U.S. stocks rebounded yesterday after Monday’s large decline interrupted what was a welcome five-session rally. Stocks received a boost from General Electric’s announcement that they’ll maintain the dividend and the Federal Reserve extended terms on three of its lending programs aimed to provide funding to financial institutions as investors are not willing to provided funds at affordable rates.
Activity remained volatile, as the chart below illustrates, although we were positive for the entire day so that’s kind of a new one. It appeared we were headed for negative territory on a couple different occasions but rallied both times – a spike in the final 10 minutes helped the broad market regain almost half of what we lost on Monday. Today is another day though and the rest of the week may prove trying (nothing new there) as we’ll get some jobs data that will be less than auspicious, to say the least.
Financial shares led yesterday’s advance, gaining 7.93%. Industrial shares weren’t far behind, up 5.01%. Basic material and consumer discretionary stocks also beat the market, up 4.60% and 4.28%, respectively.
Market Activity for December 2, 2008
Activity remained volatile, as the chart below illustrates, although we were positive for the entire day so that’s kind of a new one. It appeared we were headed for negative territory on a couple different occasions but rallied both times – a spike in the final 10 minutes helped the broad market regain almost half of what we lost on Monday. Today is another day though and the rest of the week may prove trying (nothing new there) as we’ll get some jobs data that will be less than auspicious, to say the least.
Financial shares led yesterday’s advance, gaining 7.93%. Industrial shares weren’t far behind, up 5.01%. Basic material and consumer discretionary stocks also beat the market, up 4.60% and 4.28%, respectively.
Market Activity for December 2, 2008
The Jobs Picture
We were without any significant economic releases yesterday – well, we did get November vehicle sales but this is not one of the big ones (sales remained at recessionary levels for the second-straight month) – but we get back to it this morning with the ISM service-sector survey and for the rest of the week it will be all about jobs data. The ISM will certainly be watched, but the job surveys will be the focus.
This morning we’ll get a couple of reports that are generally not terribly accurate regarding how the government’s payroll report will turn out, but anything labor-market related will get much attention at this time . First we’ll receive the Challenger Jobs Cuts figure for November, which offers one of the nation’s largest outsourcing firm’s view of layoff activity on a year-over-year basis.
Shortly thereafter we’ll get the ADP Employment Change survey, which is expected to post -205,000 for November, which should mean we’ll get a decline in payrolls that surpassed the 300,000 level for November as ADP usually paints a rosier picture than the official Labor Department figure ends up posting.
And this is what the market expects, -325,000 is the actual estimate. The financial press has touched on a reading of this nature for a couple of weeks now, adding in their typical doom and gloom scenarios. Indeed, the labor market is headed for a rough stretch, but an economy that is in contraction mode really needs a payroll decline of something over 300,000 to make the case for substantial labor weakness – each of the past five recessions/downturns have posted numbers of at least this level of decline.
In fact, and I’m just trying to add some context here, not trying to sugar-coat a tough situation for many, prior periods in which payrolls contracted by this amount were much harsher than today because the labor market was meaningfully smaller. When you have 136.8 million payroll positions, as we do today, losing 300,000 jobs doesn’t quite mean as much as it did back in, say, 1982 when there were just 89 million positions. Or take the 602,000 decline in payrolls for December of 1974 when there were 77 million payroll positions – now that’s rough.
And then we have the unemployment rate. Again, what we have seen thus far is not the end of it, we’re going higher, but as the chart below illustrates, even if we hit the expectation of 6.8% on Friday we’re not that elevated. The swiftness of the rise though has been significant, coming from 4.4% in the spring of 2007 to the current 6.5%. (That 4.4% was somewhat artificial as it was due to the housing boom that led to a supply glut, and thus over-employment within the construction industry, due to the Fed’s easy money policy back in 2003-2005. More naturally, we should have probably bottomed at roughly 5.0%. Same is true for the ultra-low unemployment rates of 3.8% hit in the spring of 2000, which resulted from over-investment within the telecom industry. When these artificial levels are hit it results in quick increases in the jobless rate, but does not mean the rate is high from a historical perspective.)
So the job picture will get worse, and keep in mind the unemployment rate typically does not peak until six month to a year after a recession has ended, but maybe it helps to invoke historical context as we know the financial press will not, and that’s the point here.
The Rolling Bubble
We’ve seen a bubble wave, if you will, over the past few years as the Fed’s reckless monetary policy decisions from 2003 and into early 2005 kicked off a series of bubbles that flow from one asset to the next, that easy money policy continues today. (I acknowledge the current state of affairs gives Bernanke and Co. no alternative now, but when the history is written, the Fed will receive most of the blame for sparking a housing bubble and over-leveraged situation that we’re currently dealing with.)
But for sure bubbles have rolled from asset to asset. First it was housing by 2005-2006, then it was energy by the spring/summer of 2008. Now a bubble event has manifested within the Treasury market.
Take the 10-year Treasury that yields just 2.75%, while the 10-year inflation breakeven implied by the 10-year TIP (the inflation breakeven is the difference in yield between the nominal rate and the TIP rate) stands at 0.4%.
Will the market absorb the massive Treasury issuance next year due to all of this government spending? Doubt it. China will engage in huge levels of stimulus spending in order to keep down citizen uprisings that ensue when their jobless rates rises. The same is true for the EU (not the uprisings but the funding of stimulus). This will sap their appetite for Treasury securities. OPEC nations have less money for Treasuries with oil down $100 per barrel over the past five months (even if it is a good thing to starve the radicals in the region). Not saying demand for Treasuries will disappear, but decline in demand will be enough to certainly push rates higher.
Simply, the massive liquidity injections by the Fed will push interest rates higher six months to a year out as inflation takes hold again. Treasury-market bubble? It certainly looks like one.
Have a great day!
Brent Vondera, Senior Analyst
We were without any significant economic releases yesterday – well, we did get November vehicle sales but this is not one of the big ones (sales remained at recessionary levels for the second-straight month) – but we get back to it this morning with the ISM service-sector survey and for the rest of the week it will be all about jobs data. The ISM will certainly be watched, but the job surveys will be the focus.
This morning we’ll get a couple of reports that are generally not terribly accurate regarding how the government’s payroll report will turn out, but anything labor-market related will get much attention at this time . First we’ll receive the Challenger Jobs Cuts figure for November, which offers one of the nation’s largest outsourcing firm’s view of layoff activity on a year-over-year basis.
Shortly thereafter we’ll get the ADP Employment Change survey, which is expected to post -205,000 for November, which should mean we’ll get a decline in payrolls that surpassed the 300,000 level for November as ADP usually paints a rosier picture than the official Labor Department figure ends up posting.
And this is what the market expects, -325,000 is the actual estimate. The financial press has touched on a reading of this nature for a couple of weeks now, adding in their typical doom and gloom scenarios. Indeed, the labor market is headed for a rough stretch, but an economy that is in contraction mode really needs a payroll decline of something over 300,000 to make the case for substantial labor weakness – each of the past five recessions/downturns have posted numbers of at least this level of decline.
In fact, and I’m just trying to add some context here, not trying to sugar-coat a tough situation for many, prior periods in which payrolls contracted by this amount were much harsher than today because the labor market was meaningfully smaller. When you have 136.8 million payroll positions, as we do today, losing 300,000 jobs doesn’t quite mean as much as it did back in, say, 1982 when there were just 89 million positions. Or take the 602,000 decline in payrolls for December of 1974 when there were 77 million payroll positions – now that’s rough.
And then we have the unemployment rate. Again, what we have seen thus far is not the end of it, we’re going higher, but as the chart below illustrates, even if we hit the expectation of 6.8% on Friday we’re not that elevated. The swiftness of the rise though has been significant, coming from 4.4% in the spring of 2007 to the current 6.5%. (That 4.4% was somewhat artificial as it was due to the housing boom that led to a supply glut, and thus over-employment within the construction industry, due to the Fed’s easy money policy back in 2003-2005. More naturally, we should have probably bottomed at roughly 5.0%. Same is true for the ultra-low unemployment rates of 3.8% hit in the spring of 2000, which resulted from over-investment within the telecom industry. When these artificial levels are hit it results in quick increases in the jobless rate, but does not mean the rate is high from a historical perspective.)
So the job picture will get worse, and keep in mind the unemployment rate typically does not peak until six month to a year after a recession has ended, but maybe it helps to invoke historical context as we know the financial press will not, and that’s the point here.
The Rolling Bubble
We’ve seen a bubble wave, if you will, over the past few years as the Fed’s reckless monetary policy decisions from 2003 and into early 2005 kicked off a series of bubbles that flow from one asset to the next, that easy money policy continues today. (I acknowledge the current state of affairs gives Bernanke and Co. no alternative now, but when the history is written, the Fed will receive most of the blame for sparking a housing bubble and over-leveraged situation that we’re currently dealing with.)
But for sure bubbles have rolled from asset to asset. First it was housing by 2005-2006, then it was energy by the spring/summer of 2008. Now a bubble event has manifested within the Treasury market.
Take the 10-year Treasury that yields just 2.75%, while the 10-year inflation breakeven implied by the 10-year TIP (the inflation breakeven is the difference in yield between the nominal rate and the TIP rate) stands at 0.4%.
Will the market absorb the massive Treasury issuance next year due to all of this government spending? Doubt it. China will engage in huge levels of stimulus spending in order to keep down citizen uprisings that ensue when their jobless rates rises. The same is true for the EU (not the uprisings but the funding of stimulus). This will sap their appetite for Treasury securities. OPEC nations have less money for Treasuries with oil down $100 per barrel over the past five months (even if it is a good thing to starve the radicals in the region). Not saying demand for Treasuries will disappear, but decline in demand will be enough to certainly push rates higher.
Simply, the massive liquidity injections by the Fed will push interest rates higher six months to a year out as inflation takes hold again. Treasury-market bubble? It certainly looks like one.
Have a great day!
Brent Vondera, Senior Analyst
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