The Economy and Bond Market Radar (August 20, 2012)

Sunday, August 19th, 2012

The Economy and Bond Market Radar (August 20, 2012)

Treasury yields rose for a fourth week in a row.  Additionally, the benchmark 10-year yield is on the verge of breaking above the technically significant 200-day moving average.

Strengths

• The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment increased to 73.6, the highest level since May, from 72.3 the prior month.
• The four-week average for initial jobless claims remains at its lowest level since March.
• According to the Conference Board’s gauge of Leading Economic Indicators, the economic outlook for the next three to six months increased 0.4 percent last month after a revised 0.4 percent drop in June. Economists projected the gauge would rise by 0.2 percent.

Weaknesses

• Initial jobless claims rose slightly to 366,000 this week, somewhat muddling the picture for the job market.
• Manufacturing in the Philadelphia region contracted in August for a fourth consecutive month as orders and employment declined.
• China July foreign direct investment fell 8.7 percent year-over-year to $7.58 billion, its lowest level in two years, which fuels concern that a slowdown in confidence in China’s growth prospects may restrain any economic rebound.

Opportunity

• The ECB appears ready to implement some form of QE in the very near future.
• With further weak economic data out of China, the odds of additional easing measures continue to move higher.
• 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, Decisive Action, ECB, Economic Data, Economic Outlook, Economic Rebound, Foreign Direct Investment, Growth Prospects, Index Of Consumer Sentiment, Initial Jobless Claims, Leading Economic Indicators, Market Radar, Philadelphia Region, Qe, Reuters, S Gauge, Shifting Focus, Slowdown, Treasury Yields, Wildcard
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The Economy and Bond Market Radar (August 13, 2012)

Saturday, August 11th, 2012

The Economy and Bond Market Radar (August 13, 2012)

Treasury yields rose for the third week in a row. It is interesting that as we get closer to additional monetary easing in the U.S., Europe and China, the Treasury bond market has already anticipated that and is selling into the news. This would follow a similar pattern as the two quantitative easing programs in 2009 and 2010, as bond yields moved higher immediately after the announcements.

Strengths

• Initial jobless claims fell to 361,000 this week, indicating a somewhat better job dynamic than a couple of months ago.
• The Labor Department reported that job openings in June were the highest since July 2008.
• The U.S. trade deficit narrowed to $42.9 billion in June, lower by more than $5 billion. Exports grew while imports contracted.

Weaknesses

• New foreclosures rose 6 percent in July, the third monthly increase in a row.

• European economic data remains weak as Italian GDP has contracted for four quarters in a row.

• Economic news out of China was weaker than expected for July as exports grew a meager 1 percent and industrial production was weaker than expected.

Opportunity

• The ECB appears ready to implement some form of quantitative easing in the very near future.
• With weak economic data out of China this week, odds of additional easing measures continue to move higher.
• 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 Yields, Decisive Action, ECB, Economic Data, Economic News, Foreclosures, GDP, Hurry, Initial Jobless Claims, Italian Gdp, Job Openings, Labor Department, Market Radar, Quantitative Easing, Quarters, Shifting Focus, Trade Deficit, Treasury Bond Market, Treasury Yields, Wildcard
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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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The Economy and Bond Market Radar (July 2, 2012)

Monday, July 2nd, 2012

The Economy and Bond Market Radar (July 2, 2012)

Treasury yields were little changed for the week but show a downward bias. The week was volatile as the market braced for two events, the Supreme Court ruling on healthcare legislation and the EU Summit. While the healthcare ruling will likely affect us more directly the bigger news of the week for the markets was the proposals put forward at the EU Summit. Southern European countries rallied the most on the positive news with Spanish bond yields hitting the lowest level in three weeks, while German yields moved higher on the news.

Strengths

• Durable goods orders rose a better than expected 1.4 percent in May, breaking a string of declines.
• New home sales rose 7.6 percent in May, which is the largest increase since April 2010. The supply of new homes also fell to 4.7 months, which is the lowest level in nearly seven years.
• In another confirmation of strength in housing, the S&P/Case-Shiller 20-city home price index rose 1.3 percent in April.

Weaknesses

• Consumer confidence fell short of expectations and has now declined for four months in a row.
• Weekly initial jobless claims remain stuck in neutral and are indicating softness for the economy and the employment picture.
• The Brazilian central bank lowered its growth forecast for 2012 to 2.5 percent from 3.5 percent.

Opportunity

• The Fed reaffirmed its commitment to an ultra low interest rate policy through 2014 and additional monetary easing is possible in the near future.

Threat

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

Tags: 7 Months, Bond Market, Bond Yields, Brazilian Central Bank, Consumer Confidence, Declines, Durable Goods Orders, Healthcare Legislation, Home Price Index, Initial Jobless Claims, Interest Rate Policy, Market Radar, News Of The Week, Positive News, Shifting Focus, Softness, Southern European Countries, Supreme Court Ruling, Treasury Yields, Wildcard
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The Economy and Bond Market Radar (June 11, 2012)

Sunday, June 10th, 2012

The Economy and Bond Market Radar (June 11, 2012)

After hitting record lows last week, bond yields moved higher this week in what could be best described as a mini “risk on” trade. Economic data remains weak, Europe is still in turmoil and we saw interest rate cuts in China and Australia. It is somewhat counterintuitive that bonds would sell off under such a scenario but this is a similar pattern to other periods when the Federal Reserve enacted quantitative easing. The market has already priced in the easing, and by the time it actually happens, the market is already looking ahead.

Strengths

• China surprised the market by cutting interest rates by 25 basis points on Thursday. It has been speculated the rate cut was a preemptive move, anticipating weak economic data that China is scheduled to release over the weekend.
• Australia cut interest rates by 25 basis points to 3.5 percent, which is the lowest since 2009.
• The ISM Services Non-Manufacturing Index remained solidly in growth territory in May at 53.7.

Weaknesses

• Factory orders fell 0.6 percent in April and have been very weak so far this year.
• The eurozone Purchasing Managers’ Index (PMI) in May fell to the lowest level since June 2009.
• Both the Fed and European Central Bank (ECB) did not offer any additional monetary measures for the market this week, which disappointed the markets.

Opportunity

• Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
• The Fed 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 responded this week by cutting interest rates. This likely indicates weak economic data in the near term.
• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: Austerity Programs, Basis Points, Bond Market, Bond Yields, China, China Economy, China S Economy, ECB, Economic Data, Federal Reserve, Government Policy Makers, Interest Rate Cuts, Ism, Market Radar, Monetary Measures, Pmi, Preemptive Move, Purchasing Managers Index, Record Lows, Turmoil, Wildcard
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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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The Economy and Bond Market Radar (May 7, 2012)

Monday, May 7th, 2012

The Economy and Bond Market Radar (May 7, 2012)

Treasury yields have had a slight downward bias the past couple of weeks and that trend accelerated this week as yields fell across the board. U.S. economic data continues to be a mixed bag. The unemployment report was released on Friday which was lackluster at best with non-farm payrolls growing a modest 115,000. The recent trend does not inspire a lot of confidence as can be seen in the chart below. The Federal Reserve remains in play and may enact additional quantitative easing or other stimulative policy measures if the economy does not improve.

Strengths

• The ISM Manufacturing Index rose to 54.8 in April, showing surprising strength amid weakening manufacturing data in many parts of the globe.
• The HSBC Purchasing Managers Index (PMI), which is a gauge of China manufacturing, also improved but still indicated contraction.
• Australia cut interest rates by 50 basis points as inflation expectations moved lower.

Weaknesses

• Non-farm payrolls only rose a modest 115,000 and the recent trend has been disappointing.
• April same-store sales have disappointed as the consumer appears to have slowed down after a several months of beating expectations.
• The European Central Bank indicated that additional easing is not likely.

Opportunity

• Bonds continued to grind higher and appear to be forecasting a benign inflation and slow growth.

Threat

• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: Austerity Programs, Basis Points, Bias, Bond Market, Contraction, Economic Data, Federal Reserve, Gauge, Inflation Expectations, Ism Manufacturing Index, Market Radar, Non Farm Payrolls, Parts Of The Globe, Pmi, Policy Measures, Purchasing Managers Index, Quantitative Easing, Treasury Yields, Unemployment Report, Wildcard
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Europe has its Parti Quebecois Moment (Tchir)

Monday, April 23rd, 2012

by Peter Tchir, TF Market Advisors

I have said and written that I expect to see more nationalism come into play as the crisis continues. I may have been a bit early, but we are seeing growing signs of it, with Marine le Pen’s strong showing in yesterday’s French election being the most obvious example. The Dutch Parliament’s failure to approve “austerity” is another sign of growing skepticism of a one size fits all Euro solution.

In Canada, the Parti Quebecois always did better in tough economic times. When times are good, people like to hang out, talk about vacations, what they bought, which was the best Habs team of all time, and why the current version of Les Canadiens is underachieving. In tough times, people are eager to hear why the problems are someone else’s fault. Good times are always a direct result of one’s own actions; whereas, bad times tend to be blamed on someone or something else. Now they can talk a bit about how things would be better if those someone’s or something’s would change, before moving on to the best Habs player of all time, and what the current team should change to be like the old teams.

Away from the election results, more economic data came out of Europe, and it is all bad. PMI missed. Spain is clearly in a recession. Bank stocks are getting hammered. The S&P futures are sitting just above 1,360. We tested the 1,358 level last week and had a strong bounce. The week before saw one sell-off get as low as 1,355 before bouncing. I think the combination of weak data, strange votes, and the realization that the firewall has no immediate impact will weigh on the market and we will break through and trade below 1,350 before we see another round of support.

AAPL is definitely a wildcard. It is the cheapest it has been in 40 days. Yes, that is the problem. The sell-off has been dramatic, but after a parabolic move higher, we are only back to prices last seen on March 14^th. It was at $455 on February 1^st. I will be watching this closely as it is so big in the indices that it could be the catalyst for a bounce, or the trigger for a bigger sell-off towards the 100 day moving average.

CDS indices are weak across the board. In Europe, MAIN is at 148.5, 5 wider on the day, and bid/offer spread is increasing as liquidity evaporates again. IG18 is relatively strong, only 2 bps wider at 102, but with fair value being at least 105, there is some room for this index to move wider. I think Europe was just scared to push futures below that 1,360 support, and if we break that this morning, IG can quickly move to 104 bid. If HYG or JNK opens anywhere within a ¼ or possibly a ½ point of Friday’s close, it is a good sale, as they are overbought, trading at a premium to NAV, and this latest round of weakness in Europe will put pressure on all the credit markets.

French bond yields are actually a little better on the day (somewhat surprising to me given the election results, but I guess they still capture some “flight to quality” bid, but they are not as strong as German bunds. Italian and Spanish 10 year bonds are both weak, hitting yields of 5.71% (+6 bps) and 5.96% (+3 bps) respectively. They have bounced off the lows, but I think we will see a capitulation move lower with Italy getting to 6.25% and Spain to 6.5% before any serious ECB intervention occurs.

Buy the dip has worked well, almost too well, so I am not going to do that. I believe we break this support level and see one more significant downward move before we see real support in any of the risk markets.

Copyright © TF Market Advisors

Tags: Aapl, Austerity, Bank stocks, Current Team, Current Version, Dutch Parliament, Economic Data, Economic Times, French Election, Good Times, Habs, Les Canadiens, Marine Le Pen, Nationalism, Parti Quebecois, Pmi, Recession, Skepticism, Tough Times, Wildcard
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Bill Gross: “No QE 3″

Wednesday, June 8th, 2011

The latest soundbite from Bill Gross comes from the Morningstar fund conference, where he again repeated his conviction that there will be no QE3. Reuters reports: “Pimco co-chief investment officer Bill Gross said the Federal Reserve would not be able to start a third round of quantitative easing after the second round expires at the end of this month. The members of the central bank’s open market committee are “balanced but divided,” Gross, manager of the world’s largest bond fund, said on Wednesday in a speech at the Morningstar fund conference. “It will be difficult to initiate a QE3.” Instead, the Fed will try to keep interest rates low with its official statements, Gross said.  Gross’s fund, the $243 billion Pimco Total Return Fund, has gained 3.24 percent so far this year, trailing 58 percent of similar funds, according to Morningstar data.”

It is odd that Bill continues to stick to his guns in light of both the economic deterioration and the market realization that there will need to be a major drop in stocks for further easing. Ironically, Gross should realize that absent more easing, there will be continued transfer of capital from equities into bonds for the time being (thereby further impairing his, yes, short position), and with the world slowing down and global central bank tightening, a global re-recession (deep in the depression that started in December 2007) seems inevitable. The paradox is that absent QE3 to force a capital reallocation out of fixed income into stocks but mostly commodities, PIMCO’s TRF will continue to be unprofitable (even more if the fund has a steepener position on as many have speculated). The only wildcard is if there is a tax repatriation holiday which we believe has about a 30-40% chance of passing in temporary lieu of QE3.

Nonetheless, if indeed Gross believes there is no QE3, his increasing UST short position may be precariously positioned. We expect to get an update of the TRF positioning over the next 48 hours. It should prove quite informative on what Gross thinks now (and we completely ignore the discussion of “who will buy US debt” in the absence of the Fed, which is an unresolver quandary we share with Gross).

Tags: Bill Gross, Bond Fund, Chief Investment Officer, Commodities, Economic Deterioration, Federal Reserve, Fixed Income, Morningstar, Official Statements, Open Market Committee, PIMCO, Qe, Qe3, Realization, Recession, Repatriation, Reuters, Short Position, Soundbite, Trf, Wildcard
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