PIMCO’s “New Normal” and Deep Demographic “Doo-Doo”

July 29, 2010

From Pacific Investment Management Company’s June 2010 Investment Outlook, Bill Gross talks about the “New Normal” and additional headwinds for the global economy.

I write this month to condemn the inventor of the electronic “seeing eye” toilet. Yes, that’s right, I’m talking toilets here, doo-doo-stuff, some of which I hopefully won’t step in myself over the next few paragraphs. I know there must be more substantive and less objectionable topics to bring before you, but I have a sense that many of you join me in spirit if not common experience and so I devote this month’s Outlook to another trivial snippet emphasizing our joint humanity and sense of loss due to the recent disappearance of the hand flusher.

I don’t know where it is located exactly, but there’s an electronic eye in the plumbing of public toilets these days that can sense when you get up and down (or is it down and up) and are finally finished with your “business,” if you get my drift. My doctor says a proctology exam is a necessary evil but cameras in toilets? Never having seen myself from this particular angle, it is particularly embarrassing to turn over the assignment to a camera and in effect say, “Snap away – see anything that doesn’t look right?” I figure if there’s an eye there, then there could also be a little voice that says, “Have a seat,” which of course I do, usually with much haste and a sense that I’d better get on with it before I attract a crowd.

It’s after the dirty deed is complete, however, that the real intrigue begins. Does it flush or doesn’t it? Only the computer chip knows for sure. Sometimes, though, after the paperwork has been filed, pants pulled up and an attempted getaway initiated – nothing happens. No flush. Well, what is one to do in such circumstances? You can’t just leave it there, you know. Sometimes when the toilet’s plugged and there’s no plunger like in European bathrooms, you can get out of there quick with conscience in tact, but only, of course, after checking to see that there’s no one else in the restroom who might be able to testify against you in court for being a non-flusher. With electronic eye toilets, however, the conscience is never clear and so you wave your hand in front of the camera, hoping to convince it by the breaking of light waves that someone really has used the toilet and that somehow it just forgot, or maybe the deposit was so minuscule that it just didn’t merit a flush. Hello in there! Having failed to trick it, however, the next step is to look for that little button in the back that you supposedly push in an emergency – sort of like a “break glass in case of fire” toilet equivalent. But think of all the billions of germs! At least with an old handle you could kick it with your shoe, hold up your arms like a doctor scrubbing for surgery and make an exit looking like you’re auditioning for a part on ER. Finally I suppose you head for the door, all the while listening for the flush, the flush, that beautiful sound of the flush. I could have done it myself, you know, with a lot less hassle. Which is why I support a retreat to the old days, (not the backyard outhouse), but the good old-fashioned hand flusher. One push, and presto – you’re good to go!

I really do have a serious message this month, an adjunct to the New Normal that will likely impact growth and financial markets for years to come. Our New Normal, to repeat ad nauseam, is predicated upon deleveraging, reregulation and deglobalization, all of which promote slower economic growth and lower inflation in developed economies while substantially bypassing emerging market countries that have more favorable initial conditions. In recent months, Mohamed El-Erian has added a developing corollary that emphasizes the lack of an appropriate policy response to what is a structural as opposed to a cyclical development, and you should read his frequently published op-eds for a more thorough analysis as well as those written by Jeffrey Sachs and others who are constructively suggesting a way back to the old normal.

That return journey will be all the more difficult to accomplish, however, because of demographics, an influence that much like gravity is hard to see but whose effect is all too powerful. Demographics – or in this case population growth – is so long term in its influence that economists and observers are inclined to explain the functioning of economic society without ever factoring in the essential part that it plays in growth. Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence. The more and more consumers, the more and more need for things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population. Our modern era of capitalism over the past several centuries has never known a period of time in which population declined or grew less than 1% a year. Currently, the globe is adding over 77 million people a year at a pace of 1.15% annually, but slowing. Still, that’s 77 million more mouths to feed, 77 million more pairs of shoes to make, 77 million more little economic units of demand – houses, furniture, cars, roads, oil – more, more, more. Capitalism, I would assert, thrives on more, more, and more, but not so well when there is less or an expectation of less. This is not the Malthusian thesis, which maintained that at some point the world would run out of food to satisfy a growing population; it is an assertion that capitalism depends upon final demand and that if there ever comes a time when population growth slows, then the world’s most efficient economic system will be tested. If anything, my thesis is anti-Malthusian in its assertion that there will always be enough production to satisfy a growing population, but perhaps not enough new people to sustain growing production.

Read the Full Article

Posted by Rom on July 29, 2010 under Bond Gurus | | View Comments

iTB High Grade Corporate Bond Indices – July 28, 2010

July 28, 2010

Corporate bonds rallied today as seen in the iTB Corporate Bond Indices (iTB CBI), although not as much as Treasuries on poor economic outlook. The two indices, segregated by maturity, with the best and worst performers in each, are as shown.

iTB CBI 1-5

The iTB CBI 1-5Yr, which tracks 20 highly traded bonds having less than 5 years to maturity from now, advanced 0.22% to end the day at 1073.89, compared to 1071.52 yesterday. The average yield fell by 7 basis points to 2.77%, as spreads remained flat as the bonds matched the performance of Treasuries.

 

The best performer of the day was JP Morgan’s 3.7% bond maturing January 2015. The price of the bond appreciated 76 cents to the par, last trading at 102.80, as yields fell by 18 basis points. The spread to Treasuries having comparable maturities tightened 10 basis points to 1.27%. The loser of the day was Goldman Sachs 5.70% bonds maturing September 2012, as the bond sold off on news that Goldman Sachs and Citigroup plan to sell bonds backed by commercial mortgages worth $788.5 million. The bond last traded at 107.56, down 5 cents from yesterday, causing yields to rise by 2 basis points to 1.99%. The spread to Treasuries widened by 8 basis points to 1.36% as the bond underperformed.

iTB CBI- 5+

The iTB high grade corporate bond 5+ index posted gains of 0.27% from yesterday, ending at 1121.50. The average yields fell by 4 basis points to 4.33% but the spread to Treasuries with comparable maturities widened by a basis point to 1.59% as it was outperformed by the low risk government bonds.

 

The winner of the day was Wal-Mart’s 5.25% bonds maturing September 2035. The bond last traded at 102.82, appreciating 82 cents to the par. This implies that $100,000 invested in these bonds yesterday would have appreciated in price by $820 today. The yields fell 6 basis points to 5.05%, as spreads to comparable maturities narrowed 4 basis points to 1.13%. The worst performer of the day was Citigroup’s 8.5% bonds maturing May 2019, as it announced the sale of its commercial mortgage backed bonds along with Goldman Sachs. The yield on it increased 2 basis points to 5.39%, trading last at 121.60, down 16 cents from yesterday. The spread to Treasuries widened 8 basis points to 2.68%.

Posted by Maulik on July 28, 2010 under Uncategorized | | View Comments

Economic & Bond Market Recap – July 28, 2010

By Rom Badilla, CFA and Maulik Mody – Bondsquawk.com

July 28, 2010

Economic Data

The U.S. Commerce Department released a report that new orders for manufacturing durable goods continues to decline which provides further evidence that the economy is slowing.  The Durable Good Orders dropped for the second consecutive month as the Index declined 1.0 percent in June after a revised 0.8 percent fall in the previous month.   The drop disappointed as economists were expecting a 1.0 percent increase.  This is the first consecutive monthly drop since January 2009 when new orders posted straight negative readings for the preceding seven months.

Durable Goods ex Transportations declined 0.6 percent in June versus surveys of a monthly increase of 0.4 percent.  The index was revised upward in May from an initial increase of 0.9 percent to a final increase of 1.2 percent.

The Mortgage Bankers Association released its weekly applications index which suggests further declining demand for housing.  The MBA Mortgage Applications Index for the week ending July 23 fell 4.6 percent to 720.6.  This decline falls after the index increased 7.6 percent in the previous week.  Comparatively and despite the low interest rate environment, the Index is far off from the highs of 1856.70, set in May of 2003.

The Federal Reserve released its so-called Beige Book regional survey which discusses economic conditions as reported by the central bank’s 12 district banks.  The Fed says some districts report slowing economic activity.  In particular, the report stated, “Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.”  Also, wage pressures have been easing which should keep inflation expectations low.  The Fed reported that wage pressures remained “largely contained” across most districts with Dallas reporting pressure “mostly nonexistent.”  Finally, real estate in both residential and commercial continue to face pressure as most districts reported “sluggish” residential real estate and the commercial sector “continued to struggle.”

Interest Rates

Treasuries rallied today and with enough reasons as weak economic data and slow rate of growth in some areas as suggested by the Fed caused investors to resort to the safest fixed income securities. Durable goods new orders fell below expectations for last month and while the Atlanta and Chicago Fed banks reported a slowdown in growth, the Cleveland and Kansas City Fed bank reported stalled conditions. The rally was further fueled by the 5-Yr notes Treasury auction today, which had a bid-cover ratio of 3.06, higher than the 2.64 moving average.

As a result, the yield on the benchmark 10-Yr bond fell 6 basis points to end the day at 2.99%. The 2-Yr yield fell by 2 basis points to 0.61%. The belly of the curve outperformed, with the 5-Yr dropping 9 basis points to 1.69%. The long Bond inched down a modest one basis point to 4.07%.

Inflation expectation as indicated by the yield differential between the 10-Yr note and the 10-Yr TIPS (Treasury Inflation Protected Securities) tightened by a basis point to a breakeven rate of 1.79% percent.

Across the Atlantic, government bond prices rose for the developed nations. Germany’s 5-yr Bunds were trading at 1.74, down 3 basis points from yesterday. The yield on the French 5-Yr bond shed 3 basis points to cross over the integer mark to 1.99%. U.K. 5-Yr Gilts followed suit to end at 2.21%.

Across the peripherals, yields were mixed. Portugal’s 5-Yr bond yield continued its rally for a second day as it fell 26 basis points to 3.94%. Italy’s 5-Yr yields fell by 2 basis points to 2.73% with the Ireland 5-Yr yield imitating the fall to end at 3.96%. The Greece 5-Yr yield fell 18 basis points to 10.57%, while Spain’s 5-Yr bond was the only loser, with the yield rising 3 basis points to 2.96%

Credit Markets

To track the performance of the investment grade corporate bond market, check today’s iTB High Grade Corporate Bond Index.

The BofA Merrill Lynch U.S. High Yield Mater Indexwidened 4 basis points to a spread of 647 basis points or 6.47% over Treasuries with comparable maturities.

The yield differential between par-priced 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury widened by 5 basis points to 0.65%.

Capital Markets

Across the stock markets, stocks fell as investors rushed to Treasuries. The S&P 500 lost 0.7% to end the day at 1106.13. The NASDAQ composite index lost 1% to close at 2264.56. The CBOE VIX index gained close to 4% to reach 24.25.

The Dollar Index, which is measured against six major currencies, was mostly flat., ending at 82.12 as compared to 82.16 yesterday. The Euro shed some of its gain from yesterday, closing at 1.2995. The GBP gained 0.0005 to end at 1.5599.

Gold spot price gained 0.17% to 1163.60. Crude oil spot price fell almost by a percentage to 76.86.

Posted by Maulik on under Uncategorized | | View Comments

Durable Good Orders Fall, Federal Reserve Releases Regional Survey Report

July 28, 2010

The U.S. Commerce Department released a report that new orders for manufacturing durable goods continues to decline which provides further evidence that the economy is slowing.  The Durable Good Orders dropped for the second consecutive month as the Index declined 1.0 percent in June after a revised 0.8 percent fall in the previous month.   The drop disappointed as economists were expecting a 1.0 percent increase.  This is the first consecutive monthly drop since January 2009 when new orders posted straight negative readings for the preceding seven months.

Durable Goods ex Transportations declined 0.6 percent in June versus surveys of a monthly increase of 0.4 percent.  The index was revised upward in May from an initial increase of 0.9 percent to a final increase of 1.2 percent.

BNP Paribas’ economics team offered the following color on today’s data releases in an e-mail sent to clients.

Durable goods orders fell by 1.0% m/m well below market and our expectations. Boeing orders jumped to 49 in June from just 5 planes in May, however, many of these orders were booked at the end of June and they were not reflected in the June’s report. As such, non-defense aircraft orders was down by 25.6% m/m. Defense orders dropped 6.8% m/m, following two months of declines in April and May. Ex-defense was down by 0.7% m/m. Computers & electronics fell by 1.9% m/m, machinery was down 0.7%. On a positive side, vehicles and parts orders increased by 2.5% in June, while electrical equipment was up by 3.7%. There has been some moderation in core capital goods (non-defense, ex aircraft). The index increased by 0.6% m/m following a 4.6% increase in May. On a 3-months annualized basis core capital goods were up 25.1% following a 32.5% increase in the previous month. Core capital goods shipments, which strips out spending on both defense and aircraft, increased by 15.8% on a 3-month annualized basis in June, following a 17.8% increase in May. This category most closely aligns with business investment in equipment and software in GDP, and it is still suggestive of a very strong gain in equipment and software investment in Q2 (we expect an 18% q/q AR increase in Q2) but points to a more moderate gain in Q3.  Overall, today’s report is consistent with the recent fall back in the ISM manufacturing index and slower export growth, and we expect further moderation in durable goods orders as the inventory cycle fades over the second half of the year.

The Mortgage Bankers Association released its weekly applications index which suggests further declining demand for housing.  The MBA Mortgage Applications Index for the week ending July 23 fell 4.6 percent to 720.6.  This decline falls after the index increased 7.6 percent in the previous week.  Comparatively and despite the low interest rate environment, the Index is far off from the highs of 1856.70, set in May of 2003.

The Federal Reserve released its so-called Beige Book regional survey which discusses economic conditions as reported by the central bank’s 12 district banks.  Today’s report comes after last week’s statement by Fed Chairman Ben S. Bernanke that the “the economic outlook remains unusually uncertain.” Last month’s Beige Book reflected that the U.S. economy strengthened in all 12 regions in April and May, while also noting that growth in many was subdued. 

Here’s some highlights of today’s report by the Federal Reserve, followed by the full text.

  • Labor Markets “improved modestly” across regions
  • Wage pressures remained “largely contained” across most districts with Dallas reporting pressure “mostly nonexistent”
  • Credit conditions were “tight” in most districts
  • Most districts reported “sluggish” residential real estate
  • Some districts reported “modest increases” in the economy
  • Economic activity “continued to increase”
  • Economic recovery slowed in some areas
  • Commercial real estate markets “continued to struggle”
  • Increases in retail sales were modest in most regions
  • Manufacturing expanded while some districts noted slowing

Beige Book Full Text

Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady. Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.

Manufacturing activity continued to expand in most Districts, although several Districts reported that activity had slowed or leveled off during the reporting period. Districts also noted improved conditions in the services sector. The five Districts reporting on transportation noted increased activity. Tourism activity also increased across the Districts, although the Atlanta District noted concerns about decreased leisure travel to the Gulf Coast. Retail sales reports generally indicated a continued rise in spending, and several Districts noted that necessities continued to be strong sellers, while big-ticket items moved more slowly. However, most Districts that reported on auto sales noted declines in recent weeks. Activity in residential real estate markets was sluggish in most Districts after the expiration of the April 30 deadline for the homebuyer tax credit. Commercial real estate markets, especially construction, remained weak. Banking conditions varied across the Districts, with some Districts noting soft or decreased overall loan demand; credit standards remained tight in most reporting Districts. Recent rains had mixed effects on crop conditions, while activity in the natural resources sector increased. Overall labor market conditions improved modestly across the Districts, with several reports of temporary hiring. Consumer prices of goods and services held steady in most reporting Districts. Input prices also held largely steady, with only a few reports of cost increases. Wage pressures continued to be contained on the whole.

Manufacturing and Other Business Activity
Manufacturing activity in most Districts continued to move up since the last report, although the pace of activity slowed or activity leveled off in the New York, Cleveland, Kansas City, Chicago, Atlanta, and Richmond Districts. Automobile manufacturing was a bright spot for the Cleveland, Chicago, and St. Louis Districts. Automobile parts suppliers also experienced increased demand in both the Richmond and Chicago Districts. Fuel demand at refineries in the San Francisco District improved, while gasoline demand was steady in the Dallas District. Firms in the semiconductor manufacturing industry reported relatively strong sales or demand growth in both the Boston and San Francisco Districts. Firms in aircraft and parts manufacturing saw sales pick up in both the San Francisco and Dallas Districts. Manufacturing firms in the Boston, Philadelphia, Kansas City, and Dallas Districts were optimistic that demand would continue to improve in the following months. However, Cleveland’s contacts expect demand growth to taper off, Philadelphia noted that the balance of positive over negative views had narrowed, and Atlanta reported fewer firms planning expansions in production. Richmond, Chicago, and Dallas reported that firms in construction-related manufacturing experienced weak demand; construction supplies sales were flat in Kansas City, and Minneapolis reported that a firm in the sector was increasing production. Steel production declined in both the Chicago and Cleveland Districts. Some manufacturers in the Atlanta and San Francisco Districts reported high excess production capacity. Capacity utilization was below pre-recession levels in Cleveland and edged lower among steel producers in Chicago.

Activity in the services sector improved across most Districts since the previous report. The freight transportation industry experienced gains in the Cleveland, Atlanta, Kansas City, Dallas, and Philadelphia Districts. Boston, Minneapolis, and Dallas reported a pickup in demand for some consulting firms. Tourism activity increased in the San Francisco, New York, Minneapolis, Richmond, Kansas City, and Atlanta Districts. Atlanta reported that leisure travel decreased in the Gulf Coast, but some of the lost tourist traffic was offset by the presence of cleanup crews, oil company workers, and the National Guard. Information technology firms saw increased business in the Philadelphia, Chicago, and St. Louis Districts, while activity was flat in the Minneapolis District. Demand for healthcare services was flat in both the San Francisco and Richmond Districts, while activity increased in the Boston District.

Consumer Spending
Reports on retail sales during the early summer months were generally positive, although in most Districts the increases were modest. Retail sales in the New York, Philadelphia, Minneapolis, and Kansas City Districts were higher than year-earlier sales, and Dallas reported solid gains. But sales in the Boston District were mixed compared with the previous year. Recent sales increased slightly in the Cleveland, Atlanta, Chicago, and San Francisco Districts; sales in the Richmond District weakened; and sales in the Kansas City District were flat compared with the previous report. Several Districts cited apparel, food, and other necessities as recent strong sellers, while big-ticket items were weak sellers. Contacts reported satisfactory inventory levels in the New York District, mixed inventory levels in the Boston District, and low or declining inventory levels in the Richmond, Atlanta, and Chicago Districts. The outlook for sales was mixed: Retailers in the Philadelphia, Cleveland, Kansas City, and Dallas Districts reported that they expect modest positive sales growth in the upcoming months; contacts in the Cleveland, Atlanta, and Chicago Districts reported a less optimistic outlook going forward than in the previous report; and retailers in the Boston District reported a cautious outlook.

The Districts that reported on auto sales during the early summer months generally noted a decrease in recent sales. Since the previous report, auto sales in the New York, Philadelphia, Cleveland, Richmond, Chicago, and San Francisco Districts declined, while auto sales in the Kansas City District increased and were unchanged in the Dallas District. Compared with last year, auto sales in the Atlanta and St. Louis Districts were higher. New York, Philadelphia, Cleveland, Chicago, Kansas City, and Dallas all reported that inventory levels were low or declining. Auto dealers anticipate little change in sales for the rest of 2010 in the Philadelphia District and expect sales to increase slowly in the Dallas District. Contacts in the Kansas City District expect continued strong demand, while those in the Cleveland District do not anticipate strong growth in the coming months.

Real Estate and Construction
Nearly all Districts reported sluggish housing markets in the months since the homebuyer tax credit expired on April 30. While some Districts, such as Boston and St. Louis, reported an increase in May and June home sales on a year-over-year basis, some contacts noted that these sales may reflect closings of homes under contract by the April tax credit deadline. The Boston, Philadelphia, Atlanta, and Kansas City Districts reported that home sales are expected to weaken going forward. Residential construction remained limited in several Districts. In the Atlanta District, residential construction activity softened from already weak levels. Homebuilders in the Cleveland District do not expect a turnaround in new home construction any time this year. Builders in the Chicago District are not introducing new inventory without a signed contract on a home. Housing starts were expected to decline for the second half of the year in the Dallas District and to increase slightly over the next three months in the Kansas City District.

Commercial and industrial real estate markets continued to struggle in all twelve Districts. Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents. Construction activity remained weak in most Districts. The New York District noted that commercial development remained generally sluggish despite some pickup in office and retail leasing in New York City. Atlanta, Minneapolis, and Dallas reported that construction activity continued to be weak or to decline, and Cleveland reported that the increase in construction from previous reports has begun to diminish. Philadelphia reported that projects funded with federal stimulus support were near completion with no prospects for additional major construction, while Chicago reported that public infrastructure construction picked up. Developers reported difficult credit conditions in the Cleveland, Richmond, St. Louis, and Kansas City Districts, while the Dallas District reported a few developers going out of business. The outlook for commercial and industrial real estate across the Districts ranged from further declines in activity to slow growth.

Banking and Finance
Reports on banking conditions were largely mixed across the Districts. Banking activity in Richmond and loan demand in Kansas City increased modestly. Overall loan demand was reported as soft or weak in Cleveland, Atlanta, and Dallas, while total outstanding loan volume decreased in recent months in St. Louis but was steady in Philadelphia and San Francisco. Demand for commercial loans was flat to increasing in the Philadelphia, Cleveland, Richmond, Chicago, and Kansas City Districts; in contrast, St. Louis reported a decrease in commercial loans outstanding, while New York, Atlanta, and San Francisco reported restrained or decreasing demand in this lending category. Demand for consumer loans was weak in Cleveland and eased in Philadelphia; Atlanta and St. Louis indicated a decline in consumer lending; but demand for consumer loans increased in New York and Kansas City. Demand for residential mortgage loans eased in the Philadelphia District but increased in the New York District; Cleveland reported residential mortgage activity below expectations at given rates; and real estate lending decreased in St. Louis. Credit was limited for commercial real estate loans in Chicago, and demand fell for these loans in New York and Kansas City.

Most Districts reporting on credit standards continued to note that lending standards remain restrictive. New York reported tighter credit standards for all categories except consumer loans, while Kansas City reported tighter commercial lending standards. Reports on credit quality were mixed in Cleveland and Kansas City, while quality was stable in San Francisco. Credit quality improved slightly in Philadelphia, Richmond, and Chicago. In the Dallas District, nonperforming loans have stabilized and are not expected to worsen. Meanwhile, Philadelphia, Cleveland, and Richmond continued to report delinquencies above historic norms. Delinquency rates in the New York District decreased for consumer loans but experienced little or no change in other categories.

Agriculture and Natural Resources
Recent rains improved the dry conditions in the Minneapolis and Dallas Districts and reduced irrigation needs in the Kansas City District. In contrast, excess precipitation caused some crop damage in the Chicago District and some delays in the winter wheat harvest in the Kansas City District. Parts of the Atlanta District experienced some crop stress due to dryness and heat. Contacts reported that crops were in good condition overall in the Atlanta, Minneapolis, Kansas City, and Dallas Districts, but crop conditions worsened slightly in recent weeks in the Chicago District and were mixed in the St. Louis District compared with last year. Producers in the Chicago District continued to expect good yields for their corn and soybean crops, and the outlook for cotton yields in the Dallas District has improved.

Overall, activity in the energy sector increased since the previous report. Oil production in the Atlanta District and oil and natural gas production in the Cleveland District were relatively unchanged, but other activity picked up throughout the Districts during the reporting period. The number of drilling rigs increased in the Dallas District, and production continued to expand in the Kansas City District. Additionally, oil exploration in the Minneapolis District and oil extraction in the San Francisco District increased. Activity in the Minneapolis District’s mining sector increased in recent weeks, as did production and demand for coal in the Cleveland District. Kansas City reported that contacts expect to see continued growth in energy production.

Labor Markets, Wages, and Prices
Labor market conditions improved gradually in several Districts. New York, Chicago, Minneapolis, Richmond, and Atlanta all reported that labor markets improved, albeit modestly in some cases, while Boston and Dallas reported that employment was steady. Philadelphia, Atlanta, Richmond, Chicago, and Minneapolis reported that temporary employment experienced increased demand. Contacts in the Philadelphia, Atlanta, Dallas, and San Francisco Districts said that they continued to rely on temporary staff over permanent hires. Cleveland, Richmond, and Chicago saw hiring in the manufacturing sector. Cleveland also reported some new job openings in the healthcare industry. Boston and Cleveland noted that firms in some services industries were hiring mostly for replacement. Dallas reported that firms in the energy industry experienced significant regional layoffs as a result of the deepwater drilling moratorium. San Francisco noted continued high levels of unemployment and limited hiring.

Wage pressures remained largely contained across most Districts. Boston, Philadelphia, Richmond, Minneapolis, and San Francisco reported little or no change in wages, while Cleveland, Chicago, and Kansas City reported that wage pressures were small or remained subdued. Dallas reported that wage pressures were mostly nonexistent, with the exception of the airline industry.

Prices of final goods and services were relatively stable in most Districts. Several Districts indicated that prices of raw materials also held steady, and only a few Districts reported input price increases. Steel prices moved slightly higher in the San Francisco District, but Cleveland and Chicago reported that steel prices were down. Chicago and San Francisco noted an increase in energy prices, but Atlanta reported that energy prices were mostly stable since the onset of the Gulf oil spill. Increased prices were noted for some metals by the Philadelphia, Minneapolis, and San Francisco Districts. Transportation costs increased in the Atlanta, Dallas, and San Francisco Districts, and the Richmond District noted that shipping lines were attempting to raise rates.

Posted by Rom on under Bond Chatter,Fed Watching | | View Comments

“Are You Kidding Me?” Says Gluskin Sheff’s Rosenberg

July 28, 2010

Equities have surged in recent weeks and the tone of the market has changed to reflect a level of optimism that contrasts with darker sentiment from only several months ago when the European debt crisis and sluggish macro data dominated the headlines.  As we have tried to offer context on the markets via bonds, David Rosenberg of Gluskin Sheff offers his perspective on the recent stock market rally as well as yesterday’s dismal Consumer Confidence Index number in his daily report, “Breakfast with Dave.”

Earnings on the surface seem to be doing just fine but at the same time, we can see that the economy slowed visibly as Q2 came to a close and the July data are telling us to expect a slightly different tone to Q3 guidance. There was a nifty article on Market News yesterday showing how 82% of the corporate universe beating EPS estimates is standard fare and that only 68% are doing so in terms of revenues (a figure lower than we saw in the second quarter of 2008 when the economy was knee-deep in recession). Sales are up the grand total of 9% YoY and this being compounded off a -14% trend this time last year – so margins continue to stretch out to the limits and one has to wonder how long that is going to last. Who knows? Maybe profits end up going to 100% of national income and labour’s share totally vanishes.

I was asked yesterday in an interview how I respond to criticism for missing the surge in the equity market. Well, for one thing, those that were long in 2009 got their clients killed in 2008 and it’s still not even a wash. Second, I was recommending credit and commodities last year, not cash, and these strategies played out well. There are always ways to make money without having to go whole hog into the stock market (if you think I’m bearish, there are others who make me look like Jim Carrey – have a read of “Doomsday Shelters Making a Comeback” on page 3A of the USA Today).

More to the point – we can get 80% rallies in a secular bear phase, and to be totally honest, I have never billed myself as a market timer. There are others here at GS+A that do that much better than me. The Nikkei has enjoyed 260,000 rally points in the past twenty years and the market is still down 70%. If you partake of these bear market rallies, know when to get out – or at least sell call options and collect the premium. It is amazing how people are still stuck in this belief that the 80% rally off the lows is still somehow a prevailing market condition – the S&P 500 peaked on April 26th and even with the recovery of the past few weeks, the S&P 500 at 1113, with all due respect, is no higher now than it was on November 16th of last year.

Through all the zigs and zags, this market has done diddly squat now for over eight months. You were better off clipping coupons, even at these low bond yield levels. And as for that 80% rally from March/09 to April/10, we wonder aloud how many are going to remember it once we retest the lows – the market rallied 50% in the opening months of 1930, as an example. Do you ever hear anyone today talking about the great rally of 1930? Does anyone today ever have much to say about 1930, or if they do, is it a fond memory? Well, the market rallied 50% at one point that year. There’s not much left to say on this one.

For the time being, it probably pays to treat the market as a 1040-1220 decision box as far as the S&P 500 is concerned. Even after the 9% rally of the past two weeks, it is still at the halfway-point of this well-defined range of the past ten months. What is amazing is how Main Street and Wall Street have diverged in recent weeks. The market has rebounded nicely and all we see now is optimistic prognostications about the outlook because of an earnings season that seemed to contain most of its growth in April which was three months ago – meanwhile, what did we see in the July consumer confidence report? That 9% of American households rate business conditions as being “good”.

Are you kidding me? That’s all we get with a 0% funds rate, a near 10% deficit/GDP ratio and a $2.3 trillion Fed balance sheet? By way of comparison, back when Lehman failed in September 2008, 13% believed business conditions were “good”, and when Bear Stearns failed in March of that year, the ranking was at 16%. In the wake of the 9-11 tragedy, it was 19%.

Meanwhile, 44% give the business background a “bad” rating, so the ratio of growth bears to growth bulls in the survey is nearly five-to-one; we doubt you will ever see that sort of ratio among surveyed economists or strategists. Now maybe these people polled by the Conference Board don’t know the first thing about the economy, but last we saw, it is consumers that command a 71% share of GDP so their opinions will count if they translate into (in)action.

Those that do not see how abnormal this so-called recovery has been, consider that in expansions, consumer confidence averages 102; in recessions, it averages 71; and we are at 50.4 as of July. So basically, the level of consumer confidence is 20 points below what the average level is during a recession and yet virtually everyone dismisses double-dip risks out of hand. Maybe there is no double-dip because we never really fully emerged from the recession that we know officially began in December 2007 – that was certainly the message out of yesterday’s confidence report.

Indeed the equity markets have rallied and there is always the possibility that the recent run up may have a few more aces up its sleeve in positive earnings surprises.  Despite the fact that people in general want instant gratification (who doesn’t want that?!?) and views on the economy that are either black or white with no wiggle room in-between, the truth of the matter is that markets oscillate back and forth, testing beliefs and convictions.  The markets rarely move in a straight-line and sometimes do not agree with a bullish or bearish view.  Until new data emerges that may suggest a change in one’s views, the markets are unforgiving and uncertainty is part of process.

Having said this, the fact remains that nothing has really changed for the market in terms of the macro picture.  Also, the extreme levels of debt that created this mess are still here.  With the exception of the recent bounce in housing data from the extreme lows (dead cat bounce?), the macro picture has been ugly at best with many of them failing to live up to expectations.  As Rosenberg pointed out, consumers are suffering.  High levels of unemployment and the negative wealth effect, specifically the decline in house prices continue to weigh on people.  With the possibility of the expiration on the Bush tax cuts looming on the horizon, it is easy to justify why consumers are cutting back and reigning in spending and why the U.S. is at risk for an economic slowdown in the months ahead.

Posted by Rom on under Bond Chatter,Bond Gurus | | View Comments

Economic & Bond Market Recap – July 27, 2010

By Rom Badilla, CFA & Maulik Mody – Bondsquawk.com

July 27, 2010

Economic Data

The U.S. Conference Board released its monthly sentiment index, which reveals that consumers are less confident due to rising concerns of unemployment and the risk for an economic slowdown.  Consumer Confidence for July came in at a reading of 50.4 versus consensus forecasts of 51.0.  The disappointing number is lower from the revised prior period reading of 54.3.

The Richmond Federal Reserve whose district accounts for about 9.1 percent of the nation’s gross domestic product, released its Manufacturing survey index for July which shows less activity than the preceding month.  For July, the survey came in at a level of 16, down from 23 in the prior month.  Despite the decline, the survey came in above consensus surveys as economists were expecting a reading of 12.

 Looking beyond the headlines numbers, manufacturing activity fell across the board.  The monthly survey of manufacturers based in the Carolinas, the District of Columbia, Maryland, Virginia and West Virginia, reveals that the New Orders component dropped to 13 this month from 25 in July. The Shipments Index fell to 22 from 31. 

Furthermore, the price trends components reveal more downward price pressures supporting lower inflation expectations.  The Prices Paid component dropped from an annualized percentage change of 2.31 in June to 1.59 in July.  Similarly, the Prices Received component fell from 2.39 to 1.45.

To cap off the economic data, Home Prices for May increased 0.47 percent on a seasonally adjusted basis versus forecasts of 0.20 percent.  The slight increase comes after the prior month was revised upward to 0.61 percent.

Interest Rates

In yet another record setting Treasury notes auction today, markets saw the $38 billion of 2-Yr notes sell at a yield of 0.665%, which breaks the previous record of 0.738% set during the June auctions. Treasury prices were lower as the market prepared to absorb the additional government debt supply. The yield on the benchmark bond rallied 6 basis points to end the day at 3.05%. The front end of the curve, which does not move as much as compared to the long end, swayed a whopping 5 basis points to call it a day at 0.63%, up from 0.58 yesterday. The 5-Yr followed suit to close at 1.78. The Long Bond sold off as the yield hiked by 7 basis points to end at 4.08.

10-Year U.S. Treasury Yield - Intraday Chart

Inflation expectation as indicated by the yield differential between the 10-Yr note and the 10-Yr TIPS (Treasury Inflation Protected Securities) widened 2 basis point2 to a breakeven rate of 1.80% percent.

Inflation Expectations aka Breakeven Rate - Intraday Chart

Across the Atlantic, government bonds fell for the developed nations. Germany’s 5-yr Bunds were trading at 1.77, up 2 basis points from yesterday. The French 5-Yr ended up a basis point at 2.02. U.K. Gilts dropped the most as yields gained 6 basis points to 2.24.

Across the peripherals, yields fell as bonds gained. Portugal’s 5-Yr bond yield fell by 30 basis points to 4.19. While the yield on Italy’s 5-Yr fell 4 basis points to close at 2.74, Ireland’s 5-yr fell 17 basis points to 4.20. The Greece 5-Yr bond fell by 11 basis points to 10.75, while the Spain 5-yr yield shed 15 basis points to rest at 2.94.

Credit Markets

The BofA Merrill Lynch U.S. High Yield Mater Index tightened 11 basis points to a spread of 643 basis points or 6.43% over Treasuries with comparable maturities.

The yield differential between par-priced 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury was unchanged at 0.60%.

Capital Markets

Across the stock markets, the S&P posted a meager loss of 0.11% to end the day at 1113.84. The NASDAQ composite index lost 0.3% to close at 2288.25. The CBOE VIX index gained 2.02% to reach 23.19.

The Dollar Index, which is measured against six major currencies, inched up by 0.15% to 82.16. The Euro and the Great Britain Pound gained slightly to close at 1.3000 and 1.5594 respectively.

 Gold spot price fell 1.9% to 1161.60. Crude oil spot price fell 1.8% to 77.50.

Posted by Rom on July 27, 2010 under Bond Chatter | | View Comments

Case Says U.S. Housing Market `Dead in the Water’

July 27, 2010

Karl Case, an economics professor at Wellesley College and co-creator of the S&P/Case-Shiller home-price index, discusses the U.S. housing market. The S&P/Case-Shiller index of property values increased 4.6 percent in May from the same month a year ago, marking the biggest year-over-year gain since August 2006, the group said today in New York. Case talks with Tom Keene and Ken Prewitt on Bloomberg Radio’s “Bloomberg Surveillance”


(Source: Bloomberg)

Posted by Rom on under Bond Chatter | | View Comments

iTB High Grade Corporate Bond Indices – July 26, 2010

Guided by the good earnings season as most companies reported earnings better than expected, corporate bonds rallied, reducing yields and tightening spreads to comparable Treasuries.

iTB High Grade CBI 1-5

As Treasuries remained mostly unchanged, the iTB CBI 1-5 gained 0.1% to end at 1070.84. The average yield for the index bonds fell 4 basis points to 2.87%. The spread tightened by 4 basis points to 1.80% as the index outperformed Treasuries. Improved sentiments across the markets reduced credit risk as shown by the equivalent fall in yields of the bonds and spreads.

The best performer today was BP’s 5.25 bonds maturing November 2013. The yield on the bond fell by 32 basis points to 5.29%, trading last at 99.87 to the par (par being the face value expressed as $100). The spread tightened by 32 basis points to 4.20%. BP announced today that its CEO Tony Hayward will step down to be succeeded by Rober Dudley, who is the Director of BP’s oil spill response unit. BP resumed work on sealing the well permanently after storms that halted the work last week cleared out. The loser of the day was American Express 5.875% bonds maturing May 2013. The bond last traded at 109.60, down 12 cents from last weeks close, with the yield rising 3 basis points to 2.27%. The spread to comparable Treasuries widened 3 basis points to 1.38%.

iTB High Grade CBI 5+

The iTB CBI 5+ gained more as compared to its shorter maturity counterpart, advancing 0.3% to end at 1117.97. The average yield fell 4 basis points to 4.38%. The spread to comparable Treasuries tightened 4 basis points to 1.64%. A comparable fall in yield and tightening of spread, given Treasuries did not move, indicates a reduction of the credit risk premium demanded by bondholders.

The best performer today was Oracle’s 5.45% bonds maturing in January 2016. The yields fell by 16 basis points to close at 2.53%. The bond last traded at 113.82, and the spread tightened 15 basis points to 0.63%. The loser of the day was Altria Group’s 9.25% bond maturing August 2019. The price of the bond fell by a cent to 128.78, with the yield unchanged. The spread however, widened by a basis point to 2.47%.

All in all, bond yields fell and spreads tightened, mainly as companies reported good earnings and credit risk reduced.

Posted by Maulik on July 26, 2010 under Uncategorized | | View Comments

Economic & Bond Market Recap – July 26, 2010

By Maulik Mody – Bondsquawk.com

Improved new home sales for June brought some relief to the markets, breaking the recent run of weak economic data. Stocks rallied on thin trading as reported earnings improved and companies boosted forecasts for the year. Treasuries remained mostly unchanged.

Economic Data

New home sales data for June came in at 330K, above analysts’ expectations of 310K, allowing the markets to breathe. Home sales improved 23.6% in June, after plummeting 36.7% in May to a record low of 267K. The sharp rise, however, does not indicate a strong housing demand, since builders sold almost no new houses in May. The numbers were nevertheless welcome, and the four month average now stands at 350K, as compared to 355K as of last month.

The Chicago Fed National Activity Index (CFNAI), that tracks economic activity and inflationary pressures in the U.S., came in at -0.63, as opposed to 0.31 last month. The latest reading caused the three month moving average to fall to -0.05 in June as opposed to +0.31 in May, suggesting a slow economy growth rate. Of all the broad categories of indicators that make the index, only the sales, orders and inventories category made positive contributions to the index. The consumption and housing category made the most negative contribution, but it was improved as compared to May.

Here is a look at the 3 month CFNAI moving average since 1996.

Interest Rates

Treasuries declined in the beginning of the day on improved new home sales numbers, but were unmoved at the end of the day. The yield on the benchmark note ended where it started at 2.99%, after touching an intra-day high of 3.03. The belly of the curve was unchanged too, as the 5-Yr touched the ceiling at 1.77 only to come back to 1.73%. The Long Bond came a full circle, closing at 4.01. The 2-yr followed suit to call it a day at 0.58.

As the markets await the auctions of notes worth $104 billion, the Treasuries announced today that it will sell another $56 billion in bills.

Inflation expectation as indicated by the yield differential between the 10-Yr note and the 10-Yr TIPS (Treasury Inflation Protected Securities) widened by a basis pointa to a breakeven rate of 1.78 percent.

Across the Atlantic, government yields fell for the developed nations. Germany’s 5-yr Bunds were trading at 1.75%, up 8 basis points from last week’s close. The French 5-Yr ended at 2.01, 5 basis points above Friday’s close. U.K. Gilts dropped as yields gained 2 basis points to 2.18.

The performance among the peripheral nations was mixed. While Portugal’s 5-Yr inched up a basis point to 4.50%, Ireland’s 5-Yr bond fell 10 basis points to 4.37%. Italy’s 5-Yr fell 2 basis points to 2.78, while the yields on Greece 5-Yr bonds fell 15 basis points to 10.87%. Spain’s 5-Yr bond yields 13 basis points to 3.09%.

Credit Markets

To track the performance of the investment grade corporate bond market, check today’s iTB High Grade Corporate Bond Index.

The BofA Merrill Lynch U.S. High Yield Mater Index tightened 5 basis points to a spread of 654 basis points over Treasuries with comparable maturities.

The yield differential between par-priced 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury tightened 5 basis points to a spread of 60 basis points or 0.60%.

Across the Capital Markets

Stock markets rallied today, improved earnings acting as the catalyst. The S&P gained 1.12% closing at 1115.01 and the NASDAQ gained 1.19% to close at 2296.43. The CBOE VIX index dropped 3.2% to 22.73.

The Dollar Index, which is measured against six major currencies, dropped by 0.5% to 82.03. The Euro gained 0.6% to close at 1.2994, while the British Pound gained 0.4% to 1.5490.

Gold spot price fell 0.4% to 1183.55. Crude oil spot price fell a mere 0.1% to 78.89.

 

Posted by Maulik on under Uncategorized | | View Comments

Double dip unlikely, but economic recovery slow: Dudley

William Dudley, the President of Federal Bank of New York, believes that a double dip in the economy is highly unlikely as the monetary policy is stimulative. Given the inventory levels are not excessive, and industries such as housing and automobile are at very low levels, chances of a double dip are low. This is further backed by a survey by the Fed showing credit conditions are easing.

The risk of the economy slipping into a second recession is low in part because monetary policy is “quite stimulative,” Dudley said in response to questions from reporters at the briefing. The nation also doesn’t face “excesses in terms of inventories” and “highly cyclical” industries such as housing and auto sales are “already at very depressed levels,” he said.

Dudley also said he’s “optimistic” about avoiding a double dip because the Fed’s senior loan officers survey has shown credit conditions are easing.

The U.S. expansion over the past year has been less robust than prior recoveries, with a “sluggish recovery in employment,” Dudley said.

Although slowly, the economy is expanding as seen by the increasing output of manufactured goods, and an increase in domestic and foreign demand of these goods. The Fed plans to keep rates low for “an extended period”, but will eventually have to raise rates and sell assets off its balance sheet. Click here for the full report.

Posted by Maulik on under Uncategorized | | View Comments
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