Rate Watch #788 Rates at Record Lows. Comments on S&P.
The University of Michigan Consumer Sentiment Index
Sentiment Index - Level 54.9
This is a massive drop.
Initial Jobless Claims were 395,000 last week. This is the first time since April that they were below 400,000. (Several weeks ago they were announced under 400,000 but that was subsequently revised to over 400,000,) The 4-week moving average was 405,500.
This is a Bloomberg piece in which Alan Krueger of Princeton University explains his thinking about how we should start looking at unemployment. Krueger's point is that when the 99 weeks of unemployment benefit expire at the end of this year we may see the unemployment rate fall because folks leave the workforce. He suggests that we should start looking at the employment-to-population ratio, or the share of the population that is employed.
The Trade Balance for June was -$53.1 Billion. Both Exports and Imports fell because commodity prices (oil and food) fell. Keeping in mind that GDP = Consumer spending + Investments +Government Spending + (eXports - iMports) this (trade balance) is (X-M) and it drains from GDP. One topic which should be discussed is that the Eurozone debt crisis will likely result in fewer exports from the U.S. to Eurozone nations. Europe gets 20% of our exports.
In this graph of the Trade Deficit the gray bars are the monthly data and the red line is 6-month moving average.
MBA Mortgage Applications for week ending 8/5
Purchase Index - Week/Week Change -0.9 %
Refinance Index - Week/Week Change+30.4 %
Composite Index - Week/Week Change +21.7
The refinance index is driven up by very low rates. The purchase index indicates that housing is still quite soft.
Productivity and Costs
Worker Productivity (GDP/hour worked) declined 0.3% (annualized) in 2ndQ2011. The BLS report is here http://www.bls.gov/news.release/prod2.nr0.htm
Unit labor costs in nonfarm businesses rose 2.2 percent in the 2ndQ2011'
This is a graph of Worker Productivity (gray bars) and Unit Labor Cost (the solid blue line.)
NFIB Small Business Optimism Index
This index was down for the 5th consecutive month. This index is the result of a monthly survey by National Federation of Independent Business and it should be a leading indicator for jobs.
These are advance estimates for July:
Retail Sales - Month/Month change +0.5 %
Retail Sales less autos - Month/Month change +0.5 %
The Commerce Department's Report is here.
ICSC-Goldman Store Sales
Store Sales - Week/Week change -0.5 %
Store Sales - Year/Year +3.6 %
Store Sales Year/Year change +4.8 %
If Rick Davis of Consumer Metrics is really the guy with the leading consumer spending indicator then it is the case that panic is setting in just after there was no longer need for it.
What I see is schizophrenic data: sentiment is awful, Retail Sales are slightly up but the Consumer Metrics Index is sharply up. It is hard for the consumer to know what to do when the Dow moves up 500 one day and down 500 the next day. Uncertainly and market volatility reign. It is worth noting that the Consumer Metrics Index is a leading indicator and could well be a sign that consumer spending is about to pick up. That said, the S&P downgrade and the equity market volatility may have trashed the consumer’s intentions. We shall see.
Tech commentary is by Jim Grauer.
After an astonishing 5^28 point run in the 10-year Treasury since 07/28/2011 attendant with extreme volatility, the techs are indicating that a long overdue correction is needed and imminent. Let's look at what is likely to occur. The note's breakout from its Head & Shoulder formation on 7/28/2011 was at 125^052 and peaked out at 131^01, a move of 5^28 points. A reasonable assumption would be for a 50% pullback of 2^30 points to 128^03. From Thursday's close of 129^07, or 2.34% yield on the 10-year, we may therefore anticipate another 1^04 decline in price to the 50% downward correction objective, or equivalently, a 13-14 bps bump in yield to 2.48%.
At this juncture, the Daily, Weekly and Monthly Sto's have contracted their positive K/D spreads to near downcrosses in support of the coming correction. Both the Daily and Weekly Sto's are categorically overbought and need to refresh. However, lacking sufficient data points (i.e. more days of trading to flesh out the vertical line charts), no telling patterns are evident yet. For example, the H&S formation referenced above was an excellent pattern recognition tell for the rally that followed, much to the chagrin of the excess money, inflation bears who were positioned on the short side. Therefore, at present we will simply rely on the time tested, customary and usual correction assumption of 50% pending further price/Sto action pending definitive downcrosses in the Daily and Weekly Sto's. But we must wait patiently for those downcrosses, given that between now and then, the extraordinary volatility in the market will whipsaw prices in ostensibly random action. (See Daily, Weekly and Monthly Sto charts for visual stochastic K/D levels and vertical line presentation at www.stomaster.com/stopdfdc.pdf.
Economic angst causes flight-to-quality Treasury buying which induces lower mortgage rates. Most everyone may want to think about refinancing to a lower rate.
The FOMC statement that interest rates would remain low for the next two years was a reaction to the horrible GDP report of July 29. Less than one month before this report, Bernanke had described the 1stQ2011 "final" GDP increase of 1.92% as "relatively slow." On 7/29, 81% of what was "relatively slow" growth simply disappeared. There are two questions to be asked 1) just how bad is GDP? and 2) why does anyone believe BEA (the government entity which produces the GDP report) when they are making such large changes to data already termed "final." What would the media and politicians say about a CFO who, one month after his company's quarterly P&L was issued, announced that earnings were really 81% less? This is the point that Rick Davis was making in last week's newsletter.
The fact is that monetary and fiscal policy are being based on very inaccurate data produced by a government agency. This should be of concern.
Last Friday I wrote the following: "I have said little about the default possibility simply because I estimated the possibility at near-zero. From my point-of-view what happened was an enormous and bogus media campaign getting people worked up about something an then an illusion that something had been done. This deal does absolutely nothing to address the enormous obligations under Social Security, Medicare and Medicaid. In fact the debt deal contrived precisely NOT to address these. This deal was 98% politics and 2% economics.
It is clear to me that politicians are not able to address the issue of fiscal sustainability.
Before addressing what S&P said and the effects let's understand what S&P is. S&P is a private company which expresses its opinions about the ability of borrowers to repay debt. It is one of the three long-standing NRSRO's (Nationally Recognized Statistical Rating Organizations.) It is one of the three "majors." The other two: Moody's and Fitch did not lower their ratings from AAA but Moody's did assign a negative outlook.
It appears that S&P had notions similar to what I said a week ago. I agree entirely with what S&P said. To wit::
- The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.
- More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
I do not believe that what was recently passed "stabilize(s) the government's medium-term debt dynamics." What is happening is that partisans are being appointed and will be appointed to this new committee and it is likely that the issue will simply be (as S&P points out) subject to the unpredictability of "American policymaking and political institutions."
S&P was hammered by Treasury for overestimating the debt/GDP ratio. There are at least two things wrong with Treasury's math: 1) it does not include debt which Treasury owes for the money it borrowed from the Medicare and Social Security trust funds. That is money which is an obligation and if this is counted then debt/GDP is almost exactly 100%. 2) CBO has not done a good job of estimating future deficits. In 2001 CBO forecast average annual surpluses of approximately $850 billion from 2009–2012. The trustees of the Medicare trust fund may also be seriously underestimating the Medicare shortfall. The health care bill passed in 2010 mandated a > 20% decrease in what Medicare would be paying doctors starting next January. I will believe that when I see it.
What was passed has a trigger for reducing the deficit if the commission failed to achieve consensus. My thinking is "I'll believe that when I see it." Moreover, why are we continuing to ignore Simpson-Bowles? Simpson-Bowles was a broad based solution for achieving fiscal sustainability. It addressed everything including the issues which Congress has explicitly stated that it refuses to address: Medicare, Social Security and Medicaid. One last very sad point: four of the people appointed to the debt super commission voted against Simpson-Bowles.
S&P said that it was no longer worried about U.S. debt in the short term but was concerned about it in the medium term (5-10 years.)
There is much to criticize regarding S&P: they made a large error with the CBO data, they massively mis-rated mortgage debt aiding and abetting the mortgage mess and the, along with the other debt rating firms, have, at best, a spotty history of rating government debt. My subjective view is to agree with the heart of what they are saying simply because it is precisely what I have been preaching for the past five years.
The case here is a strage one. S&P expressed the opinion that it was the political process itself which makes fiscal sustainability difficult to achieve. It was subsequently criticized for getting involved in politics.
I am cursed with believing that what Jurgen Brauer and I proposed (an nonpartisan group to set the debt limit) is better that what this committee will come up with. The standard reply I get to this suggestion is something along the lines of "politicians will not go along with that" and that is precisely the problem. The beauty of what we proposed is that it removes the responsibility of setting the debt ceiling from Congress and give them an important political "out".
The question is simple: what is more likely to be a permanent solution - a one time partisan group of politicians or a permanent council of nonpartisan economists whose sole task is to regulated the debt ceiling?
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