In one relatively short speech Chairman Bernanke dispelled any idea that the Fed is about to even mildly remove its unprecedented level of monetary easing (recall this was the topic yesterday) by stating that the economy faces formidable headwinds, has some way to go before a self-sustaining recovery is assured, and questioned whether growth will be strong enough to materially bring down the unemployment rate. As a result, the dollar dropped like a rock from its early-session gains and the price of gold came off if its lows.
Funny thing that occurred though was stocks turned lower about two hours after the Bernanke speech and the dollar bounced off of its speech-driven plunge. I call this funny because the trend that’s been in place has been stocks rally when the Fed makes negative remarks (and signals ZIRP’s life expectancy has increased) – this trend has signaled the easy-money trade remains in the game. However, this late-session move lower in stocks, and up from the day’s low point in terms of the dollar, may now indicate a little safety trade in back on. We’ll have to watch this week’s activity to confirm a new trend but for what its worth (which probably isn’t much) it felt like things changed a bit.
Volume turned back down yesterday after Friday’s more normal levels (only the second session out of the past 20 in which we broke the 1.2 billion mark) as activity came in below one billion.
Market Activity for December 7, 2009
Stimulus Rolls On, But Other Actions May SmotherAs we were just talking about Friday’s trade in yesterday’s letter, specifically the concern that the Fed will remove their aggressive level of accommodation sooner than previously believe, the Chinese government came to the rescue. That government stated early Monday morning that they will maintain “moderately” loose monetary policy and “proactive” fiscal policies through 2010. This helped to ease pressures on pre-market futures trading and flowed into the trading session. Stocks were set to move much lower when I came in on Monday morning.
The market continues to depend on stimulus programs (I’m shifting back to the domestic front) because the data shows that this nascent recovery is weak, at least to this point. While things are lackluster right now even with stimulus efforts (literally more than half of the 2.8% increase in third-quarter GDP was due to clunker-cash driven auto assemblies and fed-induced ground-level interest rates and tax credits that helped home sales and thus a bump in home building) there are a lot of economists that believe the expansion will soon turn robust.
Historically, it is true, the deeper the contraction the stronger the expansion that follows. We’ll find out if the current environment will prove consistent with this history when the fourth-quarter GDP reading is released. The historical record shows that coming out of the deepest postwar recessions –1958, 1974 and 1982 – that two quarters after the final negative GDP print the economy began to surge at a 7.8% pace in the following year, on average. (That two-quarters-removed reading begins in the current quarter.) Yet I feel many people seem to be forgetting that expansions are generally helped by the Fed lowering rates and the increase in household debt levels that ensue. That expansion of credit allows for spending to offset general economic weakness. This time though, while the Fed has certainly floored interest rates, households are not in a position to increase debt loads -- not with the jobless rate in double-digit territory and consumers flush with debt; the two have never occurred simultaneously in the postwar era.
And there is another thing: the EPA slipped an “endangerment” finding on carbon dioxide in April and declared it a health hazard yesterday, which set the stage for President Obama to formally declare CO2 a dangerous pollutant. (Offers the president some bargaining power at the Smokenhagen conference) The promulgation is expected this week, as the WSJ reported yesterday. Yes, that’s right; CO2 will be considered a pollutant – you now must refrain from exhaling. Quiet though, we don’t want to alarm the plants.
What this means is that it doesn’t take passage of a cap-and-trade system (officially, the Waxman-Markey bill), this allows Washington the power to regulate all production in the U.S. – all without a vote. This will only increase uncertainty regarding future business costs and thus takes away another historical driver of expansions – business-investment spending.
It apparently isn’t enough that firms must attempt to manage their businesses unaware and trepidatious as to just how the health-care legislation will come down and to what extent tax rates will be increased. I guess Washington feels the private sector needs yet another burden to work around. The result will be a heightened level of business caution – and that caution will show itself in lower job growth and much less private-sector activity in general. (This is showing up in the monthly NFIB Small Business Confidence Survey, which is just out for November. The reading, which would normally begin to rise by this point remains stuck – we’ll touch on this reading in tomorrow’s letter.)
Of course, there are many among us that do not at all believe this is by accident or a complete ignorance as to just how our economy works, but rather by design. I’ve got to say, based upon the way that the current congressional leadership believes an increased government role in the economy will prove beneficial it’s pretty difficult to argue with them. Bottom line is that this all increases the headwinds that the early-stages of expansion must endure – these headwinds appear to be picking up speed.
Conference Board’s Employment Trends Index (ETI)
The Conference Board (a 90-year old independent economic research group) stated its ETI rose to 90.8 for November from October’s reading of 89.2. The reading is the highest since March, but remains nearly 10% below that of a year ago. A year ago the economy was shedding 650,000 jobs per month.
(The reading is well below that of a year ago probably because two of the indicators that comprise the index continue to pressure. These are: respondents who say jobs are “hard to get” and the number of people working part-time because they cannot find full-time work. The Conference Board doesn’t give the specifics on these readings, so I’m guessing here based upon other economic readings that suggest these two areas continue to fall. People saying jobs are “hard to get” continues to make new highs as shown by the consumer confidence survey and the monthly jobs report shows that the number of people working part-time for economic reasons remains at extreme elevations.)
The improving indicators were jobless claims, the number of temporary workers, industrial production, job openings and real manufacturing and trade sales. The index is released the Monday following a monthly jobs report.
Consumer Credit
The Federal Reserve reported that consumer credit contracted in October for the 10th month in a row, which extends the record (data goes back to 1943). The figure is being pressured by a significant decline in credit card lines. The drop in overall credit was well-below what was expected though, contracting just $3.5 billion vs. the $9.4 billion that was expected. The September data was revised up also, showing credit declined $8.8 billion instead of the $14.8 billion initially estimated.
Revolving credit (credit cards) continues to plunge -- down $7 billion, or 9.3% at an annual rate -- as lines are being slashed due to eroding credit quality and consumers cut back. Fitch Ratings stated that more consumers fell behind on credit-card payments in October and several banks reported their highest delinquency rates for 2009. Such is reality with 10% joblessness and 17.2% underemployment.
Non-revolving credit (basically car loans) rose $3.4 billion, or 2.6% at an annual rate. The average maturity on an auto loan stretched out to 64.4 months in October and the loan-to-value increased to 93%.
We’ll be without a major economic release until Wednesday. The big event of the week will be the October retail sales data that is due out on Friday.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment