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About Asset Management

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

  • Investment Management
  • Arbitrage Rebate Compliance Services

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

 

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

Economic Insights


FED CALMS MARKETS WITH ITS PATIENT APPROACH

Wednesday, June 17, 2015

JUNE FOMC MEETING REVEALS CAUTIOUS FED 
Fed officials emerged this afternoon from the fourth scheduled FOMC meeting of the year and suggested again that the pace of future rate hikes will be gradual. The Fed policy-making committee acknowledged that job creation had recently picked up and that they expect inflation to gradually rise toward their 2% target. The committee repeated that it will increase rates when it sees further labor market improvement and is reasonably confident that its inflation target will be reached. Today, Economic conditions do not yet warrant an increase in the fed funds rate. No surprises here. 

At this point, the “liftoff date” is still most likely September 16th. There is a July meeting scheduled, but most believe the Fed will not announce a change in policy during a meeting that didn’t include a press conference. 

The Fed’s projections showed a median year-end overnight funds rate of 0.625%. This suggests a 25 bps increase in September and another 25 bps move in December. The median funds rate projection for the end of 2016 was lowered from 1.875% in March to 1.625%.  

The Fed trimmed its 2015 GDP forecast from 2.3%-2.7% to 1.8%-2.0%, and boosted its unemployment forecast from 5.0%-5.2% to 5.2%-5.3%.   

Yellen is in the midst of the scheduled press conference. If there are any surprises, we’ll send out an update. 

The bond market has rallied a bit, pushing yields slightly lower, while the equity markets turned index losses into gains after the Fed Statement was released. The rationale here is that the Fed will be more gradual and cautious, allowing ample accommodation to continue.                    

MARKET INDICATIONS AS OF 1:45 P.M. CENTRAL TIME 

DOW

UP 76 to 17,980

NASDAQ

UP 20 to 5.075

S&P 500

UP 3 to 2,099

1-Yr T-bill

current yield 0.24%; opening yield 0.25%

2-Yr T-note

current yield 0.66%; opening yield 0.69%

5-Yr T-note

current yield 1.64%; opening yield 1.66%

10-Yr T-note

current yield 2.31%; opening yield 2.31%

30-Yr T-bond

current yield 3.08%; opening yield 3.04%



CONSUMERS BOUNCE BACK

Thursday, June 11, 2015

RETAIL SALES BOUNCE BACK 
U.S. consumers pried open their wallets in May, sending retail sales to a +1.2% gain last month while upward revisions to the two prior months added to the report’s luster. April’s original flat reading was bumped up to +0.2% while March was boosted from +1.1% previously to +1.5%. May’s headline figure was right in-line with the Bloomberg survey’s median forecast and was driven by sales of autos and gasoline, with 0.74% of the 1.21% increase attributable to those two categories. Automobile dealers sold cars and light trucks at a 17.7 million unit annual rate in May, the fastest pace since July 2005, while higher gas prices helped boost service station sales. Gains in May were broad based with 11 of the 13 major categories climbing. Retail sales ex-autos and gas advanced +0.7%, versus a median forecast of +0.5%. The retail sales control group, which feeds into GDP calculations, also grew +0.7% in May while figures were revised higher for both April (from 0.0% to +0.1%) and March (from +0.5% to +0.9%). Today’s data should result in a slight boost to the final Q1 GDP data that is due out later this month, and paints a more positive outlook for Q2 as well.

BOND SELL-OFF TAKES A REPRIEVE 
Although certainly positive, the fact that the retail sales data was generally in-line with expectations was a relief for bond investors who seemed to have been bracing for an upside surprise. The bond market sell-off that took the 10-year Treasury note yield to an eight-month high of 2.485% yesterday, has taken a breather today as prices have rallied to send the yield to 2.38%. Solid results from the auctions of 10- and 30-year Treasuries were another part of the story, as was a rally in European government bonds. Market chatter seems to indicate that perhaps the last few weeks of selling had gone too far. The inability of officials to reach a compromise on Greece is another likely factor in today’s bond rally. 

After tomorrow’s PPI report, market attention will begin focusing on next week’s FOMC meeting. The markets don’t expect any significant changes in policy just yet, but with economic data heating up, the debate and discussion about when to begin raising interest rates should be heating up as well. 

MARKET INDICATIONS AS OF 2:13 P.M. CENTRAL TIME 

DOW

UP 68 to 18068

NASDAQ

UP 10 to 5.086

S&P 500

UP 5 to 2,111

1-Yr T-bill

current yield 0.25%; opening yield 0.25%

2-Yr T-note

current yield 0.72%; opening yield 0.73%

5-Yr T-note

current yield 1.73%; opening yield 1.79%

10-Yr T-note

current yield 2.38%; opening yield 2.48%

30-Yr T-bond

current yield 3.11%; opening yield 3.22%



BOND YIELDS RISE ON STRONG EMPLOYMENT REPORT

Friday, June 5, 2015

PACE OF JOB CREATION INCREASES AS WEATHER WARMS
Non-farm payrolls rose by +280k in May, easily topping the median forecast of +226k, while job gains in the previous two months were revised upward by a total of +36k. The three-month average now stands at a solid +267k.  

The May breakdown showed the new jobs were concentrated in professional and business services (+63k), leisure and hospitality (+57k), healthcare (+47k), retail (+31k), government (+18k) and construction (+17k). The only major sector shedding significant jobs was mining (-17k).      

The unemployment rate, calculated using data from the separate household survey, rose from 5.4% to 5.5% as the number of Americans entering the labor force during the month exceeded the number who actually found jobs. The labor market participation rate (although still near a 37-year low) rose from 62.8% to 62.9% in May as 397k Americans reportedly began searching for work. 

According to the Bureau of Labor Statistics (BLS), there are still 8.7 million people actively seeking employment; of these, 28.6% or 2.5 million have been unemployed for 27 weeks or more.  

The number of involuntary part-time workers was unchanged during the month at 6.7 million. These are workers who would prefer full-time employment, but either had their hours cut or could only find part-time employment.       

There were another 1.9 million Americans who were available and willing to work and had looked for employment sometime in the past 12 months ...but were not reflected in the official unemployment rate because they had not actively looked for work in the past four weeks.   

The U6 unemployment rate, which captures all those who would accept a suitable full-time job if it were offered, remained at 10.8%. Although this sounds high, it’s well below the recessionary peak of 17.1%. 

Improved labor conditions boosted wages in May with average hourly earnings rising by $0.08 to $24.96. Over the past year, hourly earnings are now up +2.3%. Five months ago, the annual increase was +1.9%. Stagnant wages have long been a concern for Fed officials. Although the May gain is relatively small, the trend is higher, which should please the Fed.      

The stock markets are (slightly) down in early trading, while bond yields are up. Both are reflecting the notion that Fed officials are now more likely to begin hiking short-term interest rates sooner rather than later. Prior to this morning’s release, a slight majority of experts had expected a September 16th liftoff date, although plenty of economists still believed the Fed would hold out until December. Just yesterday, the International Monetary Fund suggested that the FOMC should defer its first rate increase until there are greater signs of wage or price inflation. Based on IMF forecasts, this would have postponed liftoff into the first half of 2016. 

The dollar is regaining quite of bit of strength versus the euro, which is contributing to lower crude oil prices this morning. If the dollar strength continues, the inflation rate could again creep lower along with crude oil prices and exports.  

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

DOW

DOWN 2 to 17,903

NASDAQ

DOWN 1 to 5.058

S&P 500

DOWN 7 to 2,089

1-Yr T-bill

current yield 0.26%; opening yield 0.25%

2-Yr T-note

current yield 0.73%; opening yield 0.66%

5-Yr T-note

current yield 1.76%; opening yield 1.64%

10-Yr T-note

current yield 2.39%; opening yield 2.31%

30-Yr T-bond

current yield 3.08%; opening yield 3.04%




RATES RISE AS JUNE OPENS WITH BETTER DATA

Monday, June 1, 2015


ISM MANUFACTURING INDEX IMPROVES 
The ISM Manufacturing index rose for the first time in seven months during May, climbing from 51.5 in March and April to 52.8. According to ISM, that level is associated with a +3.0% rate of growth in real GDP. The increase was driven by the new orders component which rose from 53.5 to 55.8, an encouraging signal that perhaps manufacturing can regain its footing in the months ahead. One factor in the rebound might have been the pause in dollar strengthening that occurred during April and early May. Unfortunately for manufacturers, the dollar has resumed its strengthening trend in recent days and just today hit a 12-year high versus the yen.

CONSUMERS IN A SAVING MOOD 
Personal income rose +0.4% during May while spending was flat, boosting the savings rate to 5.6%, just below February’s 5.7% high. Details help explain why as wages and salaries were up a meager +0.2%, providing precious little additional income for the average consumer to spend. The larger overall increase in income was driven by outsized gains in rental income (+0.6%) and interest and dividends (+1.2%), categories more likely to accrue to wealthier individuals and also more likely to be saved than spent. 

Inflation trends seem to be reflecting the consumer’s more cautious spending patterns. The PCE deflator was unchanged in April and up a scant +0.1% over the last twelve months. The core-PCE deflator managed a +0.1% advance in April but that wasn’t enough to stop the year-over-year rate from sliding down to +1.2% from +1.4% previously. Both the headline and core PCE indices have fallen short of the Fed’s 2.0% inflation target for three years and counting. 

CONSTRUCTION SPENDING SURGES 
On a brighter note, construction spending jumped +2.2% in April, reflecting the strength in homebuilding that was previously reported in the +20.2% increase in housing starts. Gains were broadly based, however, as private nonresidential spending surged +3.1% and government spending advanced +3.3%. The cherry on top was a sharp upward revision to March data, which was boosted from an original -0.6% to +0.5%. This was a much stronger than expected report and seems to have been the impetus for today’s sell-off in bonds. The report led Morgan Stanley to boost their estimate of Q2 GDP from +1.6% to +2.1%.  

The combination of a better ISM manufacturing index and the strength in construction spending was enough to send bond prices falling and yields higher. The two-year Treasury note yield has gone from 0.61% at open to 0.65%, while the 10-year yield has gone from 2.12% to 2.19%.

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

DOW

UP 74 to 18,085

NASDAQ

UP 23 to 5.093

S&P 500

UP 11 to 2,115

1-Yr T-bill

current yield 0.25%; opening yield 0.25%

2-Yr T-note

current yield 0.65%; opening yield 0.61%

5-Yr T-note

current yield 1.55%; opening yield 1.49%

10-Yr T-note

current yield 2.19%; opening yield 2.12%

30-Yr T-bond

current yield 2.95%; opening yield 2.88%



(AS EXPECTED) Q1 GDP REVISED INTO NEGATIVE TERRITORY

Friday May 29, 2015

FIRST QUARTER WEAKNESS EXPECTED TO REVERSE IN Q2
The first of two scheduled revisions to first quarter economic growth adjusted GDP downward from +0.2% to -0.07. Although on the surface this sounds terrible, the expectation had actually been for a bigger -0.9% drop.  
There were multiple factors contributing to the poor showing during the quarter, including inclement weather and the West Coast port strike, but the biggest factor was a widening trade gap influenced heavily by the strong U.S. dollar. In fact, the trade deficit was responsible for subtracting 1.9 percentage points from the overall number, the most in 30.years. 

Revised inventory build-up added +0.3% after a previously reported +0.7%. In theory, there should now be less inventory drag going into the second quarter. Consumer spending was revised downward from +1.9% to +1.8%. As consumer spending slowed, the savings rate increased from a previously reported +4.7% to +5.5%. 

This morning’s revision also included the first look at Q1 corporate profits. Pre-tax earnings fell 5.9% from the previous quarter, but increased 3.7% on a year-over-year basis. The Q1 dip in profits is thought to be dollar-related. 

The market reaction to this morning’s numbers so far has been muted, probably because the revision was expected to be worse and because we’re already mid-way through the second quarter. 

Most economists expected a rebound in the second quarter, although at this point it looks like Q2 annualized growth will be somewhere around +2%, suggesting annualized growth for the first half of 2015 will be just over +1.0%. The historical average GDP growth rate over the past 70 years is +3.2%. 

The Fed is anxious to begin tightening short term rates, but with growth well below average, the liftoff date will continue to be debated.                           

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

DOW

DOWN 58 to 18,068

NASDAQ

DOWN 12 to 5.086

S&P 500

DOWN 5 to 2,115

1-Yr T-bill

current yield 0.25%; opening yield 0.24%

2-Yr T-note

current yield 0.61%; opening yield 0.63%

5-Yr T-note

current yield 1.49%; opening yield 1.52%

10-Yr T-note

current yield 2.11%; opening yield 2.14%

30-Yr T-bond

current yield 2.86%; opening yield 2.89%



RECENT SIGNS OF ECONOMIC STRENGTHENING

Thursday, May 28, 2015

MORE POSITIVE NEWS IN THE HOUSING ARENA
Most of the housing sector news this spring has been much better than expected. This morning, pending home sales for the month of April rose by a higher-than-expected +3.4% to 112.4, a nine-year high. On a year-over-year basis, the index is up +14.0%, the biggest annual increase in 2½ years.   

On Tuesday, new home sales for April increased by +6.8% from a 484,000 unit sales pace to 517,000. Since new homes make up just 8% of total residential sales, and the available supply is so low, there is considerably more upward price pressure relative to existing homes - the median sales price for a new home increased by +8.3% year-over-year to a record $297,300. At the end of April, the available supply was just 205,000 units, representing a lean 4.8 month supply. This seems to legitimize the +20.1% jump in April housing starts and the +10.1% rise in April building permits.   

BOTH BUSINESS AND CONSUMER OUTLOOK IMPROVE 
Although durable goods orders fell by -0.5% in April, Tuesday’s report as a whole was quite encouraging. This particular series is notoriously volatile as the aircraft component has a tendency to dominate overall orders. Capital goods orders excluding defense and aircraft (a proxy for business investment) increased by a solid +1.0% in April after a +1.5% gain in March. U.S. companies seem to be gaining confidence.  

Consumer confidence climbed from a solid 94.3 reading in March to an even more solid 95.4 in April as the present conditions index rose from 105.1 to 108.1. Clearly, consumers are also quite upbeat about the economy. 

The U.S. dollar, which had weakened significantly from mid-April to mid-May along with the economic outlook, has strengthened over the past couple of weeks as the prospects for an economic rebound improve. In response, crude oil prices have moved lower.      

PRICE PRESSURES INCREASE A BIT IN APRIL 
Last week, the consumer price index rose by +0.1% during the month of April, exactly meeting expectations and dragging the year-over-year rate from -0.1% to -0.2%. However, core CPI rose by +0.3% during the month, the biggest increase in two years, boosting the year-over-year advance from +1.7% to +1.8%. The Fed will presumably welcome the slightly higher rate of inflation as it remains below their 2% target. The primary contributors to the April advance were medical costs and owner’s equivalent rent, which rose by +0.3% for the second straight month. Energy prices fell by -1.3% and food costs were unchanged from the previous month. 

The increase in inflation and the apparent improvement in the economy would appear to keep the Fed on track to announce the first increase in the overnight rate target since 2006 on September 17th. Of course, anything can happen between now and then. 

Treasury yields on the intermediate-to-long end of the maturity curve moved lower over the past week as the dollar gained strength. The 10-year Treasury note, trading around 2.30% last Tuesday is back down to 2.13%, while the 30-year bond yield has dropped from 3.07% to 2.88% during the same period.   
            
MARKET INDICATIONS AS OF 11:20 A.M. CENTRAL TIME 

DOW

DOWN 68 to 18,095

NASDAQ

DOWN 14 to 5.093

S&P 500

DOWN 9 to 2,112

1-Yr T-bill

current yield 0.25%; opening yield 0.23%

2-Yr T-note

current yield 0.63%; opening yield 0.65%

5-Yr T-note

current yield 1.52%; opening yield 1.53%

10-Yr T-note

current yield 2.14%; opening yield 2.13%

30-Yr T-bond

current yield 2.89%; opening yield 2.87%



U.S. CONSUMERS HAVE YET TO INCREASE SPENDING


Wednesday, May 13, 2015

RETAIL SALES SLUMP IN APRIL
The expected spring economic rebound has yet to materialize as retail sales were unchanged (+0.0%) in April. If the large and volatile auto component is excluded, sales rose by just +0.1%. Seven of 13 major categories showed gains during the month, with healthcare, eating and drinking establishments and online shopping leading the way. Sales declines were noted in general merchandise retailers, grocery stores, service stations, auto dealers, and furniture and electronics stores. The control group, used to calculate GDP, was also unchanged (+0.0%) in April. Americans saved an estimated $100 billion at the gas pump over the past year, but so far have chosen to save rather than spend the windfall.   

The bright spot in this morning’s report was an upward revision to March as the +0.9% reading was boosted to +1.1%. This is good news …but it’s old news. 
  
The Fed has repeatedly said monetary policy decisions will be data dependent. In other words, if the data is strong enough, they’ll raise rates. They have also stressed that the weak first quarter economic data is most likely transitory. The April retail sales report is one of the earliest measures of second quarter consumer spending, and so far the weakness doesn’t appear as transitory as the Fed has insisted. Most economists expect the first rate hike to be announced at the September 17th FOMC meeting, but this liftoff date is contingent on stronger data between now and then. 

Stocks are up and bond yields are down in early trading. There is a $24 billion 10-year Treasury auction today. If it goes well, the bond rally will likely be extended. Yesterday’s 3-year note action was well received.   

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

DOW

UP 20 to 18,088

NASDAQ

UP 16 to 4,992

S&P 500

UP 7 to 2,106

1-Yr T-bill

current yield 0.22%; opening yield 0.23%

2-Yr T-note

current yield 0.56%; opening yield 0.60%

5-Yr T-note

current yield 1.53%; opening yield 1.56%

10-Yr T-note

current yield 2.21%; opening yield 2.25%

30-Yr T-bond

current yield 3.01%; opening yield 3.01%



THE RECENT RISE IN GLOBAL BOND YIELDS

Tuesday, May 12, 2015

EUROPEAN GOVERNMENT BONDS LEAD A WORLDWIDE SELLOFF
A little over two weeks ago, the 10-year Treasury was yielding 1.90%, today it’s at 2.25%. Where it goes from here is anybody’s guess, but then again, market direction hasn’t been entirely clear for a long time. There are a number of interrelated reasons for the recent selloff starting with the European bond yields. 

Last fall, much of the eurozone teetered on the verge of recession. Plunging crude oil prices in the fourth quarter of 2014 contributed to deflation fears prompting European leaders to finally announce a massive, long-anticipated, quantitative easing campaign in hopes of stimulating economic growth and hopefully sparking a bit of inflation. 

Traders began buying European government bonds long before the ECB, snapping up available supply and driving yields to record lows. Once the central bank began making its purchases in March, supply was already severely strained. At one point, government bond yields in Germany were negative nearly nine years out on the maturity curve, with the 10-year German bond falling to 0.05% and other large European counties also trading at shockingly low levels. The U.S. bond market seemed to offer good value relative to rock bottom European yields, so global investors increased Treasury purchases, driving U.S. yields lower.  

Then, signs of economic recovery in Europe along with an upward climb in crude oil prices combined to calm deflationary fears. With quantitative easing showing early success and Europe flashing signs of growth, the unnaturally low yield levels suddenly seemed …much too low. 

Janus Capital’s Bill Gross declared in late April that the 10-year bund was “the short of a lifetime.” He was right.  Sellers outnumbered buyers and yields moved higher. Today, the German 10-year stands at 0.59%, and the French 10-year at 0.88% …still plenty accommodative.   

The markets simply adjusted to more appropriate yield levels. Stock markets around the world were rattled, but apparently it wasn’t so much that yields moved higher as much as the abruptness of the move. At the moment, the financial markets are relatively calm. U.S. stocks, although mostly down on the day, had rallied significantly off the lows, while overall bond yields declined.         

The story is probably much more complicated than this.  A shift in investor sentiment and expectations are related factors, although these are harder to quantify and subject to minute by minute change. 

The question now is whether rising yields are here to stay. Most expect the long-term trend is higher, but the European economy is hardly out of the woods and some analysts believe today’s $60 oil prices could return to $50 in the coming weeks and months. Large scale asset purchases continue in Japan and the ECB quantitative easing program just got started in March. 

Here in the U.S., annualized GDP rose by just +0.2% in the initial first quarter reading and is expected to be revised well into negative territory later this month. Most early estimates of second quarter GDP are below +2.0%, suggesting first half growth will be less than +1.0%. Not a recipe for higher rates.   

One of the more common forecasts had been that the global markets would experience volatility on the way to recovery. This is what it looks like.
       
MARKET INDICATIONS AS OF 3:45 P.M. CENTRAL TIME 

DOW

DOWN 37 to 18,068

NASDAQ

DOWN 17 to 4,976

S&P 500

DOWN 6 to 2,099

1-Yr T-bill

current yield 0.22%; opening yield 0.23%

2-Yr T-note

current yield 0.60%; opening yield 0.62%

5-Yr T-note

current yield 1.56%; opening yield 1.60%

10-Yr T-note

current yield 2.25%; opening yield 2.28%

30-Yr T-bond

current yield 3.01%; opening yield 3.04%



THE APRIL FED MEETING AND A SIGNFICANT GDP SLOWDOWN

Wednesday, April 29, 2015

GDP SLUMPS IN THE FIRST QUARTER
It was a busy Wednesday for the financial markets. The initial +0.2% first quarter annualized GDP reading turned out to be quite a bit weaker than the +1.0% median forecast. Personal consumption, the biggest component of GDP, declined from a +4.4% growth rate in Q4 2014 to +1.9%, with spending on services much higher than on goods. 

Business investment fell by -3.4%, while residential spending rose by just +1.3%. Exports dropped -7.2% as dollar strength continued to hamstring foreign buyers of U.S. goods, and government spending fell -0.8% as state and local governments continued to tightened their belts. 

Interestingly, business inventories were positive contributors to overall GDP during the quarter. If the inventory build-up is excluded, real final sales tumbled -0.5%. The fact that inventory accumulation added +0.7 percentage points to overall GDP in the first quarter suggests the expected second quarter rebound might not be as solid as most had assumed. 

FOMC MAINTAINS ITS STANCE  
The Fed met yesterday and today in the third scheduled FOMC meeting of the year. This afternoon, they emerged with a more downbeat assessment of the economy than six weeks earlier. The Official Statement indicated that Fed officials believe as the U.S. economy slowed during the winter “the pace of job gains moderated” and household spending “declined.”  Yawn.  All of these were variations on what they’d declared in March. Nothing new here. They also reiterated (again) that these were transitory factors, and that future economic activity would likely expand at a moderate pace, while inflation would revert back to the 2% target when the price of crude oil and imported goods move higher.               

The possibility of a June hike is still technically in play as the committee didn’t specifically say otherwise, although the weakness in the economy suggests September 17th is a much better bet. Of course, tightening in four-and-a-half months will depend on the strength of the subsequent rebound. There are a number of economists expecting the first rate increase won’t be for another year. With the last GDP reading at just +0.2, this isn’t hard to imagine. 

MARKET INDICATIONS AS OF 3:48 P.M. CENTRAL TIME 

DOW

DOWN 75 to 18,035

NASDAQ

DOWN 32 to 5,023

S&P 500

DOWN 8 to 2,107

1-Yr T-bill

current yield 0.23%; opening yield 0.23%

2-Yr T-note

current yield 0.56%; opening yield 0.56%

5-Yr T-note

current yield 1.42%; opening yield 1.40%

10-Yr T-note

current yield 2.04%; opening yield 2.00%

30-Yr T-bond

current yield 2.76%; opening yield 2.70%



WEAK DATA SUPPORTS A PATIENT FED

Friday, April 17, 2015

TIMING OF RATE HIKES STILL UNCERTAIN  
The banner headline in this morning’s Wall Street Journal declared “Fed shies away from June rate hike,” and went on to say in the article that the economic data has largely disappointed in the first quarter. Analysts from Bank of America Merrill Lynch recently calculated that the number of disappointing economic data releases relative to positive surprises had been greater than at any point during the nearly six-year recovery cycle. Because the Fed’s monetary policy is “data dependent,” it’s presumed that the economy will have to rebound significantly from its poor first quarter performance before the Fed begins to raise short rates.              

The most recent round of economic data didn’t indicate a rebound has begun. On Tuesday, March retail sales rose by +0.9%. On the surface, this was a solid number, but it fell below the median forecast and failed to make up for what had been a painfully weak first quarter. Recall that sales in January and February were down -0.8% and -0.5% respectively following a -0.9% drop in December. The retail sales control group (used to calculate GDP) increased by just +0.3% in March after falling -0.2% in each of the previous three months. 
 
On Wednesday, March industrial production dropped -0.6%, quite a bit worse than the -0.3% median forecast. There were a myriad of contributing factors including the strong U.S. dollar, the weak global economy and a struggling oil industry.  The factory sector will have to contend with these now familiar problems for the foreseeable future. Lesser negative influences such as the West Coast port slowdown and cold weather in the Northeast should no longer be impediments.       
  
Thursday brought a fresh round of housing data, and for the most part it also disappointed. Housing starts were expected to rebound sharply after a -17% weather-influenced February plunge, but the +2.0% increase fell well short of the more optimistic +15.9% median forecast.  Surprisingly, building permits didn’t suggest better times ahead as March permits fell by -5.7%. 

This morning, the March headline consumer price index (CPI) rose by +0.2%, a bit less than expected, dragging the year-over-year CPI rate to -0.1%. Obviously, this negative reading has been heavily influenced by lower energy prices. Core CPI, which excludes food and energy costs, rose +0.2% matching the January and February increases. On a year-over-year basis, the core rate crept higher from +1.7% to +1.8%, suggesting that price pressures might be firming. This morning’s stock market plunge is being blamed on the CPI rise, although it could be simple case of market jitters.     

Expectations for a tardy Fed tightening have generally pushed yields on short securities lower during the week. On the long end of the maturity curve, yields are also quite low, although the reasons have less to do with domestic economic data and more to do with global factors. The German 10-year government bond traded briefly below 0.05% early this morning, while the Swiss 10-year government bond was being offered at a negative yield of -0.14%.  By contrast, the 10-year Treasury was yielding 1.89% on Friday morning.  Daniel Ivascyn, the new CIO for PIMCO, said on Thursday that he expects bond yields will remain low for the long term, and that German and U.S. bond yields have no lower limit. 

While bond issuers continue to reap benefits, the painfully low investment yields combined with the likelihood of Fed rate increases sometime this year have made investing in this market a unique challenge. The Wall Street Journal reported on Thursday that BlackRock CEO Larry Fink had warned about a “dangerous imbalance” in the financial system, and believes “the increasingly desperate search for yield is the single greatest risk in the financial system.”  

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

DOW

DOWN 245 to 17,861

NASDAQ

DOWN 71 to 4,937

S&P 500

DOWN 21 to 2,083

1-Yr T-bill

current yield 0.21%; opening yield 0.20%

2-Yr T-note

current yield 0.51%; opening yield 0.49%

5-Yr T-note

current yield 1.31%; opening yield 1.30%

10-Yr T-note

current yield 1.88%; opening yield 1.89%

30-Yr T-bond

current yield 2.55%; opening yield 2.58%



UNEXPECTEDLY WEAK EMPLOYMENT REPORT PUSHES INITIAL RATE HIKE EXPECTATIONS TO DECEMBER

Friday, April 3, 2015

PAYROLL GROWTH SLOWS IN MARCH 
Despite a rash of disappointing first quarter data, analysts had continued to believe that the pattern of robust job growth would continue. Several hawkish Fed members, anxious to move short rates off zero, had pointed to 12 straight months of 200,000+ nonfarm payroll gains through February, the longest such stretch in nearly 20 years. But, this morning’s March employment data was an unsavory surprise as U.S. companies reported just +126,000 new jobs were created during the month, almost half the Bloomberg median forecast of +245,000. Downward revisions to January (+239,000 201,000) and February (+295,000 264,000) subtracted another 69,000, making this the worst labor report since December 2013. 

After factoring in revisions, the first quarter average payroll gain was +197,000 per month, well below the +324,000 average over the final three months of 2014.          

The unemployment rate, calculated from a separate household survey, held steady at 5.5%, but the underlying numbers were also surprising weak with household employment rising by just +34,000. If the labor force hadn’t shed another 96,000 workers in March, unemployment might have drifted higher.  

Within the less important data, the average workweek declined from 34.6 to 34.5 hours, while the factory workweek shrunk from 41.0 to 40.9. Hourly earnings, which have been stagnant for years, rose by a fairly healthy +0.3% in March - This is the only component of the March report that remotely suggests strength. 

Frigid weather and the West Coast port delays had a negative impact on hiring during the month, but these shouldn’t be contributing factors going forward. The lingering concerns are excessive dollar strength, the collapse of the oil industry, extraordinarily low inflation, the impact of quantitative easing in Europe and a host of related issues.               

Bond yields have moved sharply lower in very light Good Friday trading. At this point, any possibility of Fed rate hikes beginning in June has vanished. The bond markets are now priced for a December liftoff. 

The stock markets are closed today, but equity futures have been clobbered, with DOW futures down 165 points. This is a bit of a surprise since a longer period of Fed accommodation would seem positive for stocks. The adverse reaction indicates investors suspect the economic slowdown might not be transitory.     

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

DOW

CLOSED - Futures down 165

NASDAQ

CLOSED - Futures down 44

S&P 500

CLOSED - Futures down 20

1-Yr T-bill

current yield 0.19%; opening yield 0.24%

2-Yr T-note

current yield 0.48%; opening yield 0.54%

5-Yr T-note

current yield 1.25%; opening yield 1.35%

10-Yr T-note

current yield 1.83%; opening yield 1.91%

30-Yr T-bond

current yield 2.48%; opening yield 2.53%



(ANOTHER) APPARENT ECONOMIC SLOWDOWN THREATENS SUMMER RATE HIKE

Wednesday, April 1, 2015

NATIONAL PURCHASING MANAGERS SURVEY PAINTS DIMMER OUTLOOK 
With the exception of the employment data, most of the recent U.S. economic indicators have suggested that the stronger U.S. dollar is having a significant negative impact on the overall economy. This morning, the always important ISM manufacturing index declined for the 5th straight month. The March reading of 51.5 was the lowest in almost two years, and well below the more robust 57.9 reading from just five months earlier.  

One of the most significant concerns within the ISM report (which is data tabulated from a monthly survey of the nation’s purchasing managers) was in the employment outlook as just 39% of managers planned to increase their hiring in the coming months. This was down sharply from 56% in February, and suggests that the most critical economic indicator (employment) could slow in the coming months.   

The Fed has repeatedly told investors that monetary policy decisions will be data dependent …and the data has certainly weakened. Annualized GDP growth seems to have dropped from a somewhat lackluster +2.2% in the final quarter of 2014 to around +1.0% in early 2015. The ISM data is considered a good leading indicator, so the recent decline suggests that second quarter GDP growth may fall below expectations.  

A few Fed officials continue to support June as the most appropriate month to begin raising rates, but this date is becoming increasingly unlikely. The +2.4% overall GDP growth in 2014, the strongest of the recovery cycle, was still well below the +3.2% historical average. It’s hard to imagine economic growth would accelerate when the Fed finally begins to tighten policy.  

The March Employment report is scheduled for release on Good Friday. This isn’t actually a Federal holiday, but market activity will be limited with the stock markets closed and the bond market closing at noon Eastern. If non-farm payroll growth disappoints on Friday, any lingering expectation for a June tightening move could quickly evaporate.        

Also this morning, the ADP employment report, which some consider a preview of Friday’s Bureau of Labor Statistics monthly report, fell short of the +225k median forecast with March job gains of just +189k.   

Longer U.S. bond yields continue to respond to the downward pressure of the foreign markets. The most recent 10-year government yields in Spain, France and Germany were 1.28%, 0.46% and 0.20% respectively. By comparison, the 1.86% 10-year Treasury yield is still a relative bargain. 

Stocks are down again this morning. Yesterday, the DOW gave back all remaining first quarter gains, shedding 200 points to close at 17,776. For what it’s worth, the DOW lost ground in the first quarter of last year before increasing in each of the final three quarters.     
      
MARKET INDICATIONS AS OF 10:30 A.M. CENTRAL TIME 

DOW

DOWN 97 to 17,679

NASDAQ

DOWN 30 to 4,870 

S&P 500

DOWN 7 to 2,060

1-Yr T-bill

current yield 0.25%; opening yield 0.23%

2-Yr T-note

current yield 0.53%; opening yield 0.56%

5-Yr T-note

current yield 1.32%; opening yield 1.37%

10-Yr T-note

current yield 1.86%; opening yield 1.92%

30-Yr T-bond

current yield 2.47%; opening yield 2.54%



RECENT FED CHATTER INDICATES CONFLICTING VIEWS

Wednesday, March 25, 2015

FED TALK CONTRIBUTES TO UNCERTAINTY  
After last week’s somewhat dovish FOMC statement, a number of Fed officials have weighed in with their own opinions. Apparently, there is some dissention among Fed members about the timing of the first rate hike …although 15 of 17 committee members still expect tightening to begin at some point this year. 

Chicago Fed President Charles Evans told a London audience yesterday that the Fed needs to be "quite confident" that inflation is headed back to the 2% target before raising interest rates, suggesting tightening might be delayed until sometime in the first half of 2016, while St. Louis Fed President James Bullard warned yesterday that the current 5.5% unemployment rate doesn’t support a zero interest rate policy and that the Fed needs to raise rates “as soon as possible.”  Recently appointed Cleveland Fed President Loretta Mester reminded market participants that a June rate hike is still on the table and seconded comments by Vice Chairman Stanley Fischer that tightening (once it starts) is unlikely to follow the usual straight path upward.  

Obviously, this isn’t an easy decision for the Fed. There’s little reason to support an increase in interest rates …except that they’re simply too low.    

Reminder: In the FOMC’s recently released Summary of Economic Projections (aka the “dot plot”), the median forecast for the overnight rate target in December 2015 was revised downward from 1.125% to 0.625%, while the committee’s median projection for the end of 2016 was revised downward from 2.50% to 1.875%. 

IMPROVED HOME SALES AND SLIGHTLY HIGHER CPI DON’T INDICATE A TREND    
None of the individual economic releases this week have been worth writing about, but in total they cobble together a story worth relaying – 

On Monday, February existing home sales increased by +1.2% to an annualized sales rate of 4.88 million. Although sales were slightly better than forecast, it was the second month in row under a 5 million unit pace and well off the recovery high point pace of 5.31 million. Home sales have been unable to gain momentum as excess housing inventory clears. Weather wasn’t as big an issue as most had assumed in February with the Northeast being the only region to register a decline in sales. The supply of available existing homes remained at a lean 4.6 months, which probably kept upward pressure on the average price which rose by +7.6% year-over-year to $202,600.       

By contrast, new home sales jumped +7.8% in February to an annualized sales rate of 539k units, the highest in seven years. The unexpectedly brisk sales pushed available supply down from 5.1 to 4.7 months, while the median price increased by +2.6% on a year-over-year basis to $275,500. Obviously, there are fewer new houses available and they commend a much higher price premium.   

Home sales are a measure of relative economic health, while the consumer price index (CPI) provides a critical inflation reading. The Fed indicated at last week’s FOMC meeting that economic growth was moderating, but recent housing data suggests a bit of improvement ahead (…unless mortgage rates were to increase.)  

The Fed also indicated last week that inflation was expected to remain low for a while. The Consumer Price Index (CPI) for February (released yesterday) validated this with a +0.2% increase in overall CPI, exactly meeting the median forecast, while the year-over-year change was 0.00%.  Core CPI also rose +0.2%, nudging the year-over-year pace of core consumer inflation up from +1.6% to +1.7%.  Although consumer prices did move higher in February, there is little to indicate an upward trend. In fact, energy prices, which rose in February, have already moved back toward recent lows in March.   

This morning, both overall durable goods orders and non-defense capital goods ex-aircraft orders fell by -1.4% in February. Core capital goods orders have now dropped in each of the last six months. Although inclement weather played a role in the February weakness, much of the blame can be pinned on a strong U.S. dollar, and there is little to suggest it will weaken significantly anytime soon. 

The stock markets got crushed today with the DOW losing 292 points and the NASDAQ shedding 118. There was no clear explanation beyond a nervous market. Bond prices fell today (yields higher), so it stands to reason that cash on the sidelines probably increased. Oil prices actually rose today, although few expect we’ve seen the bottom.  

MARKET INDICATIONS AS OF 4:55 P.M. CENTRAL TIME 

DOW

DOWN 293 to 17,718

NASDAQ

DOWN 118 to 4,877

S&P 500

DOWN 31 to 2,053

1-Yr T-bill

current yield 0.23%; opening yield 0.22%

2-Yr T-note

current yield 0.60%; opening yield 0.56%

5-Yr T-note

current yield 1.41%; opening yield 1.36%

10-Yr T-note

current yield 1.92%; opening yield 1.87%

30-Yr T-bond

current yield 2.51%; opening yield 2.46%



BOND YIELDS PLUNGE FOLLOWING DOVISH FED STATEMENT

Wednesday, March 18, 2015

FED SEES LOWER INFLATION AND SLOWER GROWTH AHEAD 
The big question going into this week’s FOMC meeting was whether or not Fed officials would drop their pledge to remain “patient” in beginning to normalize the stance of its monetary policy. Fed Chair Janet Yellen has said in the past that as long as the “patient” wording remained, it would be at least two meetings before the Fed began raising rates. 

The big news this afternoon is that the Fed did remove the wording. Since it has now technically been removed, it’s at least possible that the Fed announces an increase the overnight funds rate in June. However, the new wording pretty much negated that possibility, and in fact suggests it could be much longer if the job market doesn’t improve and inflation remains low. 

The new language reads – 

“Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.” 

Committee members went on to say that the pace of U.S. economic growth “has moderated somewhat.” In January, they had described this  growth as “solid.” Weakening exports were cited as a contributing factor. They also altered their assessment of inflation from “…inflation is anticipated to decline further” to “inflation is anticipated to remain near its recent low level.” 

…So, the Fed believes it’s still failing both its employment and inflation objectives. With unemployment at 5.5%, most assumed that the Committee was at least pleased with the labor market’s performance. 

The so called Fed “dot plots” were lowered suggesting that the pace of tightening, once it begins, will be slower: 
 
For the end of 2015, the median forecast has been lowered from 1% to (0.50% - 0.75%)
For the end of 2016, from 2.5% to (1.75% - 2.0%)
For the end of 2017, from (3.5% - 3.75%) to (3.0% - 3.25%)

The bond market has rallied significantly with 10-year Treasury-note falling back below 2.0%, and the 30-year T-bond at 2.50%. 

Stocks are also in the midst of a huge rally with the DOW turning a 92 point loss into a 245 point gain in an hour’s time.    
     
MARKET INDICATIONS AS OF 2:15 P.M. CENTRAL TIME 

DOW

UP 245 to 18,095

NASDAQ

UP 63 to 5,000

S&P 500

UP 22 to 2,096

1-Yr T-bill

current yield 0.19%; opening yield 0.26%

2-Yr T-note

current yield 0.54%; opening yield 0.67%

5-Yr T-note

current yield 1.39%; opening yield 1.55%

10-Yr T-note

current yield 1.92%; opening yield 2.05%

30-Yr T-bond

current yield 2.51%; opening yield 2.60%



ANOTHER STRONG EMPLOYMENT REPORT SIGNALS HIGHER SHORT RATES ON HORIZON


Friday, March 6, 2015

FEBRUARY JOB GAINS EXCEED FORECASTS
Last month, after seeing the exceptionally strong January labor market numbers, many experts were wondering how much longer the Fed could hold the overnight rate target at “emergency levels.” After all, in just the last three months over a million new jobs had been added to business payrolls, and 2014 was the best year of job creation since 1999. Some figured we’d see a bit of a pullback in February. The Bloomberg median nonfarm payroll forecast had called for an increase of +235k. This morning, the Labor Department announced that payrolls had actually grown by +295k.  It was the 12th straight month that company job growth had topped +200k, the best stretch since a 19-month run way back in 1995. 

The separate household survey showed the headline unemployment rate dipping from 5.7% to 5.5%, the lowest since May 2008 and well below the 10% peak reached in October 2009. This hardly suggests an emergency labor market situation.   

If the Fed were inclined to begin raising the overnight target at the June 17th FOMC meeting, this morning’s headline data would provide ample cover. But if the Fed were looking for reasons to hold off a bit longer, there were numbers to support that as well. In particular, average hourly income rose just +0.1% in February, down from a surprisingly robust +0.5% gain in January. This suggests that the labor market isn’t yet so tight that employers have to pay more to attract and retain workers. And, the drop in the unemployment rate wasn’t so much a result of job creation as it was another round of Americans exiting the labor force. 

The Fed also has to consider the strong dollar and the related lack of inflationary pressure in its decision. In theory, if the Fed were to begin raising rates while the rest of the world is cutting, the dollar would likely strengthen further, making exports even more expensive and imports cheaper. Less expensive imported goods are positive for the consumer, but not so good for domestic producers.  

So far this morning, the verdict seems to be that the Fed will begin tightening in June. Interest rates are higher all across the maturity curve and stocks are down in early trading with the expectation that the generous accommodation fueling the equity markets for the last 6 or 7 years may be …less accommodative soon.    

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

DOW

DOWN 70 to 18,064

NASDAQ

DOWN 2 to 4,981

S&P 500

DOWN 6 to 2,095

1-Yr T-bill

current yield 0.26%; opening yield 0.23%

2-Yr T-note

current yield 0.73%; opening yield 0.64%

5-Yr T-note

current yield 1.70%; opening yield 1.57%

10-Yr T-note

current yield 2.23%; opening yield 2.12%

30-Yr T-bond

current yield 2.83%; opening yield 2.73%



ISM, CONSTRUCTION, PCE ALL SLIP

Monday, March 2, 2015

ISM MANUFACTURING SLIPS 
Last Friday, the Chicago Purchasing Managers’ index for February collapsed to 45.8 from January’s 59.4. Today, the February ISM Manufacturing index slipped to the lowest level in over a year with respondents citing supply issues caused by the labor dispute at West Coast ports as one factor. But the national ISM did not show anything close to the weakness of the Chicago PMI report. The ISM slipped from 53.5 to 52.9, just below the 53.0 median forecast of the Bloomberg survey. Importantly, the ISM index remains above 50, indicating expansion in the manufacturing sector. Weakness in the composite gauge reflected slower growth in orders (52.5 vs. 52.9), production (53.7 vs. 56.5), and employment (51.4 vs. 54.1), as well as another decline in the export orders index which was down 1 point to 48.5. The export orders index has fallen sharply from the recent high of 55.0 back in November and now stands at the lowest level since November 2012. Weak global economies and the strong dollar are the most likely culprits. The prices paid index was unchanged at 35.0, matching the low since 2009.

Other data released today was largely ignored as markets are more concerned with Friday’s employment report. The personal income and spending data for January was somewhat mixed with incomes rising +0.3% and spending falling -0.2%. The core personal consumption expenditures (core PCE) index, the Fed’s preferred inflation measure, gained +0.1% in January, leaving the year-over-year rate unchanged at +1.3%. Construction spending fell -1.1% in February. 

STOCKS DRIFT HIGHER, BOND YIELDS FOLLOW SUIT 
Stock markets have been drifting higher with the Dow Jones Industrial Average and the S&P 500 moving into record high territory while the NASDAQ Composite traded above 5,000 for the first time since March 2000 and is within 40 points of its all-time high. Bond prices went the other way, sending yields a bit higher, but still well within recent ranges. The two-year Treasury note yield rose to 0.66% while the yield on the 10-year T-note moved to 2.09%.

MARKET INDICATIONS AS OF 3:06 P.M. CENTRAL TIME 

DOW

UP 156 to 18,289 (record high)

NASDAQ

UP 45 to 5,008 (record high from March 2000 is 5,048.62)

S&P 500

UP 12 to 2,117 (record high)

1-Yr T-bill

current yield 0.19%; opening yield 0.19%

2-Yr T-note

current yield 0.66%; opening yield 0.62%

5-Yr T-note

current yield 1.58%; opening yield 1.50%

10-Yr T-note

current yield 2.09%; opening yield 1.99%

30-Yr T-bond

current yield 2.69%; opening yield 2.59%



BOND YIELDS LOWER AS YELLEN'S TESTIMONY SETTLES MARKETS

Tuesday, February 24, 2015

SEMIANNUAL STATE OF THE ECONOMY CONFIRMS THE FED IS STILL PATIENT  
Fed Chair Janet Yellen testified before Congress this morning that both inflation and wage growth were currently too low for the Central Bank to begin raising short-term interest rates. She further indicated that the Fed would first remove its pledge to be “patient” in its timing of rate hikes, thereby suggesting that an increase in the overnight rate target “was still at least a couple of meetings away.”  

She also told congressional leaders there was not a predetermined timetable for tightening; that after the forward guidance was removed “a change in the target range could be warranted at any meeting.”

Both the stock and bond markets rallied during and after Yellen’s comments in response to what appears to be a cautious and deliberate Fed. At this point, if the Fed does start raising rates this summer, its pace is likely to be slow, and the stopping point well below traditional tightening cycles.  
  
MARKET INDICATIONS AS OF 11:45 A.M. CENTRAL TIME

DOW

UP 58 to 18,175

NASDAQ

DOWN 5 to 4,956

S&P 500

UP 1 to 2,111

1-Yr T-bill

current yield 0.19%; opening yield 0.21%

2-Yr T-note

current yield 0.57%; opening yield 0.60%

5-Yr T-note

current yield 1.48%; opening yield 1.54%

10-Yr T-note

current yield 2.00%; opening yield 2.06%

30-Yr T-bond

current yield 2.60%; opening yield 2.66%



SOFT DATA + DOVISH (SORT OF) FOMC MINUTES = LOWER YIELDS

Wednesday, February 18, 2015

WHOLESALE PRICES DROP
Bond yields managed to shake off this morning’s full slate of generally weaker than expected economic data but have finally succumbed in the wake of this afternoon’s January FOMC meeting minutes, which were initially read as dovish. We’ll try to avoid getting bogged down in the details of this morning’s data, but here is a quick recap. Housing starts sagged -2.0% to a 1,065k annual pace versus an expected decline of -1.7%. Building Permits were expected to gain +0.9% but instead fell -0.7% to a 1,053k annual rate. Industrial production rose +0.2%, falling short of the expected +0.3% gain, while capacity utilization slipped to 79.4% versus the expected 79.9%. The producer price index (PPI) fell -0.8% in January. The fifth decline in six months was double the -0.4% median estimate in Bloomberg’s survey. Even the core rate (ex food and energy) registered a decline, falling -0.1%. On a year-over-year basis, headline final demand PPI is unchanged, while the core is up just +1.6%. Obviously falling energy prices, which were down 10.3% in January alone, are a big part of the story. But energy prices only make up a little more than 6% of the index. Falling prices were evident in both goods and services, both of which declined 0.2% as the weakness was broad based. The strong dollar is making its presence felt as prices for imported goods fall and as U.S. manufacturers lower prices in an attempt to compete.

FOMC MINUTES LACK CLARITY
One might wonder why the Fed would seem so determined to begin tightening monetary policy this summer when there are no signs of inflation, and in fact there is more evidence of deflation. Today’s minutes from the January FOMC meeting suggest that perhaps the Fed is having some second thoughts, or at least they were in late-January. Keep in mind that these minutes are from a meeting that took place before the February 6th release of the January employment report, one that showed very strong job growth as well as an increase in wages. The headlines from the minutes scrolling across Bloomberg screens today implied a dovish tilt and markets certainly reacted that way initially, quickly sending yields on the 2-year T-note from 0.65% to 0.59% and on the 10-year from 2.13% to 2.05%. But further analysis suggests the minutes were not all that dovish and they reveal a Fed that seems to lack conviction. Some members would clearly like to begin the rate hiking process, while others find a myriad of things to worry about including slow wage growth, foreign weakness, dollar strength, and geopolitical events. The committee even debated the phrase “patient,” whether it should remain and what signal its removal might send. As UBS’s Maury Harris put it, “The minutes of this FOMC meeting are quite ambiguous.” Harris went on to say, “there was no clear view on the outlook or the timing of the first rate hike.” Markets will be looking for some clarity next week when Fed Chair Janet Yellen testifies before Congress.

MARKET INDICATIONS AS OF 3:40 P.M. CENTRAL TIME 

DOW

DOWN 18 to 18,030

NASDAQ

UP 7 to 4,906

S&P 500

DOWN 1 to 2,100

1-Yr T-bill

current yield 0.20%; opening yield 0.22%

2-Yr T-note

current yield 0.60%; opening yield 0.66%

5-Yr T-note

current yield 1.52%; opening yield 1.61%

10-Yr T-note

current yield 2.08%; opening yield 2.14%

30-Yr T-bond

current yield 2.71%; opening yield 2.73%



RETAIL SALES FALL FOR THE SECOND STRAIGHT MONTH

Thursday, February 12, 2015


CONSUMERS DON’T SPEND THEIR GAS SAVINGS IN JANUARY   
As of January 26th, the nationwide average price for unleaded gasoline had fallen for 123 straight days to $2.03 per gallon, a savings of $1.25 per gallon compared to the same day a year earlier. One widely-held belief has always been that lower gas prices will boost discretionary consumer spending. This morning, the Commerce Department announced that retail sales fell by -0.8% in January following an unrevised -0.9% reading in December. 

In all fairness, much of this decline was expected as the drop in gas prices has slammed service station receipts, which are not adjusted for  changes in pump prices. Service station sales plunged -9.3%, the most since December 2008. Apparently, these savings haven’t been spent, …at least not yet. Sales of sporting goods (-2.6%), clothing (-0.8%), furniture (-0.7%), autos (-0.5%), and food (-0.3%) also fell during the month.

Although experts have speculated that consumers may be paying down credit balances and saving much of what isn’t being spent at the pump, restaurant sales (+0.8%) were one of the few beneficiaries of the extra cash.     

The number used in calculating GDP, which excludes sales at auto dealerships, home improvement stores and service stations, increased by just +0.1% in January following a -0.3% decline in December.

Although consumer spending was strong in the final quarter of 2014, shoppers seem to be taking a bit of  a breather so far in 2015. It’s unlikely that the Fed will alter its outlook as a result of the January sales number, but if spending doesn’t reaccelerate in the coming months, it will be a consideration in both the timing and magnitude of largely expected future rate hikes.  

The bond market has rallied in early trading (prices up/yields down) in response to the idea that a less strong economy might delay Fed action. Prior to this morning, bond yields had been marching steadily higher throughout the month of February in anticipation of higher short-term rates this summer.  

The stock markets have also rallied in early trading as a result of an announced Ukrainian cease-fire, generally solid corporate earnings and the possibility of extended Fed accommodation.            

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

DOW

UP 77 TO 17,939

NASDAQ

UP 34 to 4,834

S&P 500

UP 8 to 2,074

1-Yr T-bill

current yield 0.22%; opening yield 0.23%

2-Yr T-note

current yield 0.64%; opening yield 0.67%

5-Yr T-note

current yield 1.50%; opening yield 1.54%

10-Yr T-note

current yield 1.98%; opening yield 2.02%

30-Yr T-bond

current yield 2.57%; opening yield 2.59%



HUGE EMPLOYMENT NUMBERS DRIVE MARKET YIELDS UPWARD

Friday, February 6, 2015

JOB CREATION SOARS
The January employment data turned out to be the strongest in recent memory, supporting the notion that the Fed will seize the opportunity to begin hiking the overnight rate target sometime this summer. The establishment survey revealed that nonfarm payrolls had risen +257k last month, but the real surprise was found in the prior month revisions as +147k additional jobs were added to the November and December payroll count.  During the past three months, payrolls have now risen by an average of +336k per month, the biggest three month gain in 18 years. For all of 2014, U.S. companies added approximately 3.1 million workers, the most since 1999. By comparison, 2.2 million were hired in 2013.  

Significant job creation was found across a range of industries. The Bureau of Labor Statistics reported gains in retail trade (+46k), construction (+39k), health care (+38k), food services and drinking establishments (+35k), professional and technical services (+33k),  finance (+26k) and manufacturing (+22k). Employment actually fell at temporary help agencies in January. 

The unemployment rate actually rose from 5.6% to 5.7% in January. Although this may sound like a bad number, the details are quite positive.  The separate household survey showed that +759k Americans found work in January. The reason the unemployment rate increased was because 1.05 million reentered the workforce. As a result, the “participation rate,” representing the percentage of working age (16-64) people either employed or actively seeking work, rose from a 37-year low of 62.7% to 62.9%. If the labor market outlook continues to be positive, more and more people are likely to resume their job searches, which in theory could result in even higher headline unemployment. 

Average hourly earnings rose by +0.5% in January. Although this doesn’t sound like much, it was the biggest monthly gain since November 2008, and suggests that labor conditions may finally be getting tight enough that employers will have to pay more to retain and attract workers. One of the primary reasons why the Fed has held short-term rates near record lows is because wage growth has essentially been stagnant. Admittedly, one month’s data doesn’t establish a trend (December average hourly earnings were -0.2%), but it does suggest that long awaited upward wage movement might be nearing. 

Bond yields are higher in early trading in anticipation of Fed action in June or July, while stocks are waffling. Equity investors have clearly benefited from many years of Fed accommodation, so even through the January employment report signals economic strength, it could prompt the Fed to start draining the punchbowl …and it isn’t clear how well stocks will do without quite as much government supporT.

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

DOW

UP 31 TO 17,916

NASDAQ

UP 5 to 4,770

S&P 500

UP 3 to 2,058

1-Yr T-bill

current yield 0.23%; opening yield 0.20%

2-Yr T-note

current yield 0.62%; opening yield 0.52%

5-Yr T-note

current yield 1.42%; opening yield 1.30%

10-Yr T-note

current yield 1.90%; opening yield 1.82%

30-Yr T-bond

current yield 2.49%; opening yield 2.43%



LOWER EXPORTS TAKE A TOLL

Thursday, Feb 5, 2015

THE U.S. FACTORY SECTOR FEELS THE PINCH OF A STRONG DOLLAR
Most of the data that’s been released so far this week falls in the relatively minor category, but on the whole it suggests the U.S. economy might be slowing a bit more than expected. 

On Monday, the ISM January manufacturing index fell from 55.1 to 53.5, the lowest level in a year. The strength of the U.S. dollar is clearly having a negative impact on the factory sector as the export index dropped below the 50 mark (indicating contraction) for the first time since 2012.  The new orders index fell to 52.9, also the lowest level in 12 months and more than 10 points below the admittedly lofty 63.0 reading from October 2014.  The continued decline in oil prices pushed the prices paid index down to 35.0, the lowest in nearly 6 years. 

By contrast, the ISM nonmanufacturing (service sector) index actually rose from 56.5 to 56.7 in January as general business activity and new orders picked up a bit. Although the index remains below the 9½-year high of 58.8 logged in November, the January reading indicates that the service sector begins the year in its best shape since 2011. 
 
Yesterday, December factory orders dropped -3.4% after falling -1.7% in November. Orders have now declined for five straight months, reflecting lower business investment. Within the headline factory number, durable goods fell -3.4%, indicating a drop in demand. None of this is terribly positive. 

This morning, the U.S. trade deficit jumped 17.1% in December to a two-year high of $46.6 billion, as imports rose to a record high of $241.4 billion, while exports fell to $195.9 billion. With the recent dollar strength, U.S. companies are having trouble exporting higher priced goods, while U.S. consumers are happily purchasing lower priced imports. The net result of the increased trade deficit is likely to be a downward revision to fourth quarter GDP, while even lower overall inflation is likely to result from cheaper imports. 

A number of economists have suggested the Fed will be hard pressed to raise short-term rates with the dollar being so strong and inflation continuing to fall.  In theory, if the Fed were to tighten monetary policy while the rest of the world is easing, the dollar would most likely strengthen even further. However, Fed officials (at this point) appear to still be on track for a summer rate hike.     

Tomorrow, the January employment report will be released. The median forecast is for 230k new jobs and an (unchanged) unemployment rate of 5.6%. 

Bond yields are higher in early trading, although still close to historical lows on the long end of the curve.  

MARKET INDICATIONS AS OF 10:40A.M. CENTRAL TIME 

DOW

UP 168 to 17,841

NASDAQ

UP 34 to 4,750

S&P 500

UP 22 to 2,051

1-Yr T-bill

current yield 0.19%; opening yield 0.19%

2-Yr T-note

current yield 0.52%; opening yield 0.49%

5-Yr T-note

current yield 1.30%; opening yield 1.25%

10-Yr T-note

current yield 1.82%; opening yield 1.75%

30-Yr T-bond

current yield 2.42%; opening yield 2.35%



YIELDS FALL FURTHER AFTER Q4 GDP REPORT

Friday, January 30, 2015

CONSUMERS SHINE IN THE FINAL QUARTER OF THE YEAR
The initial reading of fourth quarter GDP (released this morning) was a bit weaker than expected on the surface, but the underlying spending numbers were encouraging. Although GDP grew by an annualized +2.6% during the final quarter of 2014, personal consumption expenditures surged by +4.3%, the biggest gain since the first quarter of 2006. This brisk spending by U.S. consumers (no doubt fueled by plunging gasoline prices), added a whopping 2.9 percentage points to overall GDP.  Inventory accumulation was also a positive contributor, adding 0.8 percentage points. 

On the negative side of the ledger, the strength of the U.S. dollar hammered exports and boosted imports, as the widening trade deficit subtracted a full percentage point from overall GDP.  Government spending subtracted another 0.4 percentage points primarily due to the slowest pace of defense spending in two years.  For all of 2014, GDP rose +2.4%, the biggest annual gain in four years …although in all fairness still well below the +3.2% historical average.  

On the inflation front, the GDP price index was unchanged from the previous quarter. This is just one of many recent inflation measures showing downward pressure, but with deflationary fears running rapid in Europe, declining inflation in the U.S. is a growing concern. 

The bond market has rallied significantly this morning (yields lower) as investors anticipate continued global accommodation and a more patient U.S. Central Bank. If the Fed were to begin raising rates, it would in theory be curtailing economic growth and slowing inflation ever further. By itself, this doesn’t seem to make a whole lot of sense, but neither does maintaining an emergency funds rate of zero for 6½ years when economic growth is at a four-year high. Fed decisions going forward won’t be easy.     

NO CLARITY FROM THE FED  
On Wednesday, Fed officials concluded the first FOMC meeting of 2015 and added little, if any, clarity to the rate outlook. They upgrade their assessment of domestic economic activity from “moderate” to “solid,” and job growth from “solid” to “strong.” These suggest near-term rate hikes. However, they counterbalanced this by reiterating their pledge to remain “patient,” and introduced “international developments” as a factor in the timing of future rate hikes. The official statement provided plenty of leeway to change their collective mind, but nothing in the statement suggests the FOMC is wavering in its intent to begin boosting short interest rates mid-year. 

Stocks are down in early trading …although it’s been a very volatile several weeks and the day is far from over.  The 10-year Treasury note yield is now at a fresh 20-month low of 1.67%, while the 30-year Treasury bond is trading at 2.24%, the lower level in history.  

MARKET INDICATIONS AS OF 9:35 A.M. CENTRAL TIME 

DOW

DOWN 132 to 17,284

NASDAQ

DOWN 29 to 4,655

S&P 500

DOWN 17 to 2,001

1-Yr T-bill

current yield 0.14%; opening yield 0.15%

2-Yr T-note

current yield 0.47%; opening yield 0.52%

5-Yr T-note

current yield 1.20%; opening yield 1.27%

10-Yr T-note

current yield 1.67%; opening yield 1.75%

30-Yr T-bond

current yield 2.24%; opening yield 2.31%



MIXED REPORTS HIGHLIGHT THE ECONOMIC CONFLICTS

Tuesday, January 27, 2015

GLOOMY DURABLE GOODS REPORT 
Today’s economic data releases have shined a spotlight on the fundamental conflict facing the economy right now. On the one hand, business investment has stalled. Today’s report on December durable goods orders showed a decline of -3.4%, while November data was revised lower from an originally reported -0.7% to -2.1%. As is typically the case, volatile aircraft orders are pushing the headline around, but even when transportation is excluded, durable orders still fell -0.8% in December and a revised -1.3% in November (previously -0.4%). The so-called core gauge, non-defense capital goods ex-aircraft orders, declined for the fourth straight month, falling -0.6% in December after a downwardly revised -0.6% in November. Business investment in plant and equipment is slowing as the global economic slowdown, strong dollar, and oil prices all take their toll.

NEW HOME SALES, CONSUMER CONFIDENCE SOAR
On the other hand, falling prices at the pump and low interest rates are bolstering consumer confidence and housing. The Conference Board’s index of consumer confidence rose to 102.9 in January, well above the 95.5 Bloomberg survey median forecast and the highest level since June 2007. With an unemployment rate that has fallen to 5.6% and plummeting prices at the pump that have literally cut fuel bills in half, consumers seem to be feeling pretty good. The lowest mortgage rates in 20-months are helping, too. New home sales surged 11.6% in December to a 481k annual rate, the highest since June 2008. Home prices continue to rise, but more modestly as the S&P Case Shiller home price index, which had been logging 10%+ annual appreciation, is now up a more palatable 4.7% year-over-year. Tight credit conditions remain a drag on new home sales, but with 30-year mortgage rates below 4% and the recent 50 basis point cut in the FHA mortgage insurance premium, there is reason to be hopeful on housing.

So the economic tug-of-war is on. On one side we have the U.S. consumers, bolstered by a better job market, a better balance sheet, and a pocket full of cash they aren’t spending on gasoline. On the other side we have weakening global demand, soft business investment, the fallout from oil prices and the deflationary forces of a strong dollar. That will be a lot for Team Consumer to overcome, but one should never underestimate the ability of Americans to spend!

MORE DATA AHEAD 
This week is full of important news and indicators. Next up will be tomorrow’s FOMC announcement. We expect minor tweaks to the official statement, but the real question is whether or not the Fed will acknowledge some of the recent weakness, allowing expectations for rate hike to be pushed into the latter part of the year, or if they will hold steadfast in their resolve with plans for a mid-year rate hike. The short-end of the curve will react accordingly with a hawkish statement likely to send rates higher and a dovish statement mostly reinforcing current levels. The long-end of the curve should not react as strongly, as other influences carry more weight.

We’ll also see pending home sales and initial jobless claims on Thursday, followed by the first estimate of fourth quarter GDP on Friday. Stay tuned.

MARKET INDICATIONS AS OF 2:55 P.M. CENTRAL TIME 

DOW

DOWN 290 points to 17,389

NASDAQ

DOWN 88 to 4,684

S&P 500

DOWN 25 to 2,032

1-Yr T-bill

current yield 0.15%; opening yield 0.15%

2-Yr T-note

current yield 0.50%; opening yield 0.51%

5-Yr T-note

current yield 1.32%; opening yield 1.34%

10-Yr T-note

current yield 1.82%; opening yield 1.83%

30-Yr T-bond

current yield 2.39%; opening yield 2.40%



DALLAS FED SURVEY FOR JANUARY SUGGESTS A DIMINISHED OUTLOOK

Monday, January 25, 2015

FALLING OIL PRICES THREATEN REGIONAL GROWTH
There’s been little doubt that the seven month drop in crude oil prices will have a negative effect on U.S. oil producing states. Texas is by far and away the largest of the 16, but because the Texas economy has become increasingly diversified, opinions on the degree of future impact have varied. This morning, the Dallas Fed survey suggested that potential damage could be a bit more significant than previously thought. 

The monthly survey solicits the opinions of over 300 businesses in both the manufacturing and service sectors of the Texas economy. Those surveyed were asked whether their business activity had increased, decreased or remained the same during the month. Answers are aggregated into balance indexes where numbers above zero suggest expansion while negative numbers suggest contraction. 

For the January 13-21 survey period, the general business activity index dropped from 3.5 to -4.4 indicating a slight contraction. Within the composite, the new orders index fell from 2.2 to -7.7, the production index from 16.4 to 0.7, shipment volume from 20.8 to 6.0, and the orders growth rate from -4.0 to -18.0.  In a sign that the downturn might last a while, the six-month outlook index tumbled from +13.0 to -6.4. 

Granted, this is just a survey, and apparently the response rate wasn’t terrific, but it does suggest that some Texas businesses are already feeling a pinch. West Texas Intermediate (WTI) is currently trading at slightly above $45 per barrel, $55 below the 12-month high reached on June 25th.   

The Fed meets tomorrow and Wednesday in their first official meeting of 2015. It will be interesting to see how they respond, if at all, to the recent financial events in Europe. At this point, they’re still indicating an increase in the overnight target rate as soon as the June FOMC meeting.    

Bond yields are mostly flat today, while stocks are mixed.     

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

DOW

DOWN 21 points to 17,651

NASDAQ

UP 5 to 4,763

S&P 500

UP 2 to 2,046

1-Yr T-bill

current yield 0.15%; opening yield 0.15%

2-Yr T-note

current yield 0.51%; opening yield 0.49%

5-Yr T-note

current yield 1.34%; opening yield 1.31%

10-Yr T-note

current yield 1.82%; opening yield 1.80%

30-Yr T-bond

current yield 2.40%; opening yield 2.37%



GLOBAL CENTRAL BANKS COMBAT ECONOMIC WEAKNESS AND DEFLATIONARY FEARS

Thursday, January 22, 2015

CANADA’S SURPRISE RATE CUT AND EUROPE’S QUANTITATIVE EASING  
Yesterday, the Canadian Central Bank completely surprised the financial markets with its first rate cut since 2010, lowering its key overnight lending target from 1.00% to 0.75%. Canada, which relies heavily on oil revenue, hopes lower rates will counterbalance the negative effects of falling oil prices. 
   
This morning, European Central Bank (ECB) President Mario Draghi, who has promised for years to do “whatever it takes” to protect the euro, finally announced the long-anticipated quantitative easing program for the EU. Asset purchases in maturities ranging from two to 30 years will begin in March at 60 billion euros per month (approx. $70 billion in dollars) and will continue until at least 2016. The idea is to boost European economic growth, which is teetering on the brink of recession, as well as the rate of inflation, which is nearing outright deflation. Draghi said the program would continue "until we see a sustained adjustment in the path of inflation."  
     
The ECB purchase plan is limited to investment-grade, euro-denominated securities and will include bonds trading at negative yields. Although most of the risk will be assumed by the individual central banks, 20% of the bond purchases will be subject to shared risk among the euro member countries. 

The planned asset purchases, which will eventually top one trillion euros, are expected to keep significant downward pressure on global bond yields. Long term U.S. government bond yields should also continue near record low levels as investors seek both the safety of U.S. markets as well as much higher relative yields. The 10-year German bond is currently trading at 0.44%, while the U.S. Treasury note is being offered at 1.87%. 

FED MEETING NEXT WEEK
The FOMC will meet next Tuesday and Wednesday. In recent weeks, falling commodity prices and a drop in consumer spending have increased speculation that the Fed could back off of its plan to begin raising short-term rates sometime this summer. For this reason, the January meeting will be closely watched.   

Stocks are up this morning in anticipation that Fed rate accommodation will continue, while bond yields are essentially flat.       

MARKET INDICATIONS AS OF 11:50 A.M. CENTRAL TIME 

DOW

UP 121 points to 17,674

NASDAQ

UP 42 to 4,710

S&P 500

UP 14 to 2,046

1-Yr T-bill

current yield 0.16%; opening yield 0.16%

2-Yr T-note

current yield 0.51%; opening yield 0.51%

5-Yr T-note

current yield 1.37%; opening yield 1.35%

10-Yr T-note

current yield 1.89%; opening yield 1.87%

30-Yr T-bond

current yield 2.47%; opening yield 2.46%



YIELDS FALL ON LOWER INFLATION AND GLOBAL INSTABILITY

Friday, January 16, 2014

U.S. INFLATION TUMBLES  
Bond yields pressed significantly lower during the week, and the underlying reasons suggest the possibility of still lower yields in the future. U.S. Inflation data (as expected) showed diminishing price pressure in December. On Wednesday, headline PPI fell by -0.3%, the largest percentage decline in more than three years and the fourth decrease in the last five months. On a year-over-year basis, producer prices are rising at a +1.1% pace, compared to +1.4% in November. This morning, consumer prices also showed the effects of lower energy prices as headline CPI fell by -0.4% in December, the biggest monthly decline in six years. On a year-over-year basis, CPI is now increasing at just a +0.8% rate, the lowest since September 2009. 

The Fed would generally like to see inflation closer to 2%, so it’s currently too low. In theory, tightening monetary policy (raising short term rates) would push inflation even lower. Thus, the December inflation data suggests that the Fed could postpone this summer’s largely expected rate hikes …again.
          
The biggest news of the week came from Switzerland early Thursday morning when the Swiss National Bank announced that it would remove a cap on the exchange rate between the Swiss franc and the euro. For more than three years, the bank had printed francs and bought euros to anchor the exchange rate at 1.20 francs per euro, and keep the franc from appreciating enough to jeopardize their export trade. With a now bloated central bank balance sheet, increasing concern over the stability of the euro, mounting deflationary fears, and looming asset purchases by the ECB, the Swiss apparently felt they needed to untether the line. 

The immediate result was a 30% strengthening in the Swiss currency, thought to be the biggest single day currency move between developed nations in the history. Swiss stocks quickly plunged 8.7% as investors anticipated that exported goods would now be extremely expensive to foreign buyers. But, perhaps the more substantial damage was to done to the perceived foundation of the European Union.  

Stock markets around the world have taken a beating, and the U.S. markets haven’t been spared pain. The DOW fell five straight days before gaining its footing this morning. A flight to quality has helped drive down bond yields to historical lows at several points on the curve. The 10-year Treasury closed at 1.72% on Thursday, the lowest level in 19 months and well below the 3.03% recent high from early 2014, while the 30-year Treasury bond closed at an all-time record low of 2.37% that same day. 

As crazy as it may seem to have U.S. government yields at such low levels, it’s much worst in Europe as short yields, already negative in many countries, became even more negative. This morning, the German two-year government bond yield was -0.17% and the five-year -0.05%; In Switzerland, the two-year yielded -0.89% and the 5-year -0.55%; In Finland, the two-year yielded -0.15% and the 5-year -0.04%. With the ECB set to begin large scale asset purchases soon, this situation could get even more complicated. 

The monthly Bloomberg economist survey, completed on January 14th, shows the nation’s economists are expecting the Fed to begin raising overnight rates this summer, end the year at around 0.75%, and be at 2.0% by the end of 2016. These same economists expect the two-year Treasury yield to triple before the end of this year, and the 10-year yield to climb 100 bps to 2.80%. It is far from clear what events would have to happen for this to actually take place.  

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

DOW

UP 38 points to 17,359

NASDAQ

UP 20 to 4,591

S&P 500

UP 9 to 2,000

1-Yr T-bill

current yield 0.15%; opening yield 0.15%

2-Yr T-note

current yield 0.46%; opening yield 0.41%

5-Yr T-note

current yield 1.29%; opening yield 1.16%

10-Yr T-note

current yield 1.80%; opening yield 1.72%

30-Yr T-bond

current yield 2.43%; opening yield 2.37%



UNEXPECTEDLY WEAK RETAIL SALES PUSH YIELDS SHARPLY LOWER

Wednesday, January 14, 2015

CONSUMER SPENDING DROPS IN DECEMBER 
The December retail sales report was expected to be weak on the surface. The primary reason behind the -0.1% median forecast was gross gas station sales, which have suffered as a result of sharply lower gasoline prices during the month.  Other categories were generally expected to rise as purchase dollars were reallocated.  The sales forecast ex-auto and gas was for an increase of +0.5%.  As it turned out, the overall December number was -0.9%, the lowest since last January when sub-freezing weather trapped Americans indoors, and the ex-auto and gas number was -0.3%. Nine of the 13 categories showed a drop in receipts from November.  Sales of electronics dropped by -1.6%, while building materials fell -1.9%.  A downward revision lowered November retail sales from a previously reported +0.7% to +0.4%.  
   
No way around it, this was a nasty surprise. Consumer confidence was high in December, the labor market was strong and equity indexes reached new high marks.  Economists are speculating on exactly what all this means, but at the very least, it suggests lower fourth quarter GDP growth. This is a consumer-driven economy, and the consumer seemed to fall asleep in December. There had been a prevailing belief that the domestic economy was reasonably well insulated from global weakness and that the drop in oil prices would be a net positive, but this morning’s numbers have created doubt.  
 
The bond market has taken the opportunity to rally (yields lower) on economic weakness and the notion that the Fed will be less inclined to raise short-term rates if GDP is significantly slowing. The 10-year note yield is now at 1.81%, the lowest in 18 months. A year ago today, the Bloomberg survey had shown a median 10-year forecast for Q1 2015 of 3.48%.  The 30-year Treasury-bond, at 2.43%, is currently at the lowest point EVER. 

Stocks are getting clobbered at the moment, although equities have long been fueled by accommodative Fed policy, and if today’s numbers suggest that easy policy might continue for a longer period, the equity markets could just as easily be celebrating

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

DOW

DOWN 144 to 17,470

NASDAQ

DOWN 15 to 4,646

S&P 500

DOWN 17 to 2,005

1-Yr T-bill

current yield 0.16%; opening yield 0.18%

2-Yr T-note

current yield 0.48%; opening yield 0.54%

5-Yr T-note

current yield 1.29%; opening yield 1.37%

10-Yr T-note

current yield 1.81%; opening yield 1.90%

30-Yr T-bond

current yield 2.43%; opening yield 2.50%



SOLID PAYROLL GAINS CONTINUE IN DECEMBER 

Friday, January 9, 2015

IT WAS A GOOD YEAR FOR JOBS; NOT SO GOOD FOR SALARIES  
The headlines were plenty strong, but the underlying data was much less so. There were +252k new jobs added to U.S. company payrolls in December, above the +240k median forecast, while November and October revisions added another +50k. For the year, the company survey showed nonfarm payrolls had averaged +246k per month, compared to +194k last year. With 2.95 million added in 2013, it was the best year for job creation since 1999. 

In the separate household survey, the unemployment rate fell from 5.8% to 5.6% to the lowest level since June 2008 (before the financial crisis), …although the reason for the drop wasn’t a huge number of new jobs, but rather another big decline in the number of Americans seeking work. Households reported a much smaller +111k increase in new hires for December, while the labor force fell by 273k. The participation rate, which is the percentage of working age people (16-64) either currently employed or actively seeking work, fell back to 62.7%, equaling the lowest level since 1978.       

If the Fed were to only look at nonfarm payrolls and unemployment, a good case could be made to boost short rates immediately, BUT the Fed has focused its attentions on wages, and apparently the true job market isn’t yet tight enough that employers are being forced to increase pay. Average hourly earnings actually fell by 0.2% in December, pulling down the year-over-year increase from 1.9% to 1.7%.       

After digesting the numbers, the short end of bond market has rallied a bit, pushing yields lower. The thinking here is the Fed is a little less likely to begin tightening short rates in six to eight months. With the U.S. dollar already very strong, overall domestic inflation heading lower and Europe battling deflation, a case can certainly be made that the Fed should remain on the sidelines, but it’s hard to reconcile the necessity of a zero funds rate policy when job creation is at a 15-year high. 

It’s important to note that although Fed policy can manipulate interest rates on the short end, the Fed has lost control over the intermediate-to-long end of the curve. The sector is being driven by a lack of inflation and record low global bond yields. In theory, the Fed could lift the overnight rate from the 0.00% to 0.25% range, without pushing lending rates higher.           

Stocks are down in early trading, but in all fairness, the DOW had gained 536 points in the past two days, so a small drop means little.      

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

DOW

DOWN 99 to 17,807

NASDAQ

DOWN 5 to 4,731

S&P 500

DOWN 6 to 2,055

1-Yr T-bill

current yield 0.12%; opening yield 0.13%

2-Yr T-note

current yield 0.58%; opening yield 0.61%

5-Yr T-note

current yield 1.46%; opening yield 1.49%

10-Yr T-note

current yield 2.01%; opening yield 2.02%

30-Yr T-bond

current yield 2.60%; opening yield 2.60%



DECEMBER FOMC MINUTES DON'T ALTER EXPECTED FED PATH


Wednesday, January 7, 2015

FED RATE COMMITTEE WEIGHS IN ON INFLATION 
This afternoon, the Fed released its minutes to the December 17th FOMC meeting. The markets were hoping for some clarification on how Fed official viewed the current low inflation environment …especially in light of the recent plunge in oil prices. 

The minutes revealed that committee members expected inflation would “likely decline further in the near term” due to oil prices and the strong dollar, although most thought the contributing factors were “temporary,” and believed inflation would gradually move closer to the 2% target as labor conditions continued to improve. There were, however, a number of participants who worried that future price pressures could fall “persistently below” target. 

Regarding wage inflation (or the lack thereof), the minutes showed that “most participants saw no clear evidence of a broad-based acceleration in wages.”  The minutes also suggested that the committee could begin raising short-term rates with inflation at the current depressed levels as long as participants were “…reasonably confident that inflation will move back toward 2 percent over time.” There’s quite a bit of latitude here. 

The bottom line on the much-anticipated minutes is …nothing new to add. The Fed hasn’t waffled much in recent months on the message that they’ll likely begin tightening short rates sometime around mid-year, although the degree of tightening is much less clear. 
     
PURCHASING MANGERS SURVEYS SUGGEST CAUTIOUS APPROACH   
The ISM manufacturing index for December, released on the first business day of 2015, fell from 58.7 to 55.5, well below the 57.5 median forecast. Recall that in this survey, any number above 50 still indicates expansion, so factory conditions are still upbeat, just less so than in November.  Within the composite, the current production index dropped from 64.4 to 58.8, while the new orders index declined from 66 to 57.3. Falling energy prices were evident as the prices paid index tumbled to 38.5, the lowest level in 30 months.  

Yesterday, the December ISM nonmanufacturing (service sector) index, representing 90% of the U.S. economy, fell from 59.3 to 56.2, a seven-month low.  The decline included all 10 survey categories, with the business activities index plunging from 64.4 to 57.2 and the inventory index dropping from 55.5 to 50.0.  Presumably, when businesses pare down inventories, it’s due to uncertainty about future sales. With the U.S. doing well, this is likely a reflection of global economic issues. The prices paid index fell below the 50 mark, indicating a majority of those surveyed were seeing lower input prices. The 49.5 reading was the lowest in 5+ years.  

The bottom line on these two surveys is …the drop in the indexes is surprising. Lower inputs costs are beneficial and domestic consumers should have more dollars to spend on products and services. Both surveys indicated rising intentions to hire new employees, which suggests business optimism. 
       
MARKET INDICATIONS AS OF 4:55 P.M. CENTRAL TIME 

DOW

UP 212 to 17,584

NASDAQ

UP 57 to 4,650

S&P 500

UP 25 to 2,019

1-Yr T-bill

current yield 0.24%; opening yield 0.24%

2-Yr T-note

current yield 0.61%; opening yield 0.63%

5-Yr T-note

current yield 1.48%; opening yield 1.48%

10-Yr T-note

current yield  1.97%; opening yield 1.94%

30-Yr T-bond

current yield 2.53%; opening yield 2.50%



Q3 GDP BOOMS, BUT NOVEMBER DURABLE GOODS BOMBS

Tuesday, December 23, 2014

Q3 GDP SURGES TO 5% IN FINAL REVISION 
The initial reading on Q3 GDP showed the economy had grown at a brisk +3.5% annualized pace. That estimate was subsequently revised higher to +3.9%. Economists were predicting things would look even better after today’s final revision was released with the median forecast calling for a +4.3% increase. The data came in even better than that with the economy posting a stellar +5% annualized growth rate during the July through September period, the biggest advance in eleven years. Importantly, final sales also gained +5%, meaning that the growth was not the result of building up inventories but of actual sales of goods and services. The biggest boost came from personal consumption, which was revised from +1.2% to +2.5% on increased spending on healthcare and recreation, and from business investment which was revised to +8.9% from +7.1%, mostly on software investment. 

NOVEMBER DURABLE GOODS SUGGESTS Q4 PAYBACK 
Today’s report on November durable goods orders suggests the current quarter won’t be as good. Orders for goods meant to last at least three years fell -0.7% in November, following a downwardly revised +0.3% in October (previously reported at +0.4%). Economists in the Bloomberg survey had expected a +3.0% gain, so today’s -0.7% was much weaker than expected. In the interest of brevity, and the sheer volume of other reports to cover, I’ll spare you most of the details, but the key component is a category called nondefense capital goods ex-aircraft, which feeds into GDP and attempts to strip out some of the more volatile components. Orders for these so-called core capital goods were flat in the month of November after falling 2.7% in the previous four months. That is not a good trend and might get worse as oil producers cut back on production and capital spending plans. 

CONSUMER SPENDING TO OFFSET SOME OF THE BUSINESS WEAKNESS 
While business investment might be weakening, consumer spending is on the rise thanks to the windfall from falling gas prices. Personal spending jumped +0.6% in November while the prior two months were revised higher. Consumer spending is now tracking at a +4.0% growth rate in Q4, a rare feat last seen in Q4-2010 and before that in Q4-2006. Personal incomes rose +0.4% in the month. 

With the Christmas holiday quickly approaching there has been a large slate of economic data released. A few other indicators of note included the personal consumption expenditures (PCE) and home sales. The Fed’s preferred inflation measure, the core PCE, reflected falling gas prices with an unchanged reading for November that took the year-over-year rate down two-tenths to 1.4%. That was a tenth less than expected and remains well below the Fed’s stated 2.0% target. Gas prices have fallen even more sharply in December so PCE may trend even lower. 

Existing home sales for November fell -6.1% to a 4.93 million unit annual pace after reaching a 12-month high in October. Scant inventory and the slow return of first-time buyers were cited as factors. New home sales slipped -1.6% in November to a four-month low at a 438k annual rate. Housing remains stuck in an uneven recovery, but mortgage rates remain low and with employment conditions improving, housing should too, eventually.

STOCK SURGE TO NEW RECORDS 
The major stock indices have put a positive spin on the somewhat mixed data, figuring strong consumer demand will prevail. That has propelled the DOW and the S&P 500 to new records as of this writing. Bond yields are higher, driven by a weak two-year Treasury-note auction yesterday and the generally strong economic data.

Finally, we’d like to take a moment to say HAPPY HOLIDAYS, to thank you for your business and your support, and to wish you all the best for 2015.

MARKET INDICATIONS AS OF 10:48 A.M. CENTRAL TIME 

DOW

UP 82 to 18,041 (record high)

NASDAQ

DOWN 5 to 4,776

S&P 500

UP 5 to 2,084 (record high)

1-Yr T-bill

current yield 0.26%; opening yield 0.25%

2-Yr T-note

current yield 0.74%; opening yield 0.66%

5-Yr T-note

current yield 1.70%; opening yield 1.66%

10-Yr T-note

current yield 2.21%; opening yield 2.16%

30-Yr T-bond

current yield 2.79%; opening yield 2.74%



THE FED SIGNALS "PATIENCE" IS THE LATEST KEY WORD

Tuesday, December 17, 2014

THE FED REMAINS PATIENT  
The Fed’s Open Market Committee (FOMC) met in the last official meeting of 2014. The question going into the meeting was whether the Fed would remove the “considerable period” wording, which would have confirmed the widely held notion that the Fed was likely to begin raising the overnight funds target in June.  As it turned out, they added wording that conveyed a “patient” message. Specifically, they said “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October…”  

The financial markets seem to view the addition of the “patient” language as a clue that the Fed could allow the overnight funds target to remain at 0.00% to 0.25% until late 2015 or early 2016. On the other hand, the “dot plots,” or the summary of FOMC member interest rate projections, were virtually unchanged, which suggests that Fed officials still anticipate tightening to start in six to eight months. 

Fed officials described economic growth as being “moderate,” described the labor market as “improving further,” and reiterated that inflation remains below the long-run objective, although they expect it will rise gradually toward 2%.  No surprises here. 

INFLATIONARY MEASURES RETREAT 
Over time, inflation will likely trend higher, but right now, it’s still heading lower. Morgan Stanley expects headline inflation to be negative by the second quarter of next year.  Over the past couple of days, both the producer price index and the consumer price index for November fell significantly. Headline PPI dropped by 0.2%, while core PPI was flat. Headline CPI fell by 0.3%, the biggest decline in six years, while core CPI rose by just 0.1%. The Fed would, in theory, be raising rates to slow down the economy and thereby lower inflationary pressure. This doesn’t make a whole lot of sense in the current environment.     

Bloomberg reported that for the first time in at least 55 years, not one advanced economy will see consumer prices grow by more than 4% in 2014.  Bill Gross (now of Janis Capital) weighed in on Twitter earlier this week, saying “The Fed is in a corner. It wants to raise rates in 2015, but Oil/Dollar/Disinflation say NO! NO! NO!!” 

The equity markets rallied immediately after the announcement, but oddly enough bond prices are lower (yields higher). Part of this may have to do with Yellen’s statement in the press conference following the FOMC meeting. Yellen said the committee was unlikely to begin normalizing monetary policy for at least the next couple of meetings.  Since the next three meetings are January 29th, March 19th and April 30th, she may have reopened a door that the official statement seemed to close just an hour earlier.      

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

DOW

UP 219 to 17,288

NASDAQ

UP 74 to 4,622

S&P 500

UP 25 to 1,990

1-Yr T-bill

current yield 0.22%; opening yield 0.20%

2-Yr T-note

current yield 0.60%; opening yield 0.55%

5-Yr T-note

current yield 1.60%; opening yield 1.52%

10-Yr T-note

current yield 2.14%; opening yield 2.06%

30-Yr T-bond

current yield 2.74%; opening yield 2.69%



SPENDING GETS A BOOST


Thursday, December 11, 2014

RETAIL SALES GAIN ON CHEAP GAS 
Improving employment conditions, rising wages, and falling gas prices are starting to show through in the data. Today’s Commerce Department report on November retail sales revealed a larger than expected gain of +0.7%. That easily topped the Bloomberg median estimate for a gain of +0.4% and was the biggest sales gain in eight months. October’s previously reported +0.3% increase was revised two-tenths higher to +0.5%. The headline gain in November came despite a 1.5% decline in sales at gasoline stations, which were obviously a reflection of falling gas prices. According to AAA the national average price for a gallon of regular is currently $2.62, down more than $1 from the April highs. Prices are much lower in some areas and I saw gas as low as $2.19 on my way home from Fort Worth yesterday. The extra cash in consumer pockets is helping spending as other details within today’s report were quite strong. Gains were reported in 11 of the 13 categories, with only gasoline stations and miscellaneous retailers reporting declines. Sales ex-autos and gas were up +0.6%, while the retail sales control group, which feeds into GDP calculations, also gained +0.6%. The bottom line is that despite reports of poor sales on Black Friday, consumer spending stepped up in November. That’s good news for the economy and with gasoline prices continuing to head south, perhaps an encouraging sign of things to come.

FOMC MEETS NEXT WEEK
The recent string of good economic data may be enough to persuade the Fed to remove the “considerable time” language from their statement at next week’s FOMC meeting. However, the deflationary impact of the collapse in oil prices and the strengthening dollar will have to enter the Fed calculus at some point and may give them the cover to leave the language as is. That thought was reinforced with a decline in the import price index, which fell -1.5% in November and is down -2.3% year-over-year. We’ll get more inflation data in the coming days with the producer price index due out tomorrow and the consumer price index next Wednesday. Next Wednesday also brings the FOMC meeting and investors will be scrutinizing the statement and Janet Yellen’s post-meeting press conference for hints about the path of monetary policy.

Speaking of the Fed, earlier this week I attended the Government Treasurers’ Organization of Texas Winter Seminar. The general opinion of multiple presenters’ seems to be that the Fed will indeed begin raising interest rates in 2015, but those rate hikes were expected to be modest. 

Stock markets cheered the retails sales report and have recovered much of the ground lost in yesterday’s selloff. Bond yields are a bit higher this morning, but still well below the levels seen following last Friday’s employment report. 

MARKET INDICATIONS AS OF 10:40 A.M. CENTRAL TIME 

DOW

UP 210 to 17,743

NASDAQ

UP 71 to 4,756

S&P 500

UP 28 to 2,054

1-Yr T-bill

current yield 0.20%; opening yield 0.20%

2-Yr T-note

current yield 0.60%; opening yield 0.57%

5-Yr T-note

current yield 1.61%; opening yield 1.56%

10-Yr T-note

current yield 2.20%; opening yield 2.17%

30-Yr T-bond

current yield 2.86%; opening yield 2.83%



YIELDS DRIFT HIGHER AFTER STRONG EMPLOYMENT REPORT

Friday, December 5, 2014

NOVEMBER PAYROLLS  GAINS ARE HIGHEST IN MORE THAN TWO YEARS
U.S. employers added 321k new jobs to company payrolls in November, crushing the median forecast of 225k, while upward revisions to the previous two months added another 44k to the tally. During the past three months, an average of +278k new positions were created at U.S. companies and an average of +241k per month for all of 2014. By comparison, last year averaged +194k. November marked the 10th straight month with gains exceeding 200k, the longest such stretch in more than 20 years. 

Job creation was widespread during the month with virtually all sectors reporting substantial increases. High paying business and professional services added +86k jobs in November with just 1/4th of these being temporary positions. Retail (+50k), health care (+29k), manufacturing (+28k), food service and drinking establishments (+27k), finance (+20k) and construction (+20k) all made significant contributions. 

The unemployment rate held steady at a six-year low of 5.8%, as the household survey showed just +4k jobs being created in November.  For what it’s worth, the household survey is much more volatile than the company survey, but the tiny number of new jobs last month is still a bit of a head-scratcher.  

The number of unemployed Americans was virtually unchanged at 9.1 million. Over the past 12 months, the unemployment rate has fallen by 1.2 percentage points while the number of unemployed workers has dropped by 1.7 million. There are still 6.9 million Americans working part-time for economic reasons. Presumably, they’d prefer a full-time position. 

The U6 unemployment rate, or “the underemployment rate,” (representing all those who would accept suitable fulltime position if it were offered to them) edged lower from 11.5% to 11.4%. A year ago, this number stood at 13.1%.  

The underlying data was also better than expected. Hourly earnings rose by 0.4% from $24.57 to $24.66, and 2.1% year-over-year. The monthly gain is significant as wages had been lagging up to this point in the recovery cycle. The average workweek rose by 6 minutes in November to 34.6 hours, while the factory workweek rose by 12 minutes to 41.1 hours. Although these numbers may sound trivial, they suggest additional workers are likely to be hired in the coming months.

Faulty seasonal adjustment factors may have distorted the November payroll number to the upside, but the bottom line is that headline job creation continues at its fastest pace in 15 years, and unemployment is the lowest since the summer of 2008. This is obviously great news. As a result, yields are higher with the expectation that the Fed may be forced to raise short-term interest rates before June 2014. It’s possible, but very low inflation will give the Fed ample latitude to carefully monitor global and domestic data and begin tightening when most appropriate.       
 
AUTO SALES SURGE 
Total sales of light vehicles in the U.S. rose above the 17 million annualized unit pace for only the second time in nine years in November. The recovery high point was 17.45 million four months earlier.  Robust sales are expected to continue in the U.S. as consumer confidence is high, household net worth has recovered from the beating it took during the recession, the stock markets are at record highs and job growth is the best in more than a decade.  

MARKET INDICATIONS AS OF 9:08 A.M. CENTRAL TIME 

DOW

UP 34 to 17,934 (NEW HIGH)

NASDAQ

UP 10 to 4,779

S&P 500

UP 3 to 2,075 (NEW HIGH)

1-Yr T-bill

current yield 0.14%; opening yield 0.12%

2-Yr T-note

current yield 0.62%; opening yield 0.54%

5-Yr T-note

current yield 1.67%; opening yield 1.57%

10-Yr T-note

current yield 2.30%; opening yield 2.23%

30-Yr T-bond

current yield 2.96%; opening yield 2.94%



AN OPTIMISTIC DOMESTIC OUTLOOK AMID GLOBAL WEAKNESS

Monday, December  1, 2014

CHEAP GAS AND HOLIDAY SHOPPING
The holiday shopping season seems to have gotten off to a less than terrific start, …although there’s still plenty of time to catch up. Black Friday sales were down 11% from last year, but if Americans are choosing the convenience of shopping online, Cyber Monday could recapture the shortfall. 

Oil continues to be a huge story. On Thanksgiving, OPEC announced that it would maintain its production quota despite falling global demand for oil and gasoline. This announcement prompted an $8 per barrel drop, pushing the price for WTI crude down from $74 to a five-year low $66 per barrel. It was $102 as recently as June. This is a disaster for the big oil producing countries, but a holiday gift for consumers. Since the U.S. is both the biggest consumer of energy and the biggest producer, the effect is regional. North Dakota, the second largest oil producing state behind Texas, will probably feel quite a bit of pain as the production costs of shale oil are much higher than extracting by traditional methods. Fortunately, technology has brought the breakeven price for shale production down from an estimated $70 last year to around $57 today. For what it’s worth WTI crude is up $2 per barrel this morning to approximately $68. 

On a related note, the average gasoline price in the U.S. is now around $2.75 per gallon. AAA estimates the average pump price could fall another $0.20 by Christmas. In some states, industry experts believe gas prices could dip below $2 per gallon by year-end.                           
                        
U.S. PURCHASNG MANAGERS ARE PLENTY UPBEAT
The ISM monthly survey of U.S. purchasing managers, showed a bit more strength than expected. The 58.7 reading was above the median forecast for 58, but slightly below the previous reading of 59. Any number above 50 indicates expansion in the factory sector. The average during the current recovery cycle is 54.7, so this morning’s overall number is very solid. Beneath the headline, there were some interesting subcomponents. The employment index slipped a bit from 55.5 to 54.9, suggesting that hiring could moderate in the coming months. The export index rose from 51.5 to 55, a surprise considering that the stronger dollar has made exported goods more expensive. And the prices paid index sunk from 53.4 to 44.5, reflecting the huge decline in energy prices. The bottom line is that the U.S. factory sector seems to be weathering the global slowdown better than most had expected. 

In other news from the holiday shortened week, October new home sales fell below forecasts, but were up from the previous month. The 458k annual sales pace is still significantly below the bubble high point of 1.389 million annualized units in mid-2005. The supply is low, but Americans are apparently more than happy to pay-up for a new home as the year-over-year average sales price surged by a shocking 15.4% in October to an all-time high of $305,000. By comparison, the average price of an existing home was $208,300 in October. 

Bond prices are slightly lower this morning, pushing the 10-year Treasury yield up to 2.21%. When the year began, the 10-year was yielding slightly above 3.0%. Global bond yields have had much to do with the decline making the U.S. market look cheap by comparison. The German 10-year government bond is trading at 0.73%, the French 10-year bond is at 0.99%, the Spanish 10-year is at 1.83% and the 10-year U.K. bond is at 1.89%. 

Stocks are down so far today, but in all fairness the DOW just hit a new record high on Friday. 

It’s hard to know what to make of the economy. The Fed is still on track to raise short rates in the summer of next year …assuming the domestic economy continues to grow at an acceptable pace, but the global economy is expected to slow even further. At some point the U.S. will feel the effects of weak global demand, but even now, inflation is simply not an issue. As a result, Fed tightening (when it does happen) is likely to be gradual and quite minimal.      

MARKET INDICATIONS AS OF 12:15 P.M. CENTRAL TIME 

DOW

DOWN 24 to 17,804

NASDAQ

DOWN 51 to 4,740

S&P 500

DOWN 10 to 2,057

1-Yr T-bill

current yield 0.11%; opening yield 0.12%

2-Yr T-note

current yield 0.48%; opening yield 0.49%

5-Yr T-note

current yield 1.50%; opening yield 1.48%

10-Yr T-note

current yield 2.29%; opening yield 2.16%

30-Yr T-bond

current yield 2.93%; opening yield 2.89%



U.S. GDP GROWTH REVISED HIGHER IN Q3

Tuesday, November 25, 2014


ECONOMIC GROWTH SURPRISES TO THE UPSIDE
The initial reading of third quarter annualized GDP was a solid +3.5%, but analysts were expecting scheduled revisions would lower growth for the recent quarter down to +3.3%. Surprisingly, they were dead wrong as the first revision (released this morning) actually brought Q3 GDP up to 3.9%. As a result, the last two quarters now represent the healthiest six-month period of economic growth in 11 years. The highest level of consumer confidence in more than seven years, and the strongest pace of job creation since 1999 suggest the brisk expansion could continue well into 2015. 

Making positive contributors to the upward GDP revision were consumer spending (rewritten from +1.8% to +2.2%) and business investment (revised higher from +4.7% to +6.2%). Business inventories, originally reported to have reduced GDP by 0.6 percentage points, rose more than expected, subtracting just 0.1%. The biggest negative contribution was in the net trade deficit as revisions shaved 0.5 percentage points from overall GDP. 

Corporate profits were up 2.1% last quarter, following a 8.4% advance in the previous quarter. The continued profit gains, even at a lessor pace, have helped fuel the U.S. equity markets to recent record highs. 

One of few downsides to this morning’s report was in the critical income category as the reported increase in wages and salaries last quarter was effectively cut in half. This should provide a degree of cover for the Fed to continuing holding monetary policy at historical lows until mid-year 2015.  

Bond yields are slightly lower in earlier trading, while stocks are generally mixed.  

Happy Thanksgiving.                            

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

DOW

DOWN 16 to 17,802

NASDAQ

UP 1 to 4,758

S&P 500

UP 1 to 2,068

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.53%; opening yield 0.50%

5-Yr T-note

current yield 1.60%; opening yield 1.60%

10-Yr T-note

current yield 2.29%; opening yield 2.31%

30-Yr T-bond

current yield 3.00%; opening yield 3.02%



LOWER LENDING RATES BOOST HOUSING

Thursday, November 20, 2014

HOUSING DATA GENERALLY SOLID
Earlier this week, the National Association of Home Builders (NAHB) Index climbed from 54 to 58 in November, falling one point short of a nine-year high. The NAHB current sales, future expectations and prospective buyer traffic indexes all showed increases. Although the soft data looked solid, some of the hard data was a bit softer. Housing starts fell 2.8% in October to a 1.01 million unit annual pace. Within the index, multi-family starts fell by 15.4% to a 313k unit annual pace, while single-family starts rose 4.2% to 696k. A 4.8% increase in building permits for October suggested that starts could increase in future months. 

A number of economists have suggested for years that pent-up household creation would eventually bolster the single-family housing market, but first-time homebuyers continue to face unusually tight credit conditions, heavy debt burdens (in particular student loan debt), lower wages and general affordability issues. As a result, many who would normally be purchasing their first homes are choosing to rent instead. So far in 2014, occupied rental homes have risen by nearly 1.2 million, while owner-occupied homes have fallen by 657,000.  

The decline in mortgage rates seems to have had a positive effect on home sales. This morning, existing home sales rose by a larger-than-expected +1.5% to a 5.26 million unit annualized pace, the highest level in 13 months, and the fifth straight month above five million mark. 

The median price for an existing home price declined from $209,100 to $208.300 during the month, but is still up 5.5% from a year ago. (Sales prices tend to be lower during the fall and winter months.) Available supply fell from 5.3 to 5.1 months at the same time average days-on-the-market climbed from 56 to 63. Housing supply is lean enough to expect new construction in the coming months.  

PRICES RISE, BUT REMAIN WELL CONTAINED
The short-term outlook calls for gradually lower domestic inflation, but at least for the time-being, overall prices are generally edging higher. Despite a 3% drop in energy costs, the producer price index (PPI) unexpectedly rose by 0.2% in October, the biggest increase in 15 months. The median forecast had called for a 0.1% decline. However, on a year-over-year basis, headline PPI is up by just 1.5%. Core PPI, which excludes food and energy prices, jumped 0.4% in October. On a year-over-year basis, the core is increasing at a +1.8% pace. 

By contrast, the consumer price index (CPI) was unchanged in October and up 1.7% on a year-over-year basis. Core CPI rose by 0.2% during the month and is up 1.8% year-over-year.  The cost of food is increasing at a 3.1% annual rate, while overall energy prices are down 1.9%.  In particular, gas prices continue to trend lower. On Wednesday, the average price for a gallon of regular unleaded reached a four-year low of $2.86. 

Inflation is not a current concern of the Fed. In fact, the price increases during the month are very much welcomed. On the global front, deflation continues to be the bigger concern. Consumer prices in the Eurozone are rising at a tepid +0.4% annual rate. 

This morning, bond prices are flat to slightly higher (yields lower), while the DOW and S&P are in new record territory.  

None of the data released this morning or earlier this week is likely to alter the Fed’s monetary policy stance. Overnight rates are expected to remain near zero until the middle of next year. Tightening, when it begins, is expected to be gradual.      

MARKET INDICATIONS AS OF 10:40 A.M. CENTRAL TIME 

DOW

UP 6 to 17,691 (NEW RECORD HIGH)

NASDAQ

UP 24 to 4,699

S&P 500

UP 4 to 2,052 (NEW RECORD HIGH)

1-Yr T-bill

current yield 0.13%; opening yield 0.13%

2-Yr T-note

current yield 0.52%; opening yield 0.52%

5-Yr T-note

current yield 1.64%; opening yield 1.65%

10-Yr T-note

current yield 2.35%; opening yield 2.36%

30-Yr T-bond

current yield 3.06%; opening yield 3.08%



OCTOBER RETAIL SALES SHOW IMPROVEMENT

November 14, 2014

CONSUMERS STEP UP PURCHASES  
Recall that retail sales in September had unexpectedly dropped by 0.3%, a big disappointment, so all eyes were on the October report to see if the dip was the start of a trend or an aberration. As it turned out, October retail sales rose by 0.3%, bettering the 0.2% median forecast. Although the increase wasn’t huge, and the September number was unrevised, the gains were broad-based with 11 of 13 categories advancing. Clearly, consumers benefited from the lowest pump prices in four years, although one of the two categories that declined was service station sales, simply because lower price gas reduced total receipts. The other category showing a decrease was electronics store sales which fell 1.6%, although a pullback was largely expected after iPhone sales in the prior month muscled electronics sales up 4.7%. Auto sales were also a bit lower than expected, climbing +0.5% after September’s -1.2%. Ex-autos and gas, sales gained +0.6% versus an expected +0.4%.

In a nutshell, the October retail sales wasn’t that great, but it was better than expected. At the same time, economic reports overseas were slightly better than expected, too, though still pretty lousy. The initial reading of Q3 GDP for the European Union was +0.6%. Germany skirted recession with a +0.3% advance, while France expanded +1.1%, though most of that outsized gain was due to inventory building. Italy contracted at a -0.3% rate, which was the 11th decline in the last 13 quarters. Oddly enough, Greece reported some of the strongest growth in the EU at +0.7%.            

In response to today’s data, the bond market has sold off a bit in early trading, while equity markets are mixed but mostly unchanged. Yesterday, the DOW closed at a new historical high, the NASDAQ hit a 14-year peak and the S&P was within 2 points of the record high it reached on Wednesday.  
   
MARKET INDICATIONS AS OF 8:50 A.M. CENTRAL TIME 

DOW

DOWN 18 to 17,635

NASDAQ

DOWN 12 to 4,668

S&P 500

UP 1 to 2,040

1-Yr T-bill

current yield 0.14%; opening yield 0.14%

2-Yr T-note

current yield 0.54%; opening yield 0.52%

5-Yr T-note

current yield 1.65%; opening yield 1.62%

10-Yr T-note

current yield 2.36%; opening yield 2.34%

30-Yr T-bond

current yield 3.08%; opening yield 3.07%



ANOTHER SOLID EMPLOYMENT REPORT


Friday, November 7, 2014

COMPANY PAYROLLS TOP 200k FOR 9th CONSECUTIVE MONTH
U.S. businesses added 214k new jobs to company payrolls in October, slightly below the Bloomberg median forecast for 235k, but total upward revisions to the previous two months added an additional 31k, more than making up the shortfall. So far in 2014, nonfarm payrolls have grown by an average of 228k per month, the fastest pace of job creation in 15 years, and far exceeding the considerably brisk 194k monthly average in 2013. 

The separate household survey revealed that the official unemployment rate fell from 5.9% to 5.8% in Octobert, the lowest since July 2008. Unlike previous report, the decline wasn’t due to a decrease in the number of people working, but rather significant job creation as 683k Americans reportedly found jobs during the month. 

The U6 measure, or “the underemployment rate,” representing all those who would accept a suitable, full-time position if it were available, fell from 11.8% to 11.5%, also a six-year low.  

Unfortunately, the quality of the new jobs being created is still lacking. For example, there were 41,800 lower paying restaurant jobs added during the month. As a result, wage gains continue to disappoint. Average hourly earnings rose by just $0.01 in October, pushing year-over-year earnings growth down from +2.1% to +2.0%. This indicates to many, including some Fed members, that labor market slack is still present.  

This morning’s report is unlikely to alter the Fed’s current stance on monetary policy.          

In related news, there seems to be growing concern that premature rate hikes by the Fed could cause the U.S. economy to stall. On Thursday, Bloomberg News reported a poll of the 22 primary dealers taken prior to the September FOMC meeting revealed a 20% chance that the Fed would be forced to cut its key overnight rate back to zero within two years of tightening.   

AAA reported that the average nationwide price for a gallon of regular unleaded gasoline fell yesterday to $2.96, the lowest price in nearly four years. …for what it’s worth, I paid $2.57 when I filled up at Shell on S. Lamar last night.  

Stock futures are up in early trading after closing at new record highs yesterday. In theory, the domestic economy is still flashing strength in the face of global weakening, and the Fed is expected to remain accommodative. It’s all good for equities. 

Bond prices are up a bit (yields lower).    

MARKET INDICATIONS AS OF 8:10 A.M. CENTRAL TIME 

DOW

Not yet open - 17,554 RECORD HIGH

NASDAQ

Not yet open

S&P 500

Not yet open - 2,031 RECORD HIGH

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.52%; opening yield 0.55%

5-Yr T-note

current yield 1.64%; opening yield 1.69%

10-Yr T-note

current yield 2.35%; opening yield 2.39%

30-Yr T-bond

current yield 3.08%; opening yield 3.10%



OCTOBER PURCHASING MANAGERS SURVEYS SIGNAL CONTINUED GROWTH

November 5, 2014

MANUFACTURING APPEARS HEALTHY
Earlier this week, the October ISM manufacturing index rose from 56.6 to 59.0, completely reversing the September drop and returning to a three-year high. Within the survey, the new orders index jumped from 60.0 to a lofty 65.8, while production rose from 64.6 to 64.8, reaching the highest level since 2004. The U.S. factory sector seems to be on track to expand in the coming months. By contrast, the global factory sector seems to be slowing.  Earlier in the week, the Chinese Purchasing Managers Index (PMI) for October slipped from 51.1 to 50.8, while the eurozone PMI dripped from 50.7 to 50.6. Both of these still indicate expansion, but just barely. There is some question as to whether the U.S. can flourish as the rest of the world stumbles. 

This morning, the ISM non-manufacturing (service sector) survey also signaled expansion in the coming months, although the composite index actually dropped from 58.6 to 57.1 in October.  The key business activity index signaled expansion for the 63rd straight month, although it too slipped, decreasing from 62.9 to 60. Like the consumer confidence index, which reached a 7-year high just a week ago, the ISM surveys are considered “soft data.” Recent “hard data” has told a different story.  

On Tuesday, the September trade deficit deteriorated by an unexpectedly high 7.9% as higher priced U.S. exports shrank by 1.5%. The gap of 43 billion is expected to shave as much as 0.4 percentage points from the 3.5% advance reading of Q3 GDP and suggest Q4 GDP may be significantly lower than experts had projected. The notion that the Fed would raise rates and make the dollar even stronger is being questioned by a number of economists. The rest of the world is simply too weak right now. The European Union cut its 2014 GDP forecast from 1.1% to 0.8%, and its 2015 forecast from 1.7% to 1.1%. 

Saudi Arabia cut oil prices to the U.S., driving the price of WTI crude to a 12-month low. Although this gives a boost to U.S. consumers, in particular residents of the 34 non-oil producing states, it challenges the fracking industry, which bears high production costs.   

This morning, the ADP employment report showed a higher than expected 230k jobs were added to private sector payrolls in October. This healthy number suggests that Friday’s labor market will show solid job growth. 

Bond prices are virtually unchanged from opening levels, while the stock markets are rallying, indicating approval of yesterday’s election results.   

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

DOW

UP 70 to 17,453

NASDAQ

UP 6 to 4,630

S&P 500

UP 7 to 2,012

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.52%; opening yield 0.51%

5-Yr T-note

current yield 1.64%; opening yield 1.63%

10-Yr T-note

current yield 2.35%; opening yield 2.34%

30-Yr T-bond

current yield 3.06%; opening yield 3.05%



SAYONARA QE3

Wednesday, October 29, 2014

NO REAL SURPRISES FROM FOMC, BUT YIELDS DRIFT HIGHER
The Federal Reserve’s policy setting FOMC wrapped up its two day meeting and as expected they did indeed put an end to QE3. The program had previously been tapered down in regular steps to $15 billion of monthly purchases and today was finally reduced to zero. The Fed will, however, continue to reinvest principal payments from its holdings of MBS and rollover maturing Treasury holdings. As a result, their portfolio of securities, which now exceeds $4 trillion, will not be shrinking. It just won’t be growing anymore. The FOMC also retained the so-called “considerable period” language, stating that “it likely will be appropriate to maintain the 0 to ¼ percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month….”  

The FOMC did add some new lines to the statement: “However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.” This looks like a concession to those on the committee who are worried about the vague references to some set time period. The new language clearly ties policy to incoming data on employment and inflation. 

Digging into the statement the committee believes that labor market conditions are improving and will continue to do so. They also believe that inflation will gradually move towards their longer run 2% objective. The initial reaction from the markets seems to have taken a hawkish interpretation of the statement. Expectations for future rate hikes have shifted forward once again. Bond prices have fallen in the wake of the announcement, pushing the yield on the two-year and 10-year Treasury notes up to 0.48% and 2.32% respectively, the highest levels since early October.

MARKET INDICATIONS AS OF 2:22 P.M. CENTRAL TIME 

DOW

DOWN 76 to 16,930

NASDAQ

DOWN 30 to 4,533

S&P 500

DOWN 13 to 1,972

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.48%; opening yield 0.40%

5-Yr T-note

current yield 1.59%; opening yield 1.52%

10-Yr T-note

current yield 2.32%; opening yield 2.30%

30-Yr T-bond

current yield 3.05%; opening yield 3.07%



MORE MIXED DATA AS FOMC MEETS, PANIC SUBSIDES

Tuesday, October 28, 2014


DURABLE GOODS DECLINE AGAIN
Orders for goods meant to last at least three years dropped again in September, falling -1.3% after a revised -18.3% decline in August that was skewed by aircraft orders. The September result was far below the +0.5% median Bloomberg forecast. Stripping out the volatile components and focusing on the key core gauge, nondefense capital goods ex-aircraft fell by -1.7%, the biggest drop since January, while August’s previously reported +0.6% was revised down to +0.3%. These core orders are still up +8.2% year-over-year, but the slowing trend does not bode well for fourth quarter capital spending. 

CONSUMER CONFIDENCE SURGES ON JOBS, GAS PRICES
 
Jobless claims have fallen to record low levels and gas prices in many parts of the country have dropped below $3 per gallon. That has helped boost consumer confidence, which jumped 5.5 points in October to a seven-year high of 94.5. Details within the report suggest consumers are more positive in their assessment of current conditions, expectations for the next six months, and the job market. Unfortunately, they also remain cautious as the number planning major purchases such as automobiles or appliances fell. 

LAST WEEK’S DATA ON INFLATION & HOME SALES DATA 
If you’ll indulge us for a moment we’ll catch up on a couple of data points from last week. Existing home sales climbed by 2.4% in September to a 5.17 million unit annual rate, the highest in 12 months. On a year-over-year basis, sales of existing homes are still down 1.7%. The median price increased by 5.6%  to $209,700 from the same period a year ago, while available supply dropped from 5.5 months 5.3, the lowest level since March. New home sales rose by 0.2% to a 467k annual pace. Interestingly, the previous month was revised sharply downward from a six-year high of 504k to 466k, which calls into question the voracity of the data. The median price for a new home fell by 4% from the same period a year ago to $259,000. It was the first decline in five months. There were 207,000 new homes available for sale at the end of September, representing the same relatively lean 5.3 month supply as existing homes. Clearly, the housing market hasn’t gotten over the bump in interest rates from last summer. The gradual decline in mortgage rates since has helped boost sales, but buyers have yet to return to post recession highs. In the event that buyers return in greater volume, low inventory levels suggest that the pace of housing starts could increase.    

The consumer price index (CPI) rose by 0.1% in September, just above the 0.0% median forecast. The core rate, which excludes food and energy prices, also rose by 0.1%, exactly matching forecasts. On a year-over-year basis, overall CPI and core CPI were up 1.7% and 1.6% respectively. Since the Fed generally targets a 2.0% inflation rate, these measures continue to hover below the desired level.  Gasoline prices and airfare showed big declines in September, while food prices and owner’s equivalent rent edged higher. Worth noting is that real average hourly earnings declined by 0.2% last month and are up just 0.3% on a year-over-year basis. This suggests ongoing slack in the labor market. 

PANIC SUBSIDES AS FOMC MEETS 
The market panic of two weeks ago has subsided greatly as the major stock indexes have recovered all of the ground lost in the brief, but sharp, sell off. Interest rates remain at very low levels, however. The two-year Treasury Note, which yielded 0.59% on September 24th, stands at 0.39% today. The 10-year T-note currently yields 2.28%, compared to 2.62% in mid-September. Today is the first of a two day FOMC meeting where the Fed is largely expected to put an end to quantitative easing with a final $15 billion reduction in the so called QE3 program. Other tweaks to the statement are possible, but given recent market volatility most analysts don’t expect the FOMC to abandon the “considerable time” language or make any other major shifts just yet. Markets will bide their time until the official FOMC announcement, which is due tomorrow at 1:00 p.m. central time.

MARKET INDICATIONS AS OF 12:30 P.M. CENTRAL TIME 

DOW

UP 78 to 16,1896

NASDAQ

UP 52 to 4,538

S&P 500

UP 11 to 1,972

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.39%; opening yield 0.38% 

5-Yr T-note

current yield 1.50%; opening yield 1.49% 

10-Yr T-note

current yield 2.28%; opening yield 2.26% 

30-Yr T-bond

current yield 3.05%; opening yield 3.04%



BOND YIELDS PLUNGE ON GLOBAL WEAKNESS

Wednesday, October 15, 2014

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

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

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

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

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

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

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

DOW

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

NASDAQ

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

S&P 500

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

1-Yr T-bill

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

2-Yr T-note

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

5-Yr T-note

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

10-Yr T-note

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

30-Yr T-bond

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



(YESTERDAY) BOND YIELDS TUMBLE ON TROUBLING OUTLOOK

Thursday, October 9, 2014

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

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

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

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

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

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

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

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

DOW

DOWN 233 to 16,761

NASDAQ

DOWN 55 to 4,413

S&P 500

DOWN 25 to 1,944

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.44%; opening yield 0.45%

5-Yr T-note

current yield 1.57%; opening yield 1.55%

10-Yr T-note

current yield 2.32%;opening yield 2.32%

30-Yr T-bond

current yield 3.07%; opening yield 3.06%



JOB GAINS ACCELERATE IN SEPTEMBER

Friday, October 3, 2014

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

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

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

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

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

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

DOW

UP 145 to 16,946

NASDAQ

UP 42 to 4,472

S&P 500

UP 20 to 1,966

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.57%; opening yield 0.53%

5-Yr T-note

current yield 1.76%; opening yield 1.69%

10-Yr T-note

current yield 2.47%;opening yield 2.43%

30-Yr T-bond

current yield 3.16%; opening yield 3.14%



STOCKS AND BOND YIELDS FALL ON GLOBAL WORRIES, SOFTER ISM


Thursday, October 2, 2014

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

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

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

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

DOW

DOWN 23 to 16,783

NASDAQ

UP 2 to 4,424

S&P 500

DOWN 1 to 1,945

1-Yr T-bill

current yield 0.08%; opening yield 0.09%

2-Yr T-note

current yield 0.52%; opening yield 0.52%

5-Yr T-note

current yield 1.68%; opening yield 1.67%

10-Yr T-note

current yield 2.41%; opening yield 2.39%

30-Yr T-bond

current yield 3.14%; opening yield 3.09%



HOME SALES MOSTLY IMPROVED IN AUGUST

Thursday, September 25, 2014

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

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

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

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

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

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

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

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

DOW

DOWN 223 to 16,987

NASDAQ

DOWN 78 to 4,477

S&P 500

DOWN 24 to 1,967

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.57%; opening yield 0.59%

5-Yr T-note

current yield 1.77%; opening yield 1.80%

10-Yr T-note

current yield 2.52%; opening yield 2.56%

30-Yr T-bond

current yield 3.23%; opening yield 3.28%



BOND YIELDS RISE ON SOLID SPENDING REPORT

September 12, 2014


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

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

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

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

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

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

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

DOW

DOWN 31 to 17,017

NASDAQ

DOWN 15 to 4,577

S&P 500

DOWN 6 to 1,983

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.57%; opening yield 0.56%

5-Yr T-note

current yield 1.81%; opening yield 1.79%

10-Yr T-note

current yield 2.60%; opening yield 2.55%

30-Yr T-bond

current yield 3.33%; opening yield 3.28%

 


SURPRISING WEAK LABOR REPORT NUDGES YIELDS LOWER


Friday, September 5, 2014

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

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

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

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

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

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

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

DOW

UP 20 to 17,050

NASDAQ

UP 1 to 4,561

S&P 500

UP 5 to 1,992

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.50%; opening yield 0.53%

5-Yr T-note

current yield 1.65%; opening yield 1.71%

10-Yr T-note

current yield 2.41%; opening yield 2.45%

30-Yr T-bond

current yield 3.19%; opening yield 3.21%



PLENTY OF STRENGTH IN FRONT OF TOMORROW'S EMPLOYMENT RELEASE

Thursday, September 4, 2014


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

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

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

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

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

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

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

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

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

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

DOW

UP 37 to 17,115

NASDAQ

UP 13 to 4,585

S&P 500

UP 6 to 2,005 (NEW HIGH)

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.53%; opening yield 0.52%

5-Yr T-note

current yield 1.71%; opening yield 1.67%

10-Yr T-note

current yield 2.44%; opening yield 2.40%

30-Yr T-bond

current yield 3.20%; opening yield 3.14%



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

Friday, August 29, 2014

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

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

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

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

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

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

DOW

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

NASDAQ

UP 20 to 4,578

S&P 500

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

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.49%; opening yield 0.50%

5-Yr T-note

current yield 1.63%; opening yield 1.63%

10-Yr T-note

current yield 2.34%; opening yield 2.34%

30-Yr T-bond

current yield 3.07%; opening yield 3.08%



SOARING DURABLE GOODS, CONSUMER CONFIDENCE PROPEL STOCKS TO RECORD HIGHS

Tuesday, August 26, 2014

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

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

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

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

DOW

UP 30 to 17,107

NASDAQ

UP 13 to 4,570

S&P 500

UP 2 to 2,000.02 (record high)

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.49%; opening yield 0.50%

5-Yr T-note

current yield 1.66%; opening yield 1.67%

10-Yr T-note

current yield 2.40%; opening yield 2.38%

30-Yr T-bond

current yield 3.16%; opening yield 3.13%



EASING INFLATIONARY PRESSURE PROVIDES FED COVER

Tuesday, August 19, 2014

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

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

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

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

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

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

DOW

UP 67 to 16,905

NASDAQ

UP 12 to 4,520

S&P 500

UP 7 to 1,974

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.41%; opening yield 0.41%

5-Yr T-note

current yield 1.56%; opening yield 1.58%

10-Yr T-note

current yield 2.38%; opening yield 2.39%

30-Yr T-bond

current yield 3.20%; opening yield 3.20%



CONSUMER SPENDING SLOWS AS Q3 BEGINS

Wednesday, August 13, 2014

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

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

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

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

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

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

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

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

DOW

UP 31 to 16,592

NASDAQ

UP 27 to 4,416

S&P 500

UP 5 to 1,936

1-Yr T-bill

current yield 0.08%; opening yield 0.09%

2-Yr T-note

current yield 0.41%; opening yield 0.45%

5-Yr T-note

current yield 1.58%; opening yield 1.62%

10-Yr T-note

current yield 2.42%; opening yield 2.45%

30-Yr T-bond

current yield 3.26%; opening yield 3.28%



GLOBAL EVENTS MAKE FOR ROCKY WEEK

Friday, August 8, 2014

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

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

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

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

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

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

DOW

UP 184 to 16,552

NASDAQ

UP 37 to 4,372

S&P 500

UP 21 to 1,930

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.44%; opening yield 0.43%

5-Yr T-note

current yield 1.62%; opening yield 1.60%

10-Yr T-note

current yield 2.42%; opening yield 2.41%

30-Yr T-bond

current yield 3.23%; opening yield 3.22%



BOND YIELDS LOWER ON MODERATE JULY JOB GAINS

Friday, August 1, 2014

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

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

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

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

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

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

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

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

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

DOW

DOWN 7 to 16,556

NASDAQ

UP 7 to 4,376

S&P 500

UP 1 to 1,931

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.49%; opening yield 0.53%

5-Yr T-note

current yield 1.71%; opening yield 1.75%

10-Yr T-note

current yield 2.53%; opening yield 2.56%

30-Yr T-bond

current yield 3.33%; opening yield 3.32%



YIELDS RISE ON STRONG HEADLINE GDP GROWTH

Wednesday, July 30, 2014

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

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

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

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

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

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

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

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

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

DOW

DOWN 84 to 16,828 

NASDAQ

UP 5 to 4,448

S&P 500

DOWN 3 to 1,967

1-Yr T-bill

current yield 0.11%; opening yield 0.10%

2-Yr T-note

current yield 0.57%; opening yield 0.54%

5-Yr T-note

current yield 1.77%; opening yield 1.69%

10-Yr T-note

current yield 2.52%; opening yield 2.46%

30-Yr T-bond

current yield 3.27%; opening yield 3.23%



A CRAZY WEEK

Friday, July 18, 2014

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

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

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

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

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

DOW

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

NASDAQ

UP 67 to 4,431

S&P 500

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

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.48%; opening yield 0.45%

5-Yr T-note

current yield 1.67%; opening yield 1.62%

10-Yr T-note

current yield 2.48%; opening yield 2.45%

30-Yr T-bond

current yield 3.29%; opening yield 3.27%



RETAIL SALES FALL SHORT YET AGAIN

Tuesday, July 15, 2014

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

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

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

DOW

DOWN 13 to 17,042

NASDAQ

DOWN 34 to 4,406

S&P 500

DOWN 6 to 1,965

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.48%; opening yield 0.46%

5-Yr T-note

current yield 1.70%; opening yield 1.67%

10-Yr T-note

current yield 2.57%; opening yield 2.55%

30-Yr T-bond

current yield 3.39%; opening yield 3.37%



STRONG EMPLOYMENT - PAYROLLS JUMP IN JUNE

Friday, July 3, 2014

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

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

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

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

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

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

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

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

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

Have a safe 4th of July.

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

DOW

UP 66 to 17,042

NASDAQ

UP 14 to 4,472

S&P 500

UP 5 to 1,973

1-Yr T-bill

current yield 0.11%; opening yield 0.10%

2-Yr T-note

current yield 0.52%; opening yield 0.48%

5-Yr T-note

current yield 1.76%; opening yield 1.71%

10-Yr T-note

current yield 2.67%; opening yield 2.63%

30-Yr T-bond

current yield 3.49%; opening yield 3.46%


SMOOTH SAILING FOR ISM MANUFACTURING INDEX

Tuesday, July 1, 2014

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

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

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

DOW

UP 134 to 16,961

NASDAQ

UP 52 to 4,460

S&P 500

UP 13 to 1,973

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.47%; opening yield 0.46%

5-Yr T-note

current yield 1.65%; opening yield 1.63%

10-Yr T-note

current yield 2.55%; opening yield 2.53%

30-Yr T-bond

current yield 3.38%; opening yield 3.36%



Q1 GDP WORST SINCE 2009, HOUSING DATA IMPROVES

Wednesday, June 25, 2014

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

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

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

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

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

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

DOW

UP 35 to 16,853

NASDAQ

UP 7 to 4,357

S&P 500

UP 5 to 1,955

1-Yr T-bill

current yield 0.10%; opening yield 0.08%

2-Yr T-note

current yield 0.48%; opening yield 0.46%

5-Yr T-note

current yield 1.64%; opening yield 1.67%

10-Yr T-note

current yield 2.54%; opening yield 2.58%

30-Yr T-bond

current yield 3.37%; opening yield 3.40%



FED MEETING IS MOSTLY A NON-EVENT

Wednesday, June 18, 2014

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

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

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

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

DOW

UP 64 to 16,872

NASDAQ

UP 16 to 4,353

S&P 500

UP 9 to 1,942

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.47%; opening yield 0.48%

5-Yr T-note

current yield 1.71%; opening yield 1.75%

10-Yr T-note

current yield 2.61%; opening yield 2.65%

30-Yr T-bond

current yield 3.43%; opening yield 3.44%



INFLATION UPDATES

Tuesday, June 17, 2014

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

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

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

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

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

Stocks are up in early trading …not sure why.

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

DOW

UP 12 to 16,793

NASDAQ

UP 18 to 4,339

S&P 500

UP 2 to 1,940

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.48%; opening yield 0.47%

5-Yr T-note

current yield 1.75%; opening yield 1.70%

10-Yr T-note

current yield 2.62%; opening yield 2.60%

30-Yr T-bond

current yield 3.43%; opening yield 3.40%



RETAIL SALES FALL SHORT IN MAY

Thursday, June 12, 2014

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

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

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

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

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

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

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

DOW

DOWN 69 to 16,775

NASDAQ

DOWN 20 to 4,311

S&P 500

DOWN 9 to 1,927

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.43%; opening yield 0.43%

5-Yr T-note

current yield 1.67%; opening yield 1.70%

10-Yr T-note

current yield 2.62%; opening yield 2.64%

30-Yr T-bond

current yield 3.45%; opening yield 3.47%



MAY LABOR NUMBERS PROVE SOLID

Friday, June 6, 2014

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

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

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

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

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

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

DOW

Up 66 to 16,902

NASDAQ

Up 14 to 4,310

S&P 500

Up 6 to 1,947

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.39%; opening yield 0.38%

5-Yr T-note

current yield 1.62%; opening yield 1.62%

10-Yr T-note

current yield 2.55%; opening yield 2.58%

30-Yr T-bond

current yield 3.40%; opening yield 3.43%



U.S. DATA LOOKS POSITIVE, ECB GOES NEGATIVE

Thursday, June 5, 2014

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

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

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

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

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

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

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

DOW

Up 100 to 16,838

NASDAQ

Up 37 to 4,289

S&P 500

Up 9 to 1,937

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.38%; opening yield 0.39%

5-Yr T-note

current yield 1.62%; opening yield 1.64%

10-Yr T-note

current yield 2.58%; opening yield 2.60%

30-Yr T-bond

current yield 3.43%; opening yield 3.44%



ISM ERRORS ADD TO CONFUSION

Monday, June 2, 2014

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

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

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

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

DOW

Up 20 to 16,737

NASDAQ

Down 9 to 4,233

S&P 500

Up 1 to 1,925

1-Yr T-bill

current yield 0.10%; opening yield 0.09%

2-Yr T-note

current yield 0.39%; opening yield 0.37%

5-Yr T-note

current yield 1.60%; opening yield 1.54%

10-Yr T-note

current yield 2.48%; opening yield 2.53%

30-Yr T-bond

current yield 3.37%; opening yield 3.33%



FIRST QUARTER ECONOMIC GROWTH IS NEGATIVE

Thursday, May 29, 2014

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

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

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

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

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

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

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

DOW

UP  16,648

NASDAQ

UP 12 to 4,237

S&P 500

UP 2 to 1912

1-Yr T-bill

current yield 0.09%; opening yield 0.07%

2-Yr T-note

current yield 0.35%; opening yield 0.37%

5-Yr T-note

current yield 1.47%; opening yield 1.48%

10-Yr T-note

current yield 2.41%; opening yield 2.44%

30-Yr T-bond

current yield 3.27%; opening yield 3.29%



BOND RALLY PROVES IMPERVIOUS TO DATA

Friday, May 16, 2014

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

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

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

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

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

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

DOW

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

NASDAQ

DOWN 6 TO 4,063

S&P 500

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

1-Yr T-bill

current yield 0.08%; opening yield 0.08%

2-Yr T-note

current yield 0.36%; opening yield 0.35%

5-Yr T-note

current yield 1.54%; opening yield 1.52%

10-Yr T-note

current yield 2.50%; opening yield 2.49%

30-Yr T-bond

current yield 3.33%; opening yield 3.33%




RETAIL SALES UNEXPECTEDLY SLOWS IN APRIL

Tuesday, May 13, 2014

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

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

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

DOW

UP 19 TO 16,715

NASDAQ

DOWN 12 TO 4,132

S&P 500

UP 1 to 1,898

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.39%; opening yield 0.40%

5-Yr T-note

current yield 1.62%; opening yield 1.66%

10-Yr T-note

current yield 2.62%; opening yield 2.66%

30-Yr T-bond

current yield 3.46%; opening yield 3.50%




JOB GAINS IN APRIL ARE THE BIGGEST IN TWO YEARS

Friday, May 2, 2014

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

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

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

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

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

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

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

DOW

UP 26 TO 16,585

NASDAQ

UP 1 TO 4,126

S&P 500

UP 5 to 1,889

1-Yr T-bill

current yield 0.11%; opening yield 0.10%

2-Yr T-note

current yield 0.42%; opening yield 0.41%

5-Yr T-note

current yield 1.71%; opening yield 1.66%

10-Yr T-note

current yield 2.65%; opening yield 2.61%

30-Yr T-bond

current yield 3.43%; opening yield 3.41%

 


BONDS RALLY ON MIXED DATA

Thursday, May 1, 2014


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

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

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

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

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

DOW

DOWN 22 TO 16,559

NASDAQ

UP 13 TO 4,127

S&P 500

Unchanged at 1,884

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.41%; opening yield 0.41%

5-Yr T-note

current yield 1.66%; opening yield 1.68%

10-Yr T-note

current yield 2.61%; opening yield 2.65%

30-Yr T-bond

current yield 3.41%; opening yield 3.46%

 


HEADLINE GDP PLUNGES IN Q1

April 30, 2014


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

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

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

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

DOW

UP 15 TO 16,549

NASDAQ

DOWN 3 TO 4,100

S&P 500

UP 1 to 1,872

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.42%; opening yield 0.44%

5-Yr T-note

current yield 1.69%; opening yield 1.74%

10-Yr T-note

current yield 2.67%; opening yield 2.69%

30-Yr T-bond

current yield 3.48%; opening yield 3.49%



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

April 24, 2014


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

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

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

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

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

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

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

DOW

Unchanged 16,502

NASDAQ

UP 21 TO 4,148

S&P 500

UP 3 to 1,879

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.44%; opening yield 0.44%

5-Yr T-note

current yield 1.74%; opening yield 1.73%

10-Yr T-note

current yield 2.68%; opening yield 2.70%

30-Yr T-bond

current yield 3.46%; opening yield 3.48%

 


RETAIL SALES SURGE WITH WARM WEATHER

Monday, April 14, 2014   


CONSUMER SPENDING THAWS

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

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

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

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

DOW

UP 80 TO 16,107

NASDAQ

UP 23 TO 4,023

S&P 500

UP 9 to 1,821

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.36%; opening yield 0.36%

5-Yr T-note

current yield 1.59%; opening yield 1.58%

10-Yr T-note

current yield 2.63%; opening yield 2.63%

30-Yr T-bond

current yield 3.48%; opening yield 3.48%

 


LABOR REPORT PROVES LUKEWARM AT BEST

Friday, April 4, 2014


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

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

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

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

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

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

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

DOW

UP 31 TO 16,603

NASDAQ

DOWN 19 TO 4,218

S&P 500

UP 8 to 1,897 

1-Yr T-bill

current yield 0.10%; opening yield 0.11%

2-Yr T-note

current yield 0.42%; opening yield 0.45%

5-Yr T-note

current yield 1.72%; opening yield 1.80%

10-Yr T-note

current yield 2.75%; opening yield 2.80%

30-Yr T-bond

current yield 3.60%; opening yield 3.63%

 


BETTER DATA, COMMENTS FROM YELLEN WARM THE MARKET

Tuesday, April 01, 2014


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

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

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

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

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

DOW

UP 75 TO 16,533

NASDAQ

UP 68 TO 4,267

S&P 500

UP 11 to 1,883 (Record High)

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.43%; opening yield 0.42%

5-Yr T-note

current yield 1.74%; opening yield 1.72%

10-Yr T-note

current yield 2.76%; opening yield 2.72%

30-Yr T-bond

current yield 3.61%; opening yield 3.56%

 


DATA THIS WEEK WAS MIXED


Friday, March 28, 2014


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

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

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

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

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

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

DOW

UP 38 TO 16,302

NASDAQ

UP 3 TO 4,154

S&P 500

UP 6 to 1,855

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.45%; opening yield 0.45%

5-Yr T-note

current yield 1.74%; opening yield 1.72%

10-Yr T-note

current yield 2.71%; opening yield 2.68%

30-Yr T-bond

current yield 3.54%; opening yield 3.53%

 


YIELDS HIGHER AFTER FED ANNOUNCEMENT

Wednesday, March 19, 2014


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

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

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

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

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

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

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

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

DOW

DOWN 53 TO 16,284

NASDAQ

DOWN 15 TO 4,318

S&P 500

DOWN 5 to 1,867

1-Yr T-bill

current yield 0.13%; opening yield 0.12%

2-Yr T-note

current yield 0.42%; opening yield 0.35%

5-Yr T-note

current yield 1.70%; opening yield 1.55%

10-Yr T-note

current yield 2.77%; opening yield 2.67%

30-Yr T-bond

current yield 3.66%; opening yield 3.61%


POCKETS OF STRENGTH

Thursday, March 13, 2014


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

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

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

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

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

DOW

DOWN 43 TO 16,297

NASDAQ

DOWN 14 TO 4,310

S&P 500

DOWN 2 to 1,866

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.37%; opening yield 0.36%

5-Yr T-note

current yield 1.59%; opening yield 1.59%

10-Yr T-note

current yield 2.72%; opening yield 2.73%

30-Yr T-bond

current yield 3.65%; opening yield 3.67%

 


LABOR SURPRISE PUSHES YIELDS HIGHER


Friday, March 7, 2014


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

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

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

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

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

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

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

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

DOW

UP 77 TO 16,499

NASDAQ

DOWN 7 TO 4,345

S&P 500

DOWN 1 to 1,876

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.37%; opening yield 0.34%

5-Yr T-note

current yield 1.64%; opening yield 1.57%

10-Yr T-note

current yield 2.80%; opening yield 2.74%

30-Yr T-bond

current yield 3.74%; opening yield 3.69%

 


UNEVEN ISM DATA AS EMPLOYMENT FRIDAY APPROACHES


Wednesday, March 5, 2014

PURCHASING MANAGERS’ SURVEYS CONTRADICT

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

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

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

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

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

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

DOW

UP 14 TO 16,382

NASDAQ

UP 3 TO 4,359

S&P 500

UP 1 to 1,875

1-Yr T-bill

current yield 0.12%; opening yield 0.11%

2-Yr T-note

current yield 0.32%; opening yield 0.33%

5-Yr T-note

current yield 1.53%; opening yield 1.54%

10-Yr T-note

current yield 2.68%; opening yield 2.70%

30-Yr T-bond

current yield 3.63%; opening yield 3.65%

 


FROZEN CONDITIONS CHILL ECONOMIC GROWTH

February 28, 2014

ECONOMIC GROWTH IN Q4 IS SLOWER THAN ORIGINALLY THOUGHT

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

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

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

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

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

DOW

UP 94 TO 16,366

NASDAQ

UP 17 TO 4,336

S&P 500

UP 11 to 1,866

1-Yr T-bill

current yield 0.10%; opening yield 0.10%

2-Yr T-note

current yield 0.32%; opening yield 0.34%

5-Yr T-note

current yield 1.54%; opening yield 1.48%

10-Yr T-note

current yield 2.69%; opening yield 2.64%

30-Yr T-bond

current yield 3.62%; opening yield 3.59%

         


RETAIL SALES IN DEEP FREEZE


Thursday, February 13, 2014

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

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

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

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

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

DOW

UP 11 TO 15,976

NASDAQ

UP 17 TO 4,218

S&P 500

UP 3 to 1,822

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.32%; opening yield 0.34%

5-Yr T-note

current yield 1.50%; opening yield 1.56%

10-Yr T-note

current yield 2.74%; opening yield 2.76%

30-Yr T-bond

current yield 3.69%; opening yield 3.72%


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

Friday, February 7

NONFARM PAYROLLS WEAK, BUT UNEMPLOYMENT FALLS

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

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

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

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

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

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

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

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

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

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

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

DOW

UP 54TO 15,682

NASDAQ

UP 28TO 4,085

S&P 500

UP 11 to 1,784

1-Yr T-bill

current yield 0.12%; opening yield 0.12%

2-Yr T-note

current yield 0.30%; opening yield 0.32%

5-Yr T-note

current yield 1.47%; opening yield 1.52%

10-Yr T-note

current yield 2.67%; opening yield 2.70%

30-Yr T-bond

current yield 3.66%; opening yield 3.67%


FEBRUARY OFF TO A POOR START

Monday, February 3, 2014


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

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

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

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

DOW

DOWN 326 TO 15,373

NASDAQ

DOWN 107 TO 3,997

S&P 500

DOWN 41 to 1,742

1-Yr T-bill

current yield 0.086%; opening yield 0.086%

2-Yr T-note

current yield 0.29%; opening yield 0.33%

5-Yr T-note

current yield 1.43%; opening yield 1.49%

10-Yr T-note

current yield 2.57%; opening yield 2.64%

30-Yr T-bond

current yield 3.52%; opening yield 3.60%


FED TAPERS BY ANOTHER $10 BILLION

Wednesday, January 29, 2014

FOMC STICKS TO PLAN

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

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

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

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

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

DOW

DOWN 200 to 15,729

NASDAQ

DOWN 49 to 4,079

S&P 500

DOWN 21 to 1,771

1-Yr T-bill

current yield 0.09%; opening yield 0.09%

2-Yr T-note

current yield 0.35%; opening yield 0.34%

5-Yr T-note

current yield 1.49%; opening yield 1.56%

10-Yr T-note

current yield 2.67%; opening yield 2.75%

30-Yr T-bond

current yield 3.61%; opening yield 3.67%

 


WEAK DURABLES ADDS UNCERTAINTY TO TOMORROW'S FOMC DECISION

Tuesday, January 28, 2014

DURABLE GOODS SLUMP IN DECEMBER

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

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

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

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

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

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

DOW

UP 67 TO 15,905

NASDAQ

DOWN 7 to 4,076

S&P 500

UP 1 to 1,788

1-Yr T-bill

current yield 0.10%; opening yield 0.11%

2-Yr T-note

current yield 0.34%; opening yield 0.34%

5-Yr T-note

current yield 1.57%; opening yield 1.57%

10-Yr T-note

current yield 2.76%; opening yield 2.75%

30-Yr T-bond

current yield 3.69%; opening yield 3.67%


DISAPPOINTING DECEMBER PAYROLLS COULD GIVE FED PAUSE


Friday, January 10, 2014

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

 

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

 

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

 

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

 

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

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


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

DOW

DOWN 39 to 16,405

NASDAQ

DOWN 7 to 4,149

S&P 500

UP 1 to 1,839

1-Yr T-bill

current yield 0.12%; opening yield 0.13%

2-Yr T-note

current yield 0.38%; opening yield 0.43%

5-Yr T-note

current yield 1.64%; opening yield 1.75%

10-Yr T-note

current yield 2.88%; opening yield 2.97%

30-Yr T-bond

current yield 3.82%; opening yield 3.88%


2014: OFF AND RUNNING

Friday, January 3, 2014

LOOKING AHEAD TO A NEW YEAR

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

 

THE FACTORY AND HOUSING OUTLOOK IS BRIGHT

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

  

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


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

DOW

UP 71 to 16,512

NASDAQ

DOWN 1 to 4,142

S&P 500

UP 5 to 1,831

1-Yr T-bill

current yield 0.11%; opening yield 0.11%

2-Yr T-note

current yield 0.40%; opening yield 0.38%

5-Yr T-note

current yield 1.73%; opening yield 1.72%

10-Yr T-note

current yield 2.99%; opening yield 2.99%

30-Yr T-bond

current yield 3.93%; opening yield 3.92%


 


 

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

Training Calendar

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

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

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