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.
Thursday, July 3, 2014
Subscribe to:
Comments (Atom)