Friday, December 26, 2014
Friday, December 19, 2014
Capital Markets Update
By Louis S. Barnes Friday, December 19, 2014
Mortgage interest rates increased slightly this past week as the Fed indicated at the conclusion of its FOMC meeting that it would be patient about when it decides to increase rates. Economic data was mixed. Economic data stronger than expected included November Industrial Production, November Capacity Utilization, and weekly jobless claims. Industrial Production increased the most since May of 2010. Economic data weaker than expected included the December New York Empire State Manufacturing Index, the December NAHB Housing Market Index, November Housing Starts, November Building Permits, and the December Philadelphia Fed Business Index. Inflation data continues to be tame. The November Consumer Price Index fell 0.3%, its largest decline since December 2008. Excluding the food and energy components, core CPI was up 0.1%, as expected. In Europe, November consumer prices increased at their slowest rate in five years, continuing to raise deflation concerns. In the United Kingdom, inflation fell to 1.00% in November, a 12 year low.
The Dow Jones Industrial Average is currently at 17,800, up over 500 points on the week. The crude oil spot price is currently $55.64 per barrel, down over $2 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Tuesday’s Durable Goods Orders, the final look at Q3 GDP, Personal Income and Outlays, the Consumer Sentiment Index, and New Home Sales, and Wednesday’s Jobless Claims as potential market moving events. All markets are closed Thursday for Christmas.
Mortgage interest rates increased slightly this past week as the Fed indicated at the conclusion of its FOMC meeting that it would be patient about when it decides to increase rates. Economic data was mixed. Economic data stronger than expected included November Industrial Production, November Capacity Utilization, and weekly jobless claims. Industrial Production increased the most since May of 2010. Economic data weaker than expected included the December New York Empire State Manufacturing Index, the December NAHB Housing Market Index, November Housing Starts, November Building Permits, and the December Philadelphia Fed Business Index. Inflation data continues to be tame. The November Consumer Price Index fell 0.3%, its largest decline since December 2008. Excluding the food and energy components, core CPI was up 0.1%, as expected. In Europe, November consumer prices increased at their slowest rate in five years, continuing to raise deflation concerns. In the United Kingdom, inflation fell to 1.00% in November, a 12 year low.
The Dow Jones Industrial Average is currently at 17,800, up over 500 points on the week. The crude oil spot price is currently $55.64 per barrel, down over $2 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Tuesday’s Durable Goods Orders, the final look at Q3 GDP, Personal Income and Outlays, the Consumer Sentiment Index, and New Home Sales, and Wednesday’s Jobless Claims as potential market moving events. All markets are closed Thursday for Christmas.
Friday, December 12, 2014
Capital Markets Update
By Louis S. Barnes Friday, December 12, 2014
Markets are moving in dramatic fashion, obscuring the improving US economy. Or vice-versa. Our 10-year T-note fell to 2.08% today, mortgages attempting to crack 4.00%; the German 10-year is a new all-time low 0.627% joined by Japan’s 0.398%. Stock markets are truly volatile, up-down-up-down. Oil has broken $60 and may go significantly lower as weaker producers are forced to pump more as prices fall.
Media commentary is badly confused trying to explain these events, the centerline holding that falling oil will cause inflation to fall, therefore buying bonds makes sense even at ridiculous yields. However, core inflation is not falling. Central banks use core (excluding energy and food) because energy is so volatile; the drop in nominal inflation today is just the flip side of the energy-driven jumps in 2008 and 2013. Proper central banking should not react to either.
Most commentary assumes the ECB will begin its first real QE in January, buying sovereign bonds, and say that markets are front-running. Don’t bet on that. Stark fear is the mover in global markets: fear that deflation is out of control in both Japan and Europe, fear that China’s slowdown will pull the stool from under commodity producers and emerging nations, and fear that the oil price drop is more hurtful than stimulative.
Fear there, but not here! From 2007 until this year the US economy was fragile and accident prone. No longer. We are still limping in spots — incomes and housing — but now we’re resilient, headwinds diminished and fewer open manholes.
The Fed is correct to plan liftoff from the “0%-.25%” of the last six years. Home mortgage credit rose in the last quarter for the first time in eight years. Total bank credit had a great year, rising 9% annualized until plopping in half in October, but in November ran a 14% pace. Retail sales are fine. The small-business survey by the NFIB in November jumped from its six-year trench. Lower oil prices are a help here, but not as much as in any prior drop. Natural gas prices have been down for five years. Electricity generated by burning oil has dropped 88% since 2013, replaced by gas and renewables. This is a gasoline-only deal: $2.50 will help, but miles driven have fallen ever since we rose above two bucks.
We have a precedent for this situation, US gaining strength, the rest of the world a mess. 1997-98 was the “Asian Contagion,” a global credit/currency meltdown concluding in default by Russia. The Fed was panicked that the US was the only growth engine, and if we faltered… no way out. So the Fed cut its overnight rate and with hindsight was dead wrong. The weakness overseas helped US strength, capped inflation here, and exactly as today pushed a flood of cash to US bonds, driving down mortgages and other borrowing costs. The Fed’s easing then did nothing but add air to the stock market bubble, and quick reversal of excessive stimulus led directly to recession.
Today, the Fed need not worry about inflation, but it absolutely should worry about the potential for hidden bubbles caused by the zero-percent regime. At zero it is at least 1.5% below inflation, highly stimulative, and zero is unnatural.
The Fed’s tightening this time may look like no other. Raising the overnight cost of money will push the dollar higher and overseas cash will continue to pour into our bonds and mortgages. Fed liftoff may have no effect at all on long-term rates, which might even continue to fall. The principal reason for the Fed not to tighten is the continuing weakness of housing, but we may be unscathed.
You can bet the most important thing the Fed will watch after liftoff will be long-term rates. If they rise, the Fed will slow or stop altogether; if no effect, the Fed may jack the Fed funds rate fairly rapidly. Imagine in 2016 a 2.00% Fed funds rate and a 2.00% 10-year, and such convergence or even inversion (short over long) not a sign of recession, just domestic strength and foreign desperation for yield!
Risks now are overseas. Markets show signs of destabilization, but thus far only reinforcing the flows of cash to us. Those flows will not stop until recovery over there, which is a hell of a lot closer to “if” than “when.”
Markets are moving in dramatic fashion, obscuring the improving US economy. Or vice-versa. Our 10-year T-note fell to 2.08% today, mortgages attempting to crack 4.00%; the German 10-year is a new all-time low 0.627% joined by Japan’s 0.398%. Stock markets are truly volatile, up-down-up-down. Oil has broken $60 and may go significantly lower as weaker producers are forced to pump more as prices fall.
Media commentary is badly confused trying to explain these events, the centerline holding that falling oil will cause inflation to fall, therefore buying bonds makes sense even at ridiculous yields. However, core inflation is not falling. Central banks use core (excluding energy and food) because energy is so volatile; the drop in nominal inflation today is just the flip side of the energy-driven jumps in 2008 and 2013. Proper central banking should not react to either.
Most commentary assumes the ECB will begin its first real QE in January, buying sovereign bonds, and say that markets are front-running. Don’t bet on that. Stark fear is the mover in global markets: fear that deflation is out of control in both Japan and Europe, fear that China’s slowdown will pull the stool from under commodity producers and emerging nations, and fear that the oil price drop is more hurtful than stimulative.
Fear there, but not here! From 2007 until this year the US economy was fragile and accident prone. No longer. We are still limping in spots — incomes and housing — but now we’re resilient, headwinds diminished and fewer open manholes.
The Fed is correct to plan liftoff from the “0%-.25%” of the last six years. Home mortgage credit rose in the last quarter for the first time in eight years. Total bank credit had a great year, rising 9% annualized until plopping in half in October, but in November ran a 14% pace. Retail sales are fine. The small-business survey by the NFIB in November jumped from its six-year trench. Lower oil prices are a help here, but not as much as in any prior drop. Natural gas prices have been down for five years. Electricity generated by burning oil has dropped 88% since 2013, replaced by gas and renewables. This is a gasoline-only deal: $2.50 will help, but miles driven have fallen ever since we rose above two bucks.
We have a precedent for this situation, US gaining strength, the rest of the world a mess. 1997-98 was the “Asian Contagion,” a global credit/currency meltdown concluding in default by Russia. The Fed was panicked that the US was the only growth engine, and if we faltered… no way out. So the Fed cut its overnight rate and with hindsight was dead wrong. The weakness overseas helped US strength, capped inflation here, and exactly as today pushed a flood of cash to US bonds, driving down mortgages and other borrowing costs. The Fed’s easing then did nothing but add air to the stock market bubble, and quick reversal of excessive stimulus led directly to recession.
Today, the Fed need not worry about inflation, but it absolutely should worry about the potential for hidden bubbles caused by the zero-percent regime. At zero it is at least 1.5% below inflation, highly stimulative, and zero is unnatural.
The Fed’s tightening this time may look like no other. Raising the overnight cost of money will push the dollar higher and overseas cash will continue to pour into our bonds and mortgages. Fed liftoff may have no effect at all on long-term rates, which might even continue to fall. The principal reason for the Fed not to tighten is the continuing weakness of housing, but we may be unscathed.
You can bet the most important thing the Fed will watch after liftoff will be long-term rates. If they rise, the Fed will slow or stop altogether; if no effect, the Fed may jack the Fed funds rate fairly rapidly. Imagine in 2016 a 2.00% Fed funds rate and a 2.00% 10-year, and such convergence or even inversion (short over long) not a sign of recession, just domestic strength and foreign desperation for yield!
Risks now are overseas. Markets show signs of destabilization, but thus far only reinforcing the flows of cash to us. Those flows will not stop until recovery over there, which is a hell of a lot closer to “if” than “when.”
Friday, December 5, 2014
Capital Markets Update
By Louis S. Barnes Friday, December 5, 2014
Mortgage interest rates increased this past week as today’s employment report for November was much stronger than anticipated. November Non-Farm Payrolls increased by 321k on expectations that they would increase by 230k. September and October Non-Farm Payrolls were revised upward as well. Private Payrolls increased by 314k on expectations that they would increase by 225k. Average hourly earnings increased 0.4% on expectations that they would increase by 0.2%. This the biggest jump in earnings since June 2013. The unemployment rate held steady at 5.8%. Other economic data stronger than expected included the November ISM Manufacturing Index, October Construction Spending, November Auto and Truck Sales, and the November ISM Services Sector Index. Economic data weaker than expected included the November ADP Private Jobs estimate, Q3 Productivity, Q3 Unit Labor Costs, the October U.S. Trade Deficit, and October Factory Orders. In Europe, the European Central Bank left their benchmark rate unchanged and will reassess additional stimulus next quarter. In China, manufacturing activity fell to its lowest level since March.
The Dow Jones Industrial Average is currently at 17,950, up over 100 points on the week. The crude oil spot price is currently $65.41 per barrel, down over $1 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Thursday’s Jobless Claims and Retail Sales and Friday’s Producer Price Index (PPI) and Consumer Sentiment index as potential market moving events.
Mortgage interest rates increased this past week as today’s employment report for November was much stronger than anticipated. November Non-Farm Payrolls increased by 321k on expectations that they would increase by 230k. September and October Non-Farm Payrolls were revised upward as well. Private Payrolls increased by 314k on expectations that they would increase by 225k. Average hourly earnings increased 0.4% on expectations that they would increase by 0.2%. This the biggest jump in earnings since June 2013. The unemployment rate held steady at 5.8%. Other economic data stronger than expected included the November ISM Manufacturing Index, October Construction Spending, November Auto and Truck Sales, and the November ISM Services Sector Index. Economic data weaker than expected included the November ADP Private Jobs estimate, Q3 Productivity, Q3 Unit Labor Costs, the October U.S. Trade Deficit, and October Factory Orders. In Europe, the European Central Bank left their benchmark rate unchanged and will reassess additional stimulus next quarter. In China, manufacturing activity fell to its lowest level since March.
The Dow Jones Industrial Average is currently at 17,950, up over 100 points on the week. The crude oil spot price is currently $65.41 per barrel, down over $1 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Thursday’s Jobless Claims and Retail Sales and Friday’s Producer Price Index (PPI) and Consumer Sentiment index as potential market moving events.
Friday, November 21, 2014
Capital Markets Update
By Louis S. Barnes Friday, November 21, 2014
Mortgage rates have been stable near 4.00%, held there by the 10-year T-note moving hardly at all in the last month, 2.31%-2.38% since Halloween. Such stability is most unusual, best understood as a market gathering tension for a significant snap.
The dominant news is central banks trying to cope with extreme deflationary pressures, and this week the Fed released the minutes of its October 28/29 meeting.
Reading Fed minutes is a black art. This set is “only” 15 pages, but unspeakably dense, jargon-ridden, in the unique code of Fed politics, most of it irrelevant to the big questions or intentionally masking answers, if any: RATES UP, OR DOWN, WHEN?
For the brave and foolhardy willing to give it a try, here follows a guide, and re-interpretation of this set (in plain sight at www.federalreserve.gov). I say “re-interpret” because I couldn’t get to the real thing until yesterday, after reading earlier reviews by media Fedologists. As I read I flashed back to the media analysis, wondering if they had read the same minutes. I don’t recall a wider gap between the analysts and what’s in the actual words. The consensus was ho-hum, Fed stands pat. Not so.
These minutes begin with an incomprehensible discussion of the mechanics of rate hikes. Ignore all of that. When they need to hike, they will.
At the bottom of page three, a big hint: “Staff Review of the Economic Situation.” The bulk of all meeting minutes is anonymous commentary by Fed governors and regional Fed presidents, at each point adding “one member said”, or a few, or several, or many, or most, as the Secretary tries to describe weight of opinion. When the Fed first began to publish minutes only three weeks after the fact (ten years ago, Bernanke invention), these modifiers were so confusing that it published a guide.
In general, all the time, ignore the governors and regional presidents (in the minutes described as “members”) until you learn which have good sense and which don’t. Since the minutes’ commentary is anonymous, we can’t tell if an apparent consensus is among the bright lights (Dudley, Fischer, Rosengren, Williams, Lacker, Evans, and Lockhart), or the dim and argumentative (Fisher, George, Bullard, Plosser, Mester, Kocherlakota — all regional presidents). One serious study by economists outside the Fed (Romer, et al) backwalked the opinions of the regional Fed presidents for predictive accuracy and concluded: “They need not offer forecasts.”
Page three: Staff said that market indications of inflation had declined, but inflation surveys were stable. Since the meeting surveys have fallen, too. That’s a big deal: in three weeks the Fed’s primary assumption about inflation has been cast in doubt.
Page four, Staff: “Foreign economies appeared to have continued to expand at a moderate rate in the third quarter… In Japan, consumption staged a mild rebound…. euro area pointed only to continued sluggish growth.” Events have proved this commentary absurdly optimistic. Strangely, profoundly out of touch.
Page 5, in puzzled tone, Staff observed that market pricing had pushed back the date for a Fed rate hike. My margin note is “duh.” Markets see US wages and global deflation. Later on that page: “Credit flows to nonfinancial business picked up in September.” The Fed’s own H.8 shows a deep slowdown in total bank credit.
Page 6: “Staff revised down its projection for real GDP growth….” What?! You see that in any media analysis? Staff: “The risks to the forecast for real GDP growth and inflation were seen as tilted to the downside.”
The labor market has improved faster than the Fed thought possible only a year ago, and has positioned to intercept the inflation pressure from wages inevitably rising as the labor market tightens. Yet wages are not rising, and may not even if unemployment falls another percent or more. Staff seems aware that things are not going according to plan. The Fed historically underweights events overseas because the US is the least export-dependent of any major economy, but these minutes are at the edge of oblivious to foreign pressures which will undercut US wages and prices.
Stick out my turkey neck: when rates snap, it will be down.
Mortgage rates have been stable near 4.00%, held there by the 10-year T-note moving hardly at all in the last month, 2.31%-2.38% since Halloween. Such stability is most unusual, best understood as a market gathering tension for a significant snap.
The dominant news is central banks trying to cope with extreme deflationary pressures, and this week the Fed released the minutes of its October 28/29 meeting.
Reading Fed minutes is a black art. This set is “only” 15 pages, but unspeakably dense, jargon-ridden, in the unique code of Fed politics, most of it irrelevant to the big questions or intentionally masking answers, if any: RATES UP, OR DOWN, WHEN?
For the brave and foolhardy willing to give it a try, here follows a guide, and re-interpretation of this set (in plain sight at www.federalreserve.gov). I say “re-interpret” because I couldn’t get to the real thing until yesterday, after reading earlier reviews by media Fedologists. As I read I flashed back to the media analysis, wondering if they had read the same minutes. I don’t recall a wider gap between the analysts and what’s in the actual words. The consensus was ho-hum, Fed stands pat. Not so.
These minutes begin with an incomprehensible discussion of the mechanics of rate hikes. Ignore all of that. When they need to hike, they will.
At the bottom of page three, a big hint: “Staff Review of the Economic Situation.” The bulk of all meeting minutes is anonymous commentary by Fed governors and regional Fed presidents, at each point adding “one member said”, or a few, or several, or many, or most, as the Secretary tries to describe weight of opinion. When the Fed first began to publish minutes only three weeks after the fact (ten years ago, Bernanke invention), these modifiers were so confusing that it published a guide.
In general, all the time, ignore the governors and regional presidents (in the minutes described as “members”) until you learn which have good sense and which don’t. Since the minutes’ commentary is anonymous, we can’t tell if an apparent consensus is among the bright lights (Dudley, Fischer, Rosengren, Williams, Lacker, Evans, and Lockhart), or the dim and argumentative (Fisher, George, Bullard, Plosser, Mester, Kocherlakota — all regional presidents). One serious study by economists outside the Fed (Romer, et al) backwalked the opinions of the regional Fed presidents for predictive accuracy and concluded: “They need not offer forecasts.”
Page three: Staff said that market indications of inflation had declined, but inflation surveys were stable. Since the meeting surveys have fallen, too. That’s a big deal: in three weeks the Fed’s primary assumption about inflation has been cast in doubt.
Page four, Staff: “Foreign economies appeared to have continued to expand at a moderate rate in the third quarter… In Japan, consumption staged a mild rebound…. euro area pointed only to continued sluggish growth.” Events have proved this commentary absurdly optimistic. Strangely, profoundly out of touch.
Page 5, in puzzled tone, Staff observed that market pricing had pushed back the date for a Fed rate hike. My margin note is “duh.” Markets see US wages and global deflation. Later on that page: “Credit flows to nonfinancial business picked up in September.” The Fed’s own H.8 shows a deep slowdown in total bank credit.
Page 6: “Staff revised down its projection for real GDP growth….” What?! You see that in any media analysis? Staff: “The risks to the forecast for real GDP growth and inflation were seen as tilted to the downside.”
The labor market has improved faster than the Fed thought possible only a year ago, and has positioned to intercept the inflation pressure from wages inevitably rising as the labor market tightens. Yet wages are not rising, and may not even if unemployment falls another percent or more. Staff seems aware that things are not going according to plan. The Fed historically underweights events overseas because the US is the least export-dependent of any major economy, but these minutes are at the edge of oblivious to foreign pressures which will undercut US wages and prices.
Stick out my turkey neck: when rates snap, it will be down.
Friday, November 14, 2014
Capital Markets Update
By Louis S. Barnes Friday, November 14, 2014
Brazilians, Russians, euro-Europeans, non-euro Europeans (Swedes, Danes, Dutch, Czechs…), Brits, Koreans… all have good reason to sell domestic money and buy dollars. The linkage: deflation is spreading outward from the worst-managed, a dead heat between Japan, Europe, and China.
Quiet on the surface, anything but quiet underneath. And “over there”… oh my.
The most important single datum: the Treasury this week sold at auction $70 billion in new long-term bonds for the first time in six years without the Fed as a QE buyer. The auction was effortless, the yield on the 10-year 2.30% Monday, 2.35% Wednesday, and today just under 2.33%. Mortgages have held slightly above 4.00%.
The world is hungry for US paper, bonds or stocks, trying to get out of whatever currency it holds (except Swiss Francs, the ultra-safety play) into dollars. And it is very nearly the whole world. Only China is maintaining its dollar peg, but everyone assumes it will have to devalue as well.
The linkage in all currencies at the moment begins with the US economy, easily in the best shape of all, no matter how poor it feels to 70% of our citizens. The NFIB small-business survey has been stuck in a Great Recession trench, but this year it’s out for real — not healthy, but out. US retail sales managed a modest 0.3% increase in October after September’s contraction.
US GDP is growing on a baseline of 2.5%, stripped of distortions from inventories and trade. The Eurozone overnight announced 3rd quarter results: up 0.2% after the 0.1% 2nd quarter. The London Telegraph on China (the Brits for old reasons are still well-connected in Asia): producer prices have fallen in 32-straight months, its CPI 1.6% and falling versus 3.5% target, and its actual GDP growth probably less than 5%.
Brazilians, Russians, euro-Europeans, non-euro Europeans (Swedes, Danes, Dutch, Czechs…), Brits, Koreans… all have good reason to sell domestic money and buy dollars. The linkage: deflation is spreading outward from the worst-managed, a dead heat between Japan, Europe, and China.
Deflation and even sub-normal inflation are fatal in a debt-soaked world. Debtors must pay interest and principal in money more valuable than they borrowed, and can’t borrow new funds. The remedy understood long before the dawn of central banks (circa 1875): chop official interest rates and print money until inflation is restored, aided by your weakening currency. The alternate or companion remedy is fiscal: borrow and spend. But the Krugman mirage is foreclosed today by ruinous sovereign debt.
A currency weakened by printing should make your exports more attractive to others, and make imports more expensive, which should… should… push domestic inflation up and out of the danger zone.
Today that ancient strategy is failing. If the fundamental global problem is excess production and excess labor, those who devalue get this disastrous reward: higher import prices raise domestic costs, but not incomes. Exactly the same effect as an oil “price shock,” self-inflicted, underway in Japan right now.
Another small problem: if everyone devalues at once, their relative positions do not change. Except versus the US and the buck. We have precedent for this situation: the 1997-’98 “Asian Contagion.” At its feverish peak, Russia defaulted on its bonds, and hyper-leverage by some math wonks at nobody-ever-heard-of Long Term Capital Management nearly collapsed the financial system.
In 1997 the Fed misunderstood. It was terrified of an unstoppable global recession, and cut the Fed funds rate from 5.50% to 4.75%. Greenspan, Summers, and Rubin made the cover of Time as the “Committee to Save the World.” Few people understood that the flood of global cash to the dollar was an enormous stimulant here, and the Fed’s rate cut just blimped more gas into the stock bubble.
Today I’m not so sure the cash flood will be as beneficial. We, too, suffer from incipient wage deflation. But, short of starting a trade war with tariffs, we have no way to keep the world from swamping our lifeboat — if that’s the correct analogy.
The Fed today is struggling. It sees conditions precedent to an overheated labor market, but a tsunami of deflation as well. Its threats to raise rates just make the currency contagion worse. Better to cork it for a bit, as the Bank of England has done.
Friday, November 7, 2014
Capital Markets Update
By Louis S. Barnes Friday, November 7, 2014
Mortgage interest rates were mostly flat on the week as economic data continues to be mixed. Economic data stronger than expected included the October ISM Manufacturing Index, weekly jobless claims, Q3 Productivity, and October unemployment. The four week moving average of jobless claims fell to its lowest level in 14 years. Unemployment fell to 5.8% but the labor participation rate is still low at 62.8%. Economic data weaker than expected included September Construction Spending, the September Trade Deficit, September Factory Orders, the October ISM Services Sector Index, October non-farm and private payrolls, and October Average Hourly Earnings. In Europe, the European Central Bank left interest rates unchanged and did not announce additional stimulus. The European Commission cut its growth forecast for the EU to 0.8% this year and to 1.1% in 2015. In China, the Purchasing Managers Index was weaker at 50.8 versus 51.2 expected. Economic weakness in Europe, China, and much of Latin America along with a strong Dollar will likely be a drag on U.S. economic growth as exports slow.
The Dow Jones Industrial Average is currently at 17,552, up over 160 points on the week. The crude oil spot price is currently at $78.78 per barrel, down almost $2 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Thursday’s Jobless Claims and Friday’s Retail Sales and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Tuesday for Veterans Day.
Mortgage interest rates were mostly flat on the week as economic data continues to be mixed. Economic data stronger than expected included the October ISM Manufacturing Index, weekly jobless claims, Q3 Productivity, and October unemployment. The four week moving average of jobless claims fell to its lowest level in 14 years. Unemployment fell to 5.8% but the labor participation rate is still low at 62.8%. Economic data weaker than expected included September Construction Spending, the September Trade Deficit, September Factory Orders, the October ISM Services Sector Index, October non-farm and private payrolls, and October Average Hourly Earnings. In Europe, the European Central Bank left interest rates unchanged and did not announce additional stimulus. The European Commission cut its growth forecast for the EU to 0.8% this year and to 1.1% in 2015. In China, the Purchasing Managers Index was weaker at 50.8 versus 51.2 expected. Economic weakness in Europe, China, and much of Latin America along with a strong Dollar will likely be a drag on U.S. economic growth as exports slow.
The Dow Jones Industrial Average is currently at 17,552, up over 160 points on the week. The crude oil spot price is currently at $78.78 per barrel, down almost $2 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Thursday’s Jobless Claims and Friday’s Retail Sales and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Tuesday for Veterans Day.
Friday, October 31, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 31st, 2014
Mortgage and long-term rates are still near their lows — reassuring, considering everything else has lost its marbles. Or perhaps bonds are doing well because everything else is nuts… a fair proposition to which we’ll return.
Aged about 12 I got to see the Ringling Brothers and Barnum & Bailey “Greatest Show in Earth” at Madison Square Garden in NYC. Three rings and then some, acts and animals all over that giant auditorium floor, but each one in confined space. Watching the economy today is like that circus, but each act interactive with the others.
A lion tamer trying to get in the little car with the clowns while lions chase them round and round… An elephant knocks down half the trapeze, Wallendas landing in the crowd… The ringmaster trying to restore order while a troop of escaped monkeys strips him of top hat, red coat, and megaphone.
From order to chaos and back to order…. The Fed, doing its level best to maintain dignity, issued a hawkish statement post-meeting Wednesday. Very hawkish, and as ignored as the ringmaster above. “Substantial improvement in the outlook for the labor market… underlying strength in the broader economy.” Chair Yellen has made her call: unemployment as traditionally measured now below 6%, and new claims for unemployment insurance at a super-cycle low, the threat is sudden gains in wages and inflation. She left in “considerable period of time” for 0%-.25% Fed funds, but we know from Fed vice-chair Stanley Fischer that “considerable” is weeks to six months.
This was a hair-trigger statement, a profound bet that those traditional measures of the labor market will again be predictive. I suppose the Chair has to make that call. Although not tightening yet, the threat itself is a form of tightening, and the market response leads us straight to the chaos.
Only currencies moved on the Fed’s words, the euro and yen resuming free-fall versus the dollar. The mechanism of falling is investors of all kinds selling zero-paying euro- and yen-denominated securities and buying dollar ones, anticipating Fed-hiked yield. Back to Fed quandaries: one of the best inflation indicators is long-term Treasurys. Treasury 10s have fallen all year, consistent with a forecast for a weak economy and falling inflation, and silly for the Fed to think of raising its rate. But, Eric Rosengren, Boston-Fed-Prez and the smartest one of the lot, pointed to this Fed problem: if the dollar is rocketing, a lot of money is buying UST-10s and artificially cutting its yield, masking an inflation threat. But the dollar is up because the Fed threatens to tighten, maybe prematurely. You want circular rings in your circus?
How about data? US GDP gained 3.5% in Q3, but hollow: consumption a thin 1.8% pace, the rest suspect. In today’s release, personal spending fell .2% in September, and incomes rose only .2%, both far below estimate. PCE core inflation held at 1.5% year-over-year but is certain to fall if only because the rocketing dollar will cut the cost of all imports. Might falling oil goose the economy? Very little, negligible compared to historical drops. Prior drops cut the cost of all energy, but today natural gas and oil are already down. This one is gasoline-only, not bad, but not big.
Stock market marbles are pouring out of heads on today’s news that the Bank of Japan will increase annual QE from $650 billion to $725 billion. And — incredible — Japan’s government pension fund will dump an additional one-quarter of its $1.4 trillion assets into global stocks, the BoJ effectively buying Japanese bonds that the fund holds to free up the cash. Meanwhile the ECB has begun a pathetic QE, roughly four years too late and a piddling $2 billion per month, but even that excites marbleless stock yahoos.
The BoJ and ECB are hosing funny money into bubbled markets, mostly so that at future trial they can say the collapse wasn’t their fault, while the Fed wants to tighten into imaginary inflation. Could I make that up?
Stick with the basics. If US wages begin to rise, the Fed will tighten quickly. The bond market, dollar-distorted or not, will then vote on the Fed’s move: appropriate, overdue, or premature? Hunch here: long-term rates might even fall on the move.
Friday, October 17, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 17, 2014
Wow. What was that all about? For one thing, not the US economy. Another thing not about: mortgage rates, just about back where they were before the stock market circus. Take it one piece at a time….
Pay as little attention as possible to the stock market. It enjoyed a one-way rally for three years, and was way overdue for waves of profit-taking — for any reason or no reason at all. But two fundamentals remain unchanged: if you sell your stocks there is nothing useful to do with the money, just safety plays with little or no yield; and second, business conditions and earnings are still good, especially in the US.
With those two forces in place it’s hard to get a deep unwind underway. To harm the real economy, stocks have to crash. The real economy may not be accelerating, but it is not slowing in any meaningful way. US manufacturing is very strong, aided by energy costs as little as one-third those of competitors overseas. September industrial production rose 1%.
Job market signals are super-strong but somehow misleading, not pushing wages up. Claims for unemployment insurance fell to 264,000 last week, a level triggering Fed tightening any time in the last 40 years. September retail sales fell .3%, yet another accurate sign of wage weakness. Housing starts are up 9% in nine months, but the whole shebang is apartments, not homes for equity-building.
If the US economy is as-was, where’s the fire? Europe. Again. Linkage to markets here are strange but powerful.
The euro experiment has been a disaster because it requires economic changes beyond cultural tolerance. Non-German Europe has never been as productive as Germany. For accounts to balance among 19 nations, the strong must adopt behavior reciprocal to the weak until the weak adopt the productive culture of the strong. For the euro to work, Germany must become consumer-based, inflation tolerant, and an importer. Italy, Spain, and, France must “reform:” shrinking their welfare states, making it easy to hire and fire workers, start and close new businesses.
Ain’t gonna happen. Never is a long time, but never. The ECB has bought time. It has given an insolvent euro-banking system enough cash to soak up sovereign debt still flooding from every treasury but Germany’s. Three years ago sovereign bonds all over Europe entered a fire sale, yields soaring. The ECB put out the fire by blustering, saying it would buy these bonds if markets dared to sell against it.
The ECB has not bought a single bond, and markets want to see the cash. The proximate cause of all the market hoo-ah this week has been awful economic news out of Europe, GDPs falling into recession and disinflation turning to deflation. The telltale is bonds, not stocks. Euro-zone bonds have decoupled again: German 10s trade 0.82%, Greek 10s 8.90% (up a full point this week), Spain’s 2.20% and Italy’s 2.56%.
Global markets have caught their breath at week’s end because everyone assumes Europe will try something to save itself. However, markets also assume that so much damage has been done to real economies that nothing will work. This crisis will recur, and on shorter cycle than prior ones.
From Europe outward, effects caromed like a pool-table break. A new European recession is profoundly deflationary for the world, thus intercepting Fed intentions to raise rates. Markets and the Fed itself had adopted “liftoff” to describe the Fed’s initial moves above zero. Now we’re groping for new slang to describe a new Fed predicament: any liftoff will be followed soon by a return to zero. “Crash” is too strong, but “dead stick” is close. James Bullard, St. Louis Fed Prez, for months a big, fluffy hawk this week said QE should be reconsidered.
ECB and Fed chatter will lurch markets temporarily, but the global bond rally reflects deep belief that the central banks have shot their wads. Now it’s up to economies themselves, and in Europe the possibility of political exhaustion with the euro experiment. The day it folds will be rough, but global recovery would follow.
Wow. What was that all about? For one thing, not the US economy. Another thing not about: mortgage rates, just about back where they were before the stock market circus. Take it one piece at a time….
Pay as little attention as possible to the stock market. It enjoyed a one-way rally for three years, and was way overdue for waves of profit-taking — for any reason or no reason at all. But two fundamentals remain unchanged: if you sell your stocks there is nothing useful to do with the money, just safety plays with little or no yield; and second, business conditions and earnings are still good, especially in the US.
With those two forces in place it’s hard to get a deep unwind underway. To harm the real economy, stocks have to crash. The real economy may not be accelerating, but it is not slowing in any meaningful way. US manufacturing is very strong, aided by energy costs as little as one-third those of competitors overseas. September industrial production rose 1%.
Job market signals are super-strong but somehow misleading, not pushing wages up. Claims for unemployment insurance fell to 264,000 last week, a level triggering Fed tightening any time in the last 40 years. September retail sales fell .3%, yet another accurate sign of wage weakness. Housing starts are up 9% in nine months, but the whole shebang is apartments, not homes for equity-building.
If the US economy is as-was, where’s the fire? Europe. Again. Linkage to markets here are strange but powerful.
The euro experiment has been a disaster because it requires economic changes beyond cultural tolerance. Non-German Europe has never been as productive as Germany. For accounts to balance among 19 nations, the strong must adopt behavior reciprocal to the weak until the weak adopt the productive culture of the strong. For the euro to work, Germany must become consumer-based, inflation tolerant, and an importer. Italy, Spain, and, France must “reform:” shrinking their welfare states, making it easy to hire and fire workers, start and close new businesses.
Ain’t gonna happen. Never is a long time, but never. The ECB has bought time. It has given an insolvent euro-banking system enough cash to soak up sovereign debt still flooding from every treasury but Germany’s. Three years ago sovereign bonds all over Europe entered a fire sale, yields soaring. The ECB put out the fire by blustering, saying it would buy these bonds if markets dared to sell against it.
The ECB has not bought a single bond, and markets want to see the cash. The proximate cause of all the market hoo-ah this week has been awful economic news out of Europe, GDPs falling into recession and disinflation turning to deflation. The telltale is bonds, not stocks. Euro-zone bonds have decoupled again: German 10s trade 0.82%, Greek 10s 8.90% (up a full point this week), Spain’s 2.20% and Italy’s 2.56%.
Global markets have caught their breath at week’s end because everyone assumes Europe will try something to save itself. However, markets also assume that so much damage has been done to real economies that nothing will work. This crisis will recur, and on shorter cycle than prior ones.
From Europe outward, effects caromed like a pool-table break. A new European recession is profoundly deflationary for the world, thus intercepting Fed intentions to raise rates. Markets and the Fed itself had adopted “liftoff” to describe the Fed’s initial moves above zero. Now we’re groping for new slang to describe a new Fed predicament: any liftoff will be followed soon by a return to zero. “Crash” is too strong, but “dead stick” is close. James Bullard, St. Louis Fed Prez, for months a big, fluffy hawk this week said QE should be reconsidered.
ECB and Fed chatter will lurch markets temporarily, but the global bond rally reflects deep belief that the central banks have shot their wads. Now it’s up to economies themselves, and in Europe the possibility of political exhaustion with the euro experiment. The day it folds will be rough, but global recovery would follow.
Friday, October 10, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 10, 2014
Mortgage interest rates improved this past week on concerns that the global economy is slowing and that deflation is spreading. The IMF lowered its global growth outlook again for 2015 down to +3.8%. German Factory Orders fell to their lowest levels since 2009. The FOMC Minutes from its September meeting indicated that risks of a weak global economy will allow the Fed to keep the Fed Funds rate at its current levels for a considerable time. September Import prices were down 0.9% year over year and Export prices were down 0.2% year over year. Inflation in Europe is currently only 0.3% and in the U.S. is only 1.5%. Other economic data of note included the August JOLTS Job Openings, weekly jobless claims, and August Wholesale Inventories which were all stronger than expected. August Consumer Credit, though, was weaker than expected. The revolving credit component fell for the first time in six months. The Treasury auctioned $61 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand.
The Dow Jones Industrial Average is currently at 16,695, down over 300 points on the week. The crude oil spot price is currently $85.61 per barrel, down over $4 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Wednesday’s Producer Price Index (PPI) and Retail Sales, Thursday’s Jobless Claims, Industrial Production, and Philadelphia Fed Survey, and Friday’s Housing Starts and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Monday for Columbus Day.
Mortgage interest rates improved this past week on concerns that the global economy is slowing and that deflation is spreading. The IMF lowered its global growth outlook again for 2015 down to +3.8%. German Factory Orders fell to their lowest levels since 2009. The FOMC Minutes from its September meeting indicated that risks of a weak global economy will allow the Fed to keep the Fed Funds rate at its current levels for a considerable time. September Import prices were down 0.9% year over year and Export prices were down 0.2% year over year. Inflation in Europe is currently only 0.3% and in the U.S. is only 1.5%. Other economic data of note included the August JOLTS Job Openings, weekly jobless claims, and August Wholesale Inventories which were all stronger than expected. August Consumer Credit, though, was weaker than expected. The revolving credit component fell for the first time in six months. The Treasury auctioned $61 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand.
The Dow Jones Industrial Average is currently at 16,695, down over 300 points on the week. The crude oil spot price is currently $85.61 per barrel, down over $4 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Wednesday’s Producer Price Index (PPI) and Retail Sales, Thursday’s Jobless Claims, Industrial Production, and Philadelphia Fed Survey, and Friday’s Housing Starts and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Monday for Columbus Day.
Friday, October 3, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 3, 2014
At the end of a strange week with lots of fresh data, two things stand out: mortgage and long-term rates stayed low, and market movements were magnified by mass escape from wrong-side trades.
On the surface the US data is strong. September payrolls jumped 248,000 jobs, plus another 69,000 revised up from prior months. But the whole purpose of a job is to make money. Average hourly earnings rose… um… er… fell one cent to $24.53, up just 2.0% year-over-year before inflation.
The Fed’s job is to lean against too-rapid job growth, because in all modern economic cycles employers began to compete for employees by paying higher wages, ultimately producing inflation. The optimists are out of their minds today, cheering the health of the economy, but the income/unemployment disconnect is without precedent — although it does connect to a different view of the world.
We are in a global deflation event, with which no one alive has or can have experience. Even those as old as I (65) have lived entire economic lives anticipating inflation, rarely high, usually moderate, and always present. Incomes have risen steadily, even if not so fast in real terms. Moderate inflation has been an enormous benefit to disciplined households. Mortgage debt is in nominal dollars, the original balance and payment gradually but steadily shrinking. Avoid buying things whose prices inflate (which varies cycle to cycle), and beat inflation.
The US is in better shape — vastly better shape — than any other major nation with the exception of the UK. However, the absence of income growth, inflated or otherwise, is a telltale. One alternate explanation for a quarter of a million new jobs monthly and no wage growth: the unemployed and partially employed are taking jobs at poorer wages than old jobs, or — just as important for the youth set — poorer than expected.
Consider math that Americans have never had to consider. If I bought a home any time after 1935, I could expect my debt-to-income ratio at the outset to fall every year thereafter. The payment would become a smaller fraction of my gross income even if I did not upgrade my career, thereby adding safety (above all), increasing disposable income aside from the house payment, and I had bought an appreciating asset.
Friends in the financial world don’t get it. They are of-by-and-for markets in which any demand/supply disequilibrium is blamed on price. Thus today, just as they misunderstood home prices falling way below “clearing prices” 2007-2011, they mistake last year’s home price rise as overdone and blame it for this year’s softening home sales. The alternate (real) universe: the bulk of last year’s home price rise (except in strong local economies, like mine) was due to a rebound in overly discounted prices, and now we are reverting to non-recovery.
We might get a housing recovery going if we backed off Dodd-Frank and CFPB hysteria, but that’s not enough. Home buyers are instinctively aware of this calculus: if my income is rising 2% per year, and I’ve got to pay 4.25% interest to buy a home which might not appreciate, maybe I’ll rent defensively even if rents are rising 5%, and beat that game by renting a lesser apartment? We need higher incomes and would have them were the world not holding us back.
Deflation. Italy downshifted its growth forecast from 0.8% to minus 0.3%, its wallpaper bonds (145% of GDP) rising to 2.32%. German 10s pay 0.89% in a currency falling fast versus the buck. Japan 10s pay 0.521%; in its suicidal miracle, it has inflated the cost of goods, but incomes less so. France will cut 1.5% from public spending, budget deficit still 4.5% of GDP, growth forecast cut to 0.4%, national debt 95% of GDP. Europe-wide year-over-year CPI fell last month to 0.3%.
The fantastic, panicked devaluation of euro and yen (soon to be joined by the yuan) is a desperate attempt to halt deflation overseas, but it exports disinflation to us.
Oh-by-the-way: the top geopolitical risk is now Hong Kong. China cannot hide a Tiananmen there, but neither can it tolerate this mass revolt. Perhaps it will fizzle.
At the end of a strange week with lots of fresh data, two things stand out: mortgage and long-term rates stayed low, and market movements were magnified by mass escape from wrong-side trades.
On the surface the US data is strong. September payrolls jumped 248,000 jobs, plus another 69,000 revised up from prior months. But the whole purpose of a job is to make money. Average hourly earnings rose… um… er… fell one cent to $24.53, up just 2.0% year-over-year before inflation.
The Fed’s job is to lean against too-rapid job growth, because in all modern economic cycles employers began to compete for employees by paying higher wages, ultimately producing inflation. The optimists are out of their minds today, cheering the health of the economy, but the income/unemployment disconnect is without precedent — although it does connect to a different view of the world.
We are in a global deflation event, with which no one alive has or can have experience. Even those as old as I (65) have lived entire economic lives anticipating inflation, rarely high, usually moderate, and always present. Incomes have risen steadily, even if not so fast in real terms. Moderate inflation has been an enormous benefit to disciplined households. Mortgage debt is in nominal dollars, the original balance and payment gradually but steadily shrinking. Avoid buying things whose prices inflate (which varies cycle to cycle), and beat inflation.
The US is in better shape — vastly better shape — than any other major nation with the exception of the UK. However, the absence of income growth, inflated or otherwise, is a telltale. One alternate explanation for a quarter of a million new jobs monthly and no wage growth: the unemployed and partially employed are taking jobs at poorer wages than old jobs, or — just as important for the youth set — poorer than expected.
Consider math that Americans have never had to consider. If I bought a home any time after 1935, I could expect my debt-to-income ratio at the outset to fall every year thereafter. The payment would become a smaller fraction of my gross income even if I did not upgrade my career, thereby adding safety (above all), increasing disposable income aside from the house payment, and I had bought an appreciating asset.
Friends in the financial world don’t get it. They are of-by-and-for markets in which any demand/supply disequilibrium is blamed on price. Thus today, just as they misunderstood home prices falling way below “clearing prices” 2007-2011, they mistake last year’s home price rise as overdone and blame it for this year’s softening home sales. The alternate (real) universe: the bulk of last year’s home price rise (except in strong local economies, like mine) was due to a rebound in overly discounted prices, and now we are reverting to non-recovery.
We might get a housing recovery going if we backed off Dodd-Frank and CFPB hysteria, but that’s not enough. Home buyers are instinctively aware of this calculus: if my income is rising 2% per year, and I’ve got to pay 4.25% interest to buy a home which might not appreciate, maybe I’ll rent defensively even if rents are rising 5%, and beat that game by renting a lesser apartment? We need higher incomes and would have them were the world not holding us back.
Deflation. Italy downshifted its growth forecast from 0.8% to minus 0.3%, its wallpaper bonds (145% of GDP) rising to 2.32%. German 10s pay 0.89% in a currency falling fast versus the buck. Japan 10s pay 0.521%; in its suicidal miracle, it has inflated the cost of goods, but incomes less so. France will cut 1.5% from public spending, budget deficit still 4.5% of GDP, growth forecast cut to 0.4%, national debt 95% of GDP. Europe-wide year-over-year CPI fell last month to 0.3%.
The fantastic, panicked devaluation of euro and yen (soon to be joined by the yuan) is a desperate attempt to halt deflation overseas, but it exports disinflation to us.
Oh-by-the-way: the top geopolitical risk is now Hong Kong. China cannot hide a Tiananmen there, but neither can it tolerate this mass revolt. Perhaps it will fizzle.
Friday, September 26, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 26, 2014
Long-term rates have stabilized, mortgages just under 4.50%, but markets are rattled and it’s hard to tell exactly who or what is doing the shaking.
The Fed has everybody uneasy, simultaneously saying it may raise the cost of money faster than markets think, but is not in a hurry, but will do something next year, which draws ever-closer.
The stock market hit a li’l’ air pocket, but it’s very difficult for stocks to “correct” deeply, as so many have forecast. If you sell, where will you go? Cash pays nothing and bonds are vulnerable.
Bill Gross, greatest bond trader of all time, has left Pimco for far-smaller Janus, apparently one sunrise ahead of a firing squad. Age is kind to some of us, not to others. The bond market fears that Pimco will dump Gross’ bloated holdings.
Economic data are okay, but for the umpteenth month not accelerating. Housing is flat, sales of existing homes not increasing in August, and FHFA home price data for July a 0.1% gain, the year-over-year down to 4.4% continuing to decline .5%/month.
The yen and euro continue precipitous declines versus the dollar, the former 109.37/dollar, the latter now $1.268. Low inflation for us, but rapid, large and sustained one-way moves in currencies are not good for anybody.
Our air assault on ISIS includes the first combat missions of the F-22 Raptor, at last a soft target without anti-aircraft capability. Nine years in hangars because of deficiencies, $67 billion for only 188 buzzards. In a similar achievement, a Bloomberg study puts the cost of the Obamacare website at $2 billion.
Back to markets. As the aftermath of the Great Recession still unfolds, we have been confronted with all sorts of frights and warnings. Prudence and exhaustion have advised turning down the volume and proceeding with something productive. I do not mean the following to be another scare-story, just marking the passing of an era.
Bye-bye QE. Quantitative easing. The Fed buying Treasurys and MBS to inject credit directly into the economy around a broken banking system, and to keep long-term rates low. QE1 worked beautifully, QE2 less so, and QE3 possibly unnecessary. Exactly two years ago, QE3 began its buys, $80 billion per month, until the Fed began to taper only a little more than a year later. Markets were terrified last fall, wondering who would pick up the $80 billion monthly tab.
Turned out not to be a problem, but I don’t know anyone certain as to why it has been so easy to find buyers for US paper at rates lower than the first “taper tantrum,” and Fed rate hikes in prospect. The biggest help: foreign economic weakness and ultra-low yields overseas. One key propellant in this “rising dollar”: huge moves out of foreign bonds into ours.
A related question has been, how will the US economy and markets do when the Fed stops mainlining $80 billion monthly in cash heroin? The principal answer has been revived bank lending. Total bank credit, the Fed’s weekly H-8, has this year run at a 9% annual growth rate, replacing the QE credit add. Until last month. Since mid-August H-8 has actually declined slightly. Watch that. An anomaly? Temporary? Banks at last wilting under over-regulation?
The sheer mass Of QE is something. The US has $9 trillion in outstanding home mortgages, not including 2nds and Helocs (about $1 trillion). Of those 1st mortgages, the Fed now owns $1.7 trillion — 19%. It also owns $2.4 trillion in Treasurys, also about 20% of that market, but in normal times has owned half that much. Prior to 2008 the Fed had never bought mortgages.
Please ignore all the yammering about the Fed’s balance sheet and inflation, debasement, exit… all of that. Very silly. Do give some thought to our inability to re-design our system of mortgage lending. Since 2008 the Fed has been it, and for 70 years prior government agencies were it, and the “private sector” has neither the interest or capacity to be it.
Long-term rates have stabilized, mortgages just under 4.50%, but markets are rattled and it’s hard to tell exactly who or what is doing the shaking.
The Fed has everybody uneasy, simultaneously saying it may raise the cost of money faster than markets think, but is not in a hurry, but will do something next year, which draws ever-closer.
The stock market hit a li’l’ air pocket, but it’s very difficult for stocks to “correct” deeply, as so many have forecast. If you sell, where will you go? Cash pays nothing and bonds are vulnerable.
Bill Gross, greatest bond trader of all time, has left Pimco for far-smaller Janus, apparently one sunrise ahead of a firing squad. Age is kind to some of us, not to others. The bond market fears that Pimco will dump Gross’ bloated holdings.
Economic data are okay, but for the umpteenth month not accelerating. Housing is flat, sales of existing homes not increasing in August, and FHFA home price data for July a 0.1% gain, the year-over-year down to 4.4% continuing to decline .5%/month.
The yen and euro continue precipitous declines versus the dollar, the former 109.37/dollar, the latter now $1.268. Low inflation for us, but rapid, large and sustained one-way moves in currencies are not good for anybody.
Our air assault on ISIS includes the first combat missions of the F-22 Raptor, at last a soft target without anti-aircraft capability. Nine years in hangars because of deficiencies, $67 billion for only 188 buzzards. In a similar achievement, a Bloomberg study puts the cost of the Obamacare website at $2 billion.
Back to markets. As the aftermath of the Great Recession still unfolds, we have been confronted with all sorts of frights and warnings. Prudence and exhaustion have advised turning down the volume and proceeding with something productive. I do not mean the following to be another scare-story, just marking the passing of an era.
Bye-bye QE. Quantitative easing. The Fed buying Treasurys and MBS to inject credit directly into the economy around a broken banking system, and to keep long-term rates low. QE1 worked beautifully, QE2 less so, and QE3 possibly unnecessary. Exactly two years ago, QE3 began its buys, $80 billion per month, until the Fed began to taper only a little more than a year later. Markets were terrified last fall, wondering who would pick up the $80 billion monthly tab.
Turned out not to be a problem, but I don’t know anyone certain as to why it has been so easy to find buyers for US paper at rates lower than the first “taper tantrum,” and Fed rate hikes in prospect. The biggest help: foreign economic weakness and ultra-low yields overseas. One key propellant in this “rising dollar”: huge moves out of foreign bonds into ours.
A related question has been, how will the US economy and markets do when the Fed stops mainlining $80 billion monthly in cash heroin? The principal answer has been revived bank lending. Total bank credit, the Fed’s weekly H-8, has this year run at a 9% annual growth rate, replacing the QE credit add. Until last month. Since mid-August H-8 has actually declined slightly. Watch that. An anomaly? Temporary? Banks at last wilting under over-regulation?
The sheer mass Of QE is something. The US has $9 trillion in outstanding home mortgages, not including 2nds and Helocs (about $1 trillion). Of those 1st mortgages, the Fed now owns $1.7 trillion — 19%. It also owns $2.4 trillion in Treasurys, also about 20% of that market, but in normal times has owned half that much. Prior to 2008 the Fed had never bought mortgages.
Please ignore all the yammering about the Fed’s balance sheet and inflation, debasement, exit… all of that. Very silly. Do give some thought to our inability to re-design our system of mortgage lending. Since 2008 the Fed has been it, and for 70 years prior government agencies were it, and the “private sector” has neither the interest or capacity to be it.
Friday, September 19, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 19, 2014
Mortgage interest rates improved slightly this past week as the Federal Reserve Bank left the Fed Funds rate unchanged at the conclusion of its FOMC meeting. The language of the FOMC statement was left unchanged as well indicating that it will leave the Fed Funds rate at its current level for a considerable time. Economic data was mixed. Economic data stronger than expected included the Fed New York Empire State Manufacturing Index, the Q2 Current Account Balance, the September NAHB Housing Market Index, and weekly jobless claims. Economic data weaker than expected included August Industrial Production, August Capacity Utilization, August Housing Starts, August Building Permits, the September Philadelphia Fed Business Index, and August Leading Economic Indicators. Industrial Production had its first decline in seven months. Inflation data was tame with both the Producer Price Index (PPI) and the Consumer Price Index (CPI) up less than 2.0% on a year over year basis. In China, the central bank will add more stimulus to its five largest banks to increase economic growth.
The Dow Jones Industrial Average is currently at 17,301, up over 300 points on the week. The crude oil spot price is currently at $91.98 per barrel, down slightly on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Wednesday’s New Home Sales, Thursday’s Durable Goods Orders and Jobless Claims, and Friday’s final look at Q2 GDP and Consumer Sentiment Index as potential market moving events.
Mortgage interest rates improved slightly this past week as the Federal Reserve Bank left the Fed Funds rate unchanged at the conclusion of its FOMC meeting. The language of the FOMC statement was left unchanged as well indicating that it will leave the Fed Funds rate at its current level for a considerable time. Economic data was mixed. Economic data stronger than expected included the Fed New York Empire State Manufacturing Index, the Q2 Current Account Balance, the September NAHB Housing Market Index, and weekly jobless claims. Economic data weaker than expected included August Industrial Production, August Capacity Utilization, August Housing Starts, August Building Permits, the September Philadelphia Fed Business Index, and August Leading Economic Indicators. Industrial Production had its first decline in seven months. Inflation data was tame with both the Producer Price Index (PPI) and the Consumer Price Index (CPI) up less than 2.0% on a year over year basis. In China, the central bank will add more stimulus to its five largest banks to increase economic growth.
The Dow Jones Industrial Average is currently at 17,301, up over 300 points on the week. The crude oil spot price is currently at $91.98 per barrel, down slightly on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Wednesday’s New Home Sales, Thursday’s Durable Goods Orders and Jobless Claims, and Friday’s final look at Q2 GDP and Consumer Sentiment Index as potential market moving events.
Friday, September 12, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 12, 2014
In the backwards world of bonds and mortgages, in which good news is bad, good news pushed up long-term rates this week.
US data may encourage the Fed to accelerate the end of ZIRP (zero interest rate policy), at its meeting next week, possibly, maybe, perhaps, tentatively pre-hinting a rate hike by removing “for a considerable period” from its post-meeting statement.
Continuing this good-news issue (the only one each year), threats of war have receded. Czar Vladimir will continue to make trouble, but Russian troops are not headed for Kiev, instead pulling out of Ukraine after preserving the pretense of separatist rebellion. ISIS… more wise old heads say this 8th Century mob is a local threat in a locality beyond redemption. Newtonian physics are in play: the more dangerous either of these bad actors, the more resistance will gather against them.
US economic data have been seen for years through two lenses: worrywarts fear that we are in a protracted period of stagnation defiant of remedy, and optimists have thought recovery is protracted but underway. The optimists had a good week. Retail sales picked up .6% in August and both July and June were revised up (although auto sales are driving the show, pushed way ahead of natural demand by trash credit and giveaway discounts). The NFIB survey of small business is now in a steady up-trend (annoying to its far-right, anti-government chief economist, fighting his own data).
Behind that happy US foreground lies the Fed and the world, and that background scenery is without precedent. I don’t know of a time in the modern era when US conditions have been so different from the rest of the world, the UK excepted. As healthy as the US is becoming, and as stable because of extraordinary efforts by the Fed to de-risk the financial system, the rest of the world is deteriorating and unstable.
Just this week Brazil’s credit was downgraded near junk, caught in slowdown, inflation, and weak demand for exports. Venezuela has joined Argentina stumbling toward default. Japan’s GDP contracted at a 7.1% pace in the 2nd quarter, fading under the weight of a national sales tax taken from 5% to 8% to cut its deficit (fifty percent of spending); the slide so bad that new stimulus spending is under discussion. A bad trap, no evident escape from the austerity-stimulus circle. Europe is in a similar situation.
The benefits to us, big ones, flow through currencies and weakening foreign demand for commodities. The euro touched $1.40 in April, now $1.29; the yen one year ago traded 96 to the buck, now 107. A similar devaluation by China would mightily annoy the US (last month’s China trade surplus with the US: $49 billion), but China trades too much with Japan and Europe to tolerate an appreciating yuan versus euro and yen.
Everything we import, oil to sneakers, will tend to get cheaper. In dollar terms oil is already down 10%, gasoline prices falling. Our trade deficit will rise, and must be financed, but money is cheap thanks to the panicked policies at the ECB, BOJ, and intermittently the PBOC. Our exports become more expensive, but in total are only about 12% of our economy (over 50% in Germany).
In this circumstance it is impossible for inflation to rise to dangerous ground. The kindling is soaking wet, and the match — rising wages — nowhere in sight.
So why would the Fed consider a rate-warning next week? There are reasons for the Fed to act other than prices. In the fall of 2008 the Fed embarked on a completely unprecedented rescue which took hold in just a few months, the means an explicit intention to cause financial assets and homes to rise in value. Worked, too! Now the Fed must be concerned that these assets not bubble, not be vulnerable to more significant tightening in a real recovery.
Hunch: long-term rates are not headed far. The spread to foreign equivalents is too wide, US bonds too attractive, the US deficit under control.
Another good news hunch. China has sent a battalion of People’s Liberation Army infantry to Sudan as UN peacekeepers, the first-ever unit so large. To protect its own people and business venture there, but Chinese engagement is a hopeful thing.
In the backwards world of bonds and mortgages, in which good news is bad, good news pushed up long-term rates this week.
US data may encourage the Fed to accelerate the end of ZIRP (zero interest rate policy), at its meeting next week, possibly, maybe, perhaps, tentatively pre-hinting a rate hike by removing “for a considerable period” from its post-meeting statement.
Continuing this good-news issue (the only one each year), threats of war have receded. Czar Vladimir will continue to make trouble, but Russian troops are not headed for Kiev, instead pulling out of Ukraine after preserving the pretense of separatist rebellion. ISIS… more wise old heads say this 8th Century mob is a local threat in a locality beyond redemption. Newtonian physics are in play: the more dangerous either of these bad actors, the more resistance will gather against them.
US economic data have been seen for years through two lenses: worrywarts fear that we are in a protracted period of stagnation defiant of remedy, and optimists have thought recovery is protracted but underway. The optimists had a good week. Retail sales picked up .6% in August and both July and June were revised up (although auto sales are driving the show, pushed way ahead of natural demand by trash credit and giveaway discounts). The NFIB survey of small business is now in a steady up-trend (annoying to its far-right, anti-government chief economist, fighting his own data).
Behind that happy US foreground lies the Fed and the world, and that background scenery is without precedent. I don’t know of a time in the modern era when US conditions have been so different from the rest of the world, the UK excepted. As healthy as the US is becoming, and as stable because of extraordinary efforts by the Fed to de-risk the financial system, the rest of the world is deteriorating and unstable.
Just this week Brazil’s credit was downgraded near junk, caught in slowdown, inflation, and weak demand for exports. Venezuela has joined Argentina stumbling toward default. Japan’s GDP contracted at a 7.1% pace in the 2nd quarter, fading under the weight of a national sales tax taken from 5% to 8% to cut its deficit (fifty percent of spending); the slide so bad that new stimulus spending is under discussion. A bad trap, no evident escape from the austerity-stimulus circle. Europe is in a similar situation.
The benefits to us, big ones, flow through currencies and weakening foreign demand for commodities. The euro touched $1.40 in April, now $1.29; the yen one year ago traded 96 to the buck, now 107. A similar devaluation by China would mightily annoy the US (last month’s China trade surplus with the US: $49 billion), but China trades too much with Japan and Europe to tolerate an appreciating yuan versus euro and yen.
Everything we import, oil to sneakers, will tend to get cheaper. In dollar terms oil is already down 10%, gasoline prices falling. Our trade deficit will rise, and must be financed, but money is cheap thanks to the panicked policies at the ECB, BOJ, and intermittently the PBOC. Our exports become more expensive, but in total are only about 12% of our economy (over 50% in Germany).
In this circumstance it is impossible for inflation to rise to dangerous ground. The kindling is soaking wet, and the match — rising wages — nowhere in sight.
So why would the Fed consider a rate-warning next week? There are reasons for the Fed to act other than prices. In the fall of 2008 the Fed embarked on a completely unprecedented rescue which took hold in just a few months, the means an explicit intention to cause financial assets and homes to rise in value. Worked, too! Now the Fed must be concerned that these assets not bubble, not be vulnerable to more significant tightening in a real recovery.
Hunch: long-term rates are not headed far. The spread to foreign equivalents is too wide, US bonds too attractive, the US deficit under control.
Another good news hunch. China has sent a battalion of People’s Liberation Army infantry to Sudan as UN peacekeepers, the first-ever unit so large. To protect its own people and business venture there, but Chinese engagement is a hopeful thing.
Friday, September 5, 2014
Capital Markets Update
By Louis S. Barnes Friday, September 5, 2014
The gap in economic performance between the US and overseas is widening, holding US rates down. However, the data brings as many questions as answers.
By historical comparison, the twin ISM surveys rising in August to 59.0 (manufacturing), and 59.6 (services) have reached inflationary overheating. But this is 2014, not history, and the tidy cyclical patterns of the 50 years after WW II no longer apply. Yet some patterns must apply, especially this one: at some point of US economic growth and shrinking pool of labor, wages must rise. Right? Nothing new might happen in a globalized world, like substitution of overseas labor. Right.
Long-term rates were poised to rise today on an August payroll report expected to surge since the ISMs did. But payrolls did not perform, rising only 142,000, a little more than half the forecast. The cyclical boys, wrong ever since 2009 (and longer) have dismissed the payroll report as an aberration. Could be.
But the aberrant sword cuts two ways: August wages jumped out of stagnation to a 3% annualized increase. So long as we’re in the land of “should be,” here is the Fed’s greatest fear: that the job market is already too tight, tight enough to drive wages up faster than gains in productivity, the certain prescription for inflation. Adding to that concern this week: an elaborate Fed staff study says that the decline in the workforce is structural, old folks and the low-skilled leaving for good, the labor pool not responsive to the higher wages in a good recovery (BTW: I don’t believe that conclusion for a second; better jobs and wages and citizen workers will come out of the US woodwork).
A dart-throw into middle-ground: the hot economic stats feel sugar high. Auto sales are running stronger than real absorption can support, now a 17.5-million-annual pace, fueled by trash lending and giveaway discounts and pulling future demand forward. The stock market is now an unsustainable propellant. Bank credit is roaring along at a 9.5% annual pace, sustainability unclear. And if everything is so rosy, why is housing not attending the cyclical party?
No question, the US economy is doing better, but low-slope. New question: what effect will a slowing outside world have on the US? The answer lies in a loopy game of rock-paper-scissors, trying to figure out which forces are stronger than others.
The most important element in US strength in the last few years: cheap energy, more responsible for the US manufacturing rebound than any other element, US business electricity one-third the cost in Germany. That’s a durable boost here, which will last so long as current extraction technology is economic at today’s energy prices.
The US economy is less dependent on exports than any. Slowing overseas appetite for our stuff thus does less harm to us than anywhere.
Weakness overseas is so deep, central banks in such extreme action that super-low yielding US bonds and MBS look like all-time cheap deals. Perversely — very — when the Fed finally does begin to tighten it may have to force up short-term rates more than it usually would versus US economic activity because market-driven long-term rates will stay down. (Or the unthinkable… the Fed will begin to sell its bond and MBS trove.)
If you’re in trouble, as the outside world is, and heavily reliant on exports, as all of our overseas competitors are, you devalue your currency. The ECB’s tiptoe into QE this week will have as little (or less) effect than the Fed’s QE3. QE1 here at the end of 2008 was miraculous, knocking down long-term rates. Since then, both here and in Europe long-term rates are already dead low, QE ineffective — except to weaken currency. The euro dropped below $1.30 on the ECB news, and going lower.
Others will follow, must follow, including Japan and China. The effect is deflationary here, prices of imported goods falling, and the devaluers exporting their wage structure and unemployment along with the goods.
Overseas weakness will limit any inflation threat, and not abort US recovery. But our recovery still doesn’t amount to much. Watch wages and housing. True acceleration lies there.
The gap in economic performance between the US and overseas is widening, holding US rates down. However, the data brings as many questions as answers.
By historical comparison, the twin ISM surveys rising in August to 59.0 (manufacturing), and 59.6 (services) have reached inflationary overheating. But this is 2014, not history, and the tidy cyclical patterns of the 50 years after WW II no longer apply. Yet some patterns must apply, especially this one: at some point of US economic growth and shrinking pool of labor, wages must rise. Right? Nothing new might happen in a globalized world, like substitution of overseas labor. Right.
Long-term rates were poised to rise today on an August payroll report expected to surge since the ISMs did. But payrolls did not perform, rising only 142,000, a little more than half the forecast. The cyclical boys, wrong ever since 2009 (and longer) have dismissed the payroll report as an aberration. Could be.
But the aberrant sword cuts two ways: August wages jumped out of stagnation to a 3% annualized increase. So long as we’re in the land of “should be,” here is the Fed’s greatest fear: that the job market is already too tight, tight enough to drive wages up faster than gains in productivity, the certain prescription for inflation. Adding to that concern this week: an elaborate Fed staff study says that the decline in the workforce is structural, old folks and the low-skilled leaving for good, the labor pool not responsive to the higher wages in a good recovery (BTW: I don’t believe that conclusion for a second; better jobs and wages and citizen workers will come out of the US woodwork).
A dart-throw into middle-ground: the hot economic stats feel sugar high. Auto sales are running stronger than real absorption can support, now a 17.5-million-annual pace, fueled by trash lending and giveaway discounts and pulling future demand forward. The stock market is now an unsustainable propellant. Bank credit is roaring along at a 9.5% annual pace, sustainability unclear. And if everything is so rosy, why is housing not attending the cyclical party?
No question, the US economy is doing better, but low-slope. New question: what effect will a slowing outside world have on the US? The answer lies in a loopy game of rock-paper-scissors, trying to figure out which forces are stronger than others.
The most important element in US strength in the last few years: cheap energy, more responsible for the US manufacturing rebound than any other element, US business electricity one-third the cost in Germany. That’s a durable boost here, which will last so long as current extraction technology is economic at today’s energy prices.
The US economy is less dependent on exports than any. Slowing overseas appetite for our stuff thus does less harm to us than anywhere.
Weakness overseas is so deep, central banks in such extreme action that super-low yielding US bonds and MBS look like all-time cheap deals. Perversely — very — when the Fed finally does begin to tighten it may have to force up short-term rates more than it usually would versus US economic activity because market-driven long-term rates will stay down. (Or the unthinkable… the Fed will begin to sell its bond and MBS trove.)
If you’re in trouble, as the outside world is, and heavily reliant on exports, as all of our overseas competitors are, you devalue your currency. The ECB’s tiptoe into QE this week will have as little (or less) effect than the Fed’s QE3. QE1 here at the end of 2008 was miraculous, knocking down long-term rates. Since then, both here and in Europe long-term rates are already dead low, QE ineffective — except to weaken currency. The euro dropped below $1.30 on the ECB news, and going lower.
Others will follow, must follow, including Japan and China. The effect is deflationary here, prices of imported goods falling, and the devaluers exporting their wage structure and unemployment along with the goods.
Overseas weakness will limit any inflation threat, and not abort US recovery. But our recovery still doesn’t amount to much. Watch wages and housing. True acceleration lies there.
Friday, August 29, 2014
Capital Markets Update
By Louis S. Barnes Friday, August 29, 2014
Mortgage interest rates improved slightly this past week despite economic data that was mostly stronger than expected. Economic data stronger than expected included July Durable Goods Orders, the June FHFA Home Price Index, August Consumer Confidence, weekly jobless claims, the second look at Q2 GDP, July Pending Home Sales, the August Chicago Purchasing Managers Index, and the University of Michigan Consumer Sentiment Index. Durable Goods Orders increased by the most on record, driven mainly by aircraft orders. Consumer Confidence reached its highest level since October of 2007. Economic data weaker than expected included July New Home Sales, the June Case Shiller 20 City Home Price Index, and July Personal Spending. Increasing geopolitical tensions in Ukraine and the Middle East along with the increased likelihood of stimulus from the European Central Bank have supported Treasury and Mortgage prices. The Treasury auctioned $93 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes which were met with reasonably strong demand. Corporate profits during the second quarter were the strongest in four years.
The Dow Jones Industrial Average is currently at 17,095, up almost 100 points on the week. The crude oil spot price is currently $95.10 per barrel, up almost $2 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Tuesday’s ISM Manufacturing Index, Thursday’s International Trade and Jobless Claims, and Friday’s employment report for August as potential market moving events. All markets are closed on Monday for Labor Day.
Mortgage interest rates improved slightly this past week despite economic data that was mostly stronger than expected. Economic data stronger than expected included July Durable Goods Orders, the June FHFA Home Price Index, August Consumer Confidence, weekly jobless claims, the second look at Q2 GDP, July Pending Home Sales, the August Chicago Purchasing Managers Index, and the University of Michigan Consumer Sentiment Index. Durable Goods Orders increased by the most on record, driven mainly by aircraft orders. Consumer Confidence reached its highest level since October of 2007. Economic data weaker than expected included July New Home Sales, the June Case Shiller 20 City Home Price Index, and July Personal Spending. Increasing geopolitical tensions in Ukraine and the Middle East along with the increased likelihood of stimulus from the European Central Bank have supported Treasury and Mortgage prices. The Treasury auctioned $93 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes which were met with reasonably strong demand. Corporate profits during the second quarter were the strongest in four years.
The Dow Jones Industrial Average is currently at 17,095, up almost 100 points on the week. The crude oil spot price is currently $95.10 per barrel, up almost $2 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Tuesday’s ISM Manufacturing Index, Thursday’s International Trade and Jobless Claims, and Friday’s employment report for August as potential market moving events. All markets are closed on Monday for Labor Day.
Friday, August 22, 2014
Capital Markets Update
By Louis S. Barnes Friday, August 22, 2014
Mortgage interest rates increased slightly this past week as economic data was mostly stronger than expected. Economic data stronger than expected included the August NAHB Housing Market Index, July Housing Starts, July Building Permits, weekly jobless claims, July Existing Home Sales, the August Philadelphia Fed Business Index, and July Leading Economic Indicators. Housing Starts were the strongest in eight months, Building Permits were the best since last November, and the Philadelphia Fed Business Index reached its best level since March of 2011. Year over year, though, Existing Home Sales are down 4.3%. Inflation data was reasonably tame with July CPI up 2.0% year over year. Excluding the food and energy components, July core CPI was up 1.9% year over year. In Europe, manufacturing and services sector activity slowed in August. In China, the preliminary purchasing manager’s index was weaker than expected. Geopolitical tensions eased slightly which lessens the support for the relative safety of U.S. Treasuries. Fed Chair Yellen indicated today that labor resources remain significantly underutilized.
The Dow Jones Industrial Average is currently at 17,016, up about 350 points on the week. The crude oil spot price is currently $93.22 per barrel, down almost $4 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s New Home Sales, Tuesday’s Durable Goods Orders and Consumer Confidence Index, Thursday’s second look at Q2 GDP, Jobless Claims, and Pending Home Sales Index, and Friday’s Personal Income and Outlays as potential market moving events.
Mortgage interest rates increased slightly this past week as economic data was mostly stronger than expected. Economic data stronger than expected included the August NAHB Housing Market Index, July Housing Starts, July Building Permits, weekly jobless claims, July Existing Home Sales, the August Philadelphia Fed Business Index, and July Leading Economic Indicators. Housing Starts were the strongest in eight months, Building Permits were the best since last November, and the Philadelphia Fed Business Index reached its best level since March of 2011. Year over year, though, Existing Home Sales are down 4.3%. Inflation data was reasonably tame with July CPI up 2.0% year over year. Excluding the food and energy components, July core CPI was up 1.9% year over year. In Europe, manufacturing and services sector activity slowed in August. In China, the preliminary purchasing manager’s index was weaker than expected. Geopolitical tensions eased slightly which lessens the support for the relative safety of U.S. Treasuries. Fed Chair Yellen indicated today that labor resources remain significantly underutilized.
The Dow Jones Industrial Average is currently at 17,016, up about 350 points on the week. The crude oil spot price is currently $93.22 per barrel, down almost $4 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s New Home Sales, Tuesday’s Durable Goods Orders and Consumer Confidence Index, Thursday’s second look at Q2 GDP, Jobless Claims, and Pending Home Sales Index, and Friday’s Personal Income and Outlays as potential market moving events.
Friday, August 15, 2014
By Louis S. Barnes Friday, August 15, 2014
Mortgage interest rates improved slightly this past week as economic data was mostly weaker than expected. Economic data weaker than expected included July Retail Sales, weekly jobless claims, the August New York Empire State Manufacturing Index, and the University of Michigan Consumer Sentiment Index. Retail Sales had their worst reading in six months and the Consumer Sentiment Index fell to its lowest level since last November. Inflation data was tame with the July Producer Price Index up just 1.7% year over year and up 1.6% year over year excluding the food and energy components. Also supporting lower rates is economic data out of Europe. Germany’s economy contracted 0.2% in the most recent quarter. Italy is in recession and France’s economy is flat. This week’s data call into question whether the Federal Reserve will be able to increase short term interest rates anytime soon. The Treasury auctioned $67 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand. Geopolitical tensions continue between ISIS and Iraq, Ukraine and Russia, and Israel and Hamas.
The Dow Jones Industrial Average is currently at 16,589, up over 30 points on the week. The crude oil spot price is currently $96.63 per barrel, down almost $1 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Monday’s Housing Market Index, Tuesday’s Consumer Price Index (CPI) and Housing Starts, Wednesday’s FOMC Minutes, and Thursday’s Jobless Claims, Philadelphia Fed Survey, and Existing Home Sales as potential market moving events.
Mortgage interest rates improved slightly this past week as economic data was mostly weaker than expected. Economic data weaker than expected included July Retail Sales, weekly jobless claims, the August New York Empire State Manufacturing Index, and the University of Michigan Consumer Sentiment Index. Retail Sales had their worst reading in six months and the Consumer Sentiment Index fell to its lowest level since last November. Inflation data was tame with the July Producer Price Index up just 1.7% year over year and up 1.6% year over year excluding the food and energy components. Also supporting lower rates is economic data out of Europe. Germany’s economy contracted 0.2% in the most recent quarter. Italy is in recession and France’s economy is flat. This week’s data call into question whether the Federal Reserve will be able to increase short term interest rates anytime soon. The Treasury auctioned $67 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand. Geopolitical tensions continue between ISIS and Iraq, Ukraine and Russia, and Israel and Hamas.
The Dow Jones Industrial Average is currently at 16,589, up over 30 points on the week. The crude oil spot price is currently $96.63 per barrel, down almost $1 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Monday’s Housing Market Index, Tuesday’s Consumer Price Index (CPI) and Housing Starts, Wednesday’s FOMC Minutes, and Thursday’s Jobless Claims, Philadelphia Fed Survey, and Existing Home Sales as potential market moving events.
Friday, August 8, 2014
By Louis S. Barnes Friday, August 8, 2014
Make sense of all of this? May as well start with facts.
The US 10-year Treasury broke to 2.36% overnight, it’s lowest in more than a year. German 10s reached an all-time low 1.04%, their 2s trading below zero briefly, now paying 0.004% (ours are 0.432%), and Italian 10s are rising in yield.
These moves are “flight to quality.” The marker: no follow-through in US mortgages, still sitting close to 4.25%. When the world is scared it wants sovereign IOUs, not MBS even if government guaranteed. Unless the sovereign looks like it’s in trouble itself.
To make sense, isolate the economic effects of this geopolitical circus from other forms of misery, and from the general course of economies.
US domestic data is on fire. Maybe. The ISM reports have for a long time been excellent barometers, and in July both jumped to post-recession highs. New claims for unemployment insurance have reached weekly lows consistent with full-scale recovery. But maybe these reports do not reflect today’s economy. A WSJ/NBC poll this week: Will life for our children be better than for us? 21% yes, 76%, no.
Another head-fake: our June trade deficit fell big, 7% on one month to $41 billion, which should mean higher GDP. However, all trade fell, both imports and exports, and the imports falling the most were consumer goods, which does not speak well of domestic demand. Or the global economy. Netherlands-based CPB has found an overall decline in world trade. No matter its harm to US wages, global trade has been the 25-year engine enriching the world.
Isolate, isolate… new European data is far weaker than forecast, and sooner than could be explained by sanctions on Russia. GDP in Portugal and Italy slipped negative, and even Germany may have done so. Euro-zone inflation is down to 0.4%, which means some sectors and some entire nations are deep into deflation.
Geopolitics. The situation is Orwellian. Doublespeak. Economic recoveries which are black jokes on the word. Enemies are suddenly allies, or simultaneously allies and enemies. The US has begun airstrikes in Iraq for humanitarian reasons, hitting ISIS and its allies the Sunnis, who when allied with us brought the Iraq war to its end. The Shia government of Iraq, semi-supported by the US, is also striking ISIS/Sunni with newly arrived Russian SU-25s. Mr. Kerry this morning spoke of “genocide” in Iraq, an eye-blinker to most of the world, which has been watching Syria and Gaza unaffected by civilization — Gaza the work of newly allied Israel, Egypt, and Saudi Arabia.
Minor spats can run out of control, but we seem able to spill vast amounts of blood in long-running but contained score-settling. Watching so many places in conflict at once is unsettling, especially as the US has pulled back from power engagement without forethought or skill. However, ugly as it all is, only the Ukraine has a chance to go Sarajevo. (Later, emboldened Israel versus Iran, but later.)
Ambrose Evans-Pritchard, economics editor at the UK Telegraph has thought it through. “Russia’s economy is no bigger than California’s. This is an economic showdown between a $40 trillion power structure, and a $2 trillion producer of raw materials that has hollowed out its industrial core.” Evans-Pritchard and several others this week concluded that Czar Vladimir’s only card is an outright invasion of Ukraine, time not on his side, and his play/no-play decision is close, perhaps a few days.
About half of today’s flight to quality is Ukraine/Iraq, and the rest from new European recession. The direct effects on the US?
Ahem. Beneficial. Rates are down. The dollar is stronger which minimizes any threat of inflation. We are less dependent on external trade than anybody.
Enough to put the Fed on hold? Uh-uh. In 1998 the Fed eased into global economic trouble and was wrong, only a stock bubble for its trouble. The Fed was puzzled 2004-2006 that its .25%-per-meeting water-torture, taking the Fed funds rate from 1.00% to 5.25%, did not cause mortgage rates to rise much, and thus failed to intercept a housing bubble. If Yellen thinks the economy is heating, she’ll be comin’.
Make sense of all of this? May as well start with facts.
The US 10-year Treasury broke to 2.36% overnight, it’s lowest in more than a year. German 10s reached an all-time low 1.04%, their 2s trading below zero briefly, now paying 0.004% (ours are 0.432%), and Italian 10s are rising in yield.
These moves are “flight to quality.” The marker: no follow-through in US mortgages, still sitting close to 4.25%. When the world is scared it wants sovereign IOUs, not MBS even if government guaranteed. Unless the sovereign looks like it’s in trouble itself.
To make sense, isolate the economic effects of this geopolitical circus from other forms of misery, and from the general course of economies.
US domestic data is on fire. Maybe. The ISM reports have for a long time been excellent barometers, and in July both jumped to post-recession highs. New claims for unemployment insurance have reached weekly lows consistent with full-scale recovery. But maybe these reports do not reflect today’s economy. A WSJ/NBC poll this week: Will life for our children be better than for us? 21% yes, 76%, no.
Another head-fake: our June trade deficit fell big, 7% on one month to $41 billion, which should mean higher GDP. However, all trade fell, both imports and exports, and the imports falling the most were consumer goods, which does not speak well of domestic demand. Or the global economy. Netherlands-based CPB has found an overall decline in world trade. No matter its harm to US wages, global trade has been the 25-year engine enriching the world.
Isolate, isolate… new European data is far weaker than forecast, and sooner than could be explained by sanctions on Russia. GDP in Portugal and Italy slipped negative, and even Germany may have done so. Euro-zone inflation is down to 0.4%, which means some sectors and some entire nations are deep into deflation.
Geopolitics. The situation is Orwellian. Doublespeak. Economic recoveries which are black jokes on the word. Enemies are suddenly allies, or simultaneously allies and enemies. The US has begun airstrikes in Iraq for humanitarian reasons, hitting ISIS and its allies the Sunnis, who when allied with us brought the Iraq war to its end. The Shia government of Iraq, semi-supported by the US, is also striking ISIS/Sunni with newly arrived Russian SU-25s. Mr. Kerry this morning spoke of “genocide” in Iraq, an eye-blinker to most of the world, which has been watching Syria and Gaza unaffected by civilization — Gaza the work of newly allied Israel, Egypt, and Saudi Arabia.
Minor spats can run out of control, but we seem able to spill vast amounts of blood in long-running but contained score-settling. Watching so many places in conflict at once is unsettling, especially as the US has pulled back from power engagement without forethought or skill. However, ugly as it all is, only the Ukraine has a chance to go Sarajevo. (Later, emboldened Israel versus Iran, but later.)
Ambrose Evans-Pritchard, economics editor at the UK Telegraph has thought it through. “Russia’s economy is no bigger than California’s. This is an economic showdown between a $40 trillion power structure, and a $2 trillion producer of raw materials that has hollowed out its industrial core.” Evans-Pritchard and several others this week concluded that Czar Vladimir’s only card is an outright invasion of Ukraine, time not on his side, and his play/no-play decision is close, perhaps a few days.
About half of today’s flight to quality is Ukraine/Iraq, and the rest from new European recession. The direct effects on the US?
Ahem. Beneficial. Rates are down. The dollar is stronger which minimizes any threat of inflation. We are less dependent on external trade than anybody.
Enough to put the Fed on hold? Uh-uh. In 1998 the Fed eased into global economic trouble and was wrong, only a stock bubble for its trouble. The Fed was puzzled 2004-2006 that its .25%-per-meeting water-torture, taking the Fed funds rate from 1.00% to 5.25%, did not cause mortgage rates to rise much, and thus failed to intercept a housing bubble. If Yellen thinks the economy is heating, she’ll be comin’.
Friday, August 1, 2014
Capital Markets Update
By Louis S. Barnes Friday, August 1, 2014
In a world and life filled with uncertainty it is gratifying to watch markets behave exactly as they should.
Bonds and mortgages got a bad scare on Wednesday, rates up sharply, but as the full picture revealed itself rates are back where we started. A lot else is not where it began this week, nor will it be soon.
The catalyst for Wednesday, like an overdone pool-table break: 2nd quarter GDP arrived at a 4% growth rate. Everyone expected a rebound from the negative 1st quarter, but not an upward revision in that negative (from minus 2.9% to minus 2.1%), and especially not indications of rising spending, incomes and inflation. Real personal consumption expenditures jumped 2.5% in Q2 versus 1.2% in Q1, and the PCE “deflator” (converting nominal to after-inflation) popped to 1.9% from 1.4%.
The immediate reaction: here comes the Fed. Bonds and mortgages instantly flipped to bearish trend.
But the world is a big, complicated, and interconnected place. On Wednesday Europe at last dropped meaningful sanctions on Czar Vladimir, certain to slow the world to some degree from wherever it was going.
On Wednesday the stock market sat and watched the show. Thursday morning another Fed scare: the employment cost index (ECI) in Q2 jumped .7% from .3% in Q1. Then, beginning in Europe, stocks free-fell; at this writing the Russell 2000 has lost 4.14% of its value in 48 hours.
Friday morning… the gorilla, job data for July. Payroll gains were slimmer than forecast, no acceleration anywhere in the report, and soggiest of all: hourly earnings rose from $24.44 to $24.45. One measly cent, statistically unchanged. The pattern continues: most of those taking jobs seem to be throwing in the towel, accepting inferior pay. Revisiting data from the day before: the rise in ECI came from benefits, not wages, likely transient or another accounting quirk of ObamaCare.
Tie all of this together: the stock market is very vulnerable to the Fed, whenever it does move. The data do not support the Fed moving any earlier than sometime mid- to late 2015, and the Fed will need to see a lot of growth and income gains before then.
Mortgages and bonds are vulnerable, too, but long-term rates are held down by Europe’s troubles. The German 10-year Bund fell to 1.14%. Those looking for safety find more yield in our bonds. Newly disturbing signs in Europe: Club Med bond yields have been falling with the Bund, but rose today. Lousy economic data and the collapse of Portugal’s Banco Espirito Santo have Italian and Spanish yields rising. That’s credit fear, default fear. The Euro-zone ever closer to the deflation precipice, inflation 0.4%.
Then the fun part: dismissing tin-hat people and theories. The Philly Fed’s Plosser dissented from the Fed’s on-course meeting minutes. Too easy, he has always thought. In his pinched mind the Fed should never do anything. Richard Fisher, prez of the Dallas Fed twice this week insisted that the Fed should accelerate rate hikes. This wavy-haired graduate of the Boehner Tanning Salon is a classic Texas yahoo, a grandstander without the conviction to cast his own dissent.
The stock market’s two-day crater is a “beneficial correction.” Uh-huh. Although it’s true that the market has just coughed up this summer’s unreasonable gains, its prior gains are not necessarily sustainable.
Who knew… despite Arabia’s general hatred of Israel, most of it hates and fears Hamas more. Thus a flash point does not flash.
Who has it right? Bill Gross of PIMCO, still holding title as Best All-Time Bond Trader. “Structural global growth rates have come down due to a yawning gap of aggregate demand relative to aggregate supply.” If you have over-invested in supply, none of the demand-boosting tricks can work. Only time will re-balance.
As frustrating as it may feel here in the US, we are adapting faster than any other place.
In a world and life filled with uncertainty it is gratifying to watch markets behave exactly as they should.
Bonds and mortgages got a bad scare on Wednesday, rates up sharply, but as the full picture revealed itself rates are back where we started. A lot else is not where it began this week, nor will it be soon.
The catalyst for Wednesday, like an overdone pool-table break: 2nd quarter GDP arrived at a 4% growth rate. Everyone expected a rebound from the negative 1st quarter, but not an upward revision in that negative (from minus 2.9% to minus 2.1%), and especially not indications of rising spending, incomes and inflation. Real personal consumption expenditures jumped 2.5% in Q2 versus 1.2% in Q1, and the PCE “deflator” (converting nominal to after-inflation) popped to 1.9% from 1.4%.
The immediate reaction: here comes the Fed. Bonds and mortgages instantly flipped to bearish trend.
But the world is a big, complicated, and interconnected place. On Wednesday Europe at last dropped meaningful sanctions on Czar Vladimir, certain to slow the world to some degree from wherever it was going.
On Wednesday the stock market sat and watched the show. Thursday morning another Fed scare: the employment cost index (ECI) in Q2 jumped .7% from .3% in Q1. Then, beginning in Europe, stocks free-fell; at this writing the Russell 2000 has lost 4.14% of its value in 48 hours.
Friday morning… the gorilla, job data for July. Payroll gains were slimmer than forecast, no acceleration anywhere in the report, and soggiest of all: hourly earnings rose from $24.44 to $24.45. One measly cent, statistically unchanged. The pattern continues: most of those taking jobs seem to be throwing in the towel, accepting inferior pay. Revisiting data from the day before: the rise in ECI came from benefits, not wages, likely transient or another accounting quirk of ObamaCare.
Tie all of this together: the stock market is very vulnerable to the Fed, whenever it does move. The data do not support the Fed moving any earlier than sometime mid- to late 2015, and the Fed will need to see a lot of growth and income gains before then.
Mortgages and bonds are vulnerable, too, but long-term rates are held down by Europe’s troubles. The German 10-year Bund fell to 1.14%. Those looking for safety find more yield in our bonds. Newly disturbing signs in Europe: Club Med bond yields have been falling with the Bund, but rose today. Lousy economic data and the collapse of Portugal’s Banco Espirito Santo have Italian and Spanish yields rising. That’s credit fear, default fear. The Euro-zone ever closer to the deflation precipice, inflation 0.4%.
Then the fun part: dismissing tin-hat people and theories. The Philly Fed’s Plosser dissented from the Fed’s on-course meeting minutes. Too easy, he has always thought. In his pinched mind the Fed should never do anything. Richard Fisher, prez of the Dallas Fed twice this week insisted that the Fed should accelerate rate hikes. This wavy-haired graduate of the Boehner Tanning Salon is a classic Texas yahoo, a grandstander without the conviction to cast his own dissent.
The stock market’s two-day crater is a “beneficial correction.” Uh-huh. Although it’s true that the market has just coughed up this summer’s unreasonable gains, its prior gains are not necessarily sustainable.
Who knew… despite Arabia’s general hatred of Israel, most of it hates and fears Hamas more. Thus a flash point does not flash.
Who has it right? Bill Gross of PIMCO, still holding title as Best All-Time Bond Trader. “Structural global growth rates have come down due to a yawning gap of aggregate demand relative to aggregate supply.” If you have over-invested in supply, none of the demand-boosting tricks can work. Only time will re-balance.
As frustrating as it may feel here in the US, we are adapting faster than any other place.
Friday, July 25, 2014
Capital Markets Update
By Louis S. Barnes Friday, July 25th, 2014
Long-term rates stabilized this week as events, puzzles, forces, and conflicts scattered all over the world canceled each other.
We focus on the yields of long debt because they are the result of real-time voting on economic prospects. Belief in improved growth and its companion inflation push upward on rates. Poor or weakening prospects push down. Political instability pushes down, relief pushes back up.
We stabilized this week, but in a down pattern. The bond market has traded daily on Ukraine, but in a displaced way. The risk of conflict there is remote to the rest of the world (for now), but if Europe at last pulls up its socks and inflicts real sanctions on Russia, that will slow the whole world. Thus when Europe makes courage noises (think Cowardly Lion of Oz), rates go down; when it whimpers, markets relax, rates back up.
In the background in Europe: the still-deteriorating financial structure. European flinching from sanctions is not entirely a lack of intestinal fortitude; the place is such a mess that sanctions could tip over its pretense. German 10-year Bunds pay 1.15%, Spain’s 2.52%, and Italy’s 2.71%. Italy’s sovereign debt is now 135% of GDP and rising; falling yields are a sign of disaster, banks and investors piling into the safest possible investment while other credit dries up. Russia is weaker. Its central bank today again raised the overnight cost of money, now 8% to try to stop cash from escaping.
Uncertainty is driving us battier than a lot of the possible outcomes. The one-Europe fantasy is a bust, but could take a decade or a month to unglue. Ukraine-Gaza-Syria-Iraq-Afghanistan today collectively is nothing compared to Cuba ’62, or to Berlin ’48 or ’61, or to either ’73 or ’80 oil crisis — let alone to actual wars. But today’s world is different: pathetic Europe is no longer a stabilizing force; the US can’t do it alone; and the fastest-rising great power is preoccupied with its navel. Anybody hear anything from Xi Jinping on the need for a cease-fire in Gaza?
Here in the US, one of the all-time puzzles. We could be right on the edge of a terrific expansion born of 25 years of wage-suppression and renewed competitiveness. The one missing piece: rising incomes. Get that, and everything else falls into place.
This week initial claims for unemployment insurance fell to 284,000. The four-week moving average is only 302,000. Going back to the early 1970s, US population only two-thirds of today’s, every time the claims number fell as low as 300,000 the economy was overheating and inflationary. So much so that each Fed had to react and recession ensued. Not claims on a percentage basis, population-adjusted, but 300,000 raw.
How is it possible to drop so low now, a super-duper-cyclical drop in layoffs, and not mark the beginning of employer competition for workers? What kind of new age economy is this, in which record-few people get fired, but businesses can’t or won’t pay up to get new workers, or even hire them on a full-time basis?
Is global substitution that strong? Or has global commerce altered the business cycle? All prior US expansions and most foreign ones, the national and central bank problem has been the strong tendency of economies to enter reinforcing spirals, either up or down. See claims numbers like this, unemployment falling, new hires even if shaky jobs, every Fed would rush to pre-emptive action. But that doesn’t feel right, not to me and mercifully not to Chair Yellen. It feels as though some force of cosmology, some dark energy has tamped down US acceleration.
I hear all the violin-screeching that it’s the fault of ObamaCare, or debt, or not enough debt, or Congress, or too much government or too little, but none of that truly fits the data. Very much like the geopolitical scene, the uncertainty is worse than the likely outcomes.
Next week we’ll get some clarity. Friday brings July payroll data and ISM. If acceleration is not evident, then we don’t have it. I had an English prof who said of hidden meaning in poetry, “If it’s hidden, it’s not there.” And we’ll know if Europe will engage Czar Putin. If you’re going down, might as well go down with your head high.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-july-25-2014#sthash.pnuuXo6H.dpuf
Friday, July 18, 2014
Capital Markets Update
By Louis S. Barnes Friday, July 18, 2014
Long-term rates have again touched the lows of the year. To make sense of that news and a great deal else going by this week, step back -- especially from the awful sights on your screens.
Way back. We try to be rational in markets, at the Fed, in government, and at war, and in that effort we forget the power of Dame Fortune.
Consider the odds against the loss of two 777s by one national airline in six months, neither from flight risks. Czar Vladimir's dirty little game of empire has suddenly gone counterproductive. Hamas' 1,500 rockets have again goaded Israel into action which will result in more Hamas.
On July 28 one hundred years ago, Austria-Hungary declared war on Serbia. Russia mobilized. Three days later Germany declared war on Russia, then on France. Although that history is very much worth your time to read, that's NOT where we are going now.
The sense of expanding global disorder is unsettling to markets, especially as the US gradually withdraws its security blanket. But unsettling is all, at least for now and by a wide margin. Commerce is too important, even among bad guys. Whacking at hornets' nests is more likely to land one on your head than make you a hero.
These horrifying scenes are sideshows. The big stuff came in three stories in Monday's WSJ, unconnected there but connected (oh, my), and Chair Yellen's testimony to Congress.
The trio opened on A2 in remarks of Stephen Poloz, head of the central bank of Canada. He likened the failure of economic models at the world's central banks (abject and continuous since 2007) to "sailors of another era blown off course" to the Southern Hemisphere, where the unrecognizable night sky was useless to navigation.
Then on Op-Ed, crusty, smart, anti-partisan Mort Zuckerman (editor, US News & World Report) blew up the notion of our "recovery" -- recovery in the sense of a recognizable night sky. We now have about the same number of jobs as in 2007, but 17.5 million more people. Nearly half of the jobs regained are low-wage and part-time.
Completing the triad: on B1, Hong Kong-based Merchant House International has opened a shoe factory in Tennessee. The pay is $9-$12 per hour. Savings on shipping costs may offset US wages still 2.5 times those in China. May.
Chair Yellen did a great job before Congress. Elaborate language boiled down: If it begins to rain we will go inside. If the sun shines we will go outside.
One sentence stood out, Fed-watchers still arguing over the meaning of one word. "If the labor market continues to improve more quickly than anticipated by the Committee…, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned."
"Continues"? Is that word an accident? Or did she mean exactly what she said, that the labor market is improving, now, "more quickly than anticipated"?
A lot of Americans would respond bitterly and graphically to anybody asserting the labor market improving at any pace they can detect. More than half of last month's 288,000-job hooray were part-time. People throwing in the towel, taking what they can, conceding diminished futures?
Microsoft will fire 18,000 people next week, HP 16,000 on top of the 34,000 already canned. "Restructuring." To shoes in Tennessee.
Yellen gets it. Pinheads on the right needled her: if a zero rate has not worked, then higher rates will. She replied repeatedly: "We must be careful… We have seen false dawns." She was very direct about the risks of aborting the economy we have. The Fed did all it could to repair a balance sheet recession, unprecedented QE, but what to do with an America, 34% of those aged over 55 holding less than $10,000 in savings?
More at the hand of Dame Fortune than any other cause or fault in us, we are confronted by a new night sky. Every constellation points to the same path: we must focus all energy on helping our people to compete in a world more focused than we.
Long-term rates have again touched the lows of the year. To make sense of that news and a great deal else going by this week, step back -- especially from the awful sights on your screens.
Way back. We try to be rational in markets, at the Fed, in government, and at war, and in that effort we forget the power of Dame Fortune.
Consider the odds against the loss of two 777s by one national airline in six months, neither from flight risks. Czar Vladimir's dirty little game of empire has suddenly gone counterproductive. Hamas' 1,500 rockets have again goaded Israel into action which will result in more Hamas.
On July 28 one hundred years ago, Austria-Hungary declared war on Serbia. Russia mobilized. Three days later Germany declared war on Russia, then on France. Although that history is very much worth your time to read, that's NOT where we are going now.
The sense of expanding global disorder is unsettling to markets, especially as the US gradually withdraws its security blanket. But unsettling is all, at least for now and by a wide margin. Commerce is too important, even among bad guys. Whacking at hornets' nests is more likely to land one on your head than make you a hero.
These horrifying scenes are sideshows. The big stuff came in three stories in Monday's WSJ, unconnected there but connected (oh, my), and Chair Yellen's testimony to Congress.
The trio opened on A2 in remarks of Stephen Poloz, head of the central bank of Canada. He likened the failure of economic models at the world's central banks (abject and continuous since 2007) to "sailors of another era blown off course" to the Southern Hemisphere, where the unrecognizable night sky was useless to navigation.
Then on Op-Ed, crusty, smart, anti-partisan Mort Zuckerman (editor, US News & World Report) blew up the notion of our "recovery" -- recovery in the sense of a recognizable night sky. We now have about the same number of jobs as in 2007, but 17.5 million more people. Nearly half of the jobs regained are low-wage and part-time.
Completing the triad: on B1, Hong Kong-based Merchant House International has opened a shoe factory in Tennessee. The pay is $9-$12 per hour. Savings on shipping costs may offset US wages still 2.5 times those in China. May.
Chair Yellen did a great job before Congress. Elaborate language boiled down: If it begins to rain we will go inside. If the sun shines we will go outside.
One sentence stood out, Fed-watchers still arguing over the meaning of one word. "If the labor market continues to improve more quickly than anticipated by the Committee…, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned."
"Continues"? Is that word an accident? Or did she mean exactly what she said, that the labor market is improving, now, "more quickly than anticipated"?
A lot of Americans would respond bitterly and graphically to anybody asserting the labor market improving at any pace they can detect. More than half of last month's 288,000-job hooray were part-time. People throwing in the towel, taking what they can, conceding diminished futures?
Microsoft will fire 18,000 people next week, HP 16,000 on top of the 34,000 already canned. "Restructuring." To shoes in Tennessee.
Yellen gets it. Pinheads on the right needled her: if a zero rate has not worked, then higher rates will. She replied repeatedly: "We must be careful… We have seen false dawns." She was very direct about the risks of aborting the economy we have. The Fed did all it could to repair a balance sheet recession, unprecedented QE, but what to do with an America, 34% of those aged over 55 holding less than $10,000 in savings?
More at the hand of Dame Fortune than any other cause or fault in us, we are confronted by a new night sky. Every constellation points to the same path: we must focus all energy on helping our people to compete in a world more focused than we.
Friday, July 11, 2014
Capital Markets
By Louis S. Barnes Friday, July 11th, 2014
The big story of the week is the odd combination of saber-rattling by the Fed but falling long-term interest rates, mortgages just above 4.00%.
First a rundown on other matters high in the news but ho-hummed in markets.
Iraq has gone off-screen entirely, oil prices right back where they were before the place fractured. The dreaded Sunni-Shia new-age Thirty Years’ War may ensue, but so long as oil flows and violence is confined there… all for the entertainment of the locals.
There was a time when new violence Israel versus Hamas (or whomever) would upset markets. No longer. The world has tried many times and many ways to engineer peace of some kind, but the parties involved are determined to keep at it. All yours.
Ukraine is partly mysterious. Diplomatic exchanges between Merkel and Czar Vladimir are exceptionally private, and it is not clear why he has backed away from military action, and from his “rebels,” but it is obvious that even in ethnically Russian parts of Ukraine there is no great popular desire to join Vladimir’s economic paradise.
Markets did flinch at an oops-a-daisy by a bank in Portugal, but remembered the ECB is not going to let any bank go dominoes. But in the background were new reports of shrinking industrial production in Italy, France, and Germany, the fundamental euro disaster beyond the power of the ECB to fix. Italian and Spanish 10-year bonds each pay 2.78%, and German 1.21%. Falling euro-zone bond yields two years ago were good news; but this far is a depression/deflation trade.
On Wednesday the Fed released minutes of its June 17-18 meeting, three important pages out of three dozen. First, the Fed pre-announced the end to QE3 in October. From buying $85 billion per month in Treasurys and MBS the Fed will go to zero. No maybe. Even if the US economy faints between now and then, we are done with QE, the Fed’s balance sheet over $4 trillion. If we re-faint the Fed will try something else.
Panic followed the QE taper announcement last year. If the Fed stops buying bonds, who will take its place? The market has been helped by a dramatically lower federal deficit and collapsed MBS issuance. However, on Wednesday the Treasury auctioned $21 billion in new 10-year T-notes. Who would buy, after another 200,000-plus job gain announced just the week before?
Buyers elbowed to get the new notes, the yield down from 2.65% the week before to 2.52%, and holding a lower trading range which began in May.
Important Fed page number two: the obligatory scattergram showing each Fed governor’s future intentions for the Fed funds rate (the overnight cost of money) and the intentions of regional Fed presidents in a plot of sixteen anonymous dots. Winston Churchill said he was relieved to escape his post as Chancellor of the Exchequer because he “Couldn’t keep track of all the damned little dots.” He was referring to decimals. The Fed’s damned little dots drive everyone nuts because no one, certainly including the Fed, knows how reliable these intentions may be, but there they are.
The damned dots are clustered at a 1.00% Fed funds rate by the end of 2015. Three of the dots say no increase at all. One, obviously pea-brained Esther George of the Kansas City Fed, wants to go to 3.00%. Another four are posted between 2.25% and 1.25%. Consensus like that is soooo reassuring.
Intention to tighten leads to important page number three, how to tighten in the presence of $4 trillion in excess bank reserves (the flip side of the Fed’s assets). I have no doubt that the Fed can tighten, but the “how” discussion inside the Fed was chaotic disagreement.
Most important of all, why and when to raise its rate… silence. A desire to “normalize,” but that’s all. Whatever it might mean.
The 2.9% contraction in 1st quarter GDP was overstated, consumer spending plodding along at 1%. The 2nd quarter was supposed to rebound strongly and did not, maybe 2.6% GDP, consumer spending to maybe 1.5%. If these numbers continue, the Fed will be tightening very little in 2015. If at all.
The big story of the week is the odd combination of saber-rattling by the Fed but falling long-term interest rates, mortgages just above 4.00%.
First a rundown on other matters high in the news but ho-hummed in markets.
Iraq has gone off-screen entirely, oil prices right back where they were before the place fractured. The dreaded Sunni-Shia new-age Thirty Years’ War may ensue, but so long as oil flows and violence is confined there… all for the entertainment of the locals.
There was a time when new violence Israel versus Hamas (or whomever) would upset markets. No longer. The world has tried many times and many ways to engineer peace of some kind, but the parties involved are determined to keep at it. All yours.
Ukraine is partly mysterious. Diplomatic exchanges between Merkel and Czar Vladimir are exceptionally private, and it is not clear why he has backed away from military action, and from his “rebels,” but it is obvious that even in ethnically Russian parts of Ukraine there is no great popular desire to join Vladimir’s economic paradise.
Markets did flinch at an oops-a-daisy by a bank in Portugal, but remembered the ECB is not going to let any bank go dominoes. But in the background were new reports of shrinking industrial production in Italy, France, and Germany, the fundamental euro disaster beyond the power of the ECB to fix. Italian and Spanish 10-year bonds each pay 2.78%, and German 1.21%. Falling euro-zone bond yields two years ago were good news; but this far is a depression/deflation trade.
On Wednesday the Fed released minutes of its June 17-18 meeting, three important pages out of three dozen. First, the Fed pre-announced the end to QE3 in October. From buying $85 billion per month in Treasurys and MBS the Fed will go to zero. No maybe. Even if the US economy faints between now and then, we are done with QE, the Fed’s balance sheet over $4 trillion. If we re-faint the Fed will try something else.
Panic followed the QE taper announcement last year. If the Fed stops buying bonds, who will take its place? The market has been helped by a dramatically lower federal deficit and collapsed MBS issuance. However, on Wednesday the Treasury auctioned $21 billion in new 10-year T-notes. Who would buy, after another 200,000-plus job gain announced just the week before?
Buyers elbowed to get the new notes, the yield down from 2.65% the week before to 2.52%, and holding a lower trading range which began in May.
Important Fed page number two: the obligatory scattergram showing each Fed governor’s future intentions for the Fed funds rate (the overnight cost of money) and the intentions of regional Fed presidents in a plot of sixteen anonymous dots. Winston Churchill said he was relieved to escape his post as Chancellor of the Exchequer because he “Couldn’t keep track of all the damned little dots.” He was referring to decimals. The Fed’s damned little dots drive everyone nuts because no one, certainly including the Fed, knows how reliable these intentions may be, but there they are.
The damned dots are clustered at a 1.00% Fed funds rate by the end of 2015. Three of the dots say no increase at all. One, obviously pea-brained Esther George of the Kansas City Fed, wants to go to 3.00%. Another four are posted between 2.25% and 1.25%. Consensus like that is soooo reassuring.
Intention to tighten leads to important page number three, how to tighten in the presence of $4 trillion in excess bank reserves (the flip side of the Fed’s assets). I have no doubt that the Fed can tighten, but the “how” discussion inside the Fed was chaotic disagreement.
Most important of all, why and when to raise its rate… silence. A desire to “normalize,” but that’s all. Whatever it might mean.
The 2.9% contraction in 1st quarter GDP was overstated, consumer spending plodding along at 1%. The 2nd quarter was supposed to rebound strongly and did not, maybe 2.6% GDP, consumer spending to maybe 1.5%. If these numbers continue, the Fed will be tightening very little in 2015. If at all.
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