FMX | Connect – www.fmxconnect.com - (Reported 9/29/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
The big news is still that asset classes that traditionally move inversely are now moving in tandem — stock prices, bond prices, and the gold price. As far as the latter is concerned, have a look at Martin Wolf’s column today on page 11 of the FT — Currency Wars in an Era of Chronically Weak Demand — and also see Currency Wars: A Fight to be Weaker on page C1 of the WSJ. Perhaps all three are strengthening on the same prospect — the Fed’s strong hint of another round of quantitative easing (QE). The Fed, after all, would be buying Treasuries so it is perfectly understandable why they would rally. More money printing means more U.S. dollar depreciation, which would obliviously be positive for gold (have a look at Gold Forecast $1,450/oz on page 25 of the FT.
The equity market seems to be the odd man out but we would surmise that it is rising on hopes that QE2 will be successful yet in stimulating final demand growth. From our lens, the jury is out on the efficacies of lower interest rates in an environment of contracting credit, especially considering what little impact the sharp plunge in yields and radical expansion of the central bank balance sheet have already exerted. A record low 0.64% yield on the 10-year TIPS strongly suggests that the bond market is sniffing out a renewed contraction and the pace of economic activity before too long.
LACK OF CONFIDENCE
It is now so clear that we never did have an organic recovery on our hands. Growth is vividly slowing down in North America, and deflation, not inflation, is the primary risk. After all, if disinflation was the primary trend for 30 years amidst a secular credit expansion, it surely stands to reason that as credit contracts, and with the underlying inflation below 1% and a huge output gap of 6.5%, deflation is a totally realistic scenario. The bond market is signalling some deflationary event of great magnitude (could be an unexpected stock market shock?). Bond yields will follow the 2-year note yield and will completely melt before this interest rate cycle is complete.
In September, U.S. consumer confidence (according to the Conference Board) sagged to 48.5 from 53.2 in August — the consensus was expecting 52.0. This takes us all the way back to February and the fact that it slipped so badly in a month that saw the equity market surge must be telling us that something, somewhere else is not going well at all — most likely, in the labour market. Indeed, the spread between the “jobs hard to get” and “jobs are plentiful” series, which gapped up to a six-month high of 42.3 from 41.5 in August. This foreshadows a rise in the unemployment rate, to 9.7% from 9.6% currently.
BUSINESS SENTIMENT SLIPS TOO
It wasn’t just the consumer in a deep funk, the Conference Business Roundtable CEO poll plunged for the first time in a year — down eight points to 86 in Q3. In case anyone is wondering why the labour market indicators were so weak in the consumer confidence index, well, hiring intentions in the CEO business survey took a dive. Only 31% of respondents plan to hire in the next six months, well below the 39% print the last time the poll was taken in June.
HOUSE PRICES DIP
Well, we didn’t really need the Case-Shiller (CS) home price index to know that residential real estate prices are dipping again — we already got that from the recent FHFA, resale and new home sale reports. The CS Composite 20 series dipped 0.1% MoM in July — the first decline in four months and quite likely the re-emergence of the primary trendline … which is down.
RICHMOND, POOR MAN
The litany of softer regional economic reports continues unabated. The Richmond Fed index, if taken at face value, is pointing to a renewed contraction in industrial activity. The index slid from +11 in August to -2 in September, the weakest reading since the beginning of this year. Shipments slipped to -4 from +11 and order volumes fell off the proverbial cliff: +41 in April, to +36 in May, to +25 in June, to +13 in July, to +10 in August, to a big fat ZERO in September.
In economics land, we would typically call that a trend. Capiche!
The service sector didn’t fare much better — according to the Richmond Fed, revenues in the service sector came in at -5 in September from -10 in August. This was the first back-to-back decline since the start of this year.
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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