June 28, 2010
Consumer spending in the U.S. rose 0.2 percent in May, more than forecast of 0.1 percent, a sign households are gaining confidence in the recovery and the job market. Personal income climbed 0.4 percent versus surveys of 0.5 percent. The Savings rate increased to 4.0 percent in May from 3.8 percent in the prior month. Bloomberg’s Betty Liu and Mike McKee report.
(Source: Bloomberg)
June 28, 2010
As the U.S. economy shows signs of weakness and the bond market reaching recent lows in terms of yields, Barron’s looks to google searches to determine the investor outlook on the stock market.
This yield has been dragged lower by a series of weaker-than-anticipated economic readings on housing and a predictable (if not widely predicted) downgrade of the Fed’s scoring of the recovery. The yield on the 10-year note, also in fast retreat to 3.11%, has tracked the U.S. economic data surprise index tick for tick.
The bond and stock markets consider the chance of an important economic slowdown with roughly the same frequency with which women and men, respectively, choose to talk seriously about their relationship–the former too often, the latter not often enough. But it is women and the bond market who ultimately determine the frequency.
In case you’ve been trapped in the 1990s, note that stocks these days move in step with bond yields, both falling as economic worry and deflationary anxiety rises. Thus, last week’s 3% drop in the Dow industrials, which brought the index toward the lower reaches of the trading range that has taunted, bedeviled and bored investors this year.
As investors question whether the economy will continue to grow that is self sustaining or will double dip into another recession, company specific performance matters less.
At times like these, when the market is indisputably in the sway of the macro forces, company-level fundamentals matter less than most investors would hope, and equity valuations get discounted until marked to market with Wall Street’s best guess about the plausible adverse scenario.
For sure, the macro story is now the loudest one. Bloomberg last week reported that macro-strategy hedge funds are pulling in new cash at twice last year’s rate. And correlations among individual stocks has stretched up toward 2008 panic levels in recent weeks, as the whole market has traded as one real-time gauge of economic anxiety.
The only question that ever really matters for investors is what sort of outlook is now priced into stocks. With the Standard & Poor’s 500 trading a few percent above its 2010 low and valued at 15 times the past 12 months’ earnings and 12 times the forward year’s forecast, it seems the slow-and-erratic growth path is the market’s baseline view.
Google Trends, which tracks search-term volume, is a wonderful group psychologist. Lately there’s been a surge in searches for “double dip,” as surfers fretted over this dreaded but rare form of recession relapse. Searches for “ECRI,” or Economic Cycle Research Institute, have likewise ramped up. The firm’s weekly economic leading indicator dipped to worrying levels a week ago–to the point where ECRI researchers have been moved to downplay its efficacy in handicapping recessions. This is reminiscent of the spike in online searches for “soft patch” in 2004 and 2005, as that economic recovery segued from torrid to tepid.
The fact that the market didn’t blink upon Friday’s downward revision of first-quarter GDP hints that a softer outlook is largely discounted. Another thin reed is the fact that a Barclays Capital slashing of Goldman Sachs’ (ticker: GS) second-quarter profits to $1.95 from $5.35 Wednesday didn’t faze the bellwether stock.
The market is back near a level where fundamental investors have detected some value, but bulls have lately made a poor showing. Trading volume has been greater in declines than on bounces, a sign of a vulnerable tape. And if this bout of macro fear and headline fright requires one of those panic-spreading shakeouts before energizing the bargain hunters, then we haven’t yet gotten it, and if we do it would likely culminate below 1000 on the S&P 500.
Yet with nominal GDP now running at an all-time record, every day the market just sits there makes valuations less demanding. So it’s too early to dispense with the idea of an anxious summer trading range— but one in which the lower end isn’t far off.
Read the Full Article
June 28, 2010
The G20 summit has concluded in the Canadian city of Toronto on Sunday with world leaders pledging to halve budget deficits by 2013 and stabilise or reduce government debt by 2016. It is now up to individual countries to implement measures to reach their targets and spur financial growth. Al Jazeera’s Imtiaz Tyab reports from Toronto on how global unity on an economic plan to recover from the recession was a key theme in the summit.
(Source: Aljazeera)
June 28, 2010
The global credit markets are under duress as yields surge on concerns of a potential slowdown, which in turn could lead to rising defaults according to a Bloomberg article. With the heightened risk aversion, new issuance has slowed down considerably in recent weeks.
The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7 percent of the total, the highest share since December, according to Bank of America Merrill Lynch index data. The ratio compares with 9.2 percent on April 30, which was the lowest since November 2007.
Junk bond sales slumped to a 15-month low in June amid concern government efforts to control spiraling budget deficits will hamper global growth and drive up borrowing costs for the neediest borrowers. The 2010 default rate in the U.S. may jump as high as 6 percent by year-end from 1.3 percent currently, according to analysts at Goldman Sachs Group Inc.
Despite the gloomy forecast by Goldman Sachs, not everyone agrees.
JPMorgan Chase & Co. analysts led by high-yield credit strategist Peter Acciavatti wrote June 25 that the rate will be 2 percent in 2010. The views are diverging as investors weigh the effects of Europe’s sovereign debt crisis and on mounting concern the U.S. economy may tip back into recession.
It remains to be seen how defaults for the corporate market play out. As I have stated many times, that the final price of anything is the true arbitor of true value. Rising risk premiums in the form of higher bond yields may be suggesting that companies, especially in developed economies, are facing tough times ahead as the global economy suffers from a slowdown in growth.
Read the Full Article
by Natalie Cohen – The Public Purse
June 28, 2010
It couldn’t come at a worse time. The 53 Gulf Coast counties in Florida, Alabama, Mississippi, Louisiana and Texas look forward to peak summer months when tourists flock to beach resorts, casinos and summer homes. This year the tourists are staying away. Revenues related to tourist spending and waterfront development projects are likely to drop. The Bureau of Labor Statistics just issued a report detailing the concentration of jobs related to the hospitality and leisure industries. Of interest, the Mississippi coastline stood out with a 22% concentration of jobs in these industries compared with 14.8% in Gulf Coast Florida and 12.8% nationally (percent of private sector jobs). In terms of the number of jobs, Pinellas, Lee, Sarasota and Collier counties in Florida; Harrison, Mississippi; Mobile, Alabama; Jefferson and Orleans parishes in Louisiana stand out. BLS calculated a second indicator of concentration, a “location quotient” which measures the multiple over the national average employment concentration in these industries. We draw your attention to this valuable report to assess the bonds in your portfolio.
Natalie Cohen is principal author and has deep experience in the municipal bond market, credit research, bond insurance, risk management, rating agency and government. She previously published the Fiscal Stress Monitor, a monthly independent trend letter. She has also written articles for the Bond Buyer, Municipal Finance Journal, American City and County Magazine, Government Finance Review and the Brookings Institution. A victim of the financial services meltdown herself, she recently founded National Municipal Research, Inc. a New York City-based consulting company and producer of The Public Purse.
Posted by Rom on under Bond Chatter,Bond Gurus | Tags: BP oil spill, Gulf of Mexico, Muni, municipal bond market, municipal bonds, tax-exempt, tax-free — | View CommentsJune 27, 2010
Could Japan be the next country to fall victim to the debt crisis that is troubling economies around the globe? New leadership hopes to succeed where others have failed in tackling the rising public debt problem in the Land of the Rising Sun according to an Al Jazeera video.
Japan, the world’s second biggest economy, has racked up debt totalling $9.4t while its gross domestic product (GDP) is only $5t, making its debt to GDP ratio 181 per cent – the highest among rich countries.
Too much debt could render a country’s bond worthless and impact economic growth.
A recent example of a country that has faced a troubled economy due to its massive accumulation of debt is Greece.
But Tomohiko Taniguchi, a professor at Keio University in Japan’s capital Tokyo, told Al Jazeera the difference between Japan’s economic situation and Greece’s is that “Japan’s government debt has been almost exclusively purchased by domestic investors. Unlike Greece, the Japanese are indebted not significantly to the outside world”.
“It is more sustainable than the case of Greece, but you have to boost demand, you have to grow. The Japanese government has to make not baby steps but a significant leap,” he said.
“And most importantly, the Japanese government has to convince the Japanese domestic investors as well as the international market about the long term projection of the economy, the long term blueprint as to what the government will do to tackle both the lack of demand and ballooning budget deficit.”
Naoto Kan, Japan’s prime minister, has suggested an increase in sales taxes to combat the economic problem.
But Taniguchi said: “I think it’s more important that the Japanese administration proposes to reduce corporate tax first rather than increase the general sales tax because corporate tax in Japan is among the highest among other developed nations.
“In order to boost Japanese domestic demand and corporate investment, the corporate tax rate has to be reduced first.” Al Jazeera’s Divya Gopalan reports from Tokyo.
(Source: Al Jazeera)
Posted by Rom on June 27, 2010 under Bond Chatter | Tags: Bond Trading, deflation, Japan, JGB, Lost Decade, Yen — | View CommentsBy John Mauldin – Investor Insight
June 27, 2010
I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession.
This was not based on data, but rather on research which shows that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases. Christina Romer, Obama’s head of the Council of Economic Advisors, did the research along with her husband, so this is not a Republican conclusion.
If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession – at least the way I see it.
I was asked at my recent speech in Milan, what sorts of things could make me wrong? There are a few. First, it could be that tax increases and cuts don’t matter. Some very smart people (like Paul McCulley) feel that tax increases on the wealthy don’t really figure into Romer’s analysis.
Or maybe bank lending starts to pick up and the economy is actually growing at 3-4% by the end of the year – although the chart below suggests that bank lending is still in freefall. Notice that if this trend continues just a little while longer, bank lending will have fallen by 25% in about two years. This is a truly scary chart. It is unprecedented in modern history. Also notice that after the 2001 recession bank lending continued to fall for over two and a half years.
Or perhaps Congress decides to extend the Bush tax cuts or phases in the increase over time. That would be better and maybe not push us into recession. Maybe they vote for more stimulus, although that does not look likely. If Congress cannot extend unemployment benefits, as happened this week, then other stimulus is unlikely.
The uber-Keynesians that are in control of our economic policy clearly do not think that large tax increases matter, or if they do think so they are not speaking out about them. They are conducting an experiment on our economic body without benefit of anesthesia. Here’s a prediction about which I can feel confident: if we do slip back into recession, they will blame some factor other than the tax increase and call for massive stimulus. In fact, they will probably say that the lack of stimulus was the problem in the first place. Paul Krugman will be the head cheerleader.
(For a quick, fun, and instructive read, go to Joshua Brown’s web site [The Reformed Broker] and read about the Econ Gangs of New York, where Joshua describes the various groupings of economic thinkers. Seems I am in the gang led by my friend Mohamed El-Erian, the New Normalers. Krugman, of course, is the leader of the New Jack Keynesians, a most vicious and pernicious gang, in my opinion. http://www.thereformedbroker.com/2010/06/24/econ-gangs-of-new-york/)
Going into the last two recessions we had an inverted yield curve (where short-term rates are higher than long-term rates), which made it easy to predict a recession. Let’s look at a graph of the yield curve from my e-letter of February 16, 2007. Notice that the 3-month T-bill is about 45 basis points higher then the 10-year bond, which is what the studies use as the basis for their analysis. The curve had been like this since before September of 2006, when I was predicting a recession about a year out. (An inverted yield curve is the best predictor we have of a recession one year out that. A yield curve like the one below has always been followed about one year later by a recession.)
Here is today’s yield curve. It is normal (if you can call anything in a 0% Fed rate environment normal), and while not as steep as it used to be, is still quite steep. (Bloomberg)
We are not going to get an inverted yield curve when the Fed is holding rates at 0%. The curve we have today is not signaling a recession. It suggests that those who see continued recovery are right.
I am not so sanguine. I was on a panel with Martin Barnes (of Bank Credit Analyst, and one of the best economic minds I know) at David Kotok’s shindig in Paris last week. Martin and I are very good friends, but we do tend to go at one another. It makes for a very interesting panel for the audience.
I posited that I think the chances are better than even that we have a recession in 2011. Martin said (insert deep Scottish brogue), “John, double-dip recessions are very rare.” And he’s right. The last (and only) one we had was because Volker was stamping on the brakes trying to bring inflation under control in the ’80s.
My rejoinder was along these lines: We are not coming out of a normal business-cycle recession. We went through a debt crisis and a balance-sheet, deleveraging recession. The old data that we used to judge recoveries by just does not apply here. At best, it is misleading.
It wasn’t just a bubble in housing, it was a bubble in debt. And now we are reducing that debt. We are coming to the end of the Debt Supercycle (a term coined long ago by … Bank Credit Analyst). We now have a bubble in government debt that is getting ready to burst in one country after another. What is indeed a very rare thing (a double-dip recession) is a very real possibility. Since we don’t have the yield curve to guide us, let’s look at what we do have.
The Leading Indicators Are Starting to Turn
Even while I was on vacation in Italy, I had to regularly feed my addiction for economic and investment information. Over the course of a few days I ran across several studies on the Economic Cycle Research Institute’s (ECRI) Index of Weekly Leading Economic Indicators. The index has turned down of late. Chad Starliper of Rather & Kittrell sent me the following charts and analysis. (I love it when someone else does the work for me while I’m on vacation!)
“The ECRI has been getting some news of late. I did a little work on it, played with the rates of change, and found something a little ominous you might be interested in. The normal reported growth rate is an annualized rate of a smoothed WLI. However, when the 13-week annualized rate of change is used – shorter-term momentum – the decline in growth has fallen to a very weak -23.46%. The other times it has fallen this fast? All were either in recession or pointing to recession in short order (Dec. 2000).”
Jonathan Tepper (coauthor of the next book I am working on) sent me this piece from a group called EMphase Finance, based in Montreal. They wrote this back in April, as the Weekly LEI was beginning to turn over. They have found a bit of data that seems very good at predicting the economy of the US 12 months out. Let’s take part of their work:
Terms of Trade and US Real GDP
“Many market participants are debating whether or not a double-dip recession will occur within the next quarters. As we are writing our report, ECRI Weekly LEI fell quickly to 122.5 points from 134.7 in April. This indicator did a good job leading U.S. Real GDP Y/Y by 6 months over the last two decades. However, ECRI Weekly LEI recently became quite unreliable as it increased up to 25% Y/Y in April, a level consistent with an unrealistic 8% U.S. Real GDP Y/Y! You can notice the problem on the left chart below.
“We discovered a new leading indicator to forecast U.S. Real GDP Y/Y, and it is simply the U.S. Terms of Trade (TOT). It is defined as the export price / import price ratio. We are pleased to be the first to document this, at least publicly. On the right chart above, TOT leads U.S. Real GDP Y/Y by 12 months. The only drawback: underlying time series are monthly instead of weekly, but this is not really an issue with that much lead. Also, the relationship still holds well if we extend to the maximum data (1985).”
Their conclusion?
“As you probably noticed earlier, TOT is suggesting a decline of U.S. Real GDP Y/Y to nearly 0% within the next 12 months. Q2 2010 Real GDP Q/Q Annualized to be released on the 30th July may match expectations as it reflects data of the last three months, which were positive in general. However, we are most likely going to see weaker numbers in the next quarters. Will this lead to a double-dip recession? We believe the odds of a double-dip recession within the next 9-12 months are minimal, but odds may increase to 50-50 in 2011, depending on the evolution of variables we follow in the upcoming months.”
And while we are on leading indicators, let’s end with this note from good friend and data maven David Rosenberg of Gluskin Sheff (based in Toronto).
“For the week ending June 11th, the ECRI leading index (growth rate) slipped for the sixth week in a row, to -5.7% from -3.7%. Only once in the past – in 1987, but the Fed could cut rates then – did this fail to signal a recession. But a -5.7% print accurately signaled a recession in the lead-up to all of the past seven downturns.
“The consensus is looking at 3% real GDP growth for the second half of the year, but as Chart 2 suggests, the two quarters following a move in the ECRI to a -5% to -10% range is +0.8% at an annual rate on average. So right now the choice is really either a 2002-style growth relapse or an outright double-dip recession – pick your poison.”
My take is that Bush cut taxes in 2001 and again in 2003 in the face of weak economic circumstances. Unless something changes, we are going to enact the largest tax increase in US history. And that will be matched by equally large tax increases and spending cuts by state and local jurisdictions. And we are going to do it at a time when the above research suggests that growth may be in the 1% range and unemployment will still be in the 9-10% range. Extended unemployment benefits will be long gone for many people. Housing will still be in the doldrums (more on that in next week’s Outside the Box) and housing prices are likely to fall from here.
Growth in the first quarter was revised down (again!) to 2.7%, or about half that of the 4th quarter of last year. Much of what passed for growth was inventory rebuilding and stimulus. The underlying economy may be weaker than the headline number reveals. And by the 4th quarter, there is very little stimulus.
Given the above, I think we have to increase the odds of a 2011 recession to 60%, and those odds will rise and fall based on the economic performance of the next two quarters.
Do tax increases matter? We are about to find out.
And if I am wrong, I will be spectacularly wrong. And I hope I am. But you have to call it as you see it.
Bernanke at the Crossroads
I went to the crossroads, fell down on my knees
I went to the crossroads, fell down on my knees
Asked the Lord above, have mercy now
- Robert Johnson
If I am right about the potential for a recession, it is going to bring Ben Bernanke and the Fed to a very serious crossroads. Recessions are by definition deflationary. But inflation is already as low as it has been in a very long time. Core CPI is less than 1%. The Dallas Fed’s Trimmed Mean Inflation Index is down to 0.6% for the last 6 months.
If we enter into a recession, it is quite possible that the US could go into outright deflation. That is what M3 is saying. Take a look at this chart from John Williams of Shadowstats, who still tracks M3. But all the measures of money-supply growth are turning down. This is signaling deflation. (http://www.shadowstats.com/)
Albert Edwards of SocGen noted this week, “We are now walking on the deflationary quicksand.” Treasury markets seem to be pointing to a deflationary outcome. In the next recession, we could all become Japanese, unless …
You have to understand that when you become a Fed governor you are taken into a back room and given a DNA change. Henceforth, you become viscerally and genetically opposed to deflation. (Well, except for Tom Hoenig, president of the Kansas City Fed. His DNA change did not take. He wants to raise rates now, and is the lone dissenter at the Fed meetings. On a side note, when you Google Tom Hoenig, you get six pictures of him. Five are clearly of him, and one is moldy bread. I am not sure what that means. By the way, Tom, my invitation to Jackson Hole got lost again this year! And I would be happier with Hoenig as Secretary of the Treasury, for what that’s worth.)
What’s a central banker to do? Bernanke gave us the road map back in 2002 in his famous helicopter speech. As a last resort, you print money. But the Fed already has a very pregnant balance sheet. Can they push another $2 trillion into the economy to combat deflation? Will they?
Deflation is the antidote to debt, and especially those who are over-indebted. Great Britain seems to be purposefully pursuing a little inflation to make its debt burden easier. Will the US do the same?
If we slip into recession and deflation, I expect the Fed to react with more quantitative easing. They will start to take down longer-dated paper as they move out the yield curve. Could they expand the Fed balance sheet? Oh yes. We are in uncharted territory, gentle reader.
John is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered in multiple states. John Mauldin is President of Millennium Wave Securities, LLC a FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). He is a frequent contributor to numerous publications, and guest on TV and radio shows as well as quoted widely in the press.
June 27, 2010
Are we headed toward an economic rebound or double-dip? Martin Feldstein, a Harvard University professor and fmr. chairman of the Council of Economic Advisors, shares his insight.
(Source: CNBC)
Posted by Rom on under Bond Chatter,Fed Watching | Tags: Bond Trading, Double-Dip, economic recovery, European Debt Crisis, Federal Reserve, recession — | View CommentsMarc Chandler – Marc to Market
June 26, 2010
The euro has declined about 0.75% this week. This seems fairly resilient, given that news stream that included the downgrade of a large French and Dutch bank, record premiums by Greece and Portugal and disappointing euro zone industrial order data.
Some have sought to link this resilience to China, which is at the heart of so many conspiracy theories these days. The argument is that China may have bought euros in size this week to influence (or do you say manipulate?) to prevent the basket to which it is linking the yuan (taking last weekend’s announcement at face value) from changing very much. In effect, revival of the basket approach may have coincided with an the PBOC buying euros again.
An advisor to the PBOC (Li Daokui) comments could be read to support such ideas. While acknowledging the risk of near-term weakness, Li said that the euro zone was going to survive and the euro itself would rebound on a medium and long-term. Greece and Portugal’s challenges are serious, he opined, but Spain, Italy and Ireland are not as vulnerable.
Li’s claim, however, that the yuan needs 10-15 years to become an international currency like dollar, yen, sterling and yen, is a bit odd. First, the yen is hardly an international currency, in terms of a reserve asset (about 3%), an invoicing currency (practically nil), or reference currency. Sterling is not much better. The euro stands out this regard and then of course the dollar. For the yuan to become as important as the yen does not seem far-fetched, though it presupposes a convertible currency, an open capital account and greater transparency than exists today.
Reform of the currency seems frustratingly slow and Li’s 10-15 year horizon may err on the early side. Last weekend’s announcement that caused ripples through the global markets was more than a nonevent, but seems only barely. The yuan initially strengthened 0.4% on Monday and that has really been it. It gained 0.5% for the week.
It comes down, in some respects, to what is meant by flexibility. When US officials call for the yuan to be more flexible, they seem to mean that the government should remove its rigid hand so the currency could appreciate. When Chinese officials say the will make the yuan more flexible, they seem to mean, more tolerant of two-way movement, but within a range.
The euphoria that initially greeted the Chinese announcement has faded. A former chief economist at the US Trade Commission said that China’s currency move made the Federal Reserve irrelevant. Other made similarly bold claims how it would be boost US exports, dampen Chinese inflation and boost commodity prices.
The 0.5% move this week needs to be understood within the context of the official band that allows the dollar-yuan rate to move 0.5% away from the reference rate.
A cautious attitude still seems to warranted. The proof of the pudding is in the eating, as the saying goes. Or to say the same thing, the magnitude and speed of the yuan’s move remains a “known unknown”.
Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. In 2009 Chandler was named a Business Visionary by Forbes. Chandler’s first book, Making Sense of the Dollar was published by Bloomberg Press in August of 2009. Currently, Chandler is the chief foreign exchange strategist at Brown Brothers Harriman.
Posted by Rom on June 26, 2010 under Bond Chatter | Tags: Bond Trading, currency trading, dollar, EUR, forex, fx, sterling, Yen, yuan — | View Comments
Economic & Bond Market Recap – June 28, 2010
By Rom Badilla, CFA – Bondsquawk.com
June 28, 2010
Today’s economic data releases came in mostly in-line with expectations. Personal Incomes for May increased by 0.4 percent which were below consensus estimates of 0.5 percent while Consumer Spending increased by 0.2 percent versus surveys of 0.1 percents. Income gains were driven by increases in wages as firms increased productivity and added more hours to the work week. As income gains came in above spending, the saving rate rose to 4.0% from 3.8% a month prior.
The Personal Consumption Expenditure (PCE) Core Price Index came in slightly higher at 0.2 percent versus consensus views of 0.1 percent. According to BNP Paribas’ Senior Economist, Julia Coronado, today’s surprise reading is a result of the imputed portion of the index which includes services like bank and medical services where there is no observed price. The market-based core index which is calculated using observed prices increased 0.1 percent which was in-line with expectations.
The Chicago Fed National Activity Index, which is a indicator on the current state of economic activity and inflationary pressures, came in at a reading of 0.21 for May. Economists were expecting a reading of 0.32 after a revised prior period reading of 0.25. A reading below zero reflects below trend growth in the overall economy as well as declining inflation pressures.
In addition, the Dallas Fed Manufacturing Activity survey declined in June by 4.0 percent versus a consensus gain of 3.2 percent. The survey increased by 2.9 percent in April. According to the text, the Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Data for today’s survey were collected June 15-23, and 105 Texas manufacturers participated. The survey included questions regarding whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged from the prior month.
On concerns that the U.S. economy may falter, U.S. Treasuries rallied across the curve. The yield on the 2-Year declined even further to 0.62 percent, a drop of 3 basis points from Friday. The 5-Year declined 8 basis points to a yield of 1.82 percent and the yield on the Long Bond decreased 6 basis points to 4.00 percent. As we discussed earlier this month, the yield on the 10-Year Treasury appears to be free and clear of the 3.10 technical barrier after closing the day at 3.02 percent, a decline of 9 basis points from Friday’s close.
10-Year U.S. Treasury Yield - Historical Chart
While I think that the deflation story still has some legs to it and the 10-Year could reach to a 2.75-2.90 percent yield before the year is out, I would not be surprised to see some short-term profit taking here as we move into quarter-end. In addition, Non-Farm Payrolls and Unemployment figures are released this Friday so it’s possible that market participants clear the deck in terms of risk toward the end of this week as they await further clarity on the health of the economy.
Inflation expectations as indicated by the yield differential between the 10-Year and 10-Year TIPS declined 4 basis points to a breakeven rate of 1.91 percent.
Across the Atlantic, government bond yields were generally mixed among developed economies. German 5-Year Bunds declined 3 basis points to a yield of 1.47 percent while the yield on France’s 5-Year widened to 2.05 percent, an increase of 2 basis points. 5-Year U.K. Gilts where unchanged on the day at 2.09 percent.
Greece government bond yields continue rise on concern of an impending default or restructuring. While the yield remained the same for the 2-Year at 10.11 percent, the 3-Year maturity spiked 22 basis points to 11.30 percent. The 5-Year added 10 basis points to finish the session at 11.02 percent while the yield on the 10-Year closed at 10.59 percent to 17 basis points.
Greece Yield Curve - Daily Change
For the rest of the peripherals, bond yields were mixed. The yield on Spain’s 5-Year gained 9 basis points to close at 3.70 percent. Portugal’s declined 4 basis points to 4.67 percent while the yield on Italy’s 5-Year increased 8 basis points to 3.00 percent. Ireland 5-Year bond yields were flat and closed at 4.58 percent.
Back stateside, the credit markets were generally tame. The Merrill Lynch High Yield Master Index increased to a spread of 693 basis points over comparable maturity Treasuries. The Investment Grade Index widened a basis points to a spread of 208. The spread on the U.S. Bank Index was unchanged at 274 basis points.
Agency Mortgage Backed Securities continue to outperform Treasuries. The yield differential between 30-Year Conventional MBS priced at par and the 10-Year declined a basis point to a spread of 73. For the month, the spread has declined 12 basis points suggesting strong investor appetite.
Stocks oscillated back in forth into and out of positive territory before closing down for the day. The S&P 500 Index declined 0.2 percent to 1074.57 while the Nasdaq lost 0.1 percent to 2220.65. The CBOE VIX Index edged higher by 1.6 percent to 29.0.
The Dollar Index advanced 0.5 percent to 85.696. The Euro declined 0.7 percent to 1.2277 and the British Pound gained 0.3 percent to 1.5105.
Gold spot prices ended at 1238.95, a decline of 1.3 percent.
Tomorrow, we have the release of S&P/Case Shiller Home Price data for April which is expected to reflect a decline of 0.1 percent from the prior month. In addition, Consumer Confidence for June will be released which surveys suggest a slight index level decline to 62.5 from 63.3 in the previous period. As mentioned, Nonfarm payrolls and Unemployment numbers, which is slated for a Friday release, highlight the week.