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Empire Manufacturing Survey Falls in September

By Rom Badilla, CFA – Bondsquawk.com

September 15, 2010

The New York Federal Reserve released the results of its monthly manufacturing survey, which suggests slowing activity for the region.  The Empire Manufacturing survey, which covers 175 companies and provides an economic backdrop for the New York region, fell to a reading of 4.10 in September from 7.10 in the previous month. The fall in September disappointed market expectations as the average forecast was at 8.00 according to Bloomberg surveys. A reading above zero suggests manufacturing is expanding.  After improving to a recent high of 31.86 in April 2010 from deep negative territory during the recession, the survey has fallen to single digits and has remained there for the past three months.

Behind the headline numbers, the components are a little less grim. The New Orders component crossed back into expansionary territory by improving to 4.33 from -2.71 in August. Inventories declined slightly from 2.86 in the prior period to 1.49. Shipments, which fell off of a cliff to -11.50 in August, rebounded to -0.27 in September.

On the inflation front, price pressures remain subdued which should keep Treasury yields relatively low in the short term. The Prices Paid component improved slightly to 22.39 from 20.00. While higher for the month and similar to the headline number, the Prices Paid component has fallen from recent highs of 44.74 set in the spring of 2010. Since then, the index has averaged 23.74 in the last four months. Prices Received rebounded as well back into expansionary territory from -2.86 to 1.49.

Industrial production activity remains relatively low, which suggests more evidence that the economy is cooling. The Federal Reserve reported that Industrial Production in August increased by only 0.2 percent after the previous month’s number was revised downward by four-tenths of a percent to 0.6 percent. The August reading, which was in-line with economists’ surveys, reflected a slowdown in the production of motor vehicles and parts, which spiked in the prior month. In addition, Capacity Utilization, which provides an estimate of how much factory capacity is in use and may provide insight on inflationary pressures, continues to mire in below average territory. Capacity Utilization for August came in at 74.7, an increase of only a tenth of a percent from the prior month.  Economists were expecting a reading of 75.0. Comparatively, Capacity Utilization averaged 80.4 percent in the three months prior to the onset of the recession.

Given the recent backup in interest rates, mortgage applications declined according to the Mortgage Bankers Association.  Mortgage applications for the week ending September 10, declined 8.9 percent to an index level of 801.5. Since reaching a high of 893.8 at the tail end of August, the index has declined by more than 10 percent, which coincides with the run up in interest rates.

Currently, market reaction, as evident by changes in the major benchmarks, is rather subdued given the economic data.  The 10-Year is flat at 2.68 percent while the S&P 500 is higher by 0.2 percent.  Interestingly, the 2-Year, which is more responsive to the overall macro economic picture, is trading at 0.47 percent, a decline of 3 basis points from the previous close and within a basis point of touching its recent lows set on August 24.

Posted by Rom on September 15, 2010 under Bond Trading

Existing Home Sales Plunge to Lowest Level on Record, NAR Economist Says Recovery “Could Pick Up”

By Rom Badilla, CFA – Bondsquawk.com

August 24, 2010

The National Association for Realtors released home sales activity for July, which again was significantly off the mark of economists’ surveys. Existing Home Sales came in at an seasonally-adjusted, annualized level of 3.83 million, a decline of 27.2 percent from the revised prior period figure of 5.26 million. This massive drop, which is the largest plunge on record, disappointed the market as economists were expecting a decrease of 13.4 percent or a sales volume of 4.65 million homes.

NAR’s economist, Lawrence Yun offered some color to the latest figure. From the NAR website, Yun stated that “a soft sales pace likely will continue for a few additional months. Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September.”

Furthermore, Yun tried to place a positive spin on the dismal number and depressing housing market.  Yun said, “However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.”

Interestingly, Yun justifies recent activity by adding that, “consumers rationally jumped into the market” in his first statement. There is nothing “rational” about receiving a miniscule tax benefit that is easily outweighed by the risk of further depreciation in home value.  What good is an $8000 tax credit if the value of a home potentially drops 10 to 20 percent while the borrower wrestles with the risk of job-loss? Of course, every situation is different since not all homes are susceptible to a decline in value.  However and for the most part, buyers are driven by shortsightedness and the fear of being “left behind” in the event of a rebound, though unlikely, in prices.  The fact is that recent homebuyers fail to the see the magnitude of the current problem of too much debt, an over abundance of supply, and lackluster demand.

Furthermore, Yun added that the recovery could “pick up” given improvements in the economy, namely employment.  Unfortunately much of that statement, assuming the pick up is beyond a “dead cat bounce” is driven by hope and speculation as opposed to being backed by evidence and data.  The fact is that recent economic activity has been without the addition of jobs.  The unemployment rate remains sticky with private sector job creation near anemic levels.  In addition, weekly Initial Jobless Claims data has ticked up higher in recent weeks to a level that is more in-line with general job destruction.  Having said that, homes can remain affordable and rates can stay at “rock-bottom” levels.  However, these factors, which were prevalent prior to the recession, will have a limited effect if people do not have the means or appetite to buy.  Given the recent string of disappointing employment data coupled with the fact that GDP growth is slowing, a sales recovery seems unlikely in the coming months.

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 August, which shows less activity than the preceding month.  For August, the survey came in at a level of 11, down from 16 in the prior month.  Despite the decline, the survey came in above consensus surveys as economists were expecting a reading of 8.

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 10 this month from 13 in July. The Shipments Index plunged to a reading of 7 from 30 in the prior month. 

Furthermore, the price trends components are stabilizing.  After falling in the prior month, the Prices Paid component increased from an annualized percentage change of 1.59 in July to 2.19 in July.  The Prices Received component remained the same at an annualized percentage change of 1.45.

Due to today’s disappointing numbers, which adds more fuel to slowing economic growth, both bond yields and stocks continue to head south on a late summer day. The 2-Year is down a basis point to a paltry, though telling, yield of 0.47 percent.  The 10-Year is trading at recent lows of 2.52 percent, a drop of 8 basis points from yesterday’s close.  The S&P 500 is down 1.2 percent at 1055.00.

Posted by Rom on August 24, 2010 under Bond Trading

Economic & Bond Market Recap – August 19, 2010

By Rom Badilla, CFA – Bondsquawk.com

August 19, 2010

After the release of key economic data, bond yields continue its downward decline as both growth and inflation expectations head south in the late stages of the summer season.  Equities fell for the first time in three days, erasing all of its gains.

Economic Data

The Philadelphia Federal Reserve released its manufacturing survey for August, which suggests economic contraction and may lead the Federal Reserve to promote stimulus measures.  The Philadelphia Federal Reserve Outlook survey or simply “Philly Fed” for August plummets to a negative reading of 7.7 versus economists’ surveys of +7.0.  This marks the third consecutive decline after the outlook survey peaked in May at 21.40.

Behind the headlines, components that represent economic growth were especially weak.  Specifically, New Orders dropped further into negative territory to -7.1 from a prior month’s reading of -4.3.  Inventories fell from +4.5 in July to -11.6 while the Number of Employees component dropped from 4.0 to an August reading of -2.7.

Inflation expectations should remain subdued and keep bond yields in check as price pressures fall, judging by some of the Philly Fed components.  Prices Paid dropped from +13.1 in July to +11.8.  In addition, the Prices Received component continues to drive deeper into negative territory.  The Prices Received component fell to -12.5 following prints of -6.5 and -8.4 in June and July, respectively.

The number of people in the U.S. filing for employment benefits increased last week according to the Department of Labor. Initial Jobless Claims for the week ending August 14 jumped to 500k people.  The number of people who recently became unemployed and are now accessing government benefits was revised upward in the previous week by four thousand to 488k.  The increase, which the highest reading since November of 2009, highlights the beginning of deterioration of the employment landscape in the last few weeks as economists were expecting a reading of 478k.  Furthermore, the 4-week moving average, which is used to smooth out volatility to establish a better reading of trends, continues to inch higher to 482,500 people and is on the higher end of the recent range of 450-500k that has been established since last November.  With this in mind, the number is still associated with further job losses as has been the case in prior recessions as opposed to an average of 400k that coincides more with job creation.

Continuing Claims for the week ending August 7 came in at 4478k versus surveys of 4500k.  The prior period continuing claims figure was revised by 39k to a final figure of 4491k.  Due to the stagnant job market that has persisted for years now and as people exhaust their 99 weeks of unemployment benefits, Continuing Claims should continue to be volatile with a downward bias.

Interest Rates

Due to the weak economic data, Treasuries rallied across the curve, led by the long-end in a curve flattening trade.  The Long Bond outperformed the rest of the Treasury maturity spectrum as the yield continued its downward descent.  The 30-Year closed the trading session at 3.65 percent, a drop of 8 basis points.  The widely followed 10-Year benchmark trailed only slightly by tightening 6 basis points to finish at 2.58 percent and within 2 basis points of recent lows.  The yield on the 5-Year ended at 1.40 percent, a drop of 4 basis points while the macro-sensitive 2-Year inched lower by 2 basis points to finish at new recent low of 0.48 percent.

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

Inflation expectations as evident by the yield differential between the 10-Year and 10-Year TIPS continues to defy the “inflationistas” (Hat Tip to our friend, The Pragmatic Capitalist for popularizing the term).  The spread between the two securities fell to new lows by dropping 2 basis points to a yield differential of 1.58 percent.

Inflation Expectations aka Breakeven Rate - Historical Chart

Across the pond, government bond yields in developed economies decreased as well.  The German 5-Year dropped a basis point to 1.31 percent while France’s belly of the curve benchmark declined 2 basis points to 1.62 percent.  The yield on 5-Year U.K. Gilts dropped 5 basis points to 1.71 percent.

For the PIIGS nations, bond yields were generally higher save for one country.  Portugal and Spain’s 5-Year bond yield each increased a basis point to 3.82 and 2.80 percent, respectively.  Greece’s 5-Year added  3 basis points to its hefty yield of 11.33 percent while Italy’s 5-Year note increased 2 basis points to 2.57 percent.  Ireland’s benchmark was flat to slightly tighter by half a basis point to finish the day at 4.29 percent.

Credit Markets

A decline in equities coincides with higher implied volatility, which in turn leads to greater risk-aversion.  Of course, this does not bode well for the credit markets, generally.  The Bank of America Merrill Lynch High Yield Index increased 4 basis points to a spread over comparable maturity Treasuries of 682 basis points.

The nominal spread between par-priced 30-Year Conventional Mortgage Backed Securities and the 10-Year declined slightly today.  The yield differential tightened by a basis point to a spread of 82 basis points.  Despite today ‘s outperformance of MBS, the fact remains that spreads have been destroyed in recent weeks after the Federal Reserve announced its intention of reinvesting proceeds away from the MBS markets and back into more “traditional” holdings of U.S. Treasuries.  The spread reached a recent low of 54 basis points in late July and now has reversed its course to a higher spread environment for the time being.

30-Year MBS Spread over 10-Year - Historical Chart

Across the Curve

Equities fell after today’s dismal economic reports.  The S&P 500 dropped 1.7 percent to close out the day at 1075.63.  The NASDAQ followed a similar pattern and closed at 2178.95.  The CBOE VIX Index spiked by 7.5 percent to 26.44.

The Dollar Index, which is measured against six of the world’s major currencies, increased 0.3 percent to 82.447.  The Euro fell 0.2 percent to 1.2823 while the British Pound increased 0.1 percent to 1.5602.

Gold spot prices increased 0.2 percent while Crude Oil fell 1.3 percent to 74.43.

Posted by Rom on August 19, 2010 under Bond Trading

Housing Starts “Disappointing” as Price Pressures Remain Subdued, Industrial Production a Mystery

By Rom Badilla, CFA – Bondsquawk.com

August 17, 2010

Housing Starts for July increased by 1.7 percent in July to an annualized 546k from a prior period level of 537k, which was revised downward by 12k from the initial report.  The increase failed to meet expectations as economists forecasted a higher month over month increase of 0.2 percent.  The Goldman Sachs economics team led by Jan Hatzius stated that the report was “disappointing” for several reasons.

In their report, they stated on their website that “First, single-family starts fell 4.2% on the month; this matters because single-family units are much higher in value-added per unit. Second, data for June were revised down, though mostly in multifamily units. Third, permits were down; this drop was concentrated in multifamily units, where permits have most of their (relatively weak) predictive power for starts due to the longer leads in such construction.”

In further signs that the current housing mess will continue Building Permits, which is a gauge of future construction, fell 3.1 percent in July after a final prior period increase of 1.6 percent that was revised downward half a percent from initial readings.  Economists were expecting a more palatable decline of only 0.5 percent.

The Producer Price Index rebounded by increasing 0.2 percent in July after a prior period decline of 0.5 percent. The index aka “headline” number was in-line with market expectations and economists. However, PPI after stripping out the food and energy components aka “Core PPI” surprised to the upside by increasing 0.3 percent versus consensus surveys of 0.1 percent. The uptick in the July Core PPI number comes after a 0.1 percent increase in the prior month.

After looking at the individual components, the easing price pressure theme is still intact and inflation expectations should remain subdued for the most part. The latest figures are a result of a 1.5 percent increase in light truck prices, which declined 1.0 percent in June followed by higher prices in both prescriptions and passenger cars, which increased 0.7 and 0.3 percent, respectively. Declines in apparel of 0.5 percent and computer equipment prices, which fell 0.3 percent partially offset the some of the increases.  Finally, Intermediary Prices fell for the second consecutive month.  In July, Intermediary Prices ex Food and Energy dropped 0.4 percent following a similar decline in the prior period.

Industrial Production for July increased and surprised market expectations.  The Federal Reserve released data that Industrial Production increased by 1.0 percent, followed by downward revised prior period decline of 0.1 percent.  Economists were expecting a gain of only 0.5 percent.  The jump in Industrial Production is a result of a rather large increase in motor vehicle parts, which comprises 3.5 percent of the total.  For July, motor vehicle parts spiked 9.9 percent after falling 2.5 percent in the prior period.

This unexpected jump is a “head-scratcher” since it is inconsistent with other economic data releases, which suggests waning manufacturing activity.  Goldman Sachs in response to the outlier stated, “The key question in this island of positive surprise is where the goods are going. The survey data have been reasonably consistent in saying that orders are flagging and that inventories have been building. If that’s the pattern, then gains in production will not last. If not, then the surveys will have led us astray.”

Lastly, Capacity Utilization, which measures total output as a percent of in-place capacity, was mostly in-line with surveys.  The Capacity Utilization Index, which is released by the Federal Reserve, now stands at 74.8 percent versus surveys of 74.6 percent and after a prior period reading of 74.1 percent.  While manufacturers are becoming more efficient as evident by this latest number, utilization continues to remain far below rates prior to the recession as the Capacity Utilization Index averaged 80.7 percent in 2006 and 2007.

Posted by Rom on August 17, 2010 under Bond Trading,Fed Watching

NY Manufacturing Expands Less Than Expected, Price Pressures Non-Existent

By Rom Badilla, CFA – Bondsquawk.com

August 16, 2010

Manufacturing activity in the New York region expanded less than market forecasts despite rebounding slightly from the previous month.  Today, the New York Federal Reserve Bank released its Empire Manufacturing Index, which is a regional conditions gauge and reflects current and potentially future business activity.  The Index increased to an index reading of 7.10 in August from a prior period reading of 5.08, which was a dip from earlier this year when the index reached a 2010 high of 31.86 in April.  An Empire Manufacturing Index reading above zero represents economic expansion.  Despite the slight rebound, today’s figure disappointed market participants as economists expected the index to come in at 8.0.  The Index along with the Philly Fed survey, which is due for release on Thursday, is a leading indicator of the national manufacturing gauge, released by the Institute for Supply Management.

Looking beyond the headlines, the components reveal further deterioration of business activity.  The New Orders for August fell to a contractionary negative reading of 2.71 from a positive level of 10.13 in the July.   Inventories declined from 6.35 to 2.86 while Shipments collapsed to a negative reading of 11.50 from a positive 6.31 in July.  On a more half-full side of things, the Number of Employees component increased from 7.94 to 14.29 in August signaling slightly better hiring conditions.

The Prices Paid component, which provides insight on inflation expectations (see chart) and a component that we have been monitoring in recent months, continues to decline signaling easing price pressures.  Prices Paid fell more than five points from July’s reading to 20.0, which suggests that input prices continue to show signs of slowing.  This marks the third straight decline after peaking in May when the Prices Paid index reached a strong reading of 44.74.  Prices Received component, which reflects lower selling prices, mires in negative territory at 2.86 from a contractionary reading of 1.59 in July.

NY and Philly Fed Prices Paid Indices & Inflation Expectations - Past 5 Years

Finally, the National Association of Home Builders survey index declined suggesting continuing pressures on the depressed housing market.  The NAHB market index, which is a survey that includes responses by over four hundred homebuilders, fell to a reading of 13 in August from 14 set in the previous month.  Economists failed to forecast today’s drop, which is the lowest reading since March 2009, as Bloomberg consensus surveys expected a reading of 15. Behind the numbers, the components for current and future sales dropped.  The Present Single Family Sales Index declined by a point from the previous month to an August reading of 14.  Similarly, the Future Sales index fell three points to a level of 18 in August.   Comparatively, the Future Sales Index reached a recent high of 27 in May and the six-month average stands at 23.

Posted by Rom on August 16, 2010 under Bond Trading,Fed Watching
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Retail Sales and Consumer Prices In-Line, Bond Yields Drift Lower

By Rom Badilla, CFA – Bondsquawk.com

August 13, 2010

Retail Sales came in close to expectations suggesting subdued consumer activity and slowing economic growth. The U.S. Department of Commerce released its Advanced Retail Sales data which increased by 0.4 percent in July after a revised prior period decline of 0.3 percent. Despite the July improvement, the latest release failed to meet market expectations as surveys called for an increase of 0.5 percent. Similarly, Retail Sales less Autos increased 0.2 percent versus surveys of 0.3 percent. Retail Sales, stripping out auto and gas components declined 0.1 percent versus expectations of an increase of 0.1 percent and after a revised prior period reading of a gain of 0.2 percent.

After falling for three consecutive months, consumer prices in the U.S. increased in July, mostly in-line with expectations. The U.S. Bureau of Labor Statistics released its Consumer Price Index which increased by 0.3 percent on a month over month basis in July. The increase was slightly above market surveys as economists expected general price levels to increase by 0.2 percent after falling since April. Consumer Prices excluding Food and Energy aka “Core CPI” increased by only 0.1 percent in which met economists’ surveys after increasing by 0.2 percent in the prior month. On a year over year basis, Core CPI remained at a subdued 0.9 percent after this latest release which should temper inflation expectations and bond yields.

Beyond the headlines, the components are roughly in-line with stabilization in price pressures. Owners Equivalent Rent (OER) increased for the second consecutive month after falling earlier in the year. OER which represents roughly 25 percent of total CPI increased by 0.1 percent but fell on a non-seasonally adjusted basis by 0.2 percent. Tobacco increased substantially by 1.6 percent, which were offset by price declines of 0.1 percent in both the recreation and medical care components.

Finally on the economic data front, the University of Michigan revealed its latest survey which suggests that confidence for consumers remains at relatively low levels. Preliminary Consumer Confidence for August came in at a reading of 69.6, which were above surveys by six tenths of a percent but were mostly in-line with expectations. The survey increased from a July reading of 67.8 but despite this, Confidence remains low after plunging from a averaging in the low to mid 70’s throughout 2010. Comparatively, the survey reached a five-year apex of 96.9 at the beginning of 2007 and before the onset of the current economic recession.

As far as market reaction is concerned, bond yields on the long-end are lower after today’s economic data releases. Both the 10-Year and Long Bond are down 5-6 basis points to 2.70 and 3.89 percent, respectively. Inflation expectations as evident by the yield differential between the 10-Year and 10-Year TIPS are unchanged from yesterday but lower from earlier in the week at 1.68 percent. The 2-Year is trading at 0.53 percent, a slight decline of nearly a basis point from yesterday’s close.

Posted by Rom on August 13, 2010 under Bond Chatter,Bond Gurus,Bond Trading
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Consensus Plays Catch Up to the Fall in Interest Rates

By Rom Badilla, CFA – Bondsquawk.com

August 11, 2010

For quite some time now, we have been scratching our heads over the fact that many market participants have continually undermined the bond market and have called for higher rates. As noted here, Bloomberg’s survey of economic forecasts from May 2010 suggested back then that the Federal Funds rate would increase by 25 basis points starting in the fourth quarter of 2010. Furthermore, the yield on the 10-Year would have a four handle by the time we reach 2011. Back then, the 10-Year Treasury traded at 3.48 percent.

In addition, here is another snapshot that that we posted at the beginning of July when we dismissed at the idea of a “bond bubble.” Back then, Bloomberg’s economic forecasts called for higher rates as we entered the second half of 2010 and into 2011.

 According to this, which was recorded on July 5, economists were calling for the 10-Year Treasury to hit 3.37 percent by the end of the third quarter and 3.58 percent by the end of the fourth.

Taken July 5, 2010

Now, here is the latest.  Take note that even today, economists are still calling for higher rates at 3.03 percent and 3.21 percent, respectively.

Taken August 10, 2010

The 10-Year is now trading at 2.70 percent.  While I am sure that we are in store for a short-term pullback at some point in time, the fact remains that the consensus, save for a few, have been flat out wrong.

Rates have dropped and generally will stay low for quite some time due to declining inflation expectations as evident by excess capacity in labor and asset prices, in particular real estate. Furthermore, rates will remain subdued because of a slowing economy that was drugged up on inventory replenishment and federal stimulus. Given that those pockets of activity are running its course, the economy is now showing signs of its true identity where demand has been lackluster.  This should persist until we see evidence of true organic private-sector activity in the form of job growth. In the meantime, expect consumers to reign in spending as they “hunker down” and pay down debt as they experience a “balance sheet recession.” Until that reverses which is unlikely to happen for quite some time, expect general weakness in the U.S. economy and for interest rates to remain low. (I want to throw out a “hat tip” to our friend, the Pragmatic Capitalist for posting a great article covering the balance sheet recession and why the economy is not responding to stimulus measures.  Be sure to check out his postings, as they are a great read). 

Posted by Rom on August 11, 2010 under Bond Gurus,Bond Trading
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China’s Economy Slows

August 11, 2010

China’s economy continued to slow last month as the government’s measures to rein in the real-estate market and reduce energy consumption got into gear, even as inflation spiked. Maarten Jan Bakkum, global emerging markets strategist at ING Investment Management joined CNBC for more.


(Source: CNBC)

Posted by Rom on under Bond Trading
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U.S. Productivity Falls as Market Waits for FOMC Decision

By Rom Badilla, CFA – Bondsquawk.com

August 10, 2010

Productivity in the U.S. fell in the second quarter as output from workers slow as the economic recovery shows signs of stalling.  The U.S. Department of Labor released that Non-Farm Productivity dropped to an annualized rate of 0.9 percent.  The second quarter figures surprised to the downside as consensus forecasts were calling for an increase of 0.1 percent.  Partially offsetting the decline, the previous quarter was revised upward by more than a percent from an initial release to an annualized increase of 3.9 percent.  The decline marks the first drop in productivity gains since the fourth quarter of 2008.

In addition, Unit Labor Costs, which is a broad based measure of inflation, came in close to flat for the second quarter and below economists’ forecasts.  Unit Labor Costs increased an anemic 0.2 percent versus surveys calling for an advance of 1.5 percent.  Furthermore, the previous quarter was revised downward by 2.4 percent from the initial reading to a final drop of 3.7 percent.  The latest reading marks the end of the recent string in declines in Labor Costs which has fallen for three straight quarters.

The drop is significant since productivity growth is crucial since it allows for higher wages and faster economic growth without inflationary consequences.  Assuming stable prices, productivity growth plays a role in facilitating in increasing the overall wealth of the economy since the potential for real wages increase when workers are more productive per hour.

As the market waits for the FOMC decision on short-term rates and information on the prospects for more Quantitative Easing, market followers witnessed the release of two key surveys, which revealed dimmering hopes of a sustainable economic recovery. 

According to the National Federation of Independent Business, small businesses continue to be less optimistic on future business conditions.  The Small Business Optimism Index fell by 1.0 percent to a reading of 88.1 in July versus 89.0 in the prior month.  Analysts were expecting a higher reading for July of 88.0.  While the latest release is higher from the recessionary lows set in March of 2009 of 81.0, the fact remains that it is a far from readings established after previous recessions.

After the conclusion of the 2001 recession as determined by NBER, the 12-month average of the Small Business Index was at 101.3.  For the 1990-1991 downturn, the survey averaged 98.5 in the following year.

The numbers behind the headlines reveal a less encouraging outlook.  Of the small companies reporting, a net 2 percent of responding small businesses plan to add workers in the next three months indicating lackluster job growth (net number equals the number of small businesses offering a positive response less the number of companies providing a negative one).  The net number of companies planning to increase inventory declined to -4 percent from -3 percent in June. 

Interestingly, the net number of companies that expect a better economy fell off a cliff.  The net number expecting better prospects dropped from -6 percent in June to -15 percent in July.  For comparison purposes, this particular component dropped from a net number reading of -10 to -22 from December 2007 to January 2008, which is the period that marks the official beginning of the recession.

In addition, the net number of companies who think that access to loans is getting easier continues to deteriorate from -13 percent to -14 percent in July.  As Ben Bernanke stated early last month in a conference held in Washington DC addressing the needs of small businesses, extending credit for companies with limited workforce are the key to a U.S. economic recovery.  Conditions have not changed for small businesses and as a result, this should not bode well for the recovery going forward. 

Finally, Investors Business Daily released numbers suggesting that optimism for the U.S economy continues to decline.  The IBD Economic Optimism Index dropped from 44.7 set in July to an August reading of 43.6.  The decline disappointed as economists were expecting an increase to 45.0 based off Bloomberg surveys.

The markets are in stand-by mode as rates are generally flat to slightly higher.  The 2-Year Treasury is trading at 0.55 percent, up 2 basis points from yesterday but continues to hover near recent lows.  The 10-Year is flat at 2.83 percent.  Stocks are finally showing some doubt of the recovery it seems and is down by close to a percent to 1116.96, which is kissing support levels in the 200-day moving average.  Check back later for an update on the markets after today’s key FOMC rate decision.

Posted by Rom on August 10, 2010 under Bond Chatter,Bond Trading,BondSquawk
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Post-Jobs Data Thoughts–Vulnerabilities Abound

By Marc Chandler – Marc to Market

August 9, 2010

There is no doubt that the US jobs data is disappointing. The debate among the talking heads is the degree of the disappointment.

One of the key themes we have been hammering is that the shift in the incentive structure of interest rate differentials has swung against the dollar. We have focused on Euribor and the 2-year US-German differential. In response to the jobs data, US rates have fallen further and have spark a rally in European debt instruments as well. Interest rate differentials are moving further against the US. Equities are tumbling, but remain higher on the week still.

The terms of the debate have shifted. Calls for fiscal consolidation have lessened. Now there are more calls for the government, including the Fed, to do more to support the economy.

Following the jobs data, the first issue is the implications for the US economy and Fed policy On the margin, it may increase speculation that the FEd will recycle the proceeds from the maturing and early paydowns from its MBS holdings back into the MBS market. While we think it would do very little material good given the low level of interest rates and spreads now and could further aggravate the illiquidity of the MBS market, it is a distinct possibility. The Fed typically does this with its Treasury holdings so treating its MBS portfolio the same way is not really a significant step, though it is not clear how that would support the economy.

The second issue is the implication for other countries. Here Canada and Mexico have been hit. Canada had its own disappointing jobs and PMI (IVEY) today, which has gone a long way to negate the positive impact of the M&A talk, wheat story and Fin Min comments that helped lift the Loonie yesterday. The Mexican peso is under pressure today primarily as a response to the implications of the disappointing jobs data.

Earlier today both Germany and the UK reported unexpected contractions in June industrial output figures. With fiscal tightening around the corner in most euro zone countries (this year is really more of a Greece, Spain, Ireland and Portugal story), short-term interest rates rising (Euribor made new 12 month highs this week) and the euro and sterling’s appreciation, it does not seem reasonable to expect Europe to maintain the kind of momentum seen in Q2. This also raises the issue of decoupling in the emerging markets. Surely the market has taken on board that the US economy has downshifted. It has not yet reached that conclusion about Europe. The recent PMIs suggest that the region has decent momentum at the beginning of Q3.

Meanwhile the markets love affair with emerging markets has continued. China issues many key economic reports next week. Most of the data is expected to be consistent with a modest slow down. One of the key tail risks in the financial markets would seem to be that global investors become more cautious about emerging markets. Many do not seem prepared for that. Since much of the EM buying appears to be funded with the dollar, a setback in the emerging markets might actually more more supportive for the greenback than may be appreciated.

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 August 9, 2010 under Bond Gurus,Bond Trading
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