Friday, May 29, 2015
Capital Markets Update
By Louis S. Barnes May 29, 2015
Another week of quiet waiting for big data next week (not tekkies spying, just the monthly jobs report). I am not a betting man, but I do occasionally guess: there are hints that the next interest rate move will be down.
First, head-shaking news of humanity. While working out I mumbled near a young trainer, “The quality of a civilization depends on the extent of corruption.” After “huh?” he asked for more. FIFA this week has been exposed as utterly corrupt, yet member nations today re-elected silly-putty Sepp Blatter to a fifth term as its president.
Yesterday, crawling from under his rock for the first time since 2008, Richard S. Fuld, chairman of Lehman upon its collapse, gave a speech now viral on YouTube. His one-liners opened a window to a mind possibly too incompetent to be corrupt. “Lehman Brothers at the point of 2008 was not a bankrupt company.” All through 2008 Fuld had been a Wall Street laughingstock trying to sell Lehman as it imploded. Hemingway on bankruptcy: “Two ways… gradually, then suddenly.” Lehman was the parent of infamous Aurora Loan Services, ALS, the all-time subprime bucket-shop, killing clients, brokers, and itself. Fuld: “I feel sorry for all of you that don’t drink, ‘cause when you wake up in the morning that’s as good as you’re going to feel. I told my children that.”
And people still think the housing and credit bubbles were caused by mortgage brokers, Fannie, and too-easy Greenspan. Sheesh.
In a more serious vein (possibly hard to tell), here is the recent key to global financial markets: the Fed says its going to lift off from 0%, which has made the dollar “strong” and pulled up the value of everything dollar-denominated except US bonds, which fear the Fed. Most of the rest of the world’s central banks have been printing money harder than ever, which has contributed to dollar “strength.” All of that reached equilibrium 45 days ago, and a weird daily dance has followed: any soft US data presumably pushes Fed action further out, dollar down. The others don’t want the dollar down, the ECB especially accelerating its money-printing to keep the euro weak.
The Fed’s desire to lift off is reasonable, if only to prevent financial bubbles. However, much as I admire Chair Yellen, her insistence that the US economy is improving enough for liftoff and then normalization is becoming embarrassing.
US Q1 GDP was revised to negative .7% as expected, mostly because US exports have been crushed by a “strong” dollar: up 4.5% in Q4 2014, in Q1 they fell 7.6%. Personal expenditures were okay in Q1, up 1.8%, but less than half of Q4.
More disturbing than back-look GDP is the Fed’s new annual study of “Household Well-being.” It is worth your trouble. It describes two Americas: households earning less than $40,000/year are not making it, and ones making between $40,000 and $100,000 are treading water and fragile.
A re-read of the Fed’s minutes from its late-April meeting found this (unremarked elsewhere): The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy appeared well positioned to help the economy withstand substantial adverse shocks. All at the Fed insist that liftoff will not be a tightening, just a reduction in extreme ease. I don’t know anyone at a bond desk who believes that. Tightening is tightening.
One bright spot possibly justifying tightening: housing. One theory for its continuing weakness: just delayed. Maybe so, after all. NAR has April pending sales up 3.4%, four times the estimate, and up a solid 14% year-over-year. One inside indicator: a major bank wholesaler this month entered gridlock, buried with business, turn times running out to two weeks. The strongest component in US CPI: housing cost, driven up by rising rents, which sooner or later will push people to buy.
Last in the rates-down calculus: Greece. Everyone has been wrong and/or premature for four years. But it looks now as though there never has been a deal or even real negotiation, just can-kicking. Rates are trading down today on that thought.
Next Friday, jobs. The Fed’s forecast is on the line.
Another week of quiet waiting for big data next week (not tekkies spying, just the monthly jobs report). I am not a betting man, but I do occasionally guess: there are hints that the next interest rate move will be down.
First, head-shaking news of humanity. While working out I mumbled near a young trainer, “The quality of a civilization depends on the extent of corruption.” After “huh?” he asked for more. FIFA this week has been exposed as utterly corrupt, yet member nations today re-elected silly-putty Sepp Blatter to a fifth term as its president.
Yesterday, crawling from under his rock for the first time since 2008, Richard S. Fuld, chairman of Lehman upon its collapse, gave a speech now viral on YouTube. His one-liners opened a window to a mind possibly too incompetent to be corrupt. “Lehman Brothers at the point of 2008 was not a bankrupt company.” All through 2008 Fuld had been a Wall Street laughingstock trying to sell Lehman as it imploded. Hemingway on bankruptcy: “Two ways… gradually, then suddenly.” Lehman was the parent of infamous Aurora Loan Services, ALS, the all-time subprime bucket-shop, killing clients, brokers, and itself. Fuld: “I feel sorry for all of you that don’t drink, ‘cause when you wake up in the morning that’s as good as you’re going to feel. I told my children that.”
And people still think the housing and credit bubbles were caused by mortgage brokers, Fannie, and too-easy Greenspan. Sheesh.
In a more serious vein (possibly hard to tell), here is the recent key to global financial markets: the Fed says its going to lift off from 0%, which has made the dollar “strong” and pulled up the value of everything dollar-denominated except US bonds, which fear the Fed. Most of the rest of the world’s central banks have been printing money harder than ever, which has contributed to dollar “strength.” All of that reached equilibrium 45 days ago, and a weird daily dance has followed: any soft US data presumably pushes Fed action further out, dollar down. The others don’t want the dollar down, the ECB especially accelerating its money-printing to keep the euro weak.
The Fed’s desire to lift off is reasonable, if only to prevent financial bubbles. However, much as I admire Chair Yellen, her insistence that the US economy is improving enough for liftoff and then normalization is becoming embarrassing.
US Q1 GDP was revised to negative .7% as expected, mostly because US exports have been crushed by a “strong” dollar: up 4.5% in Q4 2014, in Q1 they fell 7.6%. Personal expenditures were okay in Q1, up 1.8%, but less than half of Q4.
More disturbing than back-look GDP is the Fed’s new annual study of “Household Well-being.” It is worth your trouble. It describes two Americas: households earning less than $40,000/year are not making it, and ones making between $40,000 and $100,000 are treading water and fragile.
A re-read of the Fed’s minutes from its late-April meeting found this (unremarked elsewhere): The risks to the forecast for real GDP and inflation were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy appeared well positioned to help the economy withstand substantial adverse shocks. All at the Fed insist that liftoff will not be a tightening, just a reduction in extreme ease. I don’t know anyone at a bond desk who believes that. Tightening is tightening.
One bright spot possibly justifying tightening: housing. One theory for its continuing weakness: just delayed. Maybe so, after all. NAR has April pending sales up 3.4%, four times the estimate, and up a solid 14% year-over-year. One inside indicator: a major bank wholesaler this month entered gridlock, buried with business, turn times running out to two weeks. The strongest component in US CPI: housing cost, driven up by rising rents, which sooner or later will push people to buy.
Last in the rates-down calculus: Greece. Everyone has been wrong and/or premature for four years. But it looks now as though there never has been a deal or even real negotiation, just can-kicking. Rates are trading down today on that thought.
Next Friday, jobs. The Fed’s forecast is on the line.
Friday, May 22, 2015
Capital Markets Update
By Louis S. Barnes Friday, May 22, 2015
Another week of anxious pencil-tapping in quiet markets, and one more holiday-short week ahead before events will conspire to move the herd. Long quiet, big move.
A “data-dependent” Fed means more than ordinary waiting for data. If the Fed is waiting, too, then we’re really waiting. The first flash report on May manufacturing will appear Monday, June 1st, employment data Friday the 5th. Nothing is going to happen until we know if the economy is coming out of its apparent stall, and at what slope.
Q1 GDP is going to be revised to negative, and Q2 will look pathetic, but it’s all about trade accounts, not actual stall. The pattern, exports-down/imports-up means that we’re buying someone else’s production, but we’re still buying at a roughly 2% annual expansion pace. If consumption stops, then we’re stalling.
Overseas data matters more all the time, but arrives at nearly random moments compared to the regular cycle of US data. The one standout through the holiday week: it looks as though Greece will at last default and exit. Its 2-year sovereign IOUs today trade at an annual yield of 73% — a bet that you might earn interest for a year and at maturity receive 25% of your principal. Markets are either prepared, or bored stupid by the story and will be surprised.
Janet Yellen spoke this afternoon. Beware Fed Chairpersons speaking on Friday afternoons before long weekends! When a bomb needs to be dropped, better to give markets three days to dig out and calm down before trading resumes.
No bomb today, just deep wisdom every time she speaks, distinguished by noting the limitations on her own knowledge. She opened by establishing that the economy is “not yet” at full employment, but in Q&A said that if her forecast for an improving economy pans out, then a rate hike is coming in 2015. Balanced by all of the following:
“A number of economic headwinds have slowed the recovery”: housing, fiscal contraction, and weakness overseas. Pea-brains in the financial press continue to say that housing is slowed by higher prices (NYT today) and/or scarce inventory (NAR, WSJ, NYT). Please, people, think: rising prices add heat to housing markets by expanded equity and therefore down payments for trading-up/down/sideways, easing commission payments, and reducing fear of a new bust. My local market is in an extreme expansion after 12 dud years, unit sales up 15% YTD despite inventory falling below sustenance — because listings are not listed long enough to become statistical “inventory.”
What is really wrong with housing? “…Mortgage credit, but more generally, many years of a weak job market and slow wage gains seem to have induced many people to double-up on housing, and many young adults continue to live with their parents.”
Right! Weak housing reflects the weakness of households. What to do about that? “Sustained increases in productivity are necessary to support rising incomes. The growth rate of output per hour worked has averaged about 1.75% per year since the recession began in late 2007. This rate is down from gains averaging 2.75% over the preceding decade. Policies to strengthen education, to encourage entrepreneurship and innovation, and to promote capital investment, both public and private, can all be of great benefit.”
Yup. Would be helpful if we did any of that. Limits to knowledge and power: “The Federal Reserve’s objectives of maximum employment and price stability do not, by themselves, ensure a strong pace of economic growth or an improvement in living standards.” Meanwhile an asinine bunch — from Senators Elizabeth Warren and Richard Selby trying to limit — powers the Fed does have, to a crew on Wall Street including Stanley Druckenmiller and Satyajit Das — wants you to believe the Fed has caused all of our trouble.
We must pull up our own socks. The Fed saved us, and since has done what it can.
Setting a standard for all future Fed Chairs for data-dependency and humility: “I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so.”
Another week of anxious pencil-tapping in quiet markets, and one more holiday-short week ahead before events will conspire to move the herd. Long quiet, big move.
A “data-dependent” Fed means more than ordinary waiting for data. If the Fed is waiting, too, then we’re really waiting. The first flash report on May manufacturing will appear Monday, June 1st, employment data Friday the 5th. Nothing is going to happen until we know if the economy is coming out of its apparent stall, and at what slope.
Q1 GDP is going to be revised to negative, and Q2 will look pathetic, but it’s all about trade accounts, not actual stall. The pattern, exports-down/imports-up means that we’re buying someone else’s production, but we’re still buying at a roughly 2% annual expansion pace. If consumption stops, then we’re stalling.
Overseas data matters more all the time, but arrives at nearly random moments compared to the regular cycle of US data. The one standout through the holiday week: it looks as though Greece will at last default and exit. Its 2-year sovereign IOUs today trade at an annual yield of 73% — a bet that you might earn interest for a year and at maturity receive 25% of your principal. Markets are either prepared, or bored stupid by the story and will be surprised.
Janet Yellen spoke this afternoon. Beware Fed Chairpersons speaking on Friday afternoons before long weekends! When a bomb needs to be dropped, better to give markets three days to dig out and calm down before trading resumes.
No bomb today, just deep wisdom every time she speaks, distinguished by noting the limitations on her own knowledge. She opened by establishing that the economy is “not yet” at full employment, but in Q&A said that if her forecast for an improving economy pans out, then a rate hike is coming in 2015. Balanced by all of the following:
“A number of economic headwinds have slowed the recovery”: housing, fiscal contraction, and weakness overseas. Pea-brains in the financial press continue to say that housing is slowed by higher prices (NYT today) and/or scarce inventory (NAR, WSJ, NYT). Please, people, think: rising prices add heat to housing markets by expanded equity and therefore down payments for trading-up/down/sideways, easing commission payments, and reducing fear of a new bust. My local market is in an extreme expansion after 12 dud years, unit sales up 15% YTD despite inventory falling below sustenance — because listings are not listed long enough to become statistical “inventory.”
What is really wrong with housing? “…Mortgage credit, but more generally, many years of a weak job market and slow wage gains seem to have induced many people to double-up on housing, and many young adults continue to live with their parents.”
Right! Weak housing reflects the weakness of households. What to do about that? “Sustained increases in productivity are necessary to support rising incomes. The growth rate of output per hour worked has averaged about 1.75% per year since the recession began in late 2007. This rate is down from gains averaging 2.75% over the preceding decade. Policies to strengthen education, to encourage entrepreneurship and innovation, and to promote capital investment, both public and private, can all be of great benefit.”
Yup. Would be helpful if we did any of that. Limits to knowledge and power: “The Federal Reserve’s objectives of maximum employment and price stability do not, by themselves, ensure a strong pace of economic growth or an improvement in living standards.” Meanwhile an asinine bunch — from Senators Elizabeth Warren and Richard Selby trying to limit — powers the Fed does have, to a crew on Wall Street including Stanley Druckenmiller and Satyajit Das — wants you to believe the Fed has caused all of our trouble.
We must pull up our own socks. The Fed saved us, and since has done what it can.
Setting a standard for all future Fed Chairs for data-dependency and humility: “I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so.”
Friday, May 15, 2015
Capital Markets Update
By Louis S. Barnes Friday, May 15, 2015
After three weeks of startling (and painful) movement, financial markets have staggered to a standstill.
The question before the house: Did the market-lurching signify changes in economic trend, or correction of prior events?
Stick with correction. Here is the reconstruction.
Way back, 18 months ago, US long-term rates were rising fast based on Fed withdrawal from QE and another apparent US economic acceleration. The US 10-year Treasury reached 3.00% twice, mortgages close to 5.00% at New years 2014. Then, in one of the more remarkable patterns of recent times, the 10-year entered a straight-line glide path for 16 months, culminating at 1.90% in the third week of April.
The lurch upward since, into the 2.20s has disturbed a lot of people but should not. The 16-month slide was the work of the US economy doing far better than Europe, hence the Fed shouting intentions to raise its rate while the ECB threatened its first bond-buying QE. By last fall, into winter the central bank divergence had spectacular effect on currency markets, the euro crashing towards 1:1 with the dollar; and as the euro crashed it forced other central banks to undercut their currencies to maintain trade competitiveness with Europe.
The dollar rising versus the world pulled cash into the US, pushing up prices for bonds (their yields down) and stocks. This currency force overwhelmed any market fear of a higher overnight Fed rate.
There were several sideshows during the period, oil in the lead. I argued then and re-state now: the oil decline had far less stimulative effect on the world economy than any previous decline. Prices of natural gas had crashed five years before, instead of simultaneous with oil as in previous oil declines. Same for coal. The primary Western use of oil is for gasoline, and its $3.50/gallon had already been so high (the same price per liter in the rest of the world because of taxes) that that we were already weaning ourselves. “Miles-driven” in the US had not risen since 2008. Optimistic-side economists are still hunting for consumer stimulus, but no Wascally Wabbit in sight.
The oil drop has thickened the cap on inflation, but the fundamental lid has been welded, bolted, chained, and cemented in place for two decades: wages are barely growing. Here and everywhere, same.
The last month’s reversals are just correctives to an overdone fall-winter move. In a beautiful illustration of recurrent technical trading patterns, the US 10-year has now retraced exactly one-third of its 16-month drop. The euro is back to $1.14, and as the dollar has slid, bonds have been dumped, yields up. Some make the truly foolish argument that ECB QE has worked and Europe has righted itself and Euro-inflation is on the way. Nah. Its economies have gotten a boost from the weak euro, which has had the reciprocal effect here, weakening the US.
All of this feels as though global markets have reached a temporary equilibrium. Now we need for something to happen, perhaps several in concert to tell us if the world economy is headed upward, or will drift back into the long-term disinflationary goop.
Everything I can see says the latter. Nothing grim: big demographic shifts not far ahead will diminish the oversupply of labor, and then add to its compensation. But in the meantime the whole world is trying to rig the game in favor of its exports. Except us, of course, maybe-maybe-not able to get TPP off the ground — and TPP is not a table-tipper, just a balancer.
Persistent QE in Europe and Japan, and its residual here I suppose could produce some kind of stagflation, but it’s not likely. Every nation is trying in varying degrees of desperation to keep its people at work, to service overgrown debts both public and private. That effort could not be more deflationary, and the central bank QE cash has little effect except competitive currency devaluation.
And the Fed is on hold, its forecasts in flinders.
After three weeks of startling (and painful) movement, financial markets have staggered to a standstill.
The question before the house: Did the market-lurching signify changes in economic trend, or correction of prior events?
Stick with correction. Here is the reconstruction.
Way back, 18 months ago, US long-term rates were rising fast based on Fed withdrawal from QE and another apparent US economic acceleration. The US 10-year Treasury reached 3.00% twice, mortgages close to 5.00% at New years 2014. Then, in one of the more remarkable patterns of recent times, the 10-year entered a straight-line glide path for 16 months, culminating at 1.90% in the third week of April.
The lurch upward since, into the 2.20s has disturbed a lot of people but should not. The 16-month slide was the work of the US economy doing far better than Europe, hence the Fed shouting intentions to raise its rate while the ECB threatened its first bond-buying QE. By last fall, into winter the central bank divergence had spectacular effect on currency markets, the euro crashing towards 1:1 with the dollar; and as the euro crashed it forced other central banks to undercut their currencies to maintain trade competitiveness with Europe.
The dollar rising versus the world pulled cash into the US, pushing up prices for bonds (their yields down) and stocks. This currency force overwhelmed any market fear of a higher overnight Fed rate.
There were several sideshows during the period, oil in the lead. I argued then and re-state now: the oil decline had far less stimulative effect on the world economy than any previous decline. Prices of natural gas had crashed five years before, instead of simultaneous with oil as in previous oil declines. Same for coal. The primary Western use of oil is for gasoline, and its $3.50/gallon had already been so high (the same price per liter in the rest of the world because of taxes) that that we were already weaning ourselves. “Miles-driven” in the US had not risen since 2008. Optimistic-side economists are still hunting for consumer stimulus, but no Wascally Wabbit in sight.
The oil drop has thickened the cap on inflation, but the fundamental lid has been welded, bolted, chained, and cemented in place for two decades: wages are barely growing. Here and everywhere, same.
The last month’s reversals are just correctives to an overdone fall-winter move. In a beautiful illustration of recurrent technical trading patterns, the US 10-year has now retraced exactly one-third of its 16-month drop. The euro is back to $1.14, and as the dollar has slid, bonds have been dumped, yields up. Some make the truly foolish argument that ECB QE has worked and Europe has righted itself and Euro-inflation is on the way. Nah. Its economies have gotten a boost from the weak euro, which has had the reciprocal effect here, weakening the US.
All of this feels as though global markets have reached a temporary equilibrium. Now we need for something to happen, perhaps several in concert to tell us if the world economy is headed upward, or will drift back into the long-term disinflationary goop.
Everything I can see says the latter. Nothing grim: big demographic shifts not far ahead will diminish the oversupply of labor, and then add to its compensation. But in the meantime the whole world is trying to rig the game in favor of its exports. Except us, of course, maybe-maybe-not able to get TPP off the ground — and TPP is not a table-tipper, just a balancer.
Persistent QE in Europe and Japan, and its residual here I suppose could produce some kind of stagflation, but it’s not likely. Every nation is trying in varying degrees of desperation to keep its people at work, to service overgrown debts both public and private. That effort could not be more deflationary, and the central bank QE cash has little effect except competitive currency devaluation.
And the Fed is on hold, its forecasts in flinders.
Friday, May 8, 2015
Capital Markets Update
By Louis S. Barnes Friday, May 8, 2015
The big news of the week: the US economy stalled in the first quarter, GDP rising 0.2%. And long-term rates, which go down on weak economic news instead went up.
There are several keys to this conundrum. The first: the economy did not stall. The most basic forward momentum in our economy (any economy): 321 million Americans need to spend money every day to live, and “personal consumption expenditures” in the first quarter plodded along at a 1.9% annualized rate. Second, there is no new evident weakness in employment, although next Friday’s payroll report could surprise.
Home sales are not rocketing, but not bad either: pending sales in March were 11% higher than one year ago. Today’s release of the manufacturing ISM index arrived unchanged in April at 51.5 despite weakness in the oil patch and the strong dollar hurting exports.
GDP calculations are weird. BTW: nobody should have been surprised by a poor number — the Atlanta Fed’s real-time GDP tracker (“GDPNOW’) has had a near-zero figure for six weeks. Pulling GDP down: investments fell in Q1, everything from residential to business, some of that due to pullback in drilling. Another big sinker: imports rose, but exports fairly collapsed, down 7.3% in Q1 — we were still spending, but buying the production of others.
The one aspect of the GDP report which does indicate a stall: businesses built a lot of inventory in Q1 which did not sell, but the production boosted GDP — it would have been negative without the inventory accumulation. Now we infer that the overstock will mean underproduction in Q2. And the Atlanta Fed tracker shows no rebound in April.
If not a stall, certainly underperformance, then why the jump in mortgage and bond yields? Mortgages are still a hair below 4.00%, but the 10-year T-note is up to 2.11% and looks lousy. If ever you wanted confirmation that the outside world has more and more impact on daily life in the US, follow this bouncing ball.
Last winter the Fed adopted the rhetoric of inevitable rate-hikes ahead. If economic growth merely remained on current track, the Fed was coming. No need for inflation even to rise toward target, we’re coming. Simultaneously the European Central Bank and the Bank of Japan entered end-stage QE money-hosing — panicked, really.
In the near term, currencies move relative to each other because of changes in local interest rates (longer term: inflation and trade balances). Money will flow to the highest return, and in the era of electronic money on 24/7 screens, moves FAST. So the dollar rocketed up, and the euro and yen crashed, as did nearly all important currencies, those central banks also hosing in order to be trade-competitive with Europe and Japan.
If you’re going to move to dollars you have to buy dollar-denominated bonds and stocks. Thus US bonds went up in price, down in yield, at max panic in early February, the 10-year to 1.65%. The NASDAQ returned to its all-time high. QE by the ECB and BOJ pushed yen and euro bonds almost to zero, adding to buy-pressure here.
Historically, big swings in currency values take a year or years to change the flow of exports and imports. In the modern era, not just money is made of electrons; so is a lot of world trade. The weak euro has suddenly pinked European economies, Spain now the strong man of Europe, second only to Germany. However, ruddy Europe is at the zero-sum cost of a pallid US, our exports tanking.
Hence the spreading global assumption that the Fed will have to hold off, maybe indefinitely. So the whole machine has run in reverse for 10 days: dollar down, euro and yen up. Euro bond yields up (all is relative, German 10s from 0.06% to 0.37%), US Bond yields up.
Hunch: all of this QE-currency hoo-ah has not changed a thing. The world is and has been caught in oversupply of labor, materials, commodities, and manufactures, soggy everywhere, German and Chinese predation making all worse. The Fed may lift off (Bill Gross: “If only to show they can still get out of bed”), but the economy and rates are not going anywhere.
The big news of the week: the US economy stalled in the first quarter, GDP rising 0.2%. And long-term rates, which go down on weak economic news instead went up.
There are several keys to this conundrum. The first: the economy did not stall. The most basic forward momentum in our economy (any economy): 321 million Americans need to spend money every day to live, and “personal consumption expenditures” in the first quarter plodded along at a 1.9% annualized rate. Second, there is no new evident weakness in employment, although next Friday’s payroll report could surprise.
Home sales are not rocketing, but not bad either: pending sales in March were 11% higher than one year ago. Today’s release of the manufacturing ISM index arrived unchanged in April at 51.5 despite weakness in the oil patch and the strong dollar hurting exports.
GDP calculations are weird. BTW: nobody should have been surprised by a poor number — the Atlanta Fed’s real-time GDP tracker (“GDPNOW’) has had a near-zero figure for six weeks. Pulling GDP down: investments fell in Q1, everything from residential to business, some of that due to pullback in drilling. Another big sinker: imports rose, but exports fairly collapsed, down 7.3% in Q1 — we were still spending, but buying the production of others.
The one aspect of the GDP report which does indicate a stall: businesses built a lot of inventory in Q1 which did not sell, but the production boosted GDP — it would have been negative without the inventory accumulation. Now we infer that the overstock will mean underproduction in Q2. And the Atlanta Fed tracker shows no rebound in April.
If not a stall, certainly underperformance, then why the jump in mortgage and bond yields? Mortgages are still a hair below 4.00%, but the 10-year T-note is up to 2.11% and looks lousy. If ever you wanted confirmation that the outside world has more and more impact on daily life in the US, follow this bouncing ball.
Last winter the Fed adopted the rhetoric of inevitable rate-hikes ahead. If economic growth merely remained on current track, the Fed was coming. No need for inflation even to rise toward target, we’re coming. Simultaneously the European Central Bank and the Bank of Japan entered end-stage QE money-hosing — panicked, really.
In the near term, currencies move relative to each other because of changes in local interest rates (longer term: inflation and trade balances). Money will flow to the highest return, and in the era of electronic money on 24/7 screens, moves FAST. So the dollar rocketed up, and the euro and yen crashed, as did nearly all important currencies, those central banks also hosing in order to be trade-competitive with Europe and Japan.
If you’re going to move to dollars you have to buy dollar-denominated bonds and stocks. Thus US bonds went up in price, down in yield, at max panic in early February, the 10-year to 1.65%. The NASDAQ returned to its all-time high. QE by the ECB and BOJ pushed yen and euro bonds almost to zero, adding to buy-pressure here.
Historically, big swings in currency values take a year or years to change the flow of exports and imports. In the modern era, not just money is made of electrons; so is a lot of world trade. The weak euro has suddenly pinked European economies, Spain now the strong man of Europe, second only to Germany. However, ruddy Europe is at the zero-sum cost of a pallid US, our exports tanking.
Hence the spreading global assumption that the Fed will have to hold off, maybe indefinitely. So the whole machine has run in reverse for 10 days: dollar down, euro and yen up. Euro bond yields up (all is relative, German 10s from 0.06% to 0.37%), US Bond yields up.
Hunch: all of this QE-currency hoo-ah has not changed a thing. The world is and has been caught in oversupply of labor, materials, commodities, and manufactures, soggy everywhere, German and Chinese predation making all worse. The Fed may lift off (Bill Gross: “If only to show they can still get out of bed”), but the economy and rates are not going anywhere.
Friday, May 1, 2015
Capital Markets Update
By Louis S. Barnes Friday, May 1, 2015
The big news of the week: the US economy stalled in the first quarter, GDP rising 0.2%. And long-term rates, which go down on weak economic news instead went up.
There are several keys to this conundrum. The first: the economy did not stall. The most basic forward momentum in our economy (any economy): 321 million Americans need to spend money every day to live, and “personal consumption expenditures” in the first quarter plodded along at a 1.9% annualized rate. Second, there is no new evident weakness in employment, although next Friday’s payroll report could surprise.
Home sales are not rocketing, but not bad either: pending sales in March were 11% higher than one year ago. Today’s release of the manufacturing ISM index arrived unchanged in April at 51.5 despite weakness in the oil patch and the strong dollar hurting exports.
GDP calculations are weird. BTW: nobody should have been surprised by a poor number — the Atlanta Fed’s real-time GDP tracker (“GDPNOW’) has had a near-zero figure for six weeks. Pulling GDP down: investments fell in Q1, everything from residential to business, some of that due to pullback in drilling. Another big sinker: imports rose, but exports fairly collapsed, down 7.3% in Q1 — we were still spending, but buying the production of others.
The one aspect of the GDP report which does indicate a stall: businesses built a lot of inventory in Q1 which did not sell, but the production boosted GDP — it would have been negative without the inventory accumulation. Now we infer that the overstock will mean underproduction in Q2. And the Atlanta Fed tracker shows no rebound in April.
If not a stall, certainly underperformance, then why the jump in mortgage and bond yields? Mortgages are still a hair below 4.00%, but the 10-year T-note is up to 2.11% and looks lousy. If ever you wanted confirmation that the outside world has more and more impact on daily life in the US, follow this bouncing ball.
Last winter the Fed adopted the rhetoric of inevitable rate-hikes ahead. If economic growth merely remained on current track, the Fed was coming. No need for inflation even to rise toward target, we’re coming. Simultaneously the European Central Bank and the Bank of Japan entered end-stage QE money-hosing — panicked, really.
In the near term, currencies move relative to each other because of changes in local interest rates (longer term: inflation and trade balances). Money will flow to the highest return, and in the era of electronic money on 24/7 screens, moves FAST. So the dollar rocketed up, and the euro and yen crashed, as did nearly all important currencies, those central banks also hosing in order to be trade-competitive with Europe and Japan.
If you’re going to move to dollars you have to buy dollar-denominated bonds and stocks. Thus US bonds went up in price, down in yield, at max panic in early February, the 10-year to 1.65%. The NASDAQ returned to its all-time high. QE by the ECB and BOJ pushed yen and euro bonds almost to zero, adding to buy-pressure here.
Historically, big swings in currency values take a year or years to change the flow of exports and imports. In the modern era, not just money is made of electrons; so is a lot of world trade. The weak euro has suddenly pinked European economies, Spain now the strong man of Europe, second only to Germany. However, ruddy Europe is at the zero-sum cost of a pallid US, our exports tanking.
Hence the spreading global assumption that the Fed will have to hold off, maybe indefinitely. So the whole machine has run in reverse for 10 days: dollar down, euro and yen up. Euro bond yields up (all is relative, German 10s from 0.06% to 0.37%), US Bond yields up.
Hunch: all of this QE-currency hoo-ah has not changed a thing. The world is and has been caught in oversupply of labor, materials, commodities, and manufactures, soggy everywhere, German and Chinese predation making all worse. The Fed may lift off (Bill Gross: “If only to show they can still get out of bed”), but the economy and rates are not going anywhere.
The big news of the week: the US economy stalled in the first quarter, GDP rising 0.2%. And long-term rates, which go down on weak economic news instead went up.
There are several keys to this conundrum. The first: the economy did not stall. The most basic forward momentum in our economy (any economy): 321 million Americans need to spend money every day to live, and “personal consumption expenditures” in the first quarter plodded along at a 1.9% annualized rate. Second, there is no new evident weakness in employment, although next Friday’s payroll report could surprise.
Home sales are not rocketing, but not bad either: pending sales in March were 11% higher than one year ago. Today’s release of the manufacturing ISM index arrived unchanged in April at 51.5 despite weakness in the oil patch and the strong dollar hurting exports.
GDP calculations are weird. BTW: nobody should have been surprised by a poor number — the Atlanta Fed’s real-time GDP tracker (“GDPNOW’) has had a near-zero figure for six weeks. Pulling GDP down: investments fell in Q1, everything from residential to business, some of that due to pullback in drilling. Another big sinker: imports rose, but exports fairly collapsed, down 7.3% in Q1 — we were still spending, but buying the production of others.
The one aspect of the GDP report which does indicate a stall: businesses built a lot of inventory in Q1 which did not sell, but the production boosted GDP — it would have been negative without the inventory accumulation. Now we infer that the overstock will mean underproduction in Q2. And the Atlanta Fed tracker shows no rebound in April.
If not a stall, certainly underperformance, then why the jump in mortgage and bond yields? Mortgages are still a hair below 4.00%, but the 10-year T-note is up to 2.11% and looks lousy. If ever you wanted confirmation that the outside world has more and more impact on daily life in the US, follow this bouncing ball.
Last winter the Fed adopted the rhetoric of inevitable rate-hikes ahead. If economic growth merely remained on current track, the Fed was coming. No need for inflation even to rise toward target, we’re coming. Simultaneously the European Central Bank and the Bank of Japan entered end-stage QE money-hosing — panicked, really.
In the near term, currencies move relative to each other because of changes in local interest rates (longer term: inflation and trade balances). Money will flow to the highest return, and in the era of electronic money on 24/7 screens, moves FAST. So the dollar rocketed up, and the euro and yen crashed, as did nearly all important currencies, those central banks also hosing in order to be trade-competitive with Europe and Japan.
If you’re going to move to dollars you have to buy dollar-denominated bonds and stocks. Thus US bonds went up in price, down in yield, at max panic in early February, the 10-year to 1.65%. The NASDAQ returned to its all-time high. QE by the ECB and BOJ pushed yen and euro bonds almost to zero, adding to buy-pressure here.
Historically, big swings in currency values take a year or years to change the flow of exports and imports. In the modern era, not just money is made of electrons; so is a lot of world trade. The weak euro has suddenly pinked European economies, Spain now the strong man of Europe, second only to Germany. However, ruddy Europe is at the zero-sum cost of a pallid US, our exports tanking.
Hence the spreading global assumption that the Fed will have to hold off, maybe indefinitely. So the whole machine has run in reverse for 10 days: dollar down, euro and yen up. Euro bond yields up (all is relative, German 10s from 0.06% to 0.37%), US Bond yields up.
Hunch: all of this QE-currency hoo-ah has not changed a thing. The world is and has been caught in oversupply of labor, materials, commodities, and manufactures, soggy everywhere, German and Chinese predation making all worse. The Fed may lift off (Bill Gross: “If only to show they can still get out of bed”), but the economy and rates are not going anywhere.
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