The Economy and Bond Market Radar (July 23, 2012)

Saturday, July 21st, 2012

The Economy and Bond Market Radar (July 23, 2012)

Treasury yields headed modestly lower again this week. Retail sales were much weaker than expected. Inflation and manufacturing data were more or less in line with expectations, while housing data was mixed. By Friday, European financial concerns had resurfaced as Spanish 10-year bond yields spiked above 7 percent and hit new highs. Spain indicated its recession will likely continue into next year. U.S. treasuries remain a safe haven for global investors, pushing yields lower this week.

Strengths

• Industrial production rose 0.4 percent, ahead of expectations and a bright spot in an otherwise lackluster week for economic data.
• Real estate lending in China jumped 20 percent year-over-year in the second quarter and already shows Chinese policy-makers are taking aggressive action to combat the ongoing global slowdown.
• Housing starts rose 6.9 percent in June and the National Association of Home Builders confidence index had its biggest increase since September 2002.

Weaknesses

• Retail sales fell 0.5 percent and have now fallen for three months in a row, which bodes very poorly for second-quarter GDP growth.
• The Conference Board’s Leading Index fell 0.3 percent in June, also indicating lackluster growth.
• Auto sales in the European Union fell 2.8 percent in June for the ninth consecutive monthly drop.

Opportunity

• With growth tepid, the Federal Reserve will not only remain accommodative, it may increase accommodation in the next few months.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.

Tags: Aggressive Action, Auto Sales, Bond Market, Bond Yields, Chinese Policy, Confidence Index, Economic Data, Financial Concerns, GDP Growth, Global Investors, Global Slowdown, Housing Starts, Market Radar, National Association Of Home Builders, New Highs, Quarter Gdp, Safe Haven, Shifting Focus, Treasuries, Treasury Yields
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China and EU Concerns Lifts Bonds (May 28, 2012)

Sunday, May 27th, 2012

The Economy and Bond Market Radar (May 28, 2012)

Treasury yields were little changed as mixed economic data here in the U.S. and lots of back and forth speculation in Europe led to an overall muted reaction. New home sales were a bright spot and as can be seen in the chart below, have been steadily trending high since last summer. A similar pattern is taking place in the existing home market and real market recovery appears to be underway.

Strengths

• The University of Michigan Confidence Index hit the highest level since October 2007, citing lower gasoline prices.
• April new home sales rose 3.3 percent, beating expectations.
• Existing home sales grew 3.4 percent in April and the median priced jumped 7.6 percent.

Weaknesses

• Durable goods orders in April were weak, with “core” capital goods orders falling 1.9 percent, the third decline in four months.

• HSBC’s flash Purchasing Managers’ Index (PMI) for China fell to 48.7 in May and disappointed hopes for a rebound.

• Markit’s eurozone PMI told a similar story as this indicator fell to the lowest level in nearly three years.

Opportunity

• Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
• The Federal Reserve appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.

Threat

• China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: Austerity Programs, Bond Market, Capital Goods, China Economy, Confidence Index, Core Capital, Durable Goods Orders, Economic Data, Eurozone, Existing Home Sales, Federal Reserve, Four Months, Gasoline Prices, Government Policy Makers, Market Radar, Pmi, Purchasing Managers Index, Rebound, Treasury Yields, University Of Michigan Confidence, Wildcard
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Barron’s Confidence Index Takes a Worrying Turn

Thursday, January 19th, 2012

When reporting on the unfolding of the credit crisis I often referred to the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds.

The difference between the yields is indicative of investor confidence. A rising ratio indicates bond investors are growing more confident, in other words preferring more speculative bonds over high-grade bonds. On the other hand, a declining ratio indicates investors are demanding a lower premium in yield for increased risk. That shows a waning confidence in the economy.

Since hitting an all-time low in December 2008, the Index was almost back to pre-crisis levels in January this year as investors grew increasingly confident. But that was when investors started focusing on sovereigns that were starting to get into trouble.

Since the start of 2011 the Index has given up more than 40% of its gains. This puts us back at levels experienced during mid-2008 – just prior to confidence falling off a cliff. Based purely on this chart, one has to conclude that confidence remains fragile.

Source: Barron’s

Tags: Barron, Bond Investors, Bonds, Confidence Index, Credit Crisis, Crisis Levels, Economy, Investor Confidence, risk, Sovereigns
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The Economy and Bond Market Radar (January 16, 2012)

Saturday, January 14th, 2012

The Economy and Bond Market Radar (January 16, 2012)

Long-term Treasuries rallied this week, sending yields lower as the schizophrenic market continues to gyrate up one week and down the next. This is what we’ve experienced since mid-November.

Most of the gain in Treasuries came on Friday as Standard & Poor’s (S&P) downgraded several European countries including France, Italy and Austria. The U.S. dollar and Treasuries rallied on this news, while stocks sold off.

Economic data was mixed but one outlier was the consumer credit report from the Federal Reserve, which grew by more than $20 billion in December. The 9.9 percent annualized increase is the fastest growth since November 2001. Consumer confidence and retail sales have improved over the course of the quarter but it appears a sharp reversal in consumer credit may dampen the outlook going forward.

Strengths

• The University of Michigan Confidence Index and the IBD/TIPP Economic Optimism Index both registered strong increases in January.
• The three month rate in China’s M2 money supply index has accelerated very sharply and is an indication that the government is addressing the concerns of an economic hard landing. China’s bank loans rose 14 percent in December and reinforce the idea that policymakers are taking action.
• Italian 10-year bond yields fell sharply this week as bond auctions in Europe were met with strong investor demand.

Weaknesses

• Overnight deposits with the European Central Bank (ECB) hit another record high at $591 billion as banks are still unwilling to lend to each other in the overnight interbank market. This indicates significant lack of confidence in the European banking sector.
• Weekly jobless claims rose back near the 400,000 level and are at the highest level in six weeks.
• Consumer credit surged $20 billion this week as consumers levered back up in November.

Opportunities

• Inflation data will be released next week and should confirm the declining trend in inflation. We also have housing starts and building permits which will hopefully confirm some of the recent positive data points in housing.

Threats

• The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately, decisions are politically driven and it is difficult to predict outcomes and ramifications.

Tags: Bank Loans, Banking Sector, Bond Auctions, Bond Yields, Confidence Index, Consumer Confidence, Consumer Credit Report, European Banking, Ibd, Inflation Data, Interbank Market, Investor Demand, Lack Of Confidence, Market Radar, Money Supply, Outlier, Schizophrenic Market, Supply Index, University Of Michigan Confidence, Weekly Jobless Claims
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The Economy and Bond Market Radar (December 12, 2011)

Sunday, December 11th, 2011

The Economy and Bond Market Radar (December 12, 2011)

Long-term treasury yields ended the week modestly higher as European leaders came together on Friday to form a fiscal pact that placated the market for the time being and led to a sell off in the long end of the Treasury curve.

While there was considerable anticipation and discussion regarding the outcome of the European Central Bank (ECB) meeting on Thursday and Friday’s European Union (EU) summit, the most important piece of data may have come from the other side of the world. The chart below depicts year-over-year inflation in China, which fell to the lowest levels in 14 months. The reason this may be so significant is that this could be a precursor to full-fledged easing in China, which has been the incremental global growth driver in recent years. If China were to cut interest rates, that would be a strong signal that global reflationary policies are back in force and boosts prospects for both global economic growth as well as appreciation in risky assets.

Strengths

• The EU leaders came to an agreement, in principle, on a fiscal pact that will hopefully lead to real reform and stabilize markets in the near future.
• China’s November CPI fell to 4.2 percent and opens the door to more aggressive easing policies in China.
• The University of Michigan Confidence Index rose more than expected in the preliminary December release.

Weaknesses

• Weakness is several Chinese indicators also increases the probability of an interest rate cut as China’s export growth and service sector PMI slowed.
• S&P put negative outlooks on 15 of 17 eurozone countries and the EU may lose its AAA rating as well.
• Factory orders in the U.S. fell 0.4 percent in October and September’s data was also revised lower.

Opportunities

• The Federal Open Market Committee meets next Tuesday and, while expectations are low for a significant change in policy, the Fed could surprise the market.

Threats

• The situation in Europe remains extremely fluid and negative news is almost expected at this point; unfortunately, it is politically driven and difficult to predict outcomes and ramifications.

Tags: Bond Market, Confidence Index, CPI, European Leaders, Eurozone Countries, Federal Open Market Committee, Global Economic Growth, Global Growth, Inflation In China, Market Radar, Open Market Committee, Outlooks, Pact, Precursor, Risky Assets, Service Sector, Strong Signal, Treasury Curve, Treasury Yields, University Of Michigan Confidence
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The Economy and Bond Market Cheat Sheet (September 19, 2011)

Sunday, September 18th, 2011

The Economy and Bond Market Cheat Sheet (September 19, 2011)

Bond yields rose this week as crisis was averted in Europe. The French, Germans and Greeks were able to agree that a Greek euro exit was unthinkable. This calmed the market, which was bracing for a potential Greek default.

While the U.S. is not immune from what is going on in Europe, America appears much further along in dealing with the fundamental issues afflicting Europe today. One hopeful sign is the Conference Board Index of Leading Economic Indicators, commonly known as the LEI. As can be seen in the chart below, on a year-over-year basis, the LEI remains high, indicating reasonably strong economic growth in the next six months.

The LEI has historically been a good predictor of economic growth. The index deteriorated in 2000, well ahead of the recession that began in 2001. In 2007 and early 2008, the index declined before the global financial crisis and associated recession began.

One other factor confirming the strength in LEI is the number of companies in the S&P Composite 1500 Index with year-over-year revenues of more than 10 percent. Currently there are 705, almost half of the S&P 1500, which is very impressive in a slow growth environment. At the bottom of the cycle in late 2009, only 179 companies were growing this fast.

The U.S. economy continues to produce dynamic growth companies which are the driving force behind economic growth and job creation. While the current environment has been difficult, the future economic situation appears to be better than most people will give it credit for.

Strengths

• Industrial production rose a better-than-expected 0.2 percent in August.
• Sentiment among Japanese manufacturers bounced back from depressed levels earlier in the year.
• The University of Michigan Confidence Index rose in September, bouncing off very low levels in August.

Weaknesses

• Initial jobless claims rose to 428,000 in the week ended September 10, indicating no relief on the job front.
• Retail sales for August were disappointing remaining unchanged from July as consumers remain cautious.
• U.S. GDP forecasts are being revised lower as global growth has been disappointing.

Opportunities

• With the economy weak and concerns brewing about an additional financial crisis, the Federal Reserve will remain accommodative for some time and bonds appear well supported in the current environment.

Threats

• There is a crisis of confidence in world leaders at the moment and the potential for another financial crisis is rising.

Tags: Board Index, Bond Market, Bond Yields, Bonds, Cheat Sheet, Confidence Index, Depressed Levels, Driving Force, Dynamic Growth, Economic Situation, Fundamental Issues, Global Financial Crisis, Growth Environment, Hopeful Sign, Index Of Leading Economic Indicators, Initial Jobless Claims, Japanese Manufacturers, Job Creation, Leading Economic Indicators, Recession, University Of Michigan Confidence
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Economy and Bond Market (November 15, 2010)

Sunday, November 14th, 2010

The Economy and Bond Market (November 15, 2010)

Economic news flow was relatively light after an action-packed week last week. The market continued to digest the implications of quantitative easing (QE2), the mid-term elections and employment data. Bonds sold off this week, sending yields higher by as much as 25 basis points on a combination of QE2 trade unwind and speculation that troubled European lenders will be supported by the rest of the Euro region. The stress and concerns surrounding peripheral European countries can be seen in the chart below, which shows the current Irish 10-year bond price, which currently yields about 8 percent.

Strengths

• Mortgage rates fell to a record low of 4.17 percent.
• Consumer debt continued to decline in the third quarter as necessary deleveraging is taking place.
• The University of Michigan Confidence Index rose modestly in November.

Weaknesses

• Soaring Irish bond yields highlight the remaining risks and concerns surrounding the Euro region.
• China raised its bank reserve ratio as it steps up efforts to slow inflation and to offset some of the spillover from the U.S. QE2 program.
• Wholesale inventories rose 1.5 percent in September, matching the largest increase in two years. This is a potential red flag for manufacturing, as the restocking process is likely completed and this data points to slowing sales.

Opportunities

• Inflation is unlikely to be a problem for some time, giving central bankers and other policy makers around the world room for expansive policies.

Threats

• Inflation expectations as measured by TIPS spreads have risen sharply over the past month. Inflation expectations will be key data points to drive Fed policy changes going forward.

Tags: 10 Year Treasury, Basis Points, Bond Market, Bond Price, Bond Yields, China, Confidence Index, Consumer Debt, Employment Data, Fed Policy Changes, Inflation Expectations, Key Data, Mid Term Elections, Mortgage Rates, Qe2, Red Flag, Reserve Ratio, Sales Opportunities, Spillover, University Of Michigan Confidence, Wholesale Inventories
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“You Call This Capitulation?” (Rosenberg)

Thursday, August 26th, 2010

GOLD GLITTERS

A contact of mine was kind enough to send me a copy of a speech that Ben Bernanke delivered on Japanese monetary policy back when he was still teaching economics at Princeton — A Case of Self-Induced Paralysis. Imagine that he gave this speech 11 years ago, and everything he laments in his speech is part and parcel of the U.S. macro and market backdrop today.

In any event, without getting too critical, this is the earliest piece we can find — three years ahead of his famous “What If” speech on November 22, 2002. What really caught our eye — on the same day that gold prices rose another $10 an ounce — was the section on “How to Get Out of a Liquidity Trap”, which we are clearly in considering that record-low mortgage rates have not stopped home sales from cratering to record-low levels. In particular, the subsection that contains one of the solutions to a deflationary debt deleveraging cycle, which is what he was advocating for Japan back then: “Depreciation of the Yen”. Indeed, instead of depreciating, the yen has strengthened 15% since Mr. Bernanke gave that speech, and look where Japan is today. So, it would go without saying that embarking on investment strategies that are inversely correlated with the greenback would seem to make good sense, and the gold price would certainly fit that bill (we should add silver into that mix as well).

YOU CALL THIS CAPITULATION?

Short interest on the Nasdaq down 1.6% in the first week of August?

The Rasmussen investor confidence index at 80.4? Call us when it hits 50, which in the past was a “classic” washout level.

Investors Intelligence did show the bull share declining further this past week, to 33.3% from 36.7%. But the bear share barely budged and is still lower than the bull share at 31.2%. Are we supposed to believe that at the market lows, there will still be more bulls than bears out there? Hardly. At true lows, the bulls are hiding under table screaming “uncle!”.

Yes, Market Vane equity sentiment is down to 46, but in truth, this metric is usually in a 20-30% range when the market correction ends. We are waiting patiently.

As for bonds, well, Market Vane sentiment is 73%. Now what is so bubbly about that. Call us on extreme positive sentiment when this measure of excessive bullishness is closer to 90%, and we’ll be in the correction camp hopefully by the time this happens.

In any event, the extent of the denial over U.S. double-dip risks is unbelievable. These are quotes from economists and strategists in yesterday’s print media — and just a select list at that for there was just so much surreal commentary:

“I’d be shocked if you don’t make a lot money in U.S. stocks over the next decade.”

“If yields rise, then 30-year bonds will suffer.”

“It won’t be a double-dip recession but it might feel like it.”

“There is a global perception that we are not necessarily going into a Japan-type scenario, there is a recognition of a slow recovery.”

“People shouldn’t panic.”

At market lows, the recession rhetoric becomes more intense and indeed it’s when people do panic that the best buying opportunities generally occur.

Copyright (c) 2010 Gluskin Sheff

Tags: Bear Share, Capitulation, Confidence Index, Gold, Gold Glitters, Gold Price, Gold Prices, Good Sense, Greenback, Investment Strategies, Investor Confidence, Investors Intelligence, Japanese Monetary Policy, Liquidity Trap, Low Mortgage, Lows, Mortgage Rates, Nasdaq, Ows, Short Interest, Silver, Teaching Economics
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Foreign Investors Confident in China

Thursday, March 25th, 2010

March 19, 2010

For the first time ever, emerging markets claimed three of the top four destinations for foreign direct investment (FDI) according to the 2010 A.T. Kearney Foreign Direct Investment Confidence Index. China (#1), India (#3) and Brazil (#4) were the headliners in a list of emerging market countries that claimed 19 out of the top 25 spots.

China remains the top destination for FDI—a title it’s held since 2002—attracting $108.3 billion from around the world in 2008. Seventy-two percent of investors see the Asia-Pacific region leading the world out of recession. Thirty-two percent see a positive outlook for China and 31 percent said the same for India.

Rounding out the top five is the United States, who regained the #2 slot from India and Germany at #5.

Poland, the only European Union member to avoid negative GDP growth in 2009, made the biggest jump from 2007—going from #22 all the way to #6. Poland managed just over one percent GDP growth in 2009 and that figure is expected to double in 2010.

Mexico jumped 11 spots to #8 and both Canada and Germany rose five spots up the FDI food chain. On the other hand, Hong Kong, Russia and Singapore suffered the biggest declines.

Nearly half of Kearney’s survey respondents say they have postponed investments due to market uncertainty and credit difficulties. This means it may be some time before we see FDI levels near the $2 trillion mark they were at in 2007.

For a detailed briefing on each country in the top 25, check out the BusinessWeek slideshow.

View Slideshow of Top 25 Countries for Overseas Investment

Tags: Asia Pacific Region, Brazil, BRIC, BRICs, Businessweek, Canadian Market, China, China March, Confidence Index, Credit Difficulties, Emerging Market Countries, Emerging Markets, Food Chain, Foreign Direct Investment, Foreign Investors, GDP Growth, Headliners, Index China, India, Investment Confidence, Market Uncertainty, Overseas Investment, Positive Outlook, Recession, Russia, Survey Respondents, Union Member
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The Economy and Bond Market Highlights (week ending 2/15/2010)

Monday, February 15th, 2010

The Economy and Bond Market

Treasury yields moved higher this week on the back of large Treasury auctions that met somewhat tepid demand. Domestic economic news was relatively uneventful; it seemed the poor weather conditions in many parts of the country were a bigger story. Internationally it was a different story. Chinese bank lending jumped in January to one of the highest totals on record and Chinese M1 money supply grew 39 percent on a year-over-year basis, see chart below. The Chinese government has enacted numerous tightening measures in recent weeks and another was announced on Friday, raising bank reserve requirements by another 50 basis points. Growth indicators are very strong but the government tightening has begun and in the short term the economy has a lot of momentum but the government needs to be careful and not make adjustments too rapidly as it would have a global impact.

Strengths

• January retail sales rose 0.5 percent and beat market expectations.
• The National Federation of Independent Business (NFIB) small business index hit a 16 month high.
• Weekly initial jobless claims fell to 440,000 breaking the recent trend higher.

Weaknesses

• China is tightening policy on an almost weekly basis and that raises the risk of doing too much too soon.
• February’s University of Michigan Confidence Index fell to 73.7, below expectations.
• The trade balance unexpectedly widened in December on higher oil imports.

Opportunities

• The economic recovery is still intact but looks more fragile now than just a couple of months ago, which likely keeps the Fed on hold for some time.

Threats

• If one of the Euro countries were to seriously threaten default, the whole Euro currency system comes into question and threatens global financial stability

Tags: Bond Market, China, Chinese Bank, Confidence Index, Currency System, Emerging Markets, Euro Countries, Federation Of Independent Business, Global Financial Stability, Global Impact, Growth Indicators, Initial Jobless Claims, Market Expectations, Money Supply, National Federation Of Independent Business, Nfib, Oil Imports, Poor Weather Conditions, S University, Treasury Auctions, Treasury Yields, University Of Michigan Confidence
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