The Economy and Bond Market Radar (August 6, 2012)

Sunday, August 5th, 2012

The Economy and Bond Market Radar (August 6, 2012)

Treasury yields were little changed this week as a tug of war continues between global central bankers and economic data. This week was all about the Fed and ECB announcements, which came in with a bang last week but went out with a whimper this week.  Neither central bank took action and, once again, tried to reassure the markets with words not action. Global economic data remains weak as can be seen in the JPM Global PMI chart below, which indicates a global contraction in manufacturing. Tempering this news was a better than expected employment report on Friday, potentially causing policy action indecision from the Fed.

Strengths

• July nonfarm payrolls grew 163,000 vs. the 100,000 that was expected and was the best showing since February.
• Retail sales posted surprising strength in July as same-store sales rose 4.4 percent.
• Consumer confidence unexpectedly bounced back in July, showing greater optimism about short-term business and employment prospects.

Weaknesses

• ISM’s July manufacturing index remained in contraction territory for the second month in a row.
• The Fed failed to take any action this week after it was widely viewed that the Fed planted those seeds in a widely disseminated story last week.
• The ECB also failed to follow through with any action and possibly lost some credibility with investors. The market has become used to a lot of talk from European officials but when the head of the Central Bank promises to do whatever it takes to save the euro and then is unable to articulate exactly what that entails, it raises credibility issues.

Opportunity

• The Fed and ECB are still talking about additional monetary stimulus and it may happen in the near future. Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.
• China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.

Tags: Bond Market, Consumer Confidence, Contraction, Credibility Issues, ECB, Economic Data, Employment Prospects, Employment Report, European Officials, Indecision, Market Radar, Nonfarm Payrolls, Shifting Focus, Stimulus, Term Business, Treasury Yields, Tug Of War, Whimper, Wildcard
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Lucy or Charlie Brown?

Monday, July 23rd, 2012

Since the May swoon the market has been in a violent pattern of indecision.  While the trend has had an upward bias since early June, there has been no consistency.  In fact since breaking out of a five session sideways pattern in mid June we’ve had a consistent pattern of 5-7 up sessions followed by 5-7 down sessions.  Each time Lucy sets down the football and Charlie Brown runs up to kick it (the 5-7 day upswings), it is snatched away (the 5-7 day downswings).  Obviously an exasperating situation for all involved – save for Lucy.

The technical condition of the market seems to be improving but of course everything is only obvious in retrospect.   Wednesday’s move broke the S&P 500 over a series of descending highs AND yesterday’s move pushed the index nominally over early July highs.  Those are both positives.  Of course, as has been the case all spring/summer just as things look promising Lucy shows up and we are looking at a significant gap down in the morning.  It is a perpetual April Fool’s joke of spring/summer 2012.

If we are to have a real change in character the next handful of days will be quite important.  The last few pullbacks (5-7 days in duration) have given back about 2/3rds of the previous rally.  If we can see a less chaotic pullback – lighter in degree and duration, the bull case is strengthened.  If this was just another devious headfake, the action in the past few sessions will have been nothing but another headfake of spring/summer 2012.

It appears that Intel and IBM used up the “not so great, but at least not a disaster” air in the room earlier this week – we had more of those type of reports from the Microsofts and Google’s of the world last night but it’s not leading to the same reaction.  Also there were some negative reactions in Chipotle and Intuitive Surgical.  The dollar also has hit a first level support after a multi day pullback and oil needs some rest after a huge push so nothing too dire here unless we have a complete lack of buyers in the next few sessions.

There were a trio of economic reports yesterday – none of them came in well, but at this point one does not know if the market is rooting for worse or better news as the former brings more calls for QE. Today the economic calendar is clear so we’ll see who shows up on a summer Friday to press the case.

Tags: April Fool, Bull Case, Charlie Brown, Consistency, Consistent Pattern, Duration, Gap, Google, Handful, Indecision, Joke, Lucy, Microsofts, Nbsp, Pullback, Pullbacks, Retrospect, Spring Summer, Swoon, Upward Bias
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