wrong?
Stocks have turned positive this afternoon while bonds have sold off, sending yields to the highest levels of the week.
MARKET INDICATIONS AS OF 2:25 P.M. CENTRAL TIME
|
DOW
|
Up 6 to 10,200
|
|
NASDAQ
|
Up 9 to 2,213
|
|
S&P 500
|
Up 1 to 1,093
|
|
1-Yr T-bill
|
current yield 0.30%; opening yield 0.28%
|
|
2-Yr T-note
|
current yield 0.90%; opening yield 0.80%
|
|
5-Yr T-note
|
current yield 2.37%; opening yield 2.34%
|
|
10-Yr T-note
|
current yield 3.64%; opening yield 3.62%
|
|
30-Yr T-bond
|
current yield 4.55%; opening yield 4.55%
|
The Bloomberg Interest Rate and Economic Surveys
Wednesday, January 20, 2010
From January 5 through January 12, 2010, Bloomberg News surveyed 68 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 Q1 2010 unemployment is 10.2%. The median forecast for the next three quarters are 10.1%, 9.9% and 9.7%.
Expectations for December payrolls had been for no change, or perhaps even a slight increase, but instead the labor market contracted by 85K. Revisions to November, however, did show a gain of 4K jobs, the first positive mark for payrolls in nearly two years. The number of long-term unemployed (those out of work for 27 weeks or longer) rose by 229K to 6.1 million, accounting for four out of every 10 people unemployed. 661K people withdrew themselves from the labor force in December, allowing the unemployment rate to hold steady at 10.0%. As the economy begins to improve and individuals currently removed from the labor market resume their job search, the unemployment rate may likely climb, as the demand for jobs is expected to far exceed supply.
The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) rose in December to 17.3% from 17.2% the month before.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q4 2009 is +4.0. The median forecast for the next three quarters are +2.7%, +2.8% and +2.8%.
The Bloomberg survey suggests median Q4 GDP growth of 4.0%, a considerable improvement from Q3’s downwardly revised 2.2%. Despite that optimism, the data continues to suggest that any recovery will be slow to gain traction. The most recent advance retail sales number, perhaps the best gauge of consumer involvement in the economy as a whole, declined by 0.3% in December, on the heels of a 1.8% increase in November.
Business inventories for November rose slightly, suggesting 3rd quarter GDP was boosted by not only government stimulus, but by manufacturing too, as businesses replenished depleted inventories. For manufacturing to continue its positive contribution to growth though, consumer demand will need to improve in the months to come; a daunting task in the face of >10.0% unemployment, record foreclosures and exceptionally tight credit.
Consumer Prices - The median annualized consumer inflation forecast for Q1 2010 was +2.7%. The median forecast for the next three quarters are +2.20%, +2.0% and +1.8%.
December consumer prices (CPI) rose by 0.1%, after a 0.4% increase in November and less than the median forecast of the Bloomberg survey. Year-over-year, CPI was up 2.7%, in line with expectations. Core CPI also rose by 0.1% for the month and was 1.8% higher for the year, both in line with expectations.
Producer prices (PPI) increased only slightly in December by 0.2% after a jump of 1.8% in November. Year-over-year, PPI was higher by 4.4%. The expectation is for year-over-year wholesale prices to continue to rise as the cost of fuel has rebounded from its lows of December 2008. Core PPI (net of energy and food prices) was flat for the month and up just 0.9% over the year, the smallest annual increase since 2002.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q1 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%.
With capacity utilization still at some of the lowest levels since 1983, unemployment above 10% and perhaps climbing, and inflation seemingly subdued, the Fed is expected to maintain their near 0% stance on interest rates for, as they say, an “extended period of time”.
Nevertheless, two non-voting members of the FOMC have spoken out recently about the need to be pro-active in considering the next upward move in the fed funds rate.
Dallas Fed President Richard Fisher, in a speech in Waco, Texas recently proclaimed that “a great and powerful economy cannot create the conditions for sustainable noninflationary growth if its central bank is governed by a politicized monetary authority.” Furthermore, according to Mr. Fisher, “the Fed held interest rates
too low for too long in the early half of the 2000s, thus fueling reckless speculation in housing and other sectors,” an indication of his support for tighter monetary policy.
Making an even stronger pitch for higher interest rates than even Mr. Fisher,
Philadelphia Fed President Charles Plosser stated in his 2010 outlook, an “increase in rates must occur well before the unemployment rate or other measures of resource slack have diminished to acceptable levels. If we fail to do so, we run the risk of keeping real interest rates
too low for too long.”
Meanwhile, contrary to the positions of Mr. Fisher and Mr. Plosser, New York Fed President William Dudley, a voting member of the FOMC, noted that rates would remain low for “at least six months”, or “it could be a year from now, two years from now. It’s going to depend on how the economy develops.” Mr. Dudley would be unlikely to support an increase in the funds rate until the economy has recovered sufficiently “to bring the unemployment rate down.”
Two-year Treasury-note - The average 2-year yield forecast for Q1 2010 is 1.12% The average yield forecast for the next four quarters are 1.37%, 1.66%, 2.04% and 2.47%. The current 2-year Treasury yield is 0.86%.
10-year Treasury-note - The average forecast for Q1 2010 is 3.79%. The average forecast for the next four quarters are 3.92%, 4.07%, 4.22% and 4.45%. The current 10-year yield is 3.65%.
MARKET INDICATIONS AS OF 2:42 P.M. CENTRAL TIME
|
DOW
|
Down 128 to 10,597
|
|
NASDAQ
|
Down 32 to 2,288
|
|
S&P 500
|
Down 13 to 1,132
|
|
1-Yr T-bill
|
current yield 0.30%; opening yield 0.305%
|
|
2-Yr T-note
|
current yield 0.88%; opening yield 0.87%
|
|
5-Yr T-note
|
current yield 2.42%; opening yield 2.41%
|
|
10-Yr T-note
|
current yield 3.65%; opening yield 3.66%
|
|
30-Yr T-bond
|
current yield 4.54%; opening yield 4.56%
|
Fed Officials Talk as Retail Sales Fall
Thursday, January 14, 2010
RETAIL SALES UNEXPECTEDLY FALL IN DECEMBER
A primary indication of economic recovery is consumer spending. Because both October and November retail sales data had been stronger-than-expected, many economists were forecasting a strengthening of economic growth in the fourth quarter of 2009. This could still be the case, but after a weaker-than-expected December retail sales report, GDP growth forecasts may have to be toned down just a bit.
The median Bloomberg forecast for December retail sales had been for an increase of 0.5%. The actual number was a decline of 0.3%. Possible reasons for the unexpectedly weak sales might have to do with bad weather in mid-December, or the widespread use of gift cards which effectively shifts sales forward to the date the card is actually redeemed. If this is the case, perhaps January will show a rebound. As a consolation, this morning’s report brought significant upward revisions to prior periods. October retail sales got bumped up from +1.1% to +1.2% and November was revised from +1.3% to +1.8%.
MIXED CHATTER FROM THE FED
Earlier this week, three prominent Fed officials weighed in on the economy and future monetary policy. According to Reuters, Philadelphia Fed President Charles Plosser on Tuesday told the Entrepreneurs Forum of Greater Philadelphia that he expected the unemployment rate would begin to decline by the end of 2010, but reiterated a point he’d made previously suggesting that the Fed should not hesitate to raise the overnight funds rate before unemployment returns to acceptable levels.
Dallas Fed President Richard Fisher, in a speech on Tuesday to the Waco Business League, said that the economy had begun “a palpable, if tepid, recovery", but went on to say that unemployment would remain “quite high for some time”. He also admitted that the Fed had kept interest rates too low for too long in the early part of the decade, which may have fueled speculation in the housing market. Although both regional Fed presidents seem to favor raising rates before the economy is fully recovered, neither is a voting member of the FOMC.
New York Fed president, William Dudley, is a permanent voting member of FOMC, and his words suggest the Fed could be on hold for a long time. Dudley told PBS Nightly Business Report viewers on Wednesday that although the economy is in the middle of a recovery, the recovery “isn’t as strong as we would like”. He went on to say that he would like to see an economy that was “vigorous enough to bring the unemployment rate down” and that as long as inflation is “well behaved” he would be “pretty patient on the other side”. He also addressed the much-debated “extended period” language that the Fed has spoken for months, saying that the term means “at least six months”, but could be “a year from now” or even “two years from now” depending on how the economy develops.
The bond market has rallied (price up/yields down) in early trading to reflect the likelihood that Fed tightening may be delayed.
The stock markets are generally higher this morning, probably based on the notion that the Fed will be accommodative for much, if not all of 2010.
MARKET INDICATIONS AS OF 10:25 A.M. CENTRAL TIME
|
DOW
|
Up 10 to 10,691
|
|
NASDAQ
|
Up 3 to 2,310
|
|
S&P 500
|
Up 0 to 1,140
|
|
1-Yr T-bill
|
current yield 0.34%; opening yield 0.36%
|
|
2-Yr T-note
|
current yield 0.92%; opening yield 0.96%
|
|
5-Yr T-note
|
current yield 2.49%; opening yield 2.54%
|
|
10-Yr T-note
|
current yield 3.75%; opening yield 3.79%
|
|
30-Yr T-bond
|
current yield 4.67%; opening yield 4.71%
|
Payroll Report Disappoints
Friday, January 8, 2010
DECEMBER NON-FARM PAYROLLS FALL 85K
With recent data pointing to an economy that seems to be on the mend many economists and market participants were looking for the first positive print in payrolls since December 2007. Bloomberg’s survey of economists showed a median forecast for no change in non-farm payrolls, but many of us were hoping for at least a slight gain. Instead the economy lost another 85k jobs in December. November data was revised into positive territory, climbing from an originally reported loss of 11k to a gain of 4k. But that was basically offset by a nearly equal downward revision to October. The unemployment rate held steady at 10.0%, but would have risen if not for a 661k drop in the labor force. The U-6 measure, the so-called underemployment rate, actually rose slightly to 17.3%. Details of the report showed job losses across most categories with healthcare and temporary help the lone pockets of strength. Those looking for positive signs in today’s report will point to the increase in temporary help which normally leads full time hiring, and the fact that the job loss numbers in manufacturing and services continue to shrink. So at least things are heading in the right direction.
Job gains should be right around the corner as the government’s Census Bureau is expected to hire up to 1.15 million temporary workers during the first half of the year to conduct the 2010 census. The real question will be whether the economy and job growth improves enough to pick up the slack once the government starts letting those workers go around June of this year. Despite a number of positive signs that seem to be building, sorely needed job growth continues to lag behind.
REGULATORS WARN BANKS ON INTEREST RATE RISK
There was some very timely and important news from the Fed yesterday that might slip under the radar screen with today’s payroll report grabbing most of the headlines. Fixed income investors should pay attention. The Federal Financial Institutions Examination Council (FFIEC), a group made up of five U.S. agencies said in a statement yesterday that “In this current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary mitigating their exposure to potential increases” in borrowing costs. For those less familiar with banking, interest rate risk is one of the top risks that must be managed by banks. Extensive modeling and testing is done by banks and their regulators to ensure that they will remain solvent given various rate scenarios. Today’s very steep yield curve provides banks with easy profits as they borrow short-term at rates near zero, and invest or loan long-term at higher rates. But that formula blows up when the short borrowing rates suddenly rise sharply and the longer investment rates are stuck. The FFIEC has essentially sent a warning shot to banks saying you better be ready for short-term rates to rise. Investors should take heed as well.
In a speech yesterday Kansas City Fed President Thomas Hoenig said that “Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation…” He also said the Fed should move “sooner rather than later” eventually boosting the funds rate to “probably between 3.5 and 4.5 percent.” His statements stand in contrast to current policy and officially the Fed has committed to maintaining exceptionally low interest rates “for an extended period”. However, these warnings and statements are a clear reminder that the risk is skewed to higher rates, and perhaps sooner than many currently expect. One only needs to look at the 2-year Treasury to get a flavor for how fast things can change. The yield on the 2-year was 0.67% on December 1st. Yesterday it reached 1.06% before declining on this morning’s weak payroll report.
Stocks are mixed and bond prices are generally higher following this morning’s news.
MARKET INDICATIONS AS OF 9:08 A.M. CENTRAL TIME
|
DOW
|
DOWN 28 to 10,579
|
|
NASDAQ
|
UP 4 to 2,304
|
|
S&P 500
|
DOWN 2 to 1,140
|
|
1-Yr T-bill
|
current yield 0.34%; opening yield 0.36%
|
|
2-Yr T-note
|
current yield 0.98%; opening yield 1.02%
|
|
5-Yr T-note
|
current yield 2.59%; opening yield 2.61%
|
|
10-Yr T-note
|
current yield 3.83%; opening yield 3.82%
|
|
30-Yr T-bond
|
current yield 4.72%; opening yield 4.69%
|
Factory Index, Bernanke, Fannie and Tweeting
January 4, 2010
PURCHASING MANAGERS SIGNAL GROWTH AHEAD
The December ISM manufacturing index rose from 53.6 to 55.9, reaching its highest level since April 2006. Any number above 50 signals expansion. A year earlier, this same index registered a 28-year low of 32.9. The subsequent 23-point recovery represented the biggest annual gain in 26 years. Several components helped boost the overall index with new orders jumping from 60.3 to 65.5, employment from 50.8 to 52.0 and production from 59.9 to 61.8.
Although the factory sector represents only 15% of the overall economy, the ISM index has historically shown a high correlation with economic growth. As a result, the index is closely followed by market experts, and a better-than-expected number is seen as an indication that future GDP growth could prove stronger than expected.
The stock markets had already opened up big, but the ISM survey data added fuel to the rally.
Bond yields have drifted higher all along the curve, but this has occurred very gradually over the past month as economic data has gained strength.
On Friday, the December labor market report is scheduled for release. Several pieces of economic data, including the employment component of the December ISM report and a significant drop in weekly jobless claims suggest that non-farm payrolls could possibly show a slight gain for the first time in two years, even though the unemployment rate is expected to creep a bit higher.
BERNANKE MENTIONS RATE HIKES
On Sunday, in a speech to the American Economic Association, Fed Chairman Bernanke said that any revision in the Fed’s interest rate policy should be done “cautiously”, but went on to say that the FOMC should be open to hiking rates if a new financial bubble were to emerge. At the same time, he defended low interest rates as the primary reason for the housing bubble that sparked the recession, instead pointing a finger at a lack of mortgage industry regulation.
FANNIE AND FREDDIE ASSISTANCE CAPS RAISED
On Christmas Eve (in case anyone missed it), the Treasury Department removed the $200 billion Federal support caps that had been in place for the two mortgage giants. Up to this point, Freddie had requested $51 billion from the government, while Fannie had taken $60 billion. There has been considerable speculation over why the caps were removed, but the one that perhaps sounds the most logical came from the Wall Street Journal last week citing Credit Suisse analysts –
The relaxed portfolio limits calmed investor worries that Fannie and Freddie would be forced to sell some of their mortgage holdings just as the Federal Reserve was preparing to wind down its purchases of mortgage-backed securities next spring. The Fed's commitment to buy up to $1.25 trillion has helped to keep mortgage rates near record lows; without that support some economists have said that could rise to 6% by the end of 2010.
TWEETING By THINKING (from Time Magazine’s 50 Best Inventions of 2009)
In April, University of Wisconsin doctoral student Adam Wilson, tweeted 23 characters just by thinking. He focused his attention on one flashing letter after another on a computer screen while wearing a cap outfitted with electrodes that monitored changes in his brain activity to figure out which character he wanted. His efforts spelled out "USING EEG TO SEND TWEET," among other messages. The feat marks a major step forward in establishing communication for people with "locked in" syndrome, which paralyzes the body, except for the eyes, but leaves the mind alert. For now, though, it's slow going: with the speediest brain tweeters reportedly managing just eight characters a minute, it's a good thing they're limited to 140.
MARKET INDICATIONS AS OF 10:25 A.M. CENTRAL TIME
|
DOW
|
UP 151 to 10,579
|
|
NASDAQ
|
UP 41 to 2,309
|
|
S&P 500
|
Up 17 to 1,127
|
|
1-Yr T-bill
|
current yield 0.42%; opening yield 0.42%
|
|
2-Yr T-note
|
current yield 1.09%; opening yield 1.10%
|
|
5-Yr T-note
|
current yield 2.64%; opening yield 2.65%
|
|
10-Yr T-note
|
current yield 3.82%; opening yield 3.83%
|
|
30-Yr T-bond
|
current yield 4.64%; opening yield 4.65%
|
Wednesday February 10, 2010
Fed Chairman Reiterates Familiar Policy Points
The stock market were poised for a respectable opening after the Wall Street Journal reported this morning that the German government was considering a plan to offer Greece and other troubled euro-zone partners loan guarantees in order to calm market fears of default. In fact, the DOW was up 21 points early, but has since slipped presumably based on the text of a Bernanke speech presented to the House Financial Services Committee this morning.
In his testimony, Bernanke trotted out the now too familiar language, “the FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period” and added that “In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures.” None of this was a surprise. One thing that may have been a bit unexpected was Bernanke’s comment that the Fed might raise the discount rate “before long” as part of the “normalization” of Fed lending, a move that the Chairman said shouldn’t signal any change in monetary policy. Apparently, the financial markets believe otherwise as bond yields have risen and stock prices have dropped in response.
Much of what market participates were anticipating had to do with how the Fed intended to unwind the hugely accommodative policy it currently has in place. The Fed is currently holding a $2 trillion portfolio of securities. When it bought these securities, the Treasury in essence printed money to pay for them, thereby injecting huge amounts of liquidity into the financial system. The question everyone has at this point is …how will the Fed unwind their massive balance sheet?
In the long run, they’ll continue allowing securities to simply mature (agencies) or be paid-down (mortgage-backed securities). Treasuries are currently being rolled-over, but may be allowed to roll-off in the future.
Actual selling of portfolio holdings could swamp the bond market with supply and drive prices lower and yields higher, in the process generating balance sheet losses for the Fed, but Bernanke specifically testified that the Fed did not intend to sell anything in the near term. In the short-term, the Fed can enter into reverse repos, whereby they lend securities to banks in exchange for cash, or offer term deposits (like a “Fed CD”) to drain cash from the system. But nothing major is likely to happen anytime soon.
At one point, the DOW was down 97 points to 9,962, but has since recovered and is up 3 points to 10,062.
OTHER NEWS WORTH MENTIONING -
According to the latest Jobs Openings and Labor Turnover Survey (JOLTS), the number of available jobs rose by 2.6% during December to a total of 2.5 million total. But, as Bank of America pointed out, this still represents about 6 unemployed workers for every job opening - near a record high. The survey also showed the latest “quit rate” in which workers leave their jobs for better opportunities. In December, this rate fell from 1.5% to a record low of 1.3%. These numbers suggest that the job market is still in terrible shape.
MARKET INDICATIONS AS OF 1:18 P.M. CENTRAL TIME
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DOW
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Up 3 to 10,062
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NASDAQ
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Up 1 to 2,152
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S&P 500
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Up 4 to 1,067
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1-Yr T-bill
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current yield 0.36%; opening yield 0.30%
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2-Yr T-note
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current yield 0.87%; opening yield 0.83%
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5-Yr T-note
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current yield 2.36%; opening yield 2.32%
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10-Yr T-note
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current yield 3.69%; opening yield 3.65%
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30-Yr T-bond
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current yield 4.63%; opening yield 4.59%
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