WOW! STRONG JOB GROWTH IN JANUARY SURPRISES ...EVERYONE
Friday, Feb 3, 2012
A SURGE IN PAYROLL GROWTH RAISES TIGHTENING QUESTIONS
The U.S. Department of Labor Statistics reported this morning that January nonfarm payrolls rose by an unexpected 243k, far surpassing the median forecast of 140k as well as estimates from all 89 economists surveyed by Bloomberg News. In addition, December payrolls, once thought to be overstated, were actually revised upward from 200k to 203k, while November’s payroll numbers were boosted up from 100k to 157k. In the last 16 months, total job gains have exceeded 2.5 million, while private payrolls have grown by over 2.8 million.
The January gains were widespread as manufacturing added 50k jobs, health care 31k, food service and drinking establishments 33k, construction 21k and department stores 19k. Governments trimmed payrolls by another 14k positions, and have shed a total of 276k over the past year.
The unemployment rate unexpectedly dropped from 8.5% to 8.3% in January, and has now fallen by 8/10th of a point in the last five months. Experts had predicted no change. The cycle peak was 10% in October 2009. No doubt, the January figure was a shock to Fed officials, as it was just a week earlier that Bernanke said the U.S. economy wasn’t growing fast enough to push the unemployment rate significantly lower.
The total number of unemployed persons fell to 12.8 million. A year ago, this number was 13.9 million. The number of long-term unemployed (27 weeks or more) was little changed at 5.5 million. Americans working part-time who would prefer to be working full-time, was also little changed at 8.2 million. Another 2.8 million were “marginally attached” to the labor force, meaning they weren’t being counted as unemployed because they hadn’t looked for work in the four weeks preceding the survey, but were available for work and had looked for a job at some point during the past 12 months. Of these, 1.1 million were classified as “discouraged” believing no job was available to them. The “underemployment rate” or U6 measure, which factors in everyone who would accept a fulltime position if one were offered, fell from 15.2% to 15.1%. This broad U6 measure had peaked in October 2009 at 17.2%.
The underlying numbers suggest that January hires were not a fluke as the manufacturing workweek increased by 0.3 hour to 40.9, factory overtime rose 0.1 hour to 3.4 hours, the average workweek for all employees rose from a previously reported 34.4 hours to 34.5, and average hourly earnings increased by 4 cents to $23.29.
Capital Economics described this morning’s report as “unequivocally strong,” pointing to “a rapidly improving labor market,” although they “remain skeptical.” Mizuho believes unseasonably warm weather across the U.S. may be a contributing factor in the better-than-expected January data. But, little has been dredged up at this point to suggest there isn’t some legitimacy to what appears to be a solid hiring trend establishing itself in the private sector.
The takeaway for many seems to be that the Fed will have to think long and hard about launching another round of quantitative easing, and in the minds of many, the late 2014 timeframe for the initial rate hike may have been bumped forward by a few months.
Although the short end of the curve is nearly unchanged, the long end has traded off significantly since the data release. The 10-year Treasury yield is up 11 basis points, while the 30-year bond yield is 15 bps higher.
The DOW is up 140 points with the news that more Americans are finding work, which in theory should mean more dollars in consumer’s pockets …and improved economic growth.
I sure hope so.
On a side note, catch the Oscar-nominated documentary “Undefeated” if it shows up in local theaters this month. It’s a cross between “the Blind Side” and “Friday Night Lights.” Filmmakers honestly caught lightning in a bottle on this one. Inspiring. Amazing.
MARKET INDICATIONS AS OF 9:15 A.M. CENTRAL TIME
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DOW
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UP 137 to 12,842
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NASDAQ
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UP 34 to 2,893
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S&P 500
|
UP 13 to 1,336
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|
1-Yr T-bill
|
current yield 0.12%; opening yield 0.12%
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2-Yr T-note
|
current yield 0.23%; opening yield 0.22%
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5-Yr T-note
|
current yield 0.77%; opening yield 0.71%
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|
10-Yr T-note
|
current yield 1.93%; opening yield 1.82%
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30-Yr T-bond
|
current yield 3.15%; opening yield 3.00%
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SOLID ECONOMIC NUMBERS BOOST STOCKS
Wednesday, February 1, 2012
FACTORY INDEX AT FASTEST PACE IN SEVEN MONTHS
This morning, the ISM manufacturing index reached its highest level since June as the January reading rose from 53.1 to 54.1. Although this fell just short of the median forecast, any number above the 50 mark signals expansion in the factory sector. In December 2008, the index had fallen to a record low of 33.1. The high point during the past six years actually came in January of 2011 at 59.9.
Also this morning, December construction spending rose by 1.5%, topping analyst’s estimates for a lesser 0.5% gain. The spending pace was the fastest since August and suggests that housing inventories have finally normalized …even though home sales are still anemic by historical standards.
The ADP employment index showed businesses had added 170k workers in January, after a revised 292k gain in December. The ADP figure, according to a number of analysts this morning, is consistent with non-farm payroll growth of about 150k. The Labor Department will release a much anticipated January employment report on Friday morning. The most recent Bloomberg News median forecast shows 145k new jobs, although a number of experts anticipate a lower payroll number as a result of poor seasonal adjustments related to courier service jobs that distorted the December data.
The upbeat news this morning has helped push stocks higher, hopefully ending the first four-day slide since August. Treasury yields are slightly higher, but still near record lows along much of the yield curve.
In other news, the FOMC’s official statement from the January meeting has pushed short-term rates to record lows along several points on the curve, but not all Fed members are in agreement with the late 2014 timeframe for initial easing. On Monday, Philadelphia Fed President Plosser said he believes interest rates will have to rise sooner. Plosser also disagreed with the new format which includes each member’s individual forecasts, saying the FOMC “…needs to be patient and stop thinking we need to be doing more."
On Tuesday, the Conference Board’s January consumer confidence index fell from 64.8 to 61.1. This was a surprise to analysts as the median Bloomberg forecast was for an optimistic rise to 68.
MARKET INDICATIONS AS OF 10:40 A.M. CENTRAL TIME
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DOW
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UP 141 to 12,774
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NASDAQ
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UP 31 to 2,844
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S&P 500
|
UP 14 to 1,322
|
|
1-Yr T-bill
|
current yield 0.12%; opening yield 0.11%
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2-Yr T-note
|
current yield 0.22%; opening yield 0.21%
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|
5-Yr T-note
|
current yield 0.72%; opening yield 0.71%
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|
10-Yr T-note
|
current yield 1.83%; opening yield 1.80%
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|
30-Yr T-bond
|
current yield 2.98%; opening yield 2.94%
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FED STATEMENT MORE DOVISH THAN EXPECTED
Wednesday, January 25, 2012
THREE YEARS DOWN, THREE TO GO
Following a much anticipated two-day FOMC meeting, Fed officials announced this afternoon that they expect economic conditions to “warrant exceptionally low levels of the federal funds rate at least through late 2014.” In other words, they expect to keep the overnight rate at 0 to 0.25% until late 2014. Prior to this afternoon, the Fed had targeted mid-2013 as the period in which they anticipated raising rates for the first time since December 2008.
In essence, the FOMC has just eased monetary policy further by explicitly stating their expectation to hold rates steady until late 2014. Although recent economic data has been encouraging, the FOMC noted “unemployment remains elevated …growth in business fixed investment has slowed, and the housing market remains depressed.” The Fed also alluded to the problems emanating from Europe stating, “Strains in global financial markets continue to pose significant downside risks to the economic outlook.” Clearly, the Fed is not convinced that recent strength in some data is sufficient to cure the economy’s ills.
The Fed also released the economic and interest rate projections of its committee members. There were no real surprises or shocking revelations in the economic projections, which, as one would have expected, generally reflect an economy growing at a modest pace, elevated unemployment, and subdued inflation. The interest rate projections were a little more surprising, particularly with respect to the appropriate timing of policy firming. Of the 17 committee members, three felt it would be appropriate to firm later this year, another three in 2013. These were offset by four members targeting 2015 and two 2016 as the time to begin tightening interest rates. The remaining five members thought 2014 was the most appropriate time.
The range of projections for the target fed funds rate at year-end was quite wide as well. Expectations for the end of 2014 ranged from 0.25% to 2.75%. This is a fairly wide dispersion of expectations and highlights the difficulty of making long range projections as well as the wide range of opinions represented on the committee. No doubt the deliberations were lively. With 11 of the 17 members expecting tightening to occur before the end of 2014, these projections seem to be somewhat at odds with the aforementioned “late 2014” included in the official statement. It will be interesting to see how the Fed spins this in the coming days and weeks.
The FOMC cut the target fed funds rate to its current range of 0 to 0.25% in December 2008, so we have already been at these levels for more than three years. If we do indeed make it to late 2014, it will have been a remarkable six years with the primary overnight lending rate essentially at zero.
Financial instruments across the board have rallied on today’s news. Stocks are higher, commodities are higher, and bond prices are higher- pushing yields lower.
MARKET INDICATIONS AS OF 3:21 P.M. CENTRAL TIME
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DOW
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Up 83 to 12,759
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NASDAQ
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Up 32 to 2,818
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|
S&P 500
|
Up 11 to 1,326
|
|
1-Yr T-bill
|
current yield 0.097%; opening yield 0.102%
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2-Yr T-note
|
current yield 0.223%; opening yield 0.235%
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|
5-Yr T-note
|
current yield 0.80%; opening yield 0.90%
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|
10-Yr T-note
|
current yield 2.00%; opening yield 2.06%
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30-Yr T-bond
|
current yield 3.15%; opening yield 3.15%
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JANUARY 2012 BLOOMBERG INTEREST RATE AND ECONOMIC FORECAST
Tuesday, January 24, 2012
From January 6 through January 11, 2012, Bloomberg News surveyed 72 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q1 2012 unemployment is 8.6%. The median forecast for the next five quarters are 8.5%, 8.5%, 8.4%, 8.3% and 8.2%.
The U.S. economy added 200k jobs in December, exceeding expectations of 155K. Private payrolls rose 212K and have averaged +155K over the last three months. But, more than 42K of those private payrolls were in “courier and messenger” hiring, as might be expected from companies like FedEx and UPS leading up to the busy Christmas delivery season. Retail payrolls grew by 28K, and given the seasonal nature of such hires, many observers expect the coming months’ employment reports to give back many of the recent gains. The unemployment rate fell for the fourth consecutive month to 8.5%, its lowest level since February 2009.
Like the official unemployment rate, the broader U-6 unemployment rate also fell for the fourth straight month, down to 15.2% in December from 15.7% the month before. Citing the release of seasonal workers and a weaker economy in the second half of 2012, Bank of America economists find it “hard to see how this lasts; the next move on the unemployment rate is likely up.”
Real GDP (annualized economic growth) - The median GDP growth forecast for Q4 2011 is +3.0%. The median forecast for the next six quarters are +2.0%, +2.15%, +2.3%, +2.5%, +2.3% and +2.5%.
Due to be released later this week, Q4 GDP is expected to be at 3.0%, ending the year with a nice bounce from the first half’s lackluster showing. As recently as last month, most expected Q4 growth closer to 3.5%, but with weaker than expected December retail sales and a widening trade gap, those earlier forecasts have been revised lower.
Q4 started out strong as electronic sales soared, buoyed in part by the release of Apple’s latest iPhone in October. Online shopping also gave a big boost to Q4 retail sales, with online sales soaring in October and November, up 15% from the same period one year before. November was also boosted by some stores remaining open rather than closing on Thanksgiving Day, and deep discounts offered throughout the Christmas shopping season. But with the glut of early bargain shopping past, December sales disappointed, growing by only 0.1% for the month, and actually falling 0.2% when excluding auto sales. High unemployment, low savings, and wealth destruction continue to restrain consumers’ ability to spend. The antidote most widely suggested is sustained job creation to generate income growth, but the question remains how best to make that happen.
Consumers did feel better about the economy in early January, according to the University of Michigan’s consumer sentiment index, which increased from 69.9 in December to 74.0.
Consumer Prices - The median annualized consumer inflation forecast for Q1 2012 is +2.4%. The median forecast for the next five quarters are +2.2%, +1.8%, +2.1%, +2.2% and +2.2%.
The Producer Price Index (PPI) fell 0.1% on lower gasoline and food prices during December, moving the year-over-year rate down a point to 4.8%. Core PPI was higher by 0.3% during the month, slightly higher than expected, and boosting the yearly pace up to 3.0%.
For the second consecutive month, the headline Consumer Price index (CPI) was unchanged in December, and 3.0% higher for the year. Excluding food and energy, the core CPI rose 0.1% and was up 2.2% year-over-year.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q4 2011 is 0.25%. The MEDIAN forecast for the next five quarters are 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
In the Fed’s minutes from the December FOMC meeting, they painted a relatively bleak picture of economic prospects. The minutes cited several factors that would act to “restrain” the pace of economic expansion: an only gradual decline in the unemployment rate, unsettled financial markets, fiscal tightening in the United States, high levels of uncertainty among households and businesses, a continued weak housing market, and continued household deleveraging.
The minutes also revealed Fed officials’ intentions to provide more transparency by publishing their interest rate projections, and maybe more importantly, each participant’s expectation for the "likely timing of the first increase in the target range."
In the Fed Funds futures market, the first rate hike is being priced in at February 2014. However, analysts at Bank of America are expecting rates to “remain on hold until Q3 2014, and reaching just 50 bp by the end of 2014.”
Two-year Treasury-note - The average 2-year yield forecast for Q1 2012 is 0.29%. The average yield forecast for the next fivequarters are 0.36%, 0.45%, 0.55%, 0.70% and 0.89%. The current 2-yr Treasury yield is 0.24%.
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Q1 2012
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Q2 2012
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Q3 2012
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Q4 2012
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Q1 2013
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Q2 2013
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|
Current Survey
(January 2011)
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0.29%
|
0.36%
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0.45%
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0.55%
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0.70%
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0.89%
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|
Prior Survey
(December 2011)
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0.33%
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0.42%
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0.55%
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0.67%
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0.91%
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1.12%
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10-year Treasury-note - The average 10-year yield forecast for Q1 2012 is 2.03%. The average forecast for the next five quarters are 2.18%, 2.37%, 2.58%, 2.76% and 2.97%. The current 10-year yield is 2.06%.
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|
Q1 2012
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Q2 2012
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Q3 2012
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Q4 2012
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Q1 2013
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Q2 2013
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|
Current Survey
(January 2011)
|
2.03%
|
2.18%
|
2.37%
|
2.58%
|
2.76%
|
2.97%
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|
Prior Survey
(December 2011)
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2.22%
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2.41%
|
2.59%
|
2.77%
|
2.97%
|
3.17%
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30-year Treasury-bond - The average 30-year yield forecast for Q1 2012 is 3.09%. The average forecast for the next five quarters are 3.24%, 3.43%, 3.64%, 3.77% and 3.98%. The current 30-year yield is 3.14%.
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|
Q1 2012
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Q2 2012
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Q3 2012
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Q4 2012
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Q1 2013
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Q2 2013
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|
Current Survey
(January 2011)
|
3.09%
|
3.24%
|
3.43%
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3.64%
|
3.77%
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3.98%
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|
Prior Survey
(December 2011)
|
3.24%
|
3.41%
|
3.6%
|
3.79%
|
4.02%
|
4.21%
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MARKET INDICATIONS AS OF 11:30 A.M. CENTRAL TIME
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DOW
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Down 45 to 12,663
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NASDAQ
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Down 1 to 2,783
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|
S&P 500
|
Down 2.6 to 1,308
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|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.24%; opening yield 0.24%
|
|
5-Yr T-note
|
current yield 0.91%; opening yield 0.89%
|
|
10-Yr T-note
|
current yield 2.06%; opening yield 2.04%
|
|
30-Yr T-bond
|
current yield 3.16%; opening yield 3.12%
|
MORE POSITIVE NEWS BOLSTER OUTLOOK
Thursday, January 19, 2012
SUCCESSFUL BOND AUCTIONS IN EUROPE
There is a heavy slate of data due out today and at first glance, it appears most of it is positive. Let’s start across the pond where we got some encouraging signals from successful bond auctions in France and Spain. The Spanish government had planned to sell €4.5 billion of bonds maturing in 2016, 2019, and 2022. Demand was stronger than expected, however, which allowed Spain to increase the size by 50% to €6.6 billion. Yields on Spanish 10-year debt, at about 5.18% this morning, are higher following the auction, but well below the 6.78% reached back in November. France, despite their recent downgrade from AAA to AA+ by S&P, saw good demand for its €8 billion auction of two to four-year notes. The solid auctions are a positive development and reflect the success of the ECB’s recently introduced long-term refinancing operations (LTRO).
U.S. DATA WINNING STREAK CONTINUES
Turning to domestic news, the consumer price index was unchanged in December and up 3.0% year-over-year. The year-over-year rate is well off the 3.9% peak reached last September and will reinforce the Fed’s stance that price pressures are abating. Excluding food and energy, the core CPI rose 0.1% in December and 2.2% on the year. The results were right in line with expectations. Inflation should moderate further in the months ahead due to favorable year over year comparisons and weaker economic performance outside of the U.S.
First time claims for unemployment benefits fell sharply in the latest week. After surging to a revised 402k in the prior week, initial jobless claims fell to 352k for the week ended January 14th, setting another post-recession low. Problems with seasonal adjustments are likely contributing to the volatility, but the trend is very encouraging. The four-week moving average declined to 379k.
On the surface December housing starts appeared fairly weak, falling 4.1% to an annual rate of 657k, well below expectations for a 680k annual pace. However, the drop reflected a 20.4% decline in multi-family starts that reversed much of last month’s outsized 25% gain in that category. Single-family starts actually rose by 4.4% in December. For all of 2011, there were 606,900 homes started, up from 587,000 in 2010, primarily driven by multi-family units. During the peak of the housing boom, starts were running at better than a 2 million annual rate. New home construction continues to bounce along the bottom with a slight upward bias in recent months, but at least the free fall has stopped.
Interest rates on the short-end are anchored by Fed policy and have shown little reaction to today’s data. Further out the curve, bonds are selling off, pushing yields higher. After reaching an intraday low of 1.83% on Wednesday, the 10-year has moved up to 1.96% this morning. The 30-year has moved above 3% for the first time in a week. The major stock indices are all in positive territory for the week.
MARKET INDICATIONS AS OF 9:55 A.M. CENTRAL TIME
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DOW
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Up 24 to 12,603
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|
NASDAQ
|
Up 18 to 2,788
|
|
S&P 500
|
Up 5 to 1,313
|
|
1-Yr T-bill
|
current yield 0.102%; opening yield 0.102%
|
|
2-Yr T-note
|
current yield 0.23%; opening yield 0.226%
|
|
5-Yr T-note
|
current yield 0.844%; opening yield 0.804%
|
|
10-Yr T-note
|
current yield 1.965%; opening yield 1.898%
|
|
30-Yr T-bond
|
current yield 3.033%; opening yield 2.95%
|
EUROPE FLOUNDERS WHILE U.S. IMPROVEMENT CONTINUES
Wednesday, January 18, 2012
EUROPEAN PROBLEMS INTENSIFY
Late last Friday, S&P announced that it had downgraded the sovereign debt of nine Eurozone countries including France and Austria, both of whom were cut from AAA to AA+. Since France and Austria guarantee about 40% of the long-term debt of the €440 billion European Financial Stability Fund, its rating was also downgraded from AAA to AA+. Italy, Portugal and Spain were all downgraded two notches. Spain is now rated A, Portugal BB, and Italy joins Ireland at BBB+. For anyone keeping track, Finland, Germany, Luxembourg and the Netherlands are all still AAA, while Greece brings up the rear with a rating of CC. Speaking of Greece, critical negotiations between the Greek government and private bondholders broke down on Friday, threatening the latest stack of bailout money. And amidst a deteriorating financial landscape, Capital Economics wrote “the Eurozone is slipping into a recession which we expect to be deep and prolonged and to result in the break-up of the single currency area.” San Francisco Fed President John Williams recently forecasted GDP growth of 2.5% for 2012, but pointed to Europe as a risk that could threaten this growth, saying “European leaders have been working to solve this problem and they may be able to muddle through. But, if they fail, all bets are off.”
STILL MORE SIGNS OF DOMESTIC IMPROVEMENT
But as has been the case for many months, the U.S. doesn’t seem to be catching the European bug. Last Friday, the University of Michigan consumer sentiment index rose by 4.1 points to 74.0, the highest level since last May, and yesterday, the Empire State (New York region) Manufacturing Index jumped from 8.2 to a nine-month high of 13.5. In this index, any number above zero indicates expansion. This morning, U.S. industrial production rebounded from a poor November showing to rise 0.4% in December. Factory production, which makes up 75% of total output rose the most in a year, while capacity utilization rose to 78.1%, the highest level since July 2008.
Also this morning, the Mortgage Bankers Association announced that its applications index had risen 23% last week, the biggest single week increase since July 2009. The new purchase index climbed 10%, while the refi index jumped 26% to its highest level since August. Mortgage apps are getting a boost from historically low lending rates. Freddie Mac reported that the average rate on a 30-year fixed mortgage loan fell to a record low of 3.89% last week. By comparison, the average rate over the past decade, according to the Freddie Mac website, is 5.69%.
MARKET INDICATIONS AS OF 9:58 A.M. CENTRAL TIME
|
DOW
|
UP 60 to 12,542
|
|
NASDAQ
|
UP 22 to 2,750
|
|
S&P 500
|
UP 8 to 1,297
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.22%; opening yield 0.22%
|
|
5-Yr T-note
|
current yield 0.79%; opening yield 0.78%
|
|
10-Yr T-note
|
current yield 1.86%; opening yield 1.86%
|
|
30-Yr T-bond
|
current yield 2.91%; opening yield 2.90%
|
HOLIDAY SHOPPING NUMBERS DISAPPOINT
Thursday, January 12, 2012
RETAIL SALES LESS THAN EXPECTED IN DECEMBER
Retail sales increased by just 0.1% in December, falling short of the 0.3% median forecast. As a consolation, November sales were revised upward by two-tenths from 0.2% to 0.4%. If the volatile auto component is excluded, December sales dropped 0.2%. Based on earlier data collected, most experts thought the holiday buying season had been the best in years. As it turned out, retail sales in the Christmas month seemed to be the worst since 2008 …although with internet sales up 15% from last year, it isn’t clear the picture’s complete. Still, analysts have begun reducing their fourth quarter GDP forecasts to reflect lower consumer spending.
One of the positive economic stories from the fourth quarter had been a big drop in first-time claims for unemployment benefits. Unfortunately, claims rose significantly during the first weekly tally in 2012. Initial claims were expected to rise just slightly to the 375k mark, but instead jumped all the way to 399k, the highest in six weeks. The four week moving average, which had been at the lowest level of the recovery cycle, rose to 382k. Experts have concluded this morning that seasonal adjustments may have underestimated the number of seasonal employees who have subsequently been let go, but the net takeaway is that the labor market outlook has dimmed a bit.
Treasury yields are virtually unchanged from opening levels, but stocks are down with the realization that the U.S. economy may be starting the year with a lesser head of steam than previously thought.
GREEK WOES
Although no longer drawing front page headlines, concern over Greece continues, as private debt holders try to negotiate a deal before March 20th when a $14.5 billion government bond payment is due. The Wall Street Journal online reported on Tuesday that Greek debt holders could be asked to accept a haircut of 60%, as the 50% write-down agreed to in October is no longer believed sufficient due to continued deterioration of the Greek economy. In return, the Greek government would be forced to make additional cuts in income and pensions. Investors are still betting on a default as evidenced by the two-year Greek bonds trading at a record yield of 176% earlier in the week.
Investors are staying away from Greek debt, but flocking to German debt. The last 6-month German bill auction was believed to have produced the first negative auction yield in history. Wells Fargo pointed out that the German government would receive 1.2 basis points from investors for issuing the bills. For what its’ worth, the U.S. Treasury has set a zero percent floor on its own auctions. When yields turn negative, it’s a result of trading in the secondary market.
MARKET INDICATIONS AS OF 9:42 A.M. CENTRAL TIME
|
DOW
|
DOWN 48 to 12,402
|
|
NASDAQ
|
DOWN 11 to 2,700
|
|
S&P 500
|
DOWN 4 to 1,284
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.23%; opening yield 0.23%
|
|
5-Yr T-note
|
current yield 0.83%; opening yield 0.82%
|
|
10-Yr T-note
|
current yield 1.92%; opening yield 1.91%
|
|
30-Yr T-bond
|
current yield 2.97%; opening yield 2.96%
|
A BETTER THAN EXPECTED LABOR REPORT FOR DECEMBER
Friday, January 6, 2012
DECEMBER EMPLOYMENT SURPRISES
The U.S. Bureau of Labor Statistics reported that nonfarm payrolls rose by 200k during the month of December, topping the median Bloomberg forecast of 155k, while the unemployment rate unexpectedly dropped to a three-year low.
Although the number of government jobs fell by another 12k in December, bringing the 2011 total government job loss to 280k, private payrolls more than filled the gap with an increase of 212k during the month.
Revisions to prior months subtracted a net 8k jobs, but for all of 2011, businesses added 1.64 million workers, the most since 2006, and significantly above the 2010 total of 940k. Bloomberg News kept these gains in perspective by noting that 8.75 million workers had lost jobs during the recession.
The unemployment rate, calculated through a separate survey of U.S. households, unexpectedly fell from 8.7% to 8.5%, although much of this decline had to do with a lower denominator as the total labor force shrank by 194k. For all of 2011, unemployment averaged 8.9%, a respectable decline from 9.6% in 2010.
There were 945k Americans falling into the category of “discouraged workers” in December. Just one year ago, this number was 1.32 million. The number of persons employed “part-time for economic reasons” (involuntary part-time workers) fell by 371k to 8.1 million in December as many companies returned workers to fulltime status. The U6 unemployment rate, a much broader measure that includes everyone who would accept a full-time job if one were offered to them (including all of the discouraged workers and involuntary part-timers) fell from 15.6% to 15.2% in December. As recently as September, this rate was 16.4%.
Factory sector jobs increased by 23k in December, capping the strongest year of manufacturing job growth since 1997. Construction jobs increased by 17k, reflecting a significant jump in November housing starts. Retail jobs increased by 28k as stores bulked up for the holiday season. Health care services added another 23k jobs, bringing the 2011 sector total to 315k. Eating and drinking establishments added 24k more workers in December for a total of 230k added during the past 12 months. Courier industry jobs, which include companies like FedEx and UPS, jumped by 42k during the month. This one raised some eyebrows, and may be the (nearly invisible) wet blanket on an otherwise solid report. According to Morgan Stanley Smith Barney, a “seasonal quirk” typically beefs up this number in December, but takes back the gains in the following month.
Some of the more minor numbers suggest that the labor gains are likely to continue. Average hourly earnings rose by 0.2% to $23.24, while the average workweek rose to 34.4.
All in all, it was another unexpectedly good economic number. Payroll gains are capable of “priming the pump.” When Americans are employed, they’re more likely to spend money and drive economic growth …which in turn results in additional job gains. Another side benefit to payroll growth comes in the form of confidence. If American businesses (and Americans in general) were lacking confidence at the end of the summer, it seems to be returning. Confident businesses hire workers, and confident workers are more likely to spend.
PIMCOs Bill Gross said this morning that the U.S. employment market still faces a “tough slog” ahead, as the benefits experienced in recent months are the result of a weak dollar, accommodative Fed policy and less fiscal drag relative to other countries.
Still, there’s reason for cautious optimism.
MARKET INDICATIONS AS OF 9:30 A.M. CENTRAL TIME
|
DOW
|
DOWN 45 to 12,371
|
|
NASDAQ
|
DOWN 2 to 2,668
|
|
S&P 500
|
DOWN 1 to 1,272
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.26%; opening yield 0.26%
|
|
5-Yr T-note
|
current yield 0.86%; opening yield 0.88%
|
|
10-Yr T-note
|
current yield 1.96%; opening yield 2.00%
|
|
30-Yr T-bond
|
current yield 3.02%; opening yield 3.06%
|
STILL MORE GOOD NEWS
Thursday, January 5, 2012
SUPPORT FOR LABOR MARKET CONTINUES
Although most experts have already shrugged off this morning’s strong ADP Employment report due to expectations of a faulty seasonal data adjustment, the number of jobs allegedly created in December was the largest monthly gain in the 10-year history of the ADP series. The 325k increase was well above both the median December forecast of 178k and November’s revised 204k gain. In all fairness, the ADP report hasn’t been as good an indicator of nonfarm payroll growth as many had hoped, but the general trend does track the older and more respected data series well over time.
Another positive piece of labor data released this morning was the weekly initial claims report which showed another drop in first-time filings for unemployment benefits. The 372k total for the final week of 2011 brought the 4-week moving average down to its lowest level since the spring of 2008.
On Tuesday, the ISM Manufacturing Index rose from 52.7 to 53.9 in December, topping the median forecast of 53.5. Just two months earlier, the composite index stood at 50.8, teetering on the edge (50) between factory expansion and contraction. December’s number was the highest in six months, and according to Bank of America, is consistent with 3.5% GDP growth. Considering that the U.S. economy grew at an anemic 0.8% in the first half of 2011, the notion that we could end the year at a 3.5% pace is terrific.
Within the overall number, the new orders index increased from 56.7 to 57.6, suggesting future increases in production. The percentage of factory managers who believed inventories were too low increased from 19 to 25, while the percentage believing inventories were too high, dropped to 10, the lowest level since May. This supports the argument that managers will build up stockpiles in the coming months. And finally, the employment index jumped from 51.8 to 55.1 in December, the highest in six months. This suggests that factories will hire in the coming months, yet another indicator that payrolls will continue to expand into 2012.
The non-manufacturing ISM index, released this morning, wasn’t quite as encouraging. The median forecast was 53.0, but the actual December reading was only 52.6. The good news is that the 0.6 increase reverses a four month gradual downtrend in the much larger service sector index, and the overall number is still above the 50 mark. The bad news is that the employment index remained in contraction territory at 49.4, just a slight increase from 48.9 in November.
THE FED URGES CONGRESS TO INCREASE SUPPORT FOR HOUSING
According to the Wall Street Journal, Fed officials sent a 26-page letter to members of Congress yesterday expressing their concerns over the crippled housing market and calling for more aggressive action. The Journal reported that Bernanke believes housing has stymied the Fed’s low interest rate policies, and that tight mortgage lending standards are holding back the broader economy. The letter to Congress advocated more aggressive use of Fannie and Freddie to support housing recovery. Among the Fed’s ideas is a national plan to facilitate the conversion of foreclosed properties into rental units, which would allow banks to generate rental income instead of selling REO properties at distressed levels. Another article in today’s Journal said that apartment vacancy levels had fallen to a 10-year low as more and more Americans shift away preferences from purchase to rental. The Fed’s letter also included the admission that the Federal Housing Finance Agency, the regulator and conservator of Fannie and Freddie, was under a great deal of scrutiny and tension, but suggested that “some actions that cause greater losses to be sustained (by Fannie and Freddie) in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”
EMPLOYMENT REPORT TOMORROW
The Department of Labor will release its December employment report Friday morning. The median forecast is for a 153k increase in total nonfarm payrolls, a 175k increase in private sector payrolls and a slight increase in the unemployment rate from 8.6% to 8.7%. The increase in rate would reflect a return of formerly discouraged workers to the workforce as a result of improved conditions.
MARKET INDICATIONS AS OF 11:50 A.M. CENTRAL TIME
|
DOW
|
Down 27 to 12,391
|
|
NASDAQ
|
Up 12 to 2,660
|
|
S&P 500
|
Down 2 to 1,271
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.26%; opening yield 0.26%
|
|
5-Yr T-note
|
current yield 0.88%; opening yield 0.88%
|
|
10-Yr T-note
|
current yield 1.99%; opening yield 1.98%
|
|
30-Yr T-bond
|
current yield 3.04%; opening yield 3.03%
|
MORE SIGNS OF MOMENTUM IN THE U.S. ECONOMY
Thursday, December 22, 2011
JOBLESS CLAIMS DECLINE AGAIN
First time filings for unemployment benefits fell by another 4k to 364k for the week ending December 17th to a new 3½ year low. The median Bloomberg forecast had shown an expected increase to 380k. Initial claims have now fallen by a huge 40k in just the past three weeks, and suggest a relatively strong December employment report. It’s been pointed out by several economists that much of the hiring is seasonal, but even temporary work puts dollars in pockets, so it’s a positive. Last year at this time, weekly claims were 423k. As the new year began, employers started adding workers, and filings reached what had been the year’s low point of 375k in February.
In other news from this morning, third quarter GDP was revised downward from 2.0% growth to 1.8%. The experts were generally expecting a slight increase. Interestingly, all of the decline had to do with a big downward revision to healthcare spending. If this head-scratcher is excluded, GDP growth would have actually risen by half a point. Within the number, real final sales rose 3.2%; although this measure of consumer spending was lower than the originally reported 3.6%, it is well above the 0.0% and +1.6% reported increases from Q1 and Q2. The inventory component subtracted 1.35 percentage points from the third quarter. This suggests that inventory accumulation could be a positive contributor in the fourth quarter, and perhaps quarters to come if sales remain relatively brisk.
Consumer confidence continues to slowly improve, thanks in large part to better labor market conditions, a mostly upbeat stock market, and lower gasoline prices. The University of Michigan’s final reading of consumer sentiment rose from 64.1 to 69.9 at the end of November, reaching a six-month high. To put this number in perspective, Bloomberg News reported that the index had averaged 89 in the five-year period leading into the recession, reached a 28-year low of 55.3 in November 2008, and nearly equaled this at 55.7 four months ago when the ugly budget ceiling debate had reached a fever pitch.
HOUSING DATA IMPROVES …FROM LOWER LOWS
Earlier this week, the National Association of Homebuyers (NAHB) housing market index increased from 19 to 21 in December. This represented the fourth straight increase and the highest level since May 2010, the month before homebuyer tax credits ended. Historically, a reading of 21 is still quite low, but just three months ago, the index stood at 14, and in Jan 2009, it was just 8.
November housing starts were significantly stronger than expected, with starts jumping by 9.3% to a 685k annual rate, the highest since April 2009. Multi-family starts were up 25% as the shift to apartments and rental units continued, but single family starts also rose, increasing by +2.3% to a five-month high. In a sign that the starts data may ultimately have legs, building permits rose to a one-year high.
Existing homes sales for November was a strange piece of data to evaluate. Sales of existing homes rose by 4% to a 4.42 million unit annual rate, the highest level since January. But, the National Association of Realtors had just adjusted 2010 sales downward by a huge 15% from 4.91 to 4.19 million, and the prior month had been reset downward from 4.97 to 4.25 million …so take it for what it’s worth. On the bright side, the inventory of homes listed for sale dropped to a 6½-year low, and at the current sales pace, experts now calculate a seven-month supply, very close to the six-month supply that would indicate a normalized market. There is still a large inventory of homes quietly residing on the books of banks, but supposedly this shadow inventory number is diminishing. This is all very hopeful news for a sector that many believed would be a drain on the economy for many years to come. This may still prove to be the case, but as of now, recent housing data falls in the category of positive surprise.
…Here’s to more positive news in 2012.
MARKET INDICATIONS AS OF 12:45 P.M. CENTRAL TIME
|
DOW
|
UP 71 to 12,179
|
|
NASDAQ
|
UP 23 to 2,601
|
|
S&P 500
|
UP 12 to 1,249
|
|
1-Yr T-bill
|
current yield 0.11%; opening yield 0.11%
|
|
2-Yr T-note
|
current yield 0.27%; opening yield 0.27%
|
|
5-Yr T-note
|
current yield 0.92%; opening yield 0.92%
|
|
10-Yr T-note
|
current yield 1.96%; opening yield 1.96%
|
|
30-Yr T-bond
|
current yield 2.99%; opening yield 3.00%
|
THE DECEMBER 2011 BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Wednesday, December 21, 2011
From December 2 through December 8, 2011, Bloomberg News surveyed 64 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q4 2011 unemployment is 8.8%. The median forecast for the next five quarters are 8.8%, 8.8%, 8.7%, 8.6% and 8.5%.
The U.S. economy added 120k jobs in November, about as expected, while upward revisions to the previous two months added another 72k jobs. According to the Bureau of Labor Statistics, most of November’s gains came in the service sector as retailers began increasing their staffs ahead of the holiday season. The private sector added 140K new jobs, but the government sector continued to contract, losing another 20K during the month. The unemployment rate fell from 9.0% in October to 8.6% in November, its lowest level since March 2009.
The broader U-6 unemployment rate (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) fell to 15.6% in November from 16.2%. Much of the decline in both measures, however, was the result of 315K people dropping out of the labor force, and in doing so, were not counted as a part of the official unemployment number. With such large numbers leaving the job hunt, the labor force participation rate fell 0.2 percentage points in November to 64.0. Many analysts believe the unemployment numbers to be suspect in light of the lower participation rate and seasonal factors this time of year.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q4 2011 is +2.7%. The median forecast for the next six quarters are +1.9%, +2.2%, +2.3%, +2.5%, +2.4% and +2.8%.
After strong gains in September and October, shoppers tapped the brakes a bit in November, as retail sales rose by only 0.2%, less than had been expected. With wage growth still weak, consumers are unwilling, or unable, to extend themselves too far by assuming additional debt.
Electronics retailers were the biggest winners in November. Their sales grew by 2.1% as shoppers splurged on new cell phones, iPads, electronic book-readers, and of course, HD TVs. Time will tell if consumers continue their willingness to buy these and other items after the deep discounts are gone.
Generally speaking, the economists we read and/or speak to believe the economy should continue to muddle along, growing somewhere between 2.0% to 3.0% annually. A recurring theme amongst all of them lately seems to be that our economy is moving in a positive direction, and rather than fearing a new U.S. recession, many believe growth could exceed previous estimates. Perhaps in support of that view, business inventories for October, released along with retail sales, were shown to have increased by 0.8%, another positive sign in support of improved Q4 GDP as companies fortify stockrooms ahead of the holiday shopping season. However, an increase in October inventories, coupled with slower demand in November, could also prove costly in the long run as repeated increases in inventories can signal declining demand.
Consumer Prices - The median annualized consumer inflation forecast for Q4 2011 is +3.4%. The median forecast for the next five quarters are +2.6%, +2.1%, +1.9%, +2.1% and +2.15%.
The Producer Price Index (PPI) climbed 0.3% during the month of November. On a year-over-year basis, headline PPI was higher by 5.7%, down from last month’s 6.1% annual pace, and lower still from this summer’s high of 7.1%. Core producer inflation was higher by 0.1%, missing expectations for a 0.2% increase. The core rate has risen by 2.9% year-over-year.
Consumer inflation is steady as well. After falling last month, there was no change in the Consumer Price Index (CPI) in November. Headline CPI rose 3.4% in the 12 months ending November. Excluding food and energy, the core CPI rose 0.2% and was up 2.2% year-over-year.
With steady or declining inflation, the Fed will have the flexibility to either stay the course, which is already one of fairly easy money, or begin an even more accommodative approach to monetary policy where they undergo more asset purchases or a more clarified communication approach.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q4 2011 is 0.25%. The MEDIAN forecast for the next five quarters are 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
The Fed made no changes to its accommodative policy stance at its December meeting, noting that the economy is "expanding moderately," but “strains in global financial markets continue to pose significant downside risks to the outlook.” As such, with inflation pressures continuing to fade and the outlook leaning to the downside, analysts at Bank of America Merrill Lynch expect Fed officials will “extend their commitment to exceptionally low rates into 2014, and will eventually embark on QE3 during the second half of 2012.”
Two-year Treasury-note - The average 2-year yield forecast for Q1 2012 is 0.33%. The average yield forecast for the next fivequarters are 0.42%, 0.55%, 0.67%, 0.91% and 1.12%. The current 2-yr Treasury yield is 0.26%.
|
|
Q1 2012
|
Q2 2012
|
Q3 2012
|
Q4 2012
|
Q1 2013
|
Q2 2013
|
|
Current Survey
(December 2011)
|
0.33%
|
0.42%
|
0.55%
|
0.67%
|
0.91%
|
1.12%
|
|
Prior Survey
(November 2011)
|
0.33%
|
0.42%
|
0.50%
|
0.61%
|
0.76%
|
0.95%
|
10-year Treasury-note - The average 10-year yield forecast for Q1 2012 is 2.22%. The average forecast for the next five quarters are 2.41%, 2.59%, 2.77%, 2.97% and 3.17%. The current 10-year yield is 1.93%.
|
|
Q1 2012
|
Q2 2012
|
Q3 2012
|
Q4 2012
|
Q1 2013
|
Q2 2013
|
|
Current Survey
(December 2011)
|
2.22%
|
2.41%
|
2.59%
|
2.77%
|
2.97%
|
3.17%
|
|
Prior Survey
(November 2011)
|
2.26%
|
2.45%
|
2.61%
|
2.78%
|
2.92%
|
3.07%
|
30-year Treasury-bond - The average 30-year yield forecast for Q1 2012 is 3.24%. The average forecast for the next five quarters are 3.41%, 3.6%, 3.79%, 4.02% and 4.21%. The current 30-year yield is 2.96%.
|
|
Q1 2012
|
Q2 2012
|
Q3 2012
|
Q4 2012
|
Q1 2013
|
Q2 2013
|
|
Current Survey
(December 2011)
|
3.24%
|
3.41%
|
3.6%
|
3.79%
|
4.02%
|
4.21%
|
|
Prior Survey
(November 2011)
|
3.31%
|
3.46%
|
3.63%
|
3.79%
|
3.92%
|
4.06%
|
MARKET INDICATIONS AS OF 11:25 A.M. CENTRAL TIME
|
DOW
|
Down 83 to 12,020
|
|
NASDAQ
|
Down 53 to 2,550
|
|
S&P 500
|
Down 10 to 1,226
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.26%; opening yield 0.25%
|
|
5-Yr T-note
|
current yield 0.89%; opening yield 0.875%
|
|
10-Yr T-note
|
current yield 1.93%; opening yield 1.91%
|
|
30-Yr T-bond
|
current yield 2.96%; opening yield 2.93%
|
MORE GOOD NEWS ON THE DOMESTIC FRONT
Thursday, December 15, 2011
JOBLESS CLAIMS FALL TO A 3-YEAR LOW
This morning, the Labor Department reported that initial jobless claims had unexpectedly dropped from a revised 385k to a 3½-year low of 366k for the week ending December 10th. This substantial decline in new applications for unemployment benefits pushed the 4-week moving average to its lowest level since July 2008, prior to the Lehman collapse. The improved weekly claims data hints that business hiring should improve in the near future, although more than one analyst has suggested that company staffing is so skeletal already that there are simply less workers to fire, so a drop in new claims was inevitable. But that sounds fatalistic. This was still a great number.
In other news from this morning, the Empire State manufacturing index (New York region) rose to a 7-month high in December, up from 0.6 to 9.5, suggesting that the factory sector may be picking up steam. Within the composite, there was strengthening in current shipments, new orders and the employment index. The Philadelphia Fed survey also showed nice improvement with an increase from 3.6 to 10.3 in November. Like the Empire index, any number above zero indicates expansion.
There was apparent improvement on the inflation front as producer prices increased by 0.3% in November, nudging the year-over-year headline rate downward from 5.9% to 5.7%. Much of the headline PPI was a result of a 1.0% jump in food prices. Since agriculture prices have plunged in recent months, headline PPI should fall further going forward. Core PPI, which excludes food and energy prices, increased by just 0.1% in November after being unchanged in October. The bottom line is the Fed’s hope that moderating inflation will support its super-accommodative monetary policy seems to be materializing.
YESTERDAY’S NEWS – HOLIDAY SHOPPERS LOST SOME MOMENTUM
November Retail sales (actually released on Tuesday) rose by just 0.2%, well below the median forecast for a 0.6% increase. Strong sales on Black Friday and Cyber Monday didn’t reflect the month as a whole. In somewhat of a consolation, the prior two months were revised upward; October from 0.5% to 0.6%, and September from 1.1% to 1.3%. Despite the disappointing sales number for November, most economists are still expecting fairly strong fourth quarter GDP. Citi is now estimating 3.7% growth, which would be a nice increase from the 2.5% Q3 rate. Having said that, the 2012 outlook generally appears less bright as it becomes likely that Europe is either already in recession or well on its way.
Just this morning, the Eurozone Purchasing Managers Index for December was reported at 47.9, up a little from the previous month's 47.0, but still below 50 in contraction territory. On a side note, the Chinese PMI showed contraction for the second straight month at 49.0, although it rose slightly from the prior month’s reading of 47.7.
The Fed met on Tuesday in the last FOMC meeting of the year, and the official statement, as expected, showed no change in monetary policy or any change in how future changes will be communicated. Most expect these points will be addressed early next year. Fed officials did point to “some improvement in overall labor market conditions" and thought the economy was still "expanding moderately” although they did note the slowdown in global growth and went on to say that “international strains continue to pose significant downside risks to the economic outlook.” They described inflation as “moderating” and reiterated their expectation that the “extended period” of zero short-term interest rates would be in effect through mid-2013.
It hasn’t been a great week for stocks with the market down the first three days. Much of the decline probably has to do with disappointment over the outcome of the European summit, just as the prior week’s gains may have stemmed from optimism leading into the summit. Not sure where the optimism comes from. Yesterday, German Chancellor Angela Merkel told members of the German Parliament that there is no easy and fast solution to the sovereign debt crisis and voiced her opposition to euro bonds as a crisis fix.
MARKET INDICATIONS AS OF 9:55 A.M. CENTRAL TIME
|
DOW
|
UP 51 to 11,875
|
|
NASDAQ
|
UP 1 to 2,540
|
|
S&P 500
|
UP 3 to 1,209
|
|
1-Yr T-bill
|
current yield 0.11%; opening yield 0.11%
|
|
2-Yr T-note
|
current yield 0.24%; opening yield 0.24%
|
|
5-Yr T-note
|
current yield 0.84%; opening yield 0.85%
|
|
10-Yr T-note
|
current yield 1.90%; opening yield 1.90%
|
|
30-Yr T-bond
|
current yield 2.90%; opening yield 2.90%
|
DECLINE IN UNEMPLOYMENT HIGHLIGHTS NOVEMBER REPORT
Friday, December 2, 2011
LABOR MARKET IMPROVES IN NOVEMBER
The unemployment rate unexpectedly dropped from 9% to 8.6% during the month of November, a point and a half below the 10.1% cycle peak from October 2009 and the lowest level in more than 2½ years. As encouraging as this sounds, much of the decline can be attributed to an unexpected 315k person drop in the overall labor force.
The number of Americans now unemployed for 27 weeks or more (the so called long-term unemployed) was little changed at 5.7 million, or 43% of the total unemployed, while the average duration of unemployment is now a shocking 41 weeks. The total number of involuntary part-time workers fell by 378k to 8.5 million, while 2.6 million people were considered “marginally attached” to the labor force meaning they were not actively seeking work (1.1 million of this group are “discouraged workers” who didn’t believe they’d be able to find a job.) The U6 measure of unemployment, which includes all those seeking jobs, as well the involuntary part-time workers who would prefer to work full-time, and discouraged workers who have given up the search but would happily accept a job if one were offered, fell from 16.2% to 15.6%.
The ratio of unemployed workers to available jobs remains at approximately 4 to 1, with the BLS reporting 3.1 million job openings at last count, and 13.3 million officially unemployed. In the for-what-it’s-worth department, the employment/population ratio was little changed at 58.5%.
Nonfarm payrolls increased by 120k during the month of November, slightly below the 125k median forecast, but upward revisions to September and October payroll data added another 72k jobs. The November job gains came primarily in the service sector as 50k retail workers were hired, probably to staff up for the holiday season. Food service and drinking establishments added 33k jobs. Professional and business services also added 33k jobs, while health care services added another 17k. Job losses were mostly concentrated in construction (-12k), state and local governments (-16k) and the Federal government (-4k).
As many have reported this morning, the detail within the survey wasn’t quite as impressive as the headline numbers. Market participants seem to have reached this same conclusion. DOW futures were up over 140 points before the market opened, perhaps in anticipation of a stronger report, but stock gains have been less robust in the first 30 minutes after the opening bell. The bond market is flat for the most part, with virtually no movement in bond yields this morning.
It’s nice to see continued data improvement, but most investors are skeptical and don’t put much faith in the idea that self-sustaining growth has begun. Still, the improvement is fairly broad-based. Auto sales are the strongest they’ve been in more than three years (with the exception of the cash-for-clunkers single month blip) and even the housing market is showing signs of stabilizing. The DOW is quietly in the midst of its best week in three years with a 900 point gain so far.
There’s reason for cautious optimism. But the European sovereign debt problem continues to hang over the global markets like a toxic cloud.
MARKET INDICATIONS AS OF 9:15 A.M. CENTRAL TIME
|
DOW
|
UP 111 points to 12,131
|
|
NASDAQ
|
UP 30 points to 2,656
|
|
S&P 500
|
UP 12 to 1,255
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.26%; opening yield 0.26%
|
|
5-Yr T-note
|
current yield 0.98%; opening yield 0.97%
|
|
10-Yr T-note
|
current yield 2.11%; opening yield 2.09%
|
|
30-Yr T-bond
|
current yield 3.10%; opening yield 3.09%
|
STOCKS SURGE IN RESPONSE TO EURO LIQUIDITY FIX
Wednesday, November 30, 2011
GLOBAL CENTRAL BANKS EASE CREDIT FOR NON U.S. BANKS
In a coordinated effort, the Fed, the European Central Bank (ECB), the Bank of England, the Bank of Japan, the Swiss National Bank and the Bank of Canada all lowered dollar swap rates by 50 bps from approximately 1.00% to 0.50% for loan periods of up to 90 days. The move, which will go into effect on Monday, December 5, is primarily intended ensure European banks have access to dollar-based funding and to lower short-term borrowing costs. The six central banks have also agreed to establish bilateral swap lines so that each region can benefit.
Non-U.S. banks use our dollars to fund international trade and U.S. operations. Normally, these foreign banks are able to borrow funds by selling short term investments like commercial paper to money market investors at a reasonable cost. But these investors have become increasing concerned about exposure to potential losses from the bonds of Greece, Italy, Portugal, Ireland and Spain held within the bank’s investment portfolios. This concern had pushed their funding costs to a three-year high, further compounding the debt crisis. So, the net result of today’s action is that banks will have a cheaper funding source though the central banks.
Note that European banks will borrow from the ECB. Thus, the Fed will not be on the hook if a European bank were to fail.
The announcement sparked a 5% rally in German stocks and a 4% rise in the French market. So far, this morning, the DOW is up well over 400 points. Unfortunately, this is a short term liquidity fix, it doesn’t solve the long term sovereign debt crisis. In fact, several have speculated that the desperate coordinated move suggests that the problem may be worse than we’ve been led to believe. Hope not.
But while troubles continue in Europe, U.S. data continues to improve.
ADP EMPLOYMENT REPORT SIGNALS INCREASED JOB GAINS FOR NOVEMBER
The monthly ADP Employer Services report showed that 206,000 workers were added to payrolls in November. The median Bloomberg forecast was for a lesser increase of 130k. After seeing this number, economists began ramping up their forecasts for Friday’s labor market report. Morgan Stanley increased its call for nonfarm payrolls from 120k to 150k, while UBS increased its call from 125k to 150k. This would be nearly double the job gains in October.
In other news released this morning, the Chicago Purchasing Managers Index rose from 58.4 to 62.6 in November, while October pending home sales jumped 10.4%. Yesterday, the Conference Board’s November consumer confidence index unexpectedly surged from a revised 40.9 October reading to 56 in November, the largest single month gain since April 2003. The median Bloomberg forecast had been for a lesser 44 reading. There are several key components within this data series, but one of the more interesting is a measurement of the perceived plentifulness of jobs. In November, the gap between survey respondents who thought jobs were hard to get versus respondents thinking jobs were plentiful fell to the lowest level in three years. This is another number supporting (at least near-term) improvement in the critical labor market. Also within the components is a significant rise in future expectations, up from 50.0 to 67.8. It’s amazing how much improvement has happened in such a short period. Just a month ago, the October confidence reading was the lowest since April 2009, which if you remember was a particularly depressing period with 2.3 million jobs lost in the Jan 2009 through March 2009 time frame, and the DOW reaching a 12-year low of 6,547 in early March 2009.
U.S. bond yields are generally higher, at least out beyond the 2-year point. This signals that the Fed is now less likely to keep yields exceptionally low beyond the mid-2013 expected date.
It’s hard to buy into the idea that all is well. The data has certainly improved. Maybe people are simply getting tired of feeling bad.
MARKET INDICATIONS AS OF 10:12 A.M. CENTRAL TIME
|
DOW
|
UP 417 to 11,972
|
|
NASDAQ
|
UP 88 to 2,603
|
|
S&P 500
|
UP 41 to 1,238
|
|
1-Yr T-bill
|
current yield 0.11%; opening yield 0.11%
|
|
2-Yr T-note
|
current yield 0.27%; opening yield 0.26%
|
|
5-Yr T-note
|
current yield 0.98%; opening yield 0.93%
|
|
10-Yr T-note
|
current yield 2.09%; opening yield 1.99%
|
|
30-Yr T-bond
|
current yield 3.08%; opening yield 2.96%
|
THE NOVEMBER 2011 BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Monday, November 21, 2011
From November 4 through November 9, 2011, Bloomberg News surveyed 80 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q4 2011 unemployment is 9.0%. The median forecast for the next five quarters are 9.0%, 8.9%, 8.8%, 8.7% and 8.55%.
In October, non-farm payrolls grew by 80K, fewer than the previous month and missing Wall Street expectations of 95K. Although the increase fell short of expectations, revisions to September and August were considerably better than first reported, according to the government’s numbers. Gains in September were revised from 103K to 158K and in August from 57K to 104K. The unemployment rate edged down only slightly to 9.0% from 9.1%, the seventh consecutive month at or above nine percent.
The broader U-6 unemployment rate (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) declined to 16.2% from 16.5% in September. After growing by 444k last month, the number of involuntary part-time workers fell in September by 374k to 8.9 million. These people indicated they would accept a full-time position if one were available.
The number of people unemployed for six months or more (the long-term unemployed) came down slightly in October to 5.9 million, but still 42.4% of the unemployed. Of those, 4.1 million had been out of work for more than one year, according to the Labor Department. In an effort to mute some of the negative effects of long-term unemployment Congress has provided up to 99 weeks of unemployment benefits. If not approved by December 31st, the emergency extension of benefits beyond 26-weeks will expire. If not extended, it’s estimated that nearly 2 million people would lose their unemployment benefits immediately and millions more in 2012.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q3 2011 is +2.00%. The median forecast for the next six quarters are +2.3%, +2.0%, +2.2%, +2.35%, 2.5% and 2.5%.
The U.S. economy is driven by consumer spending, and recently, the consumer has reemerged. Last Tuesday, retail sales were reported to have risen by 0.5% during the month of October, following a 1.1% September surge. The median October forecast had been for a much smaller 0.3% increase. Sales gains were mostly concentrated in electronics and sporting goods. Sales excluding autos and gasoline rose by 0.7% in October, well above the 0.2% forecast. According to a recent report from Goldman Sachs, the numbers “suggest that the introduction of Apple’s latest iPhone (released for sale on October 14th) likely accounted for much of the upside surprise.”
Because of its timeliness in reflecting the current state of the economy, immediately following the retail sales release, a number of economists boosted their economic growth estimates for the fourth quarter, with Morgan Stanley now predicting 3.5% annualized growth for the final quarter of 2011. Recall that GDP readings for the first three quarters of the year were 0.4%, 1.3% and 2.5%. The challenge will be sustaining the above trend growth into next year.
Consumer Prices - The median annualized consumer inflation forecast for Q4 2011 is +3.4%. The median forecast for the next five quarters are +2.6%, +2.2%, +2.0%, 2.1% and 2.3%.
The Producer Price Index (PPI) dropped by 0.3% during the month of October, the biggest decline in 16 months. On a year-over-year basis headline PPI is now up 6.1%. This still sounds really high, but it has declined by a full percentage point over the past two months. Core producer inflation was unchanged in October and up 2.8% year-over-year. Energy prices actually fell by 1.4% in October after rising by 2.3% in September.
Consumer inflation is moderating as well. The Consumer Price Index (CPI) actually fell 0.1% in October, below expectations for no change and the first monthly CPI decline since June. Excluding food and energy, the core CPI rose 0.1% and was up 2.1% year-over-year. Gasoline prices are down $0.50 per gallon from May highs and $0.25 since September.
Despite what the government’s data suggest, the American consumer will be paying more this week for their Thanksgiving spread than they did last year. According to the American Farm Bureau Federation, a traditional meal and the basic trimmings will cost about 13% more this year. In real dollar amounts, the typical family will be spending $49.20 to feed 10 people, up $5.73 from last year’s $43.47.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q4 2011 is 0.25%. The MEDIAN forecast for the next five quarters are 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
The softening trend in PPI and CPI seems to be affirming the Fed’s recent mantra that the earlier rise in inflation would be “transitory.” The economic slowdown in Europe is likely to reinforce this trend in the coming months.
Two-year Treasury-note - The average 2-year yield forecast for Q4 2011 is 0.28%. The average yield forecast for the next sixquarters are 0.33%, 0.42%, 0.50%, 0.61%, 0.76% and 0.95%. The current 2-yr Treasury yield is 0.274%.
|
|
Q4 2011
|
Q1 2012
|
Q2 2012
|
Q3 2012
|
Q4 2012
|
Q1 2013
|
Q2 2013
|
|
Current Survey
(November 2011)
|
0.28%
|
0.33%
|
0.42%
|
0.50%
|
0.61%
|
0.76%
|
0.95%
|
|
Prior Survey
(October 2011)
|
0.28%
|
0.34%
|
0.42%
|
0.54%
|
0.67%
|
0.83%
|
1.06%
|
10-year Treasury-note - The average 10-year yield forecast for Q4 2011 is 2.15%. The average forecast for the next six quarters are 2.26%, 2.45%, 2.61%, 2.78%, 2.92% and 3.07%. The current 10-year yield is 1.96%.
|
|
Q4 2011
|
Q1 2012
|
Q2 2012
|
Q3 2012
|
Q4 2012
|
Q1 2013
|
Q2 2013
|
|
Current Survey
(November 2011)
|
2.15%
|
2.26%
|
2.45%
|
2.61%
|
2.78%
|
2.92%
|
3.07%
|
|
Prior Survey
(October 2011)
|
2.14%
|
2.29%
|
2.51%
|
2.71%
|
2.89%
|
3.07%
|
3.29%
|
30-year Treasury-bond - The average 30-year yield forecast for Q4 2011 is 3.22%. The average forecast for the next six quarters are 3.31%, 3.46%, 3.63%, 3.79%, 3.92% and 4.06%. The current 30-year yield is 2.95%.
|
|
Q4 2011
|
Q1 2012
|
Q2 2012
|
Q3 2012
|
Q4 2012
|
Q1 2013
|
Q2 2013
|
|
Current Survey
(November 2011)
|
3.22%
|
3.31%
|
3.46%
|
3.63%
|
3.79%
|
3.92%
|
4.06%
|
|
Prior Survey
(October 2011)
|
3.58%
|
3.69%
|
3.86%
|
4.02%
|
4.16%
|
4.35%
|
4.61%
|
MARKET INDICATIONS AS OF 9:10 A.M. CENTRAL TIME
|
DOW
|
Down 216 to 11,580
|
|
NASDAQ
|
Down 52 to 2,519
|
|
S&P 500
|
Down 23 to 1,190
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.09%
|
|
2-Yr T-note
|
current yield 0.27%; opening yield 0.27%
|
|
5-Yr T-note
|
current yield 0.89%; opening yield 0.89%
|
|
10-Yr T-note
|
current yield 1.96%; opening yield 1.96%
|
|
30-Yr T-bond
|
current yield 2.95%; opening yield 2.95%
|
SOLID DATA SUGGESTS IMPROVED Q4 GDP
Tuesday, November 15, 2011
U.S. ECONOMY GAINS MOMENTUM
Somewhere along the line the U.S. economy shook itself out of a first half loll, and now seems to be gathering some significant momentum as the second half nears completion. This morning, retail sales rose by 0.5% during the month of October, following a 1.1% September surge. The median October forecast was for a lesser 0.3% increase. Gains were concentrated in electronics and sporting goods.
Sales ex-autos and ex-gasoline rose by 0.7% in October, well above the 0.2% forecast - economists generally believe this particular measure is the best proxy for GDP growth. In fact, following this morning’s release, a number of economists ramped up their economic growth estimates for the fourth quarter, with Morgan Stanley now predicting 3.5% annualized growth for the final quarter of 2011. Recall that GDP in the first three quarters of the year was 0.4%, 1.3% and 2.5%.
Another encouraging economic indicator released this morning was the November Empire Manufacturing Index which rose by 9.1 points to post its first positive reading in six months. Although the 0.61 level is just barely positive, it does indicate expansion in the New York region, and suggests that the national purchasing managers index will remain in expansionary territory.
PRODUCER INFLATION SLOWS
The Producer Price Index (PPI) fell 0.3% during the month of October, the biggest decline in 16 months. On a year-over-year basis headline PPI is now up 6.1%. This still sounds really high, but it has declined by a full percentage point over the past two months. Core PPI, which excludes food and energy prices, was unchanged in October and up 2.8% year-over-year. Energy prices actually fell by 1.4% in October after rising by 2.3% in September. Gasoline prices are down $0.50 from May highs and $0.25 since September. The nationwide average for all grades as of yesterday’s close was $3.49 per gallon.
U.S. bond yields are a bit lower in early trading. Although this seems a bit counterintuitive given the improved data this morning, a flight-to-quality event is taking place as the European crisis continues to escalate with Italian 10-year bond yields again cresting above 7%.
MARKET INDICATIONS AS OF 10:30 A.M. CENTRAL TIME
|
DOW
|
DOWN 59 points to 12,020
|
|
NASDAQ
|
DOWN 8 points to 2,649
|
|
S&P 500
|
DOWN 5 to 1,247
|
|
1-Yr T-bill
|
current yield 0.09%; opening yield 0.08%
|
|
2-Yr T-note
|
current yield 0.23%; opening yield 0.23%
|
|
5-Yr T-note
|
current yield 0.87%; opening yield 0.90%
|
|
10-Yr T-note
|
current yield 2.00%; opening yield 2.06%
|
|
30-Yr T-bond
|
current yield 3.04%; opening yield 3.11%
|
PRIOR MONTH REVISIONS SWEETEN THE OCTOBER LABOR REPORT
Friday, November 4, 2011
UNEMPLOYMENT FALLS WITH MODEST LABOR MARKET IMPROVEMENT
It wasn’t a report to celebrate, nor was the report as bad as headline payroll gains suggest. Nonfarm payrolls were expected to rise by 95k in the month of October. Instead, they rose by just 80k. But, the two previous months were revised upward by a total of 102k jobs, with September payroll gains now reported at 158k and August at 104k. August payrolls were originally thought to be unchanged. At that time, the three-month average was an anemic +35k, and politicians across the US shifted to job creation as the central theme of their candidacies. This is still a valid theme, but the urgency has eased a bit. Job growth is now running at an improved 114k three-month pace. This still isn’t enough to make a significant impact on unemployment, but it’s encouraging.
The business survey, which provides the nonfarm payroll data, showed that government cuts are continuing as 22k state and local government workers and 2k federal workers lost jobs in October. Construction jobs fell by 20k, nearly reversing the surprise September gains. Jobs were added in leisure and hospitality(+22k), health care(+12k), professional and business services(+32k), manufacturing(+5k) and mining(+6k). Temporary hires increased by 15k, suggesting that job gains should continue in the coming months.
The unemployment rate, calculated from a separate household survey, unexpectedly fell from 9.1% to 9.0%. This independent survey has actually shown average monthly job gains of 335k over the past three months. The U6 average employment measure, which includes all those officially unemployment and seeking jobs, as well as discouraged workers and those working part-time who would prefer a fulltime job, fell from 16.5% to 16.2%.
The percentage of people unemployed for 27 weeks or more, tumbled from 44.6% to 42.4%, the lowest in nearly a year, while the average duration of unemployment fell to 39.4, dropping below 40 weeks for the first time since June. Average hourly earnings rose by $0.02 to $23.19, while the average workweek remained at 34.3 hours.
On the whole, the October labor report was better than expected …and better than it would appear on the surface. Take it for what it’s worth. In the first quarter of 2009, during the worst of the job cuts, the US economy shed 2.4 million jobs. In the first 10 months of this year, it has gained back 1.2 million …despite significant government cutbacks. The October report won’t change the interest rate outlook, the Fed is still on hold until at least mid-2013, but it is another dose of much needed positive news.
MARKET INDICATIONS AS OF 9:35 A.M. CENTRAL TIME
|
DOW
|
DOWN 183 to 11,860
|
|
NASDAQ
|
DOWN 41 to 2,656
|
|
S&P 500
|
DOWN 16 to 1,239
|
|
1-Yr T-bill
|
current yield 0.08%; opening yield 0.09%
|
|
2-Yr T-note
|
current yield 0.22%; opening yield 0.24%
|
|
5-Yr T-note
|
current yield 0.87%; opening yield 0.92%
|
|
10-Yr T-note
|
current yield 2.02%; opening yield 2.07%
|
|
30-Yr T-bond
|
current yield 3.08%; opening yield 3.12%
|
NEWS HEADLINES OVERSHADOW HO HUM DATA
Wednesday, November 2, 2011
ISM STAYS ABOVE 50, ADP PRIVATE PAYROLLS SHOW MODERATE GROWTH
On Tuesday, the ISM survey showed that manufacturing was still expanding, although just barely. The Institute for Supply Management’s factory index fell to 50.8 in October from 51.6 in September. The median forecast was 52, and the high end of the range was 55, so this was a bit of a disappointment. Although the U.S. markets don’t usually focus on global manufacturing numbers, there is an interest, primarily because the entire world seems to be slowing at the same time. On Monday, both a Chinese manufacturing index and a U.K. factory index fell to their lowest points in 2 ½ years. Although China’s purchasing managers index remained slightly above the 50 mark, Germany, Switzerland, Sweden and the U.K. now signal factory contraction. The growing concern is that Europe is quickly sliding back into recession and may drag the rest of the world down with it.
This is, of course, employment week, and Friday’s report on October nonfarm payrolls is expected to show an increase of 95k (according to Bloomberg) and the unemployment rate is expected to remain at 9.1%. Today, the ADP private employment survey came in above expectations with a reported 110k increase during October, while September’s original 91k increase was revised higher to 116k. That is likely to equate to an advance in the official payroll report of something less than 100k, right in line with the consensus estimate. As seems to be the case with much of the data lately, the good news is that employment growth has stabilized, while the bad news is that monthly gains in the 100k range won’t be sufficient to lower the unemployment rate.
GREEK BAILOUT STILL A PROBLEM, MF GLOBAL SINKS
Europe is still influencing the global equity markets. October had been the strongest month in 25 years for the DOW, but things came crashing down last Friday. The initial enthusiasm that followed last Thursday’s announcement of the latest Euro rescue plan was dashed on Friday when Greek Prime Minister Papandreou announced that he would put the matter to a referendum vote, asking the populace to endorse the plan. This action, which would further delay the process and potentially scuttle it entirely, has seriously rattled the markets and jeopardized the entire plan.
Adding to the troubles is the “voluntary” 50% haircut on Greek debt. Many experts believe the “haircut” is a thinly veiled default orchestrated to avoid triggering credit default swaps (CDS). Unfortunately, this may be backfiring as the credibility of the CDS product has been undermined. Owners of Greek CDS have essentially purchased a worthless insurance policy. It would be like buying flood insurance for your two-story house, but since only the first floor flooded the insurance doesn’t pay the claim. The perceived value of all CDS has been diminished as a result of these actions and that may actually be harming other troubled sovereign issuers, notably Italy, whose borrowing costs have risen further in the last week. Investors, unable to limit their exposure with CDS, are shunning the debt altogether. Uncertainty abounds and that is not good for markets.
Also not good for markets is the failure of another major financial institution. While the bankruptcy of primary dealer MF Global may not carry the weight of the failure of Bear Stearns or Lehman Brothers, it is nonetheless another black eye on the financial industry. This is particularly true in light of news reports that the firm was levered as much as 40 to 1. It has also been reported that some client funds are unaccounted for and may have been commingled with firm funds and potentially lost. This will only serve to reinforce calls for stricter limits on leverage, proprietary trading, and more regulation on an already over-burdened financial sector.
FOMC STAYS THE COURSE
The FOMC met today, making only modest changes to their official policy statement with no changes in monetary policy. They reiterated their pledge to hold the fed funds rate at the current 0-0.25% target until mid-2013 and will continue with the program commonly known as Operation Twist. In contrast to recent months, when several FOMC members dissented in opposition to easing, this time Chicago Fed President Charles Evans dissented in favor of additional measures of policy accommodation. In recent speeches Evans has argued for specific triggers to guide monetary policy. In an October 17th speech he said, "I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent." Look for this idea to get more discussion in future meetings.
With all of this news to digest, the financial markets have once again become very volatile. Daily 200 point swings in the DOW seem to have become the norm once again. The yield on the two-year T-note has rallied from 0.31% last Thursday to 0.22% this afternoon. The yield on the 10-year T-note went from just over 2.40% last Thursday to less than 2.00% now.
MARKET INDICATIONS AS OF 3:04 P.M. CENTRAL TIME
|
DOW
|
Up 178 to 11,836
|
|
NASDAQ
|
Up 33 to 2,640
|
|
S&P 500
|
Up 20 to 1,238
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.23%; opening yield 0.24%
|
|
5-Yr T-note
|
current yield 0.88%; opening yield 0.90%
|
|
10-Yr T-note
|
current yield 1.99%; opening yield 1.99%
|
|
30-Yr T-bond
|
current yield 3.02%; opening yield 3.00%
|
GDP TOPS EXPECTATIONS , EURO UPDATE
Thursday, October 27, 2011
THE LATEST EURO RESCUE PACKAGE
Market attention has been focused on headlines out of Europe all week as officials there had been expected to announce the latest and greatest rescue effort. Early this morning, European leaders finally released a broad overview of an agreement which includes private banks agreeing to a “voluntary” 50% haircut on Greek debt, a quadrupling of the European Financial Stability Facility (EFSF) to €1 trillion, and a €106 billion plan to recapitalize the banks. Global markets are cheering as stocks around the world are sharply higher on the latest news. While all this is very encouraging there are still plenty of issues to be resolved. Count me as a skeptic, but it seems like we have seen this movie before. Don’t be surprised if the initial optimism on the announcement fades away as analysts parse through the details. The reality is that the Euro-zone as a whole simply has too much debt, a weakening economy, and a dearth of healthy players to shore up the group.
U.S. DATA LOOKING BETTER
In the United States, the trend of generally better economic data has continued this week. The only exception has been the Conference Board’s Consumer Confidence Index, which surprisingly fell to a 31-month low. The index dropped from 46.4 to 39.8 in October, which was the lowest reading since March of 2009. Consumers must endure a constant barrage of negativity as news stories about the problems in Europe, the occupy Wall Street protests, high unemployment, and politicians who can’t come together on anything dominate the headlines. Clearly, consumers are worried about the economic picture. But there is a dichotomy between what consumers say and what they do. New car sales are chugging along at the fastest pace in five months. September retail sales showed the biggest gain since February. And today’s Q3 GDP report (details below) showed consumer spending grew at a better than expected 2.4% pace. So maybe things aren’t quite as bad as people seem to think.
As for the good data, we turn first to yesterday’s report on durable goods orders. While the headline dropped by 0.8% in September that result was skewed by aircraft orders. The more important ex-transportation figure advanced 1.7%, the largest gain in six months. On a year-over-year basis, headline durable goods orders grew 4.9% while ex-transportation was up 8.1%, both very healthy gains. The closely followed non-defense capital goods ex-aircraft figure, a proxy for business investment which flows into GDP data, climbed 2.4% in September and 8.4% year-over-year. Importantly, for the first time these orders have now exceeded the pre-recession high.
Next up is today’s first look at third quarter gross domestic product which showed the economy grew at a 2.5% annual rate, the fastest pace in a year. While 2.5% is fairly mediocre by historical standards, it is solidly in positive territory and should help to alleviate fears that we are headed back into recession. Several of the details within the report were very encouraging. Business fixed investment surged 16.3%, led by corporate spending on equipment and software which climbed 17.4%. Inventories grew at a slower pace than last quarter and actually subtracted from Q3 growth, which would have been 3.6% excluding inventories. That should help Q4 growth as businesses won’t have big stockpiles of inventories to take down. All in all, this was a solid report.
Markets have reacted just as one would expect with this stream of news. Stocks have rallied while bonds are selling off. The Dow is up better than 200 points and at the highest level since early August. The two-year Treasury yield has crept up to 0.29% while the 10-year is at 2.28%.
MARKET INDICATIONS AS OF 9:54 A.M. CENTRAL TIME
|
DOW
|
Up 233 to 12,102
|
|
NASDAQ
|
Up 52 to 2,703
|
|
S&P 500
|
Up 27 to 1,269
|
|
1-Yr T-bill
|
current yield 0.11%; opening yield 0.11%
|
|
2-Yr T-note
|
current yield 0.29%; opening yield 0.285%
|
|
5-Yr T-note
|
current yield 1.13%; opening yield 1.06%
|
|
10-Yr T-note
|
current yield 2.20%; opening yield 2.28%
|
|
30-Yr T-bond
|
current yield 3.31%; opening yield 3.22%
|
THE OCTOBER 2011 BLOOMBERG INTEREST RATE AND ECONOMIC SURVEYS
Monday, October 24, 2011
From October 5 through October 11, 2011, Bloomberg News surveyed 78 top economists for their most recent opinions on the U.S. economy and interest rates. The following are summaries of their responses:
The Economic Forecast
Unemployment Rate - The median forecast for Q4 2011 unemployment is 9.1%. The median forecast for the next five quarters are 9.0%, 8.9%, 8.8%, 8.7% and 8.6%.
Job growth in September remained relatively weak, but was stronger than expected and did improve substantially from Augusts’ woeful zero-sum game. September nonfarm payrolls grew by 103K and upward revisions to prior months accounted for an additional 99K. With the revisions, Augusts’ goose egg became a +57K. We’ll see what the next revisions bring.
Government employment on the whole fell by 34K, but state government grew by 2K, after expanding 11K in August. Local governments took it on the chin, slashing 35K jobs across the country, with more likely as lower property values continue to take a bite out of revenues to the localities. Year-over-year since July 2010, property values have declined 4.1%, according to the S&P/Case-Shiller index of the country’s 20 largest cities.
The U-6 measure of unemployment (total unemployed, plus all marginally attached workers, plus part-time workers for economic reasons) increased to 16.5% from 16.2% in August, as more people accepted part-time work, unable to find a full-time position. The number of involuntary part-time workers grew by 444k to nearly 9.3 million. These people indicated they would accept a full-time position if one were available.
Real GDP (annualized economic growth) - The median GDP growth forecast for Q3 2011 is +1.95%. The median forecast for the next six quarters are +2.0%, +2.0%, +2.2%, +2.5%, 2.5% and 2.5%.
Despite 14 million people officially unemployed, another 11.8 million either underemployed or having given up altogether, incessant political bickering and dismally low consumer confidence, enough people are still making purchases to keep the economy afloat. September retail sales came in better than expected, jumping 1.1% during the month, due in large part to auto sales rising by 3.6%. Solid September retail sales will help to support positive GDP growth in Q3, and likely put upward pressure on the estimates included in this survey, which was completed prior to the release of the sales data.
Looking toward Q4, expectations for the upcoming holiday shopping season are mixed, but the general consensus seems to be on par with or just slightly lower than that of last year. There was an interesting article recently in the WSJ (
here's the link) regarding the ports of Southern California, specifically Los Angeles and Long Beach, and the declining shipping volumes they’ve seen between July and early fall, a time of historically high traffic as retailers typically ramp up inventories ahead of Christmas. In a nutshell, lean inbound shipments from overseas (primarily China) translate to weak expectations from retailers and reduced inventories, as they anticipate an already cash-strapped consumer with a dour outlook on their financial future to remain frugal.
The latest quarterly review from Hoisington Investment Management economist Dr. Lacy Hunt paints a similarly dour view of the economy in the coming quarters. The opening sentence reads, “Negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012.” Clearly that level of pessimism isn’t shared by the participants of this Bloomberg survey.
The initial release of Q3 GDP is due from the Commerce Department on October 27th.
Consumer Prices - The median annualized consumer inflation forecast for Q3 2011 is +3.7%. The median forecast for the next five quarters are +3.3%, +2.5%, +2.1%, 2.0% and 2.1%.
Consumer prices in September came in on the screws with expectations, rising 0.3%, while the core rate (all items less food and energy) rose only slightly by 0.1% (0.054% unrounded), the weakest one-month increase in core inflation since late 2010. Over the last 12 months, headline CPI is up 3.9% and core CPI is up 2.0%.
Based on August numbers from the Labor Department, there are 4.6 job seekers for every available job in the country. With so much competition for so few jobs, employers are under little pressure to offer higher salaries, and for current employees, demanding an increase in salary is, to say the least, difficult. With such pressure on wages and the widespread labor market slack, inflation is expected to be restrained in the upcoming quarters.
The Interest Rate Forecast
Overnight Fed Funds - The MEDIAN fed funds forecast for Q4 2011 is 0.25%. The MEDIAN forecast for the next five quarters are 0.25%, 0.25%, 0.25%, 0.25% and 0.25%. The current fed funds target rate is a range between 0.00% and 0.25%.
With headline consumer inflation subdued and the core rate coming in at the Fed’s preferred level of 2.0%, vast amounts of spare capacity in the labor market and downward pressures on wages, not to mention the Fed’s stated intent to hold the overnight fed funds rate in its current range, no movement in the fed funds rate is expected before the second half of 2013. In fact, Bank of America-Merrill Lynch and Stifel Nicolaus strategists don’t expect action until mid to late 2014, “or later.”
Two-year Treasury-note - The average 2-year yield forecast for Q4 2011 is 0.28%. The average yield forecast for the next sixquarters are 0.34%, 0.42%, 0.54%, 0.67%, 0.83% and 1.06%. The current 2-yr Treasury yield is 0.275%.
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Q4 2011
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Q1 2012
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Q2 2012
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Q3 2012
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Q4 2012
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Q1 2013
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Q2 2013
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Current Survey
(October 2011)
|
0.28%
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0.34%
|
0.42%
|
0.54%
|
0.67%
|
0.83%
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1.06%
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Prior Survey
(September 2011)
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0.24%
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0.31%
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0.40%
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0.51%
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0.67%
|
0.82%
|
1.03%
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10-year Treasury-note - The average 10-year yield forecast for Q4 2011 is 2.14%. The average forecast for the next six quarters are 2.29%, 2.51%, 2.71%, 2.89%, 3.07% and 3.29%. The current 10-year yield is 2.21%.
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Q4 2011
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Q1 2012
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Q2 2012
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Q3 2012
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Q4 2012
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Q1 2013
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Q2 2013
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Current Survey
(October 2011)
|
2.14%
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2.29%
|
2.51%
|
2.71%
|
2.89%
|
3.07%
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3.29%
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Prior Survey
(September 2011)
|
2.24%
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2.41%
|
2.61%
|
2.80%
|
2.99%
|
3.18%
|
3.35%
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30-year Treasury-bond - The average 30-year yield forecast for Q4 2011 is 3.29%. The average forecast for the next six quarters are 3.39%, 3.59%, 3.78%, 3.94%, 4.15% and 4.33%. The current 30-year yield is 3.24%.
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|
Q4 2011
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Q1 2012
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Q2 2012
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Q3 2012
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Q4 2012
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Q1 2013
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Q2 2013
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Current Survey
(October 2011)
|
3.58%
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3.69%
|
3.86%
|
4.02%
|
4.16%
|
4.35%
|
4.61%
|
|
Prior Survey
(September 2011)
|
3.58%
|
3.69%
|
3.86%
|
4.02%
|
4.16%
|
4.35%
|
4.61%
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MARKET INDICATIONS AS OF 8:40 A.M. CENTRAL TIME
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DOW
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Up 46 to 11,855
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|
NASDAQ
|
Up 21 to 2,658
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|
S&P 500
|
Up 2.80 to 1,238
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.27%; opening yield 0.27%
|
|
5-Yr T-note
|
current yield 1.08%; opening yield 1.08%
|
|
10-Yr T-note
|
current yield 2.22%; opening yield 2.21%
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|
30-Yr T-bond
|
current yield 3.25%; opening yield 3.24%
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RETAIL SALES IMPROVE, STOCKS RALLY
Friday, October 14, 2011
RETAIL SALES FINISH Q3 ON A STRONG NOTE
For a second straight week the economic data has come in better than expected. The biggest news this week was Friday’s retail sales report for September, which advanced 1.1% for the largest gain since February. The Bloomberg survey of economists had predicted a smaller gain of 0.7%. Stripping out some of the more volatile components reveals that sales excluding automobiles gained 0.6%, doubling expectations for a 0.3% advance, and sales ex-autos and ex-gasoline climbed 0.5%, which also topped estimates of a 0.4% gain. Sales ex-autos and ex-gasoline is considered one of the best indicators of overall demand as it removes distortions caused mainly by price and supply fluctuations. Drilling down into the details there was widespread strength in the figures. Auto sales surged 3.6% following a drop of 0.8% in August, giving credence to the previously reported jump in vehicle sales to a 13.1 million unit annual pace from 12.1 million in August. Furniture, clothing, restaurant and general merchandise sales all showed strong gains during September. Negatives included building materials and sporting goods, but gainers outpaced decliners both in number and degree of change, so overall this was a very good report. To top it off, there were also positive revisions to prior months as the August headline was revised to a gain of 0.3% versus the previously reported no change. On a year-over-year basis retail sales are up a healthy 7.9%, compared to 7.5% in August.
The news on the employment front was not quite as encouraging, but initial jobless claims did manage a slight improvement, falling by 1,000 to 404k in the latest week. The four-week moving average fell from 415k to 408k, a two-month low. Although jobless claims remain stubbornly high, at least the trend of increases we saw during August and early September has been reversed.
STOCKS RALLY AS RECESSION FEARS ABATE
While neither of these releases were especially strong, they are certainly not indicative of recessionary conditions. When combined with the improvements reported in the prior weeks in the ISM indexes, payroll data, vehicle sales and construction spending, there are reasons to be cautiously optimistic. Coming off an abysmal September the shift is a welcome sign. With a little luck, maybe this one can gain some momentum. Stock and bond markets seem to have gotten the memo as well. The improving economic data has combined with signals that Europe is finally making some progress on their sovereign debt crisis to send stock prices, and bond yields, higher. From a recent low of 10,655 on October 3rd the Dow Jones Industrial Average is up 989 points, just over 9%, to 11,644 as of this writing. The S&P 500 is up more than 11% over that time span. During that same two weeks, the yield on the ten-year Treasury note has risen from 1.75% to 2.27%, while the 30-year Treasury bond has gone from 2.73% to 3.23%.
MARKET INDICATIONS AS OF 3:45 P.M. CENTRAL TIME
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DOW
|
Up 166 to 11,644
|
|
NASDAQ
|
Up 47 to 2,668
|
|
S&P 500
|
Up 21 to 1,225
|
|
1-Yr T-bill
|
current yield 0.10%; opening yield 0.09%
|
|
2-Yr T-note
|
current yield 0.27%; opening yield 0.28%
|
|
5-Yr T-note
|
current yield 1.12%; opening yield 1.10%
|
|
10-Yr T-note
|
current yield 2.25%; opening yield 2.19%
|
|
30-Yr T-bond
|
current yield 3.23%; opening yield 3.15%
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LABOR CONDITIONS IMPROVE (SLIGHTLY)
Friday, October 7, 2011
NONFARMS PAYROLLS BEAT DOUR FORECASTS
It may not be cause for celebration, but it was a relief as business payrolls rose by 103k during the month of September. The Bloomberg survey of 91 economists had offered a forecast range of minus 50k to plus 115k, and a median forecast of plus 60k. Recall that last month, the Labor Department announced there had been zero new jobs created in August, a disturbing number given the recovery officially began two years ago. This morning’s report actually revised August payrolls up by 57k, and added another 42k to the July tally. As a result, the three-month average job gain is now +85k, instead of the +35k calculation done last month. Bloomberg News reported that the U.S. economy has now recouped 1.9 million of the 8.75 million jobs lost during the 18-month recession …sort of a glass-quarter-full type statement.
Private payrolls rose by 137k, helping to offset the loss of 34k government jobs, virtually all of which came from the local government sector. Manufacturing payrolls fell by 13k in September, the biggest drop in over a year, although recent purchasing manager’s surveys suggest some factory hires in the coming months. Construction jobs rose by 26k, as nonresidential construction ramped up. And service sector jobs climbed by 85k, the most in five months. Labor market analysts estimate that job growth of 200k per month is necessary to reduce the unemployment rate, while somewhere around 150k jobs are required just to absorb all new workers entering the workforce each month.
The headline unemployment rate held steady at 9.1%, although the broader U6 measure, which includes discouraged workers as well as those who are working part-time but would rather have a fulltime position, rose from 16.2% to 16.5%, the highest this year. The number of Americans working part-time for economic reasons rose by 444k to 9.3 million in September. It seems many employers are still reducing the hours of their current employees and opting to hire part-time workers, perhaps to reduce benefits costs.
Some of the minor numbers within the report were also encouraging. The share of the population holding a job rose from 58.2 to 58.3 in September, average hourly earnings rose by 0.2% in September after falling 0.1% in August, and the average workweek climbed from 34.2 to 34.3 hours. The takeaway from recent improvement seems to be that the economic and political news in July and August was terrible and employers and consumers got really nervous, while relative calm in September has restored mediocrity. Economic numbers this week have been far from great, but hardly recessionary.
On a side note, the DOW, which hit a low of 10,432 on Tuesday, has staged a quiet, though remarkable recovery, and is now at 11,194. Much of the turnaround stems from questionable optimism out of Europe.
MARKET INDICATIONS AS OF 8:55 A.M. CENTRAL TIME
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DOW
|
Up 71 to 11,194
|
|
NASDAQ
|
Down 5 to 2,502
|
|
S&P 500
|
Up 3 to 1,168
|
|
1-Yr T-bill
|
current yield 0.08%; opening yield 0.08%
|
|
2-Yr T-note
|
current yield 0.27%; opening yield 0.27%
|
|
5-Yr T-note
|
current yield 1.05%; opening yield 1.00%
|
|
10-Yr T-note
|
current yield 2.07%; opening yield 1.99%
|
|
30-Yr T-bond
|
current yield 3.02%; opening yield 2.95%
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EXPANSION IN SEPTEMBER PURCHASING MANAGERS REPORTS
Wednesday, October 5, 2011
ISM IMPROVES
On Monday, the Institute for Supply Management (ISM) manufacturing index for September bettered expectations by rising from 50.6 to 51.6. Although this number is generated from a monthly phone survey of U.S. purchasing managers, it has proven to be a reliable leading indicator and is closely followed by market participants. Encouraging details within the key index included gains in current production (48.6 to 51.2), employment (51.8 to 53.8) and export orders. Recall that any number above the 50 mark indicates expansion in the manufacturing sector. In December of 2008, this series hit a low point of 33.3. Clearly, there is a slowing down of the pace, as the January through April indexes were all above 60, but much of the summer slowdown was driven by natural disasters in Japan. Recent pessimism probably has to do with the ongoing sovereign debt crisis in Europe, the U.S. debt ceiling debacle and subsequent credit downgrade by S&P and the global economic slowdown, but maybe things aren’t quite as bad as they seem. We’d all braced for exceptionally bad news, which positions us for upside surprises going forward.
This morning, the ISM non-manufacturing index was released. This index represents the much larger (90%) service sector of the economy, but has a much shorter track record than its more established sister report. The expectation was for a slight decline in the index from 53.3 to 52.8, but still above the expansion point. The actual September number was slightly better at 53.0. By contrast, the low point for this series was 37.6 in November 2008. Within the number, new orders rose from 52.8 to 56.5, while the employment measure fell from 51.6 to 48.7.
JOB NUMBERS
Although the expectation of hiring fewer future workers in the service sector is discouraging, it’s only a survey. The ADP employment report was also released this morning, and it painted a slightly better labor market picture with companies reporting the actual creation of 91k jobs in September, more than the 89k reported in August, and above the median forecast of 75k.
On Friday morning, the September employment report will be released. With 45k striking Verizon employees back at work, September numbers will probably show significant paper improvement from August when zero jobs were created overall. The median forecast is for a nonfarm payroll increase of 60k, although several economists have projected more than double this number. The unemployment rate is expected to remain at 9.1%. Although job creation is still poor, a steady stream of discouraged workers have regularly exited the labor force and made the overall unemployment rate appear a bit better than it would have otherwise. Days after the August labor report was released, UT Finance Professor Sandy Leeds wrote in his blog that if the workforce participation rate were to rise from the current 64% back to a more normal 66%, the official unemployment rate would be 11.8%.
Yields are a bit higher in early trading, perhaps due to the data, relative calm in Europe and positive stock market movement.
MARKET INDICATIONS AS OF 10:40 A.M. CENTRAL TIME
|
DOW
|
Up 57 to 10,866
|
|
NASDAQ
|
Up 34 to 2,438
|
|
S&P 500
|
Up 8 to 1,132
|
|
1-Yr T-bill
|
current yield 0.09%; opening yield 0.10%
|
|
2-Yr T-note
|
current yield 0.26%; opening yield 0.25%
|
|
5-Yr T-note
|
current yield 0.95%; opening yield 0.90%
|
|
10-Yr T-note
|
current yield 1.89% opening yield 1.82%
|
|
30-Yr T-bond
|
current yield 2.87%; opening yield 2.81%
|
MINOR NEWS ...BUT GOOD NEWS
There has been lots of economic news hitting the wire in recent days, but with a few exceptions, the data has not gotten the attention of the markets. Obviously, the focus has been on the debt ceiling and the deficit reduction discussion. Of course, these talks, which are getting nowhere, are definitely having a negative effect. Uncertainty is never good for the markets. Today’s Q2 GDP data briefly took the spot light and should serve as a slap to the face of our elected representatives in Washington. While they bicker about plans that will have, at most, a trivial impact on the long range debt, the economy is getting worse, confidence is collapsing, and our status as the largest, safest, most liquid investment market on the planet is being seriously jeopardized.
Unfortunately, economic growth is nowhere near 4%. In fact, today’s report on Q2 GDP showed the economy grew at a meager 1.3% in the quarter ended June 30th, well below the 1.8% economists had predicted. To make matters worse, first quarter growth was revised sharply lower to 0.4% from a previously reported 1.9%. The Commerce Department also issued revisions going all the way back to 2003. I’ll spare you most of the details, but suffice it to say the revisions only made things look worse. GDP shrank 5.1% from the fourth quarter of 2007 to the second quarter of 2009, a full percentage point lower than the previously reported 4.1% and the sharpest contraction in the post World War II era.
Economists have been busy lowering their forecasts for future growth and pushing back the dates for eventual rate hikes, which are nowhere in sight. The shenanigans in Washington are making matters much worse and threatening to throw the economy right back into recession, or worse. Financial markets are more focused on the risks to economic growth than to a U.S. default. Stock markets have been falling all week, but despite the increasing risk of a default, Treasury note prices are higher, pushing bond yields lower. Treasuries with maturities from two- to ten-years have rallied sharply following today’s GDP release. The yield on the two-year T-note has fallen to 0.37%, down from 0.44% on Wednesday, and the 10-year yield has fallen to 2.85% from 3.00%. Short-term Treasury-bills are bucking the trend with their yields higher in recent days as investors hoard cash and build liquidity that will see them through any financial market disruptions that may occur.
For a more lighthearted view, consider this, CNBC reported on Thursday that the daily statement from the U.S. Treasury reflected an operating cash balance of $73.8 billion at the end of the day on Wednesday. Apple’s last earnings report showed that they held $76.2 billion in cash and marketable securities. As CNBC reported, “the world’s largest tech company has more cash than the world’s largest sovereign government.”