Weekly Indicators for the week of October 21 at XE.com

-by New Deal democrat

The high frequency indicators are continuing their post-shutdown bounce. Click on the link to read the article.

"Real" initial jobless claims 335,000 ex-California computer glitches

. - by New Deal democrat

Computer issues in California have bedeviled the weekly initial jobless claims reports since the bginning of September. As I did last year with regard to Superstorm Sandy, we can arrive at a good estimate the "real" initial jobless claims have been, by comparing the unadjusted average for the other 49 states this year vs. last year in the same week, and projecting this year's "real" number by assuming that the percentage of claims in the other 49 states are the same percentage of the total this year as they were last year.

Using this method, the below list shows the seasonally adjusted weekly jobless claims number on the left, and the right is the average adjusting for the likely impact of California's computer issues:

Sep 07  294,000  318,000
Sep 14  311,000  327,000
Sep 21  307,000  313,000
Sep 28  308,000  314,000
Oct 05  373,000  329,000
Oct 12  362,000  335,000
Oct 19 350,000 ------------

[Note: Since the raw state data is published with a one week lag, we do not know yet what this week's number will be.]

Here's what happens to the 4 week moving average:

Sep 28 305,000 318,000
Oct 5 324,750 320,500
Oct 12 337,500 323,500
Oct 19 348,250 ------


October 5 and 12 were the two weeks during which federal workers affected by the government shutdown applied for unemployment insurance. In September,California's problems probably resulted in an underount of -53,000 claims by the above calculations. Close to 50,000 of those claims have been made up in the last two weeks. We might have one more week of distortion, and hopefully that will be the end.

RBA Should Lower Rates to Increase Australian Growth and Stem Aussie's Rise

This is up over at XE

RBA Should Lower Rates to Increase Australian Growth and Stem Aussie's Rise

This is up over at XE

Delayed September Jobs Report: More Meh

This is up over at XE.

Daily Oil Chart Moves Below 200 day EMA

Great Piece on JP Morgan

Thanks to Barry at the Big Picture for this. 

The oil choke collar disengages - and that's good news

. - by New Deal democrat

The oil choke collar -- the dynamic by which an improving economy caused gas prices to rise to the point where they choked back consumer spending on other items, which weakened the economy, which in turn caused gas prices to decline -- in other words the mechanism that acted as a governor restricting growth -- has disengaged in the last few months. Gas prices are now 13% lower than they were a year ago, and even lower than they were two years ago at this time!

That kind of price decline has only happened 5 times in the last 20 years. The graph below shows this by measuring the YoY percentage change in gas prices and adds 13 so that a 13% decline shows as zero (blue line):



In each time this has happened it has been a good sign for growth, either immediately, or at least in several quarters (real GDP YoY growth shown in red). In fact I believe the decline in the price of gas from $4.25 a gallon to $1.50 a gallon in the second half of 2008 is one of the big reasons that the great recession bottomed out in midyear 2009.

One of the things I've been pointing out in my Weekly Indicators column for months now is that, left to its own devices, the economy looks like it wants to grow more in the near future. The disengagement of the oil choke collar is a potent piece of evidence in support of that thesis.

Are Bonds Signaling A Weak Fourth Quarter Stock Market Performance?

From Marketwatch:

The sigh of relief felt in the U.S. bond market as Congress temporarily shelved its fiscal standoff is giving way to a more worrisome market signal: the economy isn’t as strong as we thought it would be by now. 

The Treasury market has been on a tear in recent days, beginning in earnest as Senate leaders announced a deal Wednesday to reopen the government through January and allow the Treasury to continue borrowing through February. The benchmark 10-year note 10_YEAR 0.00%   yield, which falls as prices rise, is down roughly 15 basis points from its close on Tuesday, on track for its lowest closing yield since August. Strategists say yields are likely to stay in this range in the near term, in contrast to the sharp yield climb that characterized much of the summer. 

“We’re pretty comfortable saying the 10-year won’t see 3% this year. At this stage, the September yield peak will be the high of the year,” said Ian Lyngen, senior rates strategist at CRT Capital Group. 

Treasury yields, which serve as benchmark rates, push lower when economic and political uncertainty prompt investors to buy into the security of the government debt market. When the Congressional standoff came to a close this week, strategists thought yields would rise as the abating political uncertainty turned investor attention away from Treasurys and back toward riskier assets. But yields made a U-turn and moved in the opposite direction, catching many market participants by surprise. It’s one sign that the debt ceiling debate had simply masked, and possibly contributed to, a slowdown in economic growth. 

Before looking at the chart, let's review some bond market basics.  In theory, bond prices are near their highest (and yields the lowest) right at the end of a recession.  At this point in the economic cycle inflation is at its lowest and equities are offering weak capital gains potential.  So, investors are looking more for the "sure thing" -- interest payments, which are more attractive because the bite of inflation is so low.  As the economy expands, investors leave bonds for riskier assets, lowering bond prices and thereby increasing bond yields.   One of the more difficult part of looking at the markets during this expansion has been the Fed's QE program, which have put a permanent bid in the bond market, thereby skewing the predictive power of this market action.  However, with the Fed talking of tapering its QE program, one could argue we're seeing a return of the predictive power of the bond market.

The Fed began its tapering take in the late Spring, which explains the drop in the IEFs from 108.4 to 98.45, or a drop of 9%.  However the bond market caught a bid during the budget showdown, printing a rounding top pattern from mid-September to mid-October.  But since the end of the stand-off, bond prices printed a gap and moved higher.  

The Marketwatch article continues:

“Since the end of the debt ceiling conflict, the focus has shifted in financial markets to what the economic implications would be,” said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock. “And it came at a time when the economy had been slowing down, when there was disappointment in what was at the time heightened expectations of better second half growth. 

Rosenberg puts the turning point in economic growth around the beginning of September, when the nonfarm-payrolls report missed expectations. Since then, many indicators have begun to slip. 

While not crashing, employment numbers haven't been printing gangbusters growth, either.  As the Fed noted in its most recent Beige Book, the expansion continues to be "moderate."  Durable goods have been OK as well.  And now we have the fiscal drag related to the debt deal shenanigans in Washington.  

This week will be the first full trading week post-debt deal.  The market action should fill begin to fill in a number of gaps as the week progresses.

Weekly Indicators for the week of October 14 - 18 at XE.com

- by New Deal democrat

Weekly Indicators at XE.com. The link takes you to the post - surprsingly positive, ocnsidering....

"Real" initial jobless claims adjusted for California's computer glitch: an update

- by New Deal democrat

Bottom line: initial jobless claims are still in an improving trend. Click on this link to read the full post at XE.com.

About That "Exploding Government" Thing

Over the last few weeks one of the most common refrains from the idiots who got us in this mess (teaparty, reality denying jackasses) is the takeover of America by an exploding federal government.  Unfortunately, that just isn't the case.

Total federal expenditures have in fact been remarkably stable over the last 4 years. When we look at a longer time series of total federal spending to GDP, we get this:

First, in the above graph notice the largest percentage of government spending/GDP figure we get is about 26%, and that was in response to the worst recession since the Great Depression.  This is standard economic policy 101, and if you don't like it, please re-read Samuelson's Economics textbook (now in its 18th Edition, I believe).  Also note the quick decline we see after that event, indicating the high level of spending relative to GDP most obviously did not continue.  In short, we did engage in extraordinary measures -- but in response to an economic meltdown caused by a freezing of the financial sector, literally forcing us into bold action.  And, what we did is part and parcel of basic economic thinking.

And about too many federal employees we get the above chart: aside from the obvious spikes caused by the census hiring, total federal employees have in fact also been remarkably stable over the last 40 years. 

Bottom line: there is no takeover by the federal government. 

I realize the above uses charts and data, which are anathema to your way of arguing.  However, please make an effort to try to learn basic logic and methods of supporting an argument in the future.

Yes, Virginia, the Slowdown Cost Us Real Money

From the NY Times:

Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress’s gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year. 

A complete accounting will take months once the government reopens and the Treasury resumes adding to the country’s debt. But economists said that the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe. 

“We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter G.D.P. growing just 1.4 percent,” said Beth Ann Bovino, chief United States economist at Standard & Poor’s, referring to earlier brinkmanship over the debt ceiling. “Given that this round of debt ceiling negotiations” took place during a shutdown, she said, “the impact on the economy could be even more severe.”

The delusion of victory and the damage done

. - by New Deal democrat

Both temporary and permanent damage has been done to the US economy due to the latest fiscal crisis. Standard and Poors estimates that the US lost $24,000,000,000 of output due to the government shutdown. But the damage is more permanent. This is from CNBC:

Currency analysts have told CNBC that the dollar's status as a reserve currency will suffer long-term damage from the impasse.

"I think it's part of the demise of the dollar as an international reserve currency," Chris Watling, CEO of Longview Economics, said of the U.S. government's political impasse. Alasdair MacLeod, head of research at GoldMoney Foundation, agreed saying the dollar's credibility has taken a "very, very bad hit".

if the dollar loses status as the world's most reliable currency, the United States will lose the right to print money to pay its debt and could be forced to pay this debt.

But at least fiscal hostage-taking has been well and truly killed, right? According to CNN, Obama certainly thinks so:

As Obama walked away from a press conference Wednesday night, he was asked whether he thought America would be going through this brouhaha again in a few months.

His answer: "No."

And so do Congressional democrats, According to Felix Salmon:

Democratic aides are confident GOP debt limit extortion is effectively dead. They acknowledge the Cruz-ites will try for another debt limit crisis, but can’t imagine GOP elites will humor this demand next time, when the 2014 elections are underway

But remember, Washington democrats also thought that the GOP would never, ever let the sequester happen. And everybody else seems to think the GOP will be right back for another bite of the apple in three months. From the same CNN article quoted above:

[F]ormer House Speaker Newt Gingrich predicts tea party and staunch conservatives in the GOP will be more energized after not getting the anti-Obamacare amendments they wanted.

"They will be more embittered, more angry. They will find more ways to go after Obama because they can't find any way to get him to negotiate," he said, adding that he expects Obamacare to become the defining issue of the next two elections cycles.

So does Felix Salmon:

The Tea Party doesn’t take legislative defeat as a signal that it’s doing something wrong: it takes it as a signal that nothing has really changed in Washington and that they therefore need to redouble their nihilistic efforts. Take it from me: come February, or March, or whenever we end up having to have this idiotic debt-ceiling fight all over again

So does John Chambers, the managing director of Standard and Poor's rating service:

"We think that we'll be back here in January debating the same issues. This is, I fear, a permanent feature of our budgetary process."

And here is one final bitter dose of the consequences, from Michael Carey of the Wall Street Journal:

The world has lost its faith in the U.S. It no longer deserves to be a Triple-A credit.

This was encapsulated in the nods of agreement that were seen in a packed auditorium at a Washington conference of international bankers on Friday when a visibly angry BlackRock Inc.BLK +2.82% CEO Laurence Fink told the audience that the U.S. is not a “principled nation.”

When men and women who control tens of trillions of dollars in U.S. investments are indicating they’ve lost their faith in America, it goes to the very question of whether the U.S. deserves to be at the center of world finance. So, whether or not Fitch Ratings follows through on the “Negative Watch” status that it placed on its top-notch U.S. rating Tuesday, it’s clear now that the dysfunctional American political system no longer justifies a Triple-A rating from anyone.

Warren Buffet this week called the debt ceiling "a political weapon of mass destruction.". It must be repealed in full.

Live Blogging the US Default

Welcome to this special edition of the Bonddad blog!

Today or tomorrow could be extremely important days in the market as we wait to see it Washington actually solves the debt problem (if only for a mere 4-6 months) or lets the nation default.

9:45 pm CDT: The House passes the bill 285 to 144, with 85 republicans joining all of the democrats. Obama signs the bill. $24,000,000,000 was utterly wasted for nothing. And the clock now starts ticking towards the next crisis in three months.

7:20 pm CDT: The Senate appved kicking the can down the road three months by 81 to 18. On CNN, the lesson Gloria Borger draws is that President Obama needs to anger progressives about Social Security and Medicare.

3:00 CDT: After the deal, the DJIA closes up 200 points, completely reversing yesterday's losses. The 10 year treasury closes at 2.66%, down in yield almost 0.09%, not quite at its October low.

Marketwatch at 11:16 am CDT: "Senate leaders agreed on a plan to fund the federal government through Jan. 15, lift the debt ceiling through Feb. 7, and set up a committee to hammer out broader budget issues. The agreement sets a Dec. 13 deadline for a report on a wide budget plan.". Translation: We'll be back here in 3 months.

10:00 AM CDT: Stock vaulted higher with the DJIA up nearly 200 points on word that the Senate was "very close" to a deal, and that the House would be permitted to vote on that deal. Bonds, meanwhile, did sell off slightly, with the 10 year bond yielding as much as 2.748% (it was at 2.62% on October 3). Bonds matureing on October 24, which had been yielding 0% in late September, were trading as high as 0.72%.

Marketwatch at 8:01 CDT: "[C]learing banks are unwilling to finance paper that matures by the end of year, causing a fairly chaotic environment," said Thomas di Galoma, co-head of fixed-income rates trading at ED&F Man Capital Markets, in a note.

We're already getting preliminary news that the markets are not happy.

From Marketwatch at 7:46 CST: Short-term treasuries are spiking.

From Marketwatch at 7:46 CST: Citigroup has dumped all its short-term treasuries.

NDD here with a brief note: (1) remember that the "best" outcome being discussed right now is that we kick the can down the road for 4 months and then do this all over again. (2) ICSC same store sales last week were only up 1% YoY. That is the worst YoY reading since the recovery began 4 years ago.

From Bonddad: A note on why the short-term treasury spike is so important: there is a market between companies called the repo market. It's essentially a short-term collateralized loan market where one party will essentially give a second market a specific amount of treasury bills in exchange for a short-term loan.  For example, company A needs $10 million because of an unexpected cash short-fall.  They're a large company who just happened to run into a short-term cash crunch.  But while they may be short on cash, they do have Treasury Bills as part of their cash management strategy.  So they give $10 million of T-Bills to a second party who essentially makes a collateralized $10 million dollar loan to the first party.  30 days later, Company A has sufficient cash on hand to repay the loan, so they do so and get their $10 million in T-Bills back.

Here's the rub: this transaction which is incredibly common and a bedrock of modern treasury management requires a "riskless" security to perform.  Enter the T-Bill which is backed by the full faith and credit of the US government.  The T-Bill makes this a routine and standard transaction.  But remove the riskless nature of the T-Bill and you've got big problems in the financial world as this market grinds to a halt, making short-term lending impossible.  That completely cripples trade and commerce, and that is why this situation is so deadly.

From Bonddad: Krugman as a link to a Macroadvisers report which shows that since these budget shenanigans began we've lost GDP.

Senate is taking the lead in budget negotiations. 

Here's a piece on XE on the already negative impacts.

Warren Buffet Calls it like he sees it: this is "asinine."

Senate is real close to a deal:

Top aides to Senate Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) are working to finalize plans to raise the debt limit through Feb. 7 and end the 16-day-old government shutdown, after a House Republican effort to forge a solution collapsed Tuesday in humiliating failure.

“We are getting real close,” Sen. Charles E. Schumer (D-N.Y.) said just before 11 a.m., as Republicans began to enter a meeting at which they were expected to finalize the plan. 

As of 12:21 CST, the markets are still rallying.  The SPYs gapped higher at the open and then continued to move up, eventually peaking at 172.  Since then we've seen a slight downward consolidation, but not a panic sell-off.

In addition, it appears the Senate has a deal:

Senate leaders announced last-minute agreement Wednesday to avert a threatened Treasury default and reopen the government after a partial, 16-day shutdown. Congress raced to pass the measure by day's end.

The Dow Jones industrial average soared on the news that the threat of default was fading, flirting with a 200-point gain in morning trading.

"This is a time for reconciliation," said Senate Majority Leader Harry Reid of the agreement he had forged with the GOP leader, Sen. Mitch McConnell of Kentucky.

McConnell said that with the accord, Republicans had sealed a deal to have spending in one area of the budget decline for two years in a row, adding, "we're not going back."

One prominent tea party lawmaker, Sen. Ted Cruz of Texas, said he would oppose the plan, but not seek to delay its passage.

Now we move on to the House, where the results are anything but certain.

Treasuries are also rallying in anticipation of a deal.  From the FT:

It's not just stocks that are rallying as confidence grows that Congress will pass a deal that removes the possibility of a US default.

US government bonds are, too. The yield on the ten-year note fell 8 basis points to 2.67 per cent, echoing gains for longer and shorter maturities.

SPYs Are Remarkably Well-Behaved Considering the Political Backdrop

Above is a 15 minute chart of the SPYs, which covers the last six trading days.  What's really interesting is how remarkably calm the price action is.  We see the big candle up on October 10th and the sharp drop at the open on the 14th, but aside from those events trading has been remarkably calm considering the Washington situation.  

UK Economy Continues To Show Improvement

This is at XE.com

Young Broder in Training falls for the good-cop, bad-cop ransom routine

. - by New Deal democrat

I can only hope that Ezra Klein was not acting as a mouthpiece for the Administration when he wrote this morning that the House GOP's latest ransom note was kinda, sorta reasonable.

The GOP has pulled a classic good-cop, bad-cop routine in the last few days. First, Mich McConnell, the good cop, gets Senate Democrats to agree to an outer edge of the envelope deal, that isn't quite a ransom. Then John Boehner, the bad cop, makes a few additional demands that don't look so different fron what Reid has already consented to. This is a classic nudge, hoping the other negotiating party is so exhausted that they simply throw in the towel for the new, additional demands.

Does the latest House plan reward the GOP for its hostage-taking? You betcha!

Let me put this another way: this deal only extends the debt limit for 4 months. Have you seen anything in the House GOP behavior in the last 48 hours that gives the slightest indication that they won't be back with a new set of ransom demands when next February rolls around? The only way to end the hostage-taking is to call their bluff (if my out-of-the-box proposal is off the table).

We have reached the end of the line. President Obama should announce that he is going to Camp David, where he will remain incommunicado until tomorrow night. At that point he will return to the White House, and there will either be a clean bill on his desk, or the US defaults.

Agricultural Prices Still Moving Lower

From Bloomberg:

Rice stockpiles in Thailand, once the world’s biggest exporter, are expanding to a record as a government program to buy production spurs farmers to plant the most crops ever and add to a global glut. 

Reserves in Thailand will increase 24 percent to 15.5 million metric tons in 2013-2014 as global output rises 1.7 percent to an all-time high of 476.8 million tons, the U.S. Department of Agriculture estimates. The price of 5-percent broken Thai white rice, an Asian benchmark, will drop 12 percent to $390 a ton by April, a five-year low, according to the median of eight trader and analyst estimates compiled by Bloomberg. 

We've seen this type of action in the agricultural sector for the last few years.  Prices spiked in 2011 but have since been declining as the private sector has responded with increased production and governments have instituted programs like those in Thailand.  We see the overall trend best in this chart of the agricultural ETF:

The weekly chart shows that prices are clearly in a downtrend.  Momentum is weak and volume flow is weak as well.  However, notice the buy signal given by the MACD.  My guess is we'll see a slight uptrend take over, moving towards the 200 week EMA.  But it won't be much of a rally and until we start to get a tightening of supply there won't be much bullish sentiment in the Ag markets.

Oil Should Be Moving Lower ...

 

 

 

Oil's chart is pointing lower.  The MACD is declining, the CMF is showing declining volume flow and the shorter EMAs (the 10, 20 and 50 day EMA) are all indicating declining prices.  However, consider this chart in the context of weekly price moves:

 

 

 



On the weekly chart, we have rising volume flow and momentum (despite the shorter term sell signal).  While the 10 and 20 week EMAs are moving lower, the 50 and 200 week EMAs are moving higher. 

 

The point here is to look at multiple time frames when thinking about price movement.