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Preview: Tony Crescenzi

Tony Crescenzi



The world of economics-including such elements as the Fed and housing-are discussed by Bond strategist Tony Crescenzi. Updated several times a day.



Copyright: 1996-2011 TheStreet.com, Inc.
 



On ADP and Fed Policy

Wed, 05 Jan 2011 20:24 GMT

A miss of just 0.1% in any forecast of the monthly payroll level equals a miss of about 130,000. Misses of 0.1% for other data are easily overlooked -- for example, any forecast on retail sales. This is why a whopper of a gain in Friday's payroll report is not necessarily a given, despite the whopper of a gain reported by ADP today. Nevertheless, a bet on a big gain in payrolls occurring over the next several months is more reasonable, particularly because the ADP data are reinforced by a plethora of other data -- for example, the recent decrease in filings for initial jobless claims. With this likelihood in mind, recent market trends look likely to persist in the months ahead. Today's ADP report was buoyed by a big gain in the service sector, which saw an increase of 270,000. Recent data indicate the service sector is gaining, as evidenced by data on personal spending on services and the monthly ISM non-manufacturing index -- this is the new torque in the economy. Gains in the service sector are essential if there is to be any meaningful gain in monthly job growth, because 112 million of the 130 million U.S. jobs are in the service-producing sector. Today's release of the ISM's December non-manufacturing index is therefore an important test of the relevance of today's ADP report. For 18 months, the ISM's manufacturing index has been above the ISM's non-manufacturing index, reflecting a skew in the composition of the growth in the U.S. economy toward manufactured products rather than services. The typical relationship in an expansion is for the non-manufacturing index to be 3 points above the manufacturing index. Continued strengthening of service-related data such as the ISM's non-manufacturing index as well as the monthly tally of personal spending on services is likely to translate into accelerating payroll gains. Payroll growth averaged 98,000 per month in the first six months of 2010. In the subsequent four months, payroll gains averaged 133,000 per month. November's gain of 50,000 was probably an anomaly. Therefore, it can be said that payroll gains have accelerated from about 100,000 per month to about 125,000 per month. In the months ahead, payroll gains are likely to move toward 150,000 per month owing to a variety of factors, not the least of which is the move toward the political center in Washington, a factor almost certainly a relief to small businesses. This factor alone can easily bring the 130,000 monthly gain to 150,000, as could additional spending related to the payroll tax cut, and the $50 billion of extra capital spending that could result from the tax deduction available to businesses that purchase new equipment. ... [...]



What to Make of the Negative TIPS Rate

Mon, 25 Oct 2010 22:39 GMT

For the first time, the U.S. Treasury issued debt at a negative interest rate, issuing five-year inflation-protected securities at -0.55%. The auction yield is striking, but it reflects a condition in the Treasury market that has been in place for months, chiefly that yields on shorter maturities have moved below the inflation rate. The auction put an exclamation point on the condition.

The negative interest rate on five-year TIPS reflects an expectation for the consumer price index to run at an annual rate of about 1.6% over the next five years. We know this from comparing TIPS with conventional Treasuries, which are composed of both a real yield (the -0.55% TIPS yield) and an inflation expectation. Remember, investors in TIPS receive the real yield plus compensation for inflation, as measured by the consumer price index. In other words, while the yield on many TIPS is negative, investors in these securities expect a positive return overall, owing to expectations for inflation that are greater than the negative yield on these TIPS.

The Federal Reserve, through its efforts to lower market interest rates, endeavors to engineer negative real interest rates as a means of pushing investors to move out the risk spectrum, as well as to boost inflation expectations. This effort has been successful, as evidenced by the performance of risk assets and the recent move higher in the break-even rates on TIPS. The challenge for the Fed is finding policy solutions that have the desired efficacy, such that gains in risk assets transmit to the broader economy. ...

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Mortgage Rates Balloon

Tue, 02 Jun 2009 14:28 GMT

Treasury yields have been rising for months, but their rise did not cause any dislodging of the private credit markets as yields on corporate bonds and mortgage securities fell. Part of the reason is the Federal Reserve's promise to purchase up to $1.25 trillion of mortgage securities and $200 billion of agency securities. Thus far the Fed has purchased about $425 billion of mortgage securities and $80 billion of agency securities.

Until last week, the Fed's purchases were enough to keep investors in the game so to speak, but the rise in Treasury yields became so great that the dam broke and mortgage rates began to climb. The increase, which will be tabulated by Freddie Mac in its weekly rate survey, could well be about three-eighths to a half percentage point.

We know this by tracking the actively traded mortgage-backed securities. For example, the Fannie Mae 4.0% mortgage-backed securities hovered around 4% for months before its yield climbed to about 4.5% -- all in a week's time. ...

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Chain-Store Sales Creep Up

Tue, 02 Jun 2009 13:26 GMT

On Monday I noted the potential for improvement in consumer spending that might result from the rebound in equities. At the end of March, Federal Reserve data indicate that equities held in the U.S. were valued at about $15.2 trillion. As a proxy, the S&P 500 has gained about 18% since then, which translates into a gain of about $2.8 trillion.

Using the conventional rule of thumb that says each $1 change in equities equals a 4-cent change in spending, an increase of about $120 billion could be seen over and above what would otherwise have been seen in the absence of the rebound in share prices.

Signs of stabilization in spending are apparent in chain-store sales data. At their worst point, sales were down 2.5% on a year-over-year basis (in the week ended Feb. 3), according to the International Council for Shopping Centers. Sales have steadily stabilized since then and in the latest week were up 0.6% on a year-over-year basis, the best reading since Dec. 2. ...

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'Wealth Effects' and GDP

Mon, 01 Jun 2009 20:39 GMT

A major influence on consumer spending for a number of quarters now has been the negative influence of the large amount of wealth destruction that has taken place as a result of the decline in both home values and the value of financial assets. Home prices certainly are not on the rise, but the equity market is, and there are implications for the economy.

A rule of thumb that economists use is to expect that for every $1 change in the value of equities, consumer spending will increase by about 3 to 5 cents. The Federal Reserve valued equities at $15.2 trillion at the end of March, and the S&P 500 has gained about 18% since then; that increase, if used as a proxy for the market, would mean a roughly $2.8 trillion increase in wealth. Using the rule of thumb, that's close to $120 billion of consumer spending, or roughly a percentage point boost to GDP.

None of this means that GDP will reach its potential, and the equity market's gains following massive losses, so it is important to not put too fine a point on the idea, but it is difficult to ignore the implication of rising asset values (as well as falling asset values, of course). ...

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Purchasing Managers Index Shoots Up Again

Mon, 01 Jun 2009 14:56 GMT

The Institute for Supply Management's monthly purchasing managers index increased for a fifth straight month in May to 42.8 from 40.1 in April. The low for the cycle was 32.9 in December, which was the lowest since June 1980. The current level is above the 41.2 threshold the ISM says historically has signified the dividing line between growth and contraction in the overall economy. A reading below 50.0 indicates contraction in the factory sector but not the overall economy.

Leading indicators within the ISM index were positive. In particular, the new orders index, which accounts for 30% of the ISM index, increased to 51.1 from 47.2 in April, its first reading above 50.0 since November 2007 and its highest since then. The increase indicates that production levels will increase in the time ahead and there is already movement toward such, as evidenced by the production index, which increased to 46.0 from 40.4 in April.

Gauges that tell us of the pressures companies are facing to either raise employee hours or expand capacity moved positively in May. The index on order backlogs increased to 48.0 from 40.5, the highest since April 2008. The more backlogs increase, the greater will be said pressures. ...

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Treasury Auction Perfectly Average

Thu, 28 May 2009 17:28 GMT

The Treasury's $26 billion auction of seven-year notes was not as good as yesterday's five-year or Tuesday's two-year auctions, but was average for a seven-year auction. The bid/cover ratio was 2.26, which is just a tad below normal. The auction yield was 3.30%, about 1 basis point more than expected and indicating a lack of aggressiveness among bidders, which is not all that surprising in light of the recent thumping Treasuries have seen. The seven-year was trading at 3.275% at the auction deadline, which means it tailed 2.5 basis points, a bit more than normal but fine in the context of the selloff.

The percentage of the auction that went to indirect bidders was 33%, which is about normal and indicates the issue is in fairly good hands (end users). ...

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Home Inventories Match 15-Year Low

Thu, 28 May 2009 15:08 GMT

New-home sales increased slightly in April to a 352,000 annual rate vs. a 351,000 rate in March. It was the sixth consecutive month below 400,000. The record high was 1.389 million in July 2005. Sales are stabilizing but near record lows.

The most important metric within the sales report is the inventory data. The number of new homes for sale fell for a 24th straight month, falling 13,000 to 297,000, matching the lowest since February 1994, which was last reached in November 1997. The current level is below both the 25-year average of 355,000 and the 15-year average of 369,000.

Inventories are falling because builders are severely under-building relative to population growth and household formation. I ask again, where will the country's 3 million additional inhabitants live when they enter the country this year? It is a simple fact of human existence that people need shelter. Inventories will fall. ...

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Durable Goods Up

Thu, 28 May 2009 13:53 GMT

Orders for durable goods increased 1.9% in April, but the prior month's 0.8% decline was revised sharply lower to a 2.1% decline. Excluding transportation orders, durable goods orders increased 0.8% following the previous month's 2.7% decline, which was revised from -0.6%.

The revisions take the shine away from the data and put the level of new orders roughly equal to the consensus forecast for the headline reading and about a percentage point lower for the core reading, the ex-transportation reading. Nevertheless, the three-month trend is slightly up for all orders and only slightly down for core orders, a big shift from previous months, as evidenced by the 26.6% and 25.2% year-over-year declines, respectively.

Orders for non-defense capital goods orders, which are a key gauge of capital spending, fell 1.5% in April following a 1.4% decline in March. Shipments of these goods, which are used as source data for GDP, fell 2.1% following a drop of 1.7%. The current level is about 12% below the first quarter's average, indicating another decline in capital spending for the current quarter; this would mark the sixth quarter in a row. It is worth noting, however, that the past two quarters saw declines of 33.8% and 28.1% respectively, indicating that the rate of decline in capital spending is slowing. ...

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Jobless Claims Still High

Thu, 28 May 2009 13:03 GMT

Initial jobless claims decreased 13,000 to 623,000 (consensus was for a reading of 628,000) in the week ended May 22 but held above the four-month low of 605,000 set three weeks earlier. The peak for the cycle was 674,000 in the week ended March 27.

The current reading is in territory that suggests that while job losses are ebbing, they remain high, as a reading of 623,000 is consistent with job losses of over 500,000 a month. Early expectations for next Friday's jobs report are for a loss of about 550,000 jobs. Job losses like that could lead to increases of two- or three-tenths per month in the unemployment rate. Underscoring the idea of ebbing but still-high job losses was the April employment tally, which fell 539,000, about 140,000 below the average of the previous five months.

Glaring evidence of the difficulties that workers are having in finding new employment is the level of continuing claims, which are reported with a one-week lag. Continuing claims increased to a new record high of 6.788 million, up 110,000 for the week and 495,000 for the month. ...

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Treasuries Run Into Weakness

Wed, 27 May 2009 18:40 GMT

Weakness in Treasuries is occurring from several fronts. For starters, the failure to react to good news (the favorable five-year auction) is a red flag reinforcing the downtrend in Treasury prices.

Second, there is selling related to tomorrow's sale of seven-year notes, a building of an auction concession.

Third, as a result of the weakness, investors in mortgage-related securities are rushing to hedge against ever-increasing duration risks (when yields rise, mortgage refinancings slip, reducing pre-payments on mortgages, resulting in higher average maturities on mortgages, a big negative when prices are falling). The hedging imperative is very apparent in swap rates, which have been trending upward in response to demand for fixed-rate rather than floating-rate obligations. ...

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Auction on Five-Year Notes Goes Well

Wed, 27 May 2009 17:38 GMT

Results of the Treasury's $35 billion auction of five-year notes were favorable from all angles. The bid/cover ratio was 2.32, which is above the 12-month average of 2.21. Expressed in dollars, the dollar amount of bids submitted was $81 billion, compared to an average of $61 billion the past year, reflecting strong bidding. The percentage of the auction that went to indirect bidders was 44.2%, the most since February and the second-most of the past 20 months, indicating that the auction is in "good hands," so to speak -- in the hands of end-users rather than primary dealers. The auction yield was 2.31%, more than a basis point lower than expected and below the 2.317% bid seen on dealer screens at the 1 p.m. auction deadline.

Today's auction was the second strong one in a row -- yesterday the Treasury sold two-year notes. There is importance to today's auction that did not exist with the two-year, because a five-year maturity is far different in the current zero-interest-rate environment. In other words, if fears about growth, inflation and rate hikes grow, the five-year will reflect this idea more than the two-year because in the context of today's economic and financial climate, two years is far too short a time to reflect these worries. Five years, on the other hand, is plenty of time for a revival in global economic growth to occur and nudge growth and inflation higher and result in Fed rate hikes. Today's result therefore suggests Treasuries are closer to their fair value, since it was not a short-dated issue that fared better, but the "long bond of the short end." ...

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TIPS Point to Alarming Inflation Outlook

Wed, 27 May 2009 16:47 GMT

The amount of inflation embedded in the Treasury's inflation-protected securities is today at is most since last September, with increases occurring very steadily and, one could say, alarmingly. The increase coincides with continued gains in equities worldwide, which by itself has implications for inflation because of its transmission channel to the demand for goods and services. There is also a surge in the Baltic Dry Index under way (it leapt 5.6% yesterday and has surged about 50% in three weeks), suggesting global trade is stabilizing, which has implications for inflation.

The Treasury's 10-year inflation-protected security is priced for the consumer price index to increase at a 1.87% annual rate over the next 10 years, up 3 basis points on the day. One week ago, 10-year TIPS were priced for a 1.68% inflation rate; they were priced for a 1.48% inflation rate just two weeks ago. The trend is a bit worrisome.

The current level is much higher than at the start of the year, when virtually no inflation was priced in. Inflation expectations have been moving steadily higher since then, particularly since the early March, when the U.S. equity market began to rebound; at the stock market's low on March 9, 10-year TIPS were priced for the consumer price index to increase at a 0.84% pace. ...

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Mortgage Apps Mixed

Wed, 27 May 2009 15:54 GMT

New data from the Mortgage Bankers Association indicate that mortgage applications for home purchases increased slightly in the week ended May 22. The MBA's purchase index increased to 256.60 from 254.0; the one-year average is 300.14. The four-week moving average is now 260.14, which is up from the low of 245.1 set in late February.

The refi index decreased to 3890.40 from 4794.40, holding above the one-year average of 3175 but well below both the peak of 6814 in early April and the average of 5326 seen since then.

In the context of the recent decline in mortgage rates, the lack of more meaningful strength in the purchase index might relate in part to onerous seasonal adjustment factors, which "expect" large increases in applications during the spring selling season. In other words, because home sales tend to jump in the spring months compared with the winter months, actual sales figures are adjusted downward to smooth the pattern. ...

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Strong Auction for Two-Year Treasury Notes

Tue, 26 May 2009 18:16 GMT

In the context of last week's scare resulting from Standard & Poor's downgrade in the outlook for the U.K.'s credit rating, investors will be focused this week on the record $101 billion auction of Treasury securities. The results of today's auction of $40 billion of two-year notes were very good and will squash these concerns -- at least until tomorrow, when the Treasury sells $35 billion of five-year notes.

It is important to keep in mind that the two-year note has special appeal in a zero-interest-rate environment that tomorrow's five-year and Thursday's seven-year do not. In other words, don't read too much into today's result, but do take some degree of comfort in the fact that the U.S. is getting the money it needs to battle the financial and economic crisis. The U.S. is not in a position to quibble with which part of the yield curve investors -- and in particular, foreign investors -- select when they park money in Treasuries. All that matters is that the U.S. get what it needs.

The bid/cover ratio is one big source of comfort. At 2.94, the cover ratio was the best since September 2007 and well above the 2.43 average of the past few years. The cover ratio is even more impressive when considering the large auction size. In other words, viewed in dollars, today's auction saw $118 billion of bids compared to an average of $85 billion the past year. ...

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Confidence Index Jumps

Tue, 26 May 2009 14:51 GMT

The Conference Board's consumer confidence index increased to 54.9 in May from 40.8 in April, beating expectations for a reading of 42.6 and moving further away from the all-time low of 25.3 in February.

This month's increase reinforces the message found in the recent steadying in filings for unemployment benefits, particularly because the Conference Board's survey is designed to capture trends in the labor market, assigning two of its five questions to the labor market. (Other surveys, such as the University of Michigan's, contains no specific reference to the labor market.)

The combined data suggest moderation in the pace of job losses, as was seen in April when the job count fell by 539,000, the smallest decrease since last November and 140,000 below the average for the period November through March. ...

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Home Price Index Drops 18.7% From Last Year

Tue, 26 May 2009 14:08 GMT

The Case-Shiller Home Price Index was down 18.70% on a year-over-year basis in March compared to -18.67% in February. Expectations were for a reading of -18.4%.

Improvements in the year-over-year reading will be challenging in the several months ahead, because relatively small monthly decreases will be falling out of the 12-month calculation. For example, in April, May and June of last year, the Case-Shiller index fell 1.29%, 0.81% and 0.49%, respectively, on a month-over-month basis. For the year-over-year tally to decline, the sequential declines must be smaller in the several months ahead than they were last year.

Meaningful improvement in the Case-Shiller index could occur in the fall and winter months when large sequential decreases for the comparable period begin to drop out (for example, there were decreases of 2.2%, 2.26%, 2.55% and 2.81% in the four months ended in January 2009). ...

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Sudden Foreign Pullout of Treasuries Unlikely

Fri, 22 May 2009 18:31 GMT

This week's topic du jour surfaced late in the week when Standard & Poor's on Thursday lowered its outlook for the United Kingdom's sovereign debt, putting widespread focus on the massive debt burdens many developed nations are facing.

A key concern is that foreign investors will pull their money out of dollar assets, in particular Treasury securities, at a time when the U.S. needs massive amounts of capital to fight its battle against the financial and economic crisis.

While there are legitimate reasons to believe that foreign central banks will be diversifying out of dollar assets in the time ahead, for many reasons they are not likely to do so overnight and evidence of a sudden shift is lacking. This is the message from the Federal Reserve data on the Treasury securities it holds on behalf of foreign central banks. ...

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TIPS and Government Credit Risks

Fri, 22 May 2009 16:25 GMT

I've had to update the behavior of the Treasury's inflation-protected securities (TIPS) three times this week because the movement there has been large and because the new underlying message carries implications for all asset classes. This was apparent Thursday in the behavior of markets worldwide following news that S&P had lowered its outlook on England's sovereign debt. The move put focus on nations with growing debt burdens, including the United States.

Investors normally associate sovereign debt burdens with growing inflation risks, especially when the debts are being monetized by expansionary monetary policies. Inflation risks are also wrought by the inefficient allocation of capital that results from money moving from the private sector to the government sector. There is also, of course, the idea that deficit spending will boost inflation pressures on their own, although the weak level of demand makes it unlikely that government spending will bring economic activity to levels that boost inflation.

...

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Update on the Fed's Balance Sheet

Fri, 22 May 2009 13:50 GMT

Federal Reserve credit expanded to a four-week high in the week ended May 20, increasing to $2.165 trillion, an increase of $48.64 billion. The Fed increased credit mainly through securities purchases, which totaled $59.9 billion. The purchases were concentrated, as usual, in mortgage-backed securities, which totaled $46.4 billion. The Fed also bought $2.4 billion of agency securities and $11.1 billion of Treasury securities.

Cumulative purchases for the asset-purchase program total $431 billion of mortgage-backed securities, $77 billion of agency securities and about $120 billion of Treasuries. The combined tally of about $600 billion leaves the Fed with plenty of firepower to influence securities prices, having committed to purchasing $1.75 trillion of securities, consisting of $1.25 trillion of MBS, $250 billion of agencies and $300 billion of Treasuries.

The Fed's securities purchases increase the amount of money that exists in the banking system, mainly in the form of excess reserves, which are those monies over and above required reserves, which are the monies that banks must put aside against deposits they hold. The excess reserves are available for lending, so in theory the increase in excess reserves should boost lending. ...

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Treasuries Take a Hit

Thu, 21 May 2009 16:01 GMT

Treasuries took a hit late this morning after the New York Fed said that it had purchased $7.4 billion of the $45.7 billion of Treasuries that dealers had offered today as part of a series of planned auctions that are part of the Fed's program to purchase $300 billion of Treasuries in the six months ending in September. There are two messages here:

Dealers, by showing a larger-than-normal amount of supply, are indicating that they are "better sellers" at current prices.

The Fed, in purchasing a smaller proportion than normal of what was offered by dealers, may have wanted to push back the dealer community after many concluded yesterday from the FOMC minutes that the Fed might either increase its Treasury purchases or be more aggressive with its purchases. ...

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Commercial Paper Market Still Shrinking

Thu, 21 May 2009 15:26 GMT

The U.S. commercial paper market shrank for a sixth consecutive week in the week ended Wednesday -- this time down by $14.1 billion, to $1.284 trillion, bringing the total decline for the six-week period to $249 billion. The contraction is mostly because of stabilization in the financial markets, which is the opposite of both the summer of 2007 and last fall when credit market strains were the main culprit. In the case of 2007, companies with mortgage-related exposures were purged from the commercial paper market, as were issuers with large duration mismatches -- structured investment vehicles, in particular. Last fall, there was an indiscriminate round of purging, with even top issuers having difficulty obtaining money, a condition that was widespread in the credit markets. The commercial paper market stabilized when the Federal Reserve established its Commercial Paper Funding Facility, a facility by which the Fed purchases commercial paper from qualifying issuers. The commercial paper market, nonetheless, began contracting again at the start of the year. A key reason is because many issuers began to "term out" their commercial paper obligations, fearful of the constant need to roll their debts in a precarious financial climate. Many of these issuers issued debt through the FDIC's Temporary Liquidity Guarantee Program, converting short-term debt obligations to terms as long as three years. A second factor impacting the commercial paper market relates more to economic than financial conditions. Specifically, the decline in industrial output has reduced the need for companies to raise working capital. Issuers have been cutting output in order to cut their inventories, which increased sharply when demand suddenly fell last fall. When inventory levels are more balanced, companies will feel compelled to raise output and the commercial paper will reflect as much. This makes the commercial paper tally useful in deciphering whether output levels might turn. When they do, worker hours will stabilize and a variety of economic data will get a boost. ... [...]



Jobless Claims Down but Still High

Thu, 21 May 2009 14:20 GMT

Initial jobless claims decreased 12,000 to 631,000 (consensus 625,000) in the week ended May 15 but held above the four-month low of 605,000 set two weeks earlier. The peak for the cycle was 674,000 in the week ended March 27.

The current reading is in territory that suggests that while job losses are ebbing, they remain high, as a reading of 631,000 is consistent with job losses of over 500,000 per month. Job losses like that could lead to increases of two-tenths or three-tenths per month in the unemployment rate.

Underscoring the idea of ebbing but still-high job losses was the April employment tally, which fell 539,000, about 140,000 below the average of the previous five months. ...

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LIBOR Set for Another Drop

Wed, 20 May 2009 19:42 GMT

LIBOR is set for another big drop at tomorrow's setting, an indication of both the surfeit of dollars available for lending in the inter-bank system and a decline in worry about counter-party risk.

With another large decline, which would be the 37th consecutive one, three-month LIBOR would edge closer to territory that was considered normal before the credit crisis began. Back then, an interest rate spread of about 12.5 to 25.0 basis points tended to prevail. Former Fed Chairman Alan Greenspan has said that "we will learn that the crisis has come to an end" once the spread between LIBOR and the overnight index swap rate (a rate that reflects bets on where market participants expect the federal funds rate to be) narrows past 25 basis points.

A narrowing that far might not happen this time around because of all of the problems in the financial system and the economy, but a move toward 25 basis points would probably represent the new normal. ...

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Preview of FOMC Minutes

Wed, 20 May 2009 17:48 GMT

The Fed releases the minutes to its April 29 meeting this afternoon. Ever since the April 29 Federal Open-Market Committee meeting, the general theme among Federal Reserve officials who have spoken publicly has been as follows:

Fed President Stern: Economic growth is likely to be "subdued, at least initially."

Fed President Fisher: Recovery is likely to be a "very slow slog." ...

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Mortgage Apps Slip

Wed, 20 May 2009 17:17 GMT

New data from the Mortgage Bankers Association indicate that mortgage applications for home purchases fell 4.4% in the week ended May 15. The MBA's purchase index fell to 254.0 from 265.7; the one-year average is 302.9. The four-week moving average is now 258.90, which is up from the low of 245.1 set in late February. The refi index increased to 4794 from 4589, holding well above the one-year average of 3122. The refi index was as high as 6800 in April (see possible reasons below).

In the context of the recent decline in mortgage rates, the lack of more meaningful strength in the purchase index might relate in part to onerous seasonal-adjustment factors, which "expect" large increases in applications during the spring selling season. In other words, because home sales tend to jump in the spring months compared with the winter months, actual sales figures are adjusted downward to smooth the pattern. This pattern is of course intact, but on a far smaller scale, resulting in a suppression of the raw data (because the actual increase in applications in the current season is far smaller than it was a few years ago).

The most important influences are of course the credit situation, the lack of confidence that prospective homebuyers have in the housing market and the labor market situation. Improvement in the degree of constrictiveness in the banking sector's willingness to lend could help open the spigot a tad from a credit perspective. ...

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LIBOR's Drop: Liquidity or Less Fear?

Wed, 20 May 2009 15:21 GMT

There are some who believe the decline in the London inter-bank offered rate, or LIBOR, is solely the function of increased liquidity. One of the most important lessons of the credit crisis is that liquidity can be fleeting and that its existence cannot by itself alter the price of financial assets. The keepers of liquidity can withhold the money and do so in a moment's time, or they can release it just the same.

With respect to LIBOR, the fact that there is today more money than yesterday cannot alone explain LIBOR's drop. For example, excess reserves ramped up way back in October, and bank holdings of cash did, too, yet LIBOR was stubbornly high.

Whenever there is a surfeit of something, its price falls, but a surfeit of money alone cannot cause its price to decline. This was proven in the fall and winter months when the cost of money on many fronts remained high. Only since the start of the "green shoots" phase has the surfeit been subject to the laws of supply and demand and lowered the cost of money, because the suppliers of inter-bank funds have released their surfeit. ...

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TIPS Move Again

Tue, 19 May 2009 20:39 GMT

The amount of inflation embedded in the Treasury's inflation-protected securities is today at is highest level since last September, having increased more than normal for a given day. The increase coincides with continued gains in equities worldwide, which have implications for inflation because of the transmission channel to the demand for goods and services. There is also a surge in the Baltic Dry Shipping Index under way, suggesting global trade is stabilizing, and that also has implications for inflation.

The Treasury's 10-year inflation-protected security is priced for the consumer price index to increase at a 1.65% annual rate over the next 10 years, up 4 basis points on the day. Two weeks ago, 10-year TIPS were priced for a 1.43% inflation rate. The current level is much higher than at the start of the year when virtually no inflation was priced in.

Inflation expectations have been moving steadily higher since then, particularly since the early March, when the U.S. equity market began to rebound; at the stock market's low on March 9, 10-year TIPS were priced for the consumer price index to increase at a 0.84% pace. ...

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Steel Output Up but Low

Tue, 19 May 2009 17:28 GMT

Steel output, which fell off a cliff beginning last September and hit a record low in December, increased to a three-month high in the week ended Friday, the third consecutive weekly increase and the first such string since January 2008. This is another case of "less bad," as the current level is still abysmal from an historical perspective.

Still, with investors feeding on signs of "green shoots," the data are supportive of recent trends in the financial markets. These trends will have limits, however, until the economic recovery shows signs of taking root and moving toward a self-sustaining condition. This will take time, and a relapse can easily occur, because the U.S. economy is still on life support. Only the inventory cycle appears to be providing a basis for recovery at present, and it is not likely to be a strong cycle for long.

Steel output was 1.06 million tons in the week ended May 18, up from 1.023 million tons the previous week, according to the American Iron and Steel Institute. The all-time low was 800 million tons in the final week of 2008, which was driven partly by seasonal factors. Steel output was an eight-year high last August and was running at over 2.0 million tons for many months until the end of September, which was when automobile sales began to go from bad to worse. Automobile sales at the beginning of 2008 ran at a roughly 16.0 million annual rate and ended the year at around a 10.0 million annual rate. ...

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Housing Starts Data Are Good News

Tue, 19 May 2009 16:46 GMT

Housing starts decreased to a record low in April, falling to an annualized pace of 458,000 from 525,000 in March, 62,000 fewer than expected. The decline was concentrated in the multi-family category, where starts fell to a meager 90,000 annual rate from 167,000 in March. In contrast, single-family starts, which tend to account for the vast majority of starts, increased in April to a 368,000 pace from 358,000 in March.

Starts are running substantially below the level needed to keep up with household formation. This will keep home inventories on a downward track. Inventories of new homes are already at a level considered normal, having fallen to a seven-year low of 311,000 from a peak of 572,000 in July 2006. The current level is below the 20-year average of 328,000 seen in the years 1985-2005.

April's decline might extend the negative contribution that home construction has made to GDP for 13 consecutive quarters. Residential construction over the past six quarters has fallen at a 23.7% annual rate. From this perspective, investors will treat the housing starts as bearish, since it will feed continued weakness in GDP. I feel it more important to stress the inventory concept. ...

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