Archive for June, 2010

Unemployment Rate Unlikely to Budge until 3mn New Jobs Created

June 30th, 2010 Michael McDonough Comments off

Disheartened job seekers who fled the labor market in mass during the height of the recession have begun to return putting pressure on the US unemployment rate.   Based on a simple interpolation the U.S. labor force today should total 157.2mn, however due to the exodus of job seekers the labor force presently amounts to only 154.4mn a difference of 2.8mn. Calculating the unemployment rate on this ‘would-be’ labor force would increase the ratio to 11.3% from its current level of 9.7%.  Meaning until the nearly 3mn gap in the labor force is closed the unemployment rate will remain under constant pressure, especially if job seekers return fast than jobs are being created, a very likely scenario.  It’s not surprising that the current consensus forecast for June’s unemployment rate is for an increment to 9.8% from 9.7%. The charts below show the ‘would-be’ labor force level and the estimated unemployment rate based on this level versus the actual rate.  Keep in mind that the recent upswing in non-farm payrolls has benefitted from U.S. census hiring, and should begin to recede in June.


ECRI Weekly Leading Index Pointing Toward a Double-Dip

June 29th, 2010 Michael McDonough Comments off

Those looking for evidence of an upcoming double dip recession may have found their canary.  The Economic Cycle Research Institute’s (ECRI) Weekly Leading Index is pointing to serious trouble ahead for U.S. economy with the index falling seven consecutive weeks moving into negative territory.  According to Laksham Achutan, managing direction of ECRI, “The continuing decline in [the index’s] growth rate to a 56-week low underscores the inevitability of the slowdown.”  Looking at the historical relationship between growth and the ECRI’s index, Laksham’s views may not be unfounded.  Over the past several years the index has done a fairly robust job at predicting turns in the U.S. economy, and if you believe the current trend things are about to get much worse.  Unlike the Conference Board’s Leading Economic Indicator Index the ECRI’s Weekly Leading Index is timelier released on a weekly basis with only a one week lag.   The next release will be this coming Friday. 


Source: Bloomberg


Categories: GDP, US Tags:

Consumer Confidence To Remain Range Bound, Despite Friday’s Marginal Improvement

June 28th, 2010 Michael McDonough Comments off

Despite Friday’s better than anticipated confidence number it’s unlikely the
index can show sustained gains until initial jobless claims move well below
current levels.   As the attached chart highlights, in 2009, as claims began to
fall, confidence began to rise off of crisis lows.  However, since the start of
2010 this trend came to an abrupt halt.  Both indices have since traded in a
relatively confined range with claims remaining north of levels indicative of
sustained job growth.  What’s shaping up to be a jobless recovery will weigh on confidence impacting everything from retail to home sales over the months ahead.  Additionally, mundane income growth, which has primarily been bolstered through increasing government transfer payments—set to slow over the months ahead—could put additional pressure on confidence without significant, albeit doubtful, gains in private pay over the near-term.


‘What’flation, 2Y Treasuries Yielding 67bps

June 25th, 2010 Michael McDonough Comments off

Inflation doves can look no further than near record low yields on 2-year Treasuries to squelch inflation hawks ‘premature’ concerns.  The 2-year yield is reflecting the fact that the recovery will remain lukewarm, with downside risks outweighing the contrary, essentially opening up hunting season on Fed hawks—already in small supply. While hawk hunting may be the primary fundamental driver behind recent yields another technical factor may also be playing a role. Chatter on the trading floor is indicating that, private sector deleveraging coupled with a slower pace of government debt issuance is leaving investors with fewer alternatives, helping push yields down across the curve. 

Over the near-term, negative sentiment derived from a housing market left out to pasture, issues in Europe, the gradual removal of government stimulus—a key crutch to recent growth— and a plethora of other geopolitical risks should keep yields and inflationary fears in check for the foreseeable future, while the risk of deflation and an eventual return to negative GDP growth remain all too real.

Categories: Fed News, US Tags: ,

Why Homebuilder Stocks Haven’t Plunged

June 23rd, 2010 Michael McDonough Comments off

The amount of new homes for sale in the U.S. reached a multi-decade low in May helping boost U.S. homebuilders.  To find a point in time where fewer new homes were on the market you would have to go all the way back to the early 70’s/late 60’s (see chart).  While the sales pace of new home doesn’t bode well for the very short-term outlook for home builders the miniscule amount of new homes on the market means that as buyers return—once labor markets improve—home builder demand will likely spike.  The low level of inventories also implies short-term homebuilder risk could be somewhat limited, giving them more room to wait out the ongoing soft patch.  While I am in no way a housing bull; the outlook for homebuilders could be worse, and the group will likely continue to trade range bound until a clearly employment picture develops.  To monitor this I will be watching weekly jobless claims and housing starts over the months ahead. 


Source: Bloomberg

The next shoe to fall will be May’s pending home sales, released on July 1st, which measures contract signings for existing home sales during the month.  I expect the decline in pending home sales will likely be at a smaller magnitude than we saw in today’s new home sales release partially due to no shortage in existing homes and much large monthly sales volumes.  Since the onset of the housing crisis buyers have generally preferred existing homes as they provide better value per dollar compared to their new home counterpart; one could compare it to buying a used car vs. new.   


China’s Real Estate Free Fall May Not Bode Well For Commodities

June 21st, 2010 Michael McDonough Comments off

China’s plummeting real estate transactions could spell trouble for domestic steel and cement industries.  The average number of real estate transaction in China’s 15 largest cities fell 75% on an annual basis according to the most weekly June release according to Goldman Sachs.  On a ytd basis transactions have declined -29%.  The Chinese government has been attempting to cool the overheating sector, in the face of mounting inflation and a more hawkish tone on monetary policy.  According to the China Daily, quoted by Bloomberg, “Apart from one villa development, no residential project obtained a sales license last week and no new residential buildings were put on the market over the weekend.”  One of the primary reasons for the decline is more stringent government policy making it more difficult to receive a second mortgage, coupled with concerns over future policies that have buyers taking a wait and see approach.  The government relied on the domestic economy, including the real estate sector to strengthen growth during the global financial crisis. 

One potentially significant international implication of a slowdown in the Chinese real estate sector is that the country’s construction industry consumes half of the nation’s steel and 36% of its aluminum.  China’s insatiable demand for natural resources has been a major crutch for the commodities industry as demand from the remainder of the world remains tepid at best.  For example in 2009 China consumed 65% of the world’s iron ore exports.  Therefore, any slowdown in Chinese demand for natural resources could have an adverse impact on the commodities sector, and continue to depress shipping companies still at the mercy of China’s whim.  To get a visual on just how significant Chinese demand for natural resources has been please see this piece from Bloomberg’s Interactive Insight team:

Categories: Asia/China Tags: , ,

Germany vs. France Not Just Being Played on the Pitch

June 17th, 2010 Michael McDonough Comments off

The spread between France’s and Germany’s 10y Government bonds remain near levels not seen since the collapse of Lehman as France takes on tough fiscal tightening.  Since the onset of the European debt crisis France and German yields have benefitted from worried investors moving funds away from economically weak Eurozone peripheries to the regions ’stable’ AAA rated credits.  However, after being blindsided by Europe’s debt crisis investors are developing a new sense of risk, which doesn’t bode well for France’s lackluster history of correcting past deficits, especially while its current budget deficit approaching 8% of GDP.    This has given Germany an edge in investors’ flight to quality. France has already undertaken remedial measures to rein in the deficit, including raising the retirement age to 62 from 60, prompting  protests from the country’s socialist party and labor unions.  France will likely struggle with its ability to rapidly implement the necessary austerity policies, with any significant slippage, or success, revealing itself in the country’s spread to equivalent German government bonds.

Source: Bloomberg

Categories: Europe Tags: , , , ,

Spain Begins to Echo Greece

June 16th, 2010 Michael McDonough Comments off

The spreads for Europe’s economically weak peripheries over equivalent German bonds—the European benchmark—continue to approach their pre-bailout highs.  The 10Y spread in Spain again reached record levels amidst rumors that IMF, EU and the U.S. Treasury may be creating a EUR250bn credit line for the country (so far the EU and the Treasury department have denied the report).  This coming Friday the head of the IMF, Dominique Strauss-Khan, is scheduled to meet with Spanish Prime Minister to discuss, “structural reform measures the government is undertaking, the labour reform to be approved tomorrow by the cabinet, and other measures to tackle the deficit, as well as measures by other countries and other economic zones.”  Spanish officials have indicated that these meetings were scheduled prior to reports of a Spanish bailout.  But, in the minds of some investors this visit is too coincidental, echoing a similar visit by the IMF to Greece just prior to that country’s own demise. 

Amidst this strife, Spain is expected to auction 10Y and 30Y government bonds tomorrow totaling an estimated EUR3.5bn.  This auction will be watched closely by investors, and any signs of weakness could spell trouble for Spain, Europe and any global risk correlated assets.  Here is a complete list from Barclays of expected European bond auctions for the remainder of the week:

Date            Country     Bond                                       Amount (EURbn)

17-Jun-10     Spain        10y SPGB (total range €2-3.5bn)    2.00

17-Jun-10     Spain        30y SPGB (total range €2-3.5bn)    1.50

17-Jun-10     France      2yr BTAN (range €6.5-8bn)              2.00

17-Jun-10     France      3yr BTAN (range €6.5-8bn)              2.00

17-Jun-10     France      New 5yr BTAN (range €6.5-8bn)     4.00

17-Jun-10     UK            2014 Gilt tap                                     4.00

17-Jun-10     France     OATi Auction (range €1.3-1.8bn)      0.50

17-Jun-10     France     OATei Auction (range €1.3-1.8bn)    0.40

17-Jun-10     France     OATi Auction (range €1.3-1.8bn)      0.70

Categories: Europe Tags: , ,

The Decline in the BDI Doesn’t Mean Much…

June 15th, 2010 Michael McDonough Comments off

The Baltic Dry Index (BDI) has fallen 28% from its recent high on May 26th, indicating to some weakness in the global economy.  The BDI tracks the prices of bulk carriers which are the life-blood of global trade carrying everything from iron ore to grain.  While the 28% decline may seem ominous, the BDI is being influenced by two outside factors that have very little to do with global economic health.  The first factor is that during shipping’s boom period, prior to the recession, a record amount of new ships were ordered that are only now being delivered creating a supply glut in the sector, while demand remains tepid at best.  Secondly, China’s unprecedented stimulus package, stoking the country’s demand for raw materials through new lending and infrastructure projects, gave the country enormous sway over the index as they were receiving the vast majority of dry bulk goods.  Further tightening in China without substantial offsetting demand increments from the remainder of the world—which are returning, but at a gradual pace—along with an armada of vessels coming online over the next several month will likely place continued pressure on the BDI, but not necessarily indicate a slowdown in the global economy. 

Categories: Shipping Sector Tags: ,

Risk Makes a Comeback

June 14th, 2010 Michael McDonough Comments off

Investors are feeling more at ease with the uncertainty facing global market.  The AUD/JPY exchange rate—a popular FX carry trade and risk metric—has moved off of its recent lows of less than 74 to a level of 79.4.  At the same time, 3M LIBOR halted its climb, and has remained fairly steady around 0.54%, albeit still more than double early March levels.  Investors growing appetite for risk partially stems from a successful Spanish three year government bond auction last week, which received a surprisingly strong bid to cover of 2.1, while still yielding an elevated 3.3%–compared to less than 2% for bonds of a similar duration in March.  Spain is scheduled to reopen EUR3.5bn of 10Y and 30Y bonds on June 17th.  With a relatively quiet week on the data front—barring the auctions in Spain and a European summit on Thursday—traders will likely continue adding on risk, pushing European spreads down; US Treasury yields up, all boding well for growth correlated assets, including equities.   

Source: Bloomberg

Categories: Europe, US Tags: , , , ,