FMX | Connect – www.fmxconnect.com - (Reported 5/28/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Equity markets are broadly firm (emerging markets up 1.8% today and closed at its best level in … over a week — break out the champagne) and government bond yields have thankfully stopped surging. Nonetheless, despite the yield backup in the past 48 hours, U.S. Treasuries have generated a not-too-shabby +1.4% return this month; only to be outdone by gold, which rallied 3% in a month where the safe-havens won out.
The trading in the past 24 hours has been dominated, so it seems, by rumours and innuendo surrounding what China was going to do with its Eurozone debt exposure. As it turns out – much ado about nothing. The euro remains weak (on track for its sixth monthly decline in a row — now that’s what we call a trend!) but corporate bond risk is declining in the credit default swap market so at a minimum liquidity conditions are easing. Credit conditions froze up to such an extent due to the European financial crisis that global corporate bond issuance receded to $61 billion in May, one-third of the activity in April and the lowest in a decade). Greek government default risks also tumbled today, and Libor rates seem to be stabilizing at the very least.
On the data front, consumer confidence in the U.K. fell to a five-year low in May, which is why the Gilt market is rallying nicely to close off the week. Japan also surprised with an uptick in its April unemployment rate, to 5.1% from 5.0% and the core CPI deflated further, to -1.5% YoY from -1.2%. Household spending also disappointed with a -0.7% YoY reading — the consensus was at +2.5% (how could it be off by that much?). So there may be ongoing enthusiasm over the U.S. recovery (not from us) but the data overnight from overseas left much to be desired. The good news? Americans go into Memorial Day weekend with gasoline prices down to a three-month low (who ever thought we’d be celebrating $2.80 a gallon for regular unleaded?). Between that and the slide in mortgage rates to sub-4.8% levels, at least the Greek crisis accomplished something positive.
MAY DAY!
The equity market has found some critical support after what can only be described as a manic May. In fact, in 16 of the past 23 sessions (or 70% of the time), we have seen the Dow moved 100 points or more (in fact, the Dow has posted an amazing 16 straight sessions of 200+ point intra-day swings). So whether one is a bull or a bear there is one fact that is not disputable, which is the degree of the volatility we are dealing with. As an aside, these wild swings are characteristic of a bear market, not the hallmark of a bull market, and to make the point clear, the last time we saw this much volatility (16 triple digit swings in 23 days) was back in the depths of despair in that post-bazooka period in November-December 2008.
SURPRISING DOWNSIDE GDP REVISION
U.S. real GDP was clipped to a +3.0% annual rate in the first revision to the Q1 data from +3.2% (and the actual +5.6% print for Q4). Outside of inventories, the U.S. economy is barely growing and is actually stagnant in real per capital terms. We are not sure how an 80% rally off the lows could have ever been considered by anyone as being consistent with such an anemic recovery in the real economy. And, if you are wondering how on earth the yield on the 10-year Treasury note can possibly be anywhere remotely close to 3%, it is because that is exactly where the trend in nominal GDP is — and we are well past the peak of all the government stimulus efforts. Believe it.
U.S. LABOUR MARKET SPUTTERING?
Initial jobless claims fell from an upwardly revised 474k level during the week of May 15th, to 460k in the May 22nd week, which was above consensus (455k) and a disappointment to be sure. The vast improvement in the second half of last year that led the turnaround in payrolls this year has completely stalled out — and not just in the past few weeks but for 2010 as a whole.
The four-week moving average has climbed back to 456.5k, which in the past was consistent with net job losses, not growth. In fact, 75% of the time in the past, employment was declining at such a level of claims and by an average of well over 100k. Stay tuned for when the Census workers fall out of the data. To put the level of claims into perspective, they are actually higher now than they were right after the 9/11 terrorist attacks (and when the economy was eight months into recession).
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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