But the Fed’s afternoon release of the minutes from the November 4 FOMC meeting seemed to foment a relative rally as they raised their growth estimates and lowered their jobless rate predictions. They also stated that the likelihood of excessive risk-taking from record-low interest rates is “relatively low.” That’s reassuring. Are we living in one big world of wishful thinking here or what?
Among the top 10 S&P 500 sectors, gains and declines were spilt in half. Five sectors lost ground on the session, led by financials, tech and basic material shares. Five sectors gained ground, led by telecoms (two days in a row), health-care and energy shares.
Yesterday’s $42 billion 5-yr auction, the final of $179 billion of issuance this week, was hugely successful. And why not, who wouldn’t love gobbling up 5-yrs at a yield of 2.15%. The bid-to-cover of 2.81 (a measure of demand) was the best since September and above the four-week average of 2.59. Indirect bidders (foreigners and global central banks) stepped up for some of this awesome yielding stuff too, accounting for 60.9%, above the average of 51.1%.
This demand is all a function of several factors: year-end balance sheet clean up, risk aversion, a view among some that we’re in a Japanese-style malaise, foreign central banks devaluing their currencies (by buying U.S. dollar assets) and you know that other thing – the Fed at zero, which means banks get money for nothing and their chics, I mean income, for free. A yield of 2.15% ain’t all bad when your cost of money is nothing.
The Treasury will issue all they can at these rock-bottom yields until…well, they can’t. Then they’ll be issuing massive amounts of debt at higher rates.
Market Activity for November 24, 2009
We’ve got a lot to talk about, I’ll try to make it as concise as possible without leaving the important stuff out.
Third-Quarter GDP Revision
The Commerce Department reported that third-quarter growth was revised down to 2.8% at a real annual rate, down from the initial estimate of 3.5%. Thus, the end to the “Great Recession” came in softer than previously thought.
Quickly, there are a lot of people believing in a powerful economic recovery simply because history shows the larger the collapse the greater the recovery. This time I don’t think past will be prologue. We’ll find out by way of the fourth quarter reading. It’s not unusual for the first positive GDP print coming out of a major contraction to be weak (weak defined as below normal – and normal is 3.4%). But just as was the case following the nasty 1958 recession, the rough 1974 recession and the harsh 1982 recession, the subsequent quarter following the end of those contractions (two quarters from the last negative GDP reading) posted a reading of at least 5.1%. In the year ended that first big GDP reading, growth averaged 7.8%. We won’t have to wait long to find out how this period compares to those in the past.
The areas that led to the downward revision to GDP were weaker-than estimated personal consumption due to lower than expected car sales, a smaller increase in gross private investment as non-residential structures declined more than previously estimated and residential construction rose less than estimated, a larger decline in inventories, and a widening in the trade deficit.
The first two reasons for the revision pretty much speak for themselves – less car sales occurred than was estimated during the first look at GDP and business-plant construction declined more than thought, while the bounce in home construction (the first in 15 quarters) was less than estimated.
The other two reasons need a little more explanation.
Inventories fell more than anticipated and thus the segment didn’t add as much to GDP as was the case when first reported. You may be asking yourself, if inventories fell, then how did they add to GDP? Logical question. The answer: inventories only need to fall at a reduced rate relative to the previous quarter to add to GDP. Since stockpiles were pared more than expected they added less to GDP – but they did fall at a reduced rate compared to the record level of slashing during the second quarter.
In terms of the trade figure, it is a function of net exports (exports minus imports). GDP = C + I + G + (X-M), or Consumption, Investment, Government, eXports –iMports. The September trade figures were not out when initial estimates to GDP were released, thus economists must guess on this reading. Well, despite the declining dollar (which had economists believing exports would get a boost), exports fell at a greater rate than did imports. Since the export number was less than expected, it subtracted more from GDP than previously thought.
Those are the main reasons for the downward revision. I’ll also note, the government consumption segment of GDP actually increased vs. what was reported via the initial estimate. Thus the private sector played even a lesser role in economic activity than previously thought.
The great crowding out has begun. Intense government involvement via deficit spending along with current actions, and future signals, of new banking regulations and higher tax rates will likely cause the business community to remain very cautious. As the government puts the clamps on risk-taking within the banking industry (while ironically telling banks to offer more loans to small business – fat chance of that happening under current guidelines) Washington is finding no problem accessing capital as banks lay low via risk-free Treasury security purchases (a topic we touched on when the latest Federal Reserve Flow of Funds report confirmed it). As a result, small business is essentially locked out. And when small business is largely locked out of the credit markets, you can forget about the most powerful engine of job creation humming anywhere near all cylinders. Thus, the jobless rate is likely to remain high for a considerable length of time and final demand will remain weak. Businesses see what is occurring and that’s precisely why they will remain cautious and keep business spending (another important economic engine) to a minimum.
S&P CaseShiller HPI
The S&P CaseShiller Home Price Index showed the year-over-year rate of decline continued to fall in September. Among the 20 major cities the index tracks, home prices fell 9.36% over the past 12 months (a bit more than the 9.10% expected but not big deal). That is down from an 11.30% y/o/y decline as of August. The monthly figure showed prices rose for a fourth-straight month, up 0.27% from August. That follows increases of 1.13%, 1.12% and 0.76% during the subsequent four months.
The numbers on the chart below are not median home prices, just index numbers.
I guess it is a bit undesirable that the monthly increase was substantially smaller than that of the previous three months. This may be a sign that the monthly increase in home prices is short-lived, even shorter than those skeptical about this housing recovery had thought.
Another sign of renewed erosion is the increase in cities that posted a monthly decline. In August only three of the 20 cities tracked posted price declines – they were Charlotte, Seattle, Las Vegas and Cleveland. In September nine of the 20 cities posted m/o/m price declines – NY, Boston, Charlotte, Seattle, Dallas, Portland, Tampa, Las Vegas and Cleveland.
Just three cities – LA, San Francisco and Chicago (which make up 30% of the overall CaseShiller index) – accounted for effectively all of the September monthly price increase.
Consumer Confidence
To no ones surprise, or at least it shouldn’t have been, the Conference Board’s gauge of consumer confidence remained depressed, coming in at 49.5 for November – up just slightly from October’s 48.7; that October print was revised up by one point. The consensus estimate had actually expected worse, a reading of 47.3 based upon the previous months initial reading of 47.7. So, on an expectations basis the number was better, up 0.8 from the previous month’s higher revision vs. an expected 0.4 point decline from the original previous month’s print of 47.7.
Nevertheless, it is difficult (actually inappropriate) to get excited about this reading simply because it beat the expectation as the reading remains at a level that’s commensurate with the low points hit during the worst recessions since 1967 – which is when the survey began.
The overall consumer confidence reading is a collection of respondents ‘ appraisals of current and expected (six months out) business conditions, current and expected employment conditions and expectations regarding household incomes six months out. Here are how a couple of these segments came in.
The present situation index made a new cycle low, posting 21.0 for November after October’s 21.1. For reference, during the market low back in March this figure fell to 21.9. The all-time low is 15.8, hit in December 1982.
The expectations reading (view of economic prospects six months out) improved to 68.5 from 67.0 in October. At least the reading seems to have left the cycle low of 27.3 hit in February (also the all-time low) in the dust.
The most important segment of this report is the jobs “plentiful” less jobs “hard to get” reading. This is the confidence index’s best indication of future consumer activity trends. The measure made a new cycle low of -46.6. The all-time low is -58.7, hit in December 1982.
The share of respondents stating jobs are “plentiful” fell to 3.2% from 3.5% in the previous month and those stating jobs are “hard to get” increased to 49.8% from 49.4%.
Policy makers who believe their efforts will stoke consumer activity, and confidence within the business community, are living a fantasy. Their response is actually causing additioanl longer-term damage. While it eases the difficulty in the short term, the aggressive increase in government involvement will prolong economic and labor-market weakness, as touched on above. It appears we’ll be waiting quite an extended period of time before the overall consumer confidence reading returns to its long-term average of 95.
As a side note, I found the survey’s question on home buying particularly interesting. Only 2% of respondents stated they planned on buying a home within six months, that’s the lowest level since October 1982. The two periods compare well in terms of joblessness as the early 1980s was the only other time in the post-WWII era in which the unemployment rate was north of 10%. However, the interest rate environment was quite different as the 30-yr fixed mortgage rate was also north of 10%; today it is south of 5%. You get my point.
FOMC Minutes
The Fed released their notes from the November 4 meeting. I won’t spend much time on this, just a couple of things. We already know they unanimously decided to keep rates at emergency levels for an extended period of time and yes, they talked about how they will remove all of this accommodation – no reason to touch on these specifics now as unwinding appears to be well off in the distance
The entertaining stuff was the growth and unemployment estimates they offered.
For 2010, the Fed Governors and Reserve Bank presidents raised their economic growth forecast for 2010 to a range of 2.5%-3.5% from 2.1%-3.3% and lowered their forecast of the unemployment rate to a range of 9.3%-9.7% from 9.5%-9.8%. For 2011 (that’s really stretching things), they predict GDP will range 3.4%-4.5% and the jobless rate to a range of 8.2%-8.6%. Oh, and their inflation projections were lowered too – which is probably appropriate over the next year at least with credit continuing to contract (I’m certainly reassessing my own views on this one). I’ve got to say though, expecting higher rates of growth and lower inflation does seem just a bit too convenient. We shall see how it turns out.
They also offered estimates for growth and unemployment for 2012. Ok, this is getting ridiculous – they’ll struggle to get their 2010 estimates even close. But I won’t leave you hanging: The economy will grow at 3.5%-4.8% in 2012 and the jobless rate will range 6.8%-7.5%, according to Bernanke & Co.
The top range of their central tendency estimate for inflation is 1.9% by 2012. Read between the lines and this says the FOMC believes rates can remain very low for two years still. Unless, unless they are forced to act to rescue the sinking dollar. Bernanke has actually spoken the word: dollar; and that is a big event for someone who normally seems to act as if he never contemplates the value of our currency. But he is paying attention now and with the greenback moving ever closer to the all-time low hit 19 months ago, the only way they’ll be able to keep rates ultra low for another two years is if the economy flat lines or even falls back into recession.
Have a great Thanksgiving!
Brent Vondera, Senior Analyst
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