FMX | Connect – www.fmxconnect.com - (Reported 6/29/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
MARKET COMMENT – THE ‘PAIN TRADE’ IN BONDLAND
The fact that the equity market ended up in the red yesterday, even fractionally, after spending most of the day in positive territory, is an ominous sign ahead of quarter-end. A head-and-shoulders pattern is becoming highly visible and should the S&P 500 break below the 1,050 mark, it is very likely going to slide towards 880 and probably very quickly.
The bond market is telling a very important story here and it is one of a deflationary depression. We may not agree with Paul Krugman’s cure of solving a credit collapse by trying to create even more credit, but his diagnosis is spot on. The same ECRI that correctly foreshadowed the inventory-led bounce in GDP over the past four quarters is now signaling a very high chance of either a double-dip recession or a growth collapse of 2002 proportions.
The stock market bulls who got the 2009 call right were the same ones that got investors whacked hard in 2008 and they again have overstayed their call. Instead of heeding what the bond market is telling them, they are calling it a “bubble”. In realty, the bond market is sending out an important signal; decelerating nominal GDP growth ahead. This does not dovetail with notions of a V-shaped increase in corporate earnings to new record highs in the coming year and we would be looking for earnings guidance to be rather spotty during the looming reporting season.
For the record, the yield on the U.S. two-year note closed at a record low yesterday, at 0.625%. Think about that, we are supposedly in the first year of a reflationary economic expansion, and the two-year note yield has fallen to an all-time low. The 5-year note is down to 1.83%; the 10-year is at 3.02%; and the long bond is 4% on the nose. These are all new closing lows since the economic recovery began a year ago.
BIG DRAG FROM STATE/LOCAL GOVERNMENT SECTOR
The San Francisco Fed just published a report indicating that the severe cuts at the State and local government level will induce a recession; however, let’s face it, when real final sales is already running at barely over a 1% annual rate and the fiscal retrenchment amounts to 1%, then saying that there will not be a recession doesn’t really say a whole lot. Call it stagnation then. There is an interesting article on page A9 of today’s WSJ (State Workers Accept Pension Cuts) on the whole topic of how attitudes are changing and there is a growing acceptance among public sector unions and civil servants that the way they spend and save is going to undergo some radical changes in the future. Furloughs, layoffs, and now less-generous pension benefits for current workers and retirees are occurring for the first time ever.
MIXED NEWS ON THE AMERICAN CONSUMER
To show how confused everyone seems to be, the Wall Street Journal ran an article today on how consumer spending picked up in May, then one on how consumer discretionary stocks are faring, then one on glorifying the improvement in consumer confidence surveys (even as their levels are still where they are typically in recessions) and another on Car Sales Are Stuck in Slow Lane.
Indeed, J.D. Power is projecting 10.9 million units annualized U.S. motor vehicle sales for June – down 6% from the 11.6 million tally in May (and 21% are coming from fleet sales versus the long-run average share of 17.7%, the actual retail sales number, once again, would be south of 9 million annualized units).
SOME GOOD NEWS IN THE U.S. CONSUMPTION/INCOME REPORT
It goes without saying that the American consumer is not going to be the area of the economy that will lead the way. Perhaps it will be capital spending, since businesses are sitting on a ton of cash, but capex is only 6.5% of GDP. Just for some perspective, State and local government spending commands twice that share. There was a time when exports would have been a bright story, but that was before the fiscal retrenchment in Europe and the surge in the U.S. dollar. Construction – well, forget about that.
Back to the U.S. consumer. At least it is hanging in despite the array of bad news from the oil spill, to the European debt morass, to the volatility in the equity market. Consumer spending in May did not stray away from the consensus, up by nearly 0.3% in real terms after a flat April. Real personal income excluding government transfers rose 0.5% for the second month in a row – this is one of the key ingredients for the NBER in its recession-expansion call and this is the strongest back-to-back gain since September-October 2006.
CHICAGO BULLS?
Well, wouldn’t you be with Lebron and Bosch (assuming the chatter in the NYT is correct)? Sports aside, the three-month trend in the Chicago Fed National Activity Index came in at +0.28% in May, the strongest reading since March 2006. This prompted the Chicago Fed to say in its press release that “Moving above +0.20, the index’s three-month moving average in May also reached a level historically associated with a mature economic recovery following a recession.” Imagine that a year into a statistical recovery and it’s already “mature”. This is because just as the coincident indicators are cresting at recovery highs, many of the leading indicators are rolling over.
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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