Belly of the Treasury Curve Is At Critical Technical Levels

The charts above are for the ETFs that represent the belly of the treasury curve -- the 3-7year (IEIs) and 7-10 year (IEFs) areas.  Yesterday there was an incredibly large sell-off in this area of the market, leaving prices right at important support levels.

Until now, the assumption that the Fed would buy bonds in the open market has provided a technical price floor.  However, last week's release of the most recent Fed meeting had this paragraph which indicated the bond buying program may be running into internal resistance:

A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then. In contrast, a few other members focused on evidence that market expectations about the total size of the program had changed little, on net, since the program was launched or had responded appropriately to incoming information. Members generally agreed on the need for the Committee to communicate clearly that the pace and ultimate size of its asset purchases would depend on the Committee's continued assessment of the outlook for the labor market and inflation in addition to its judgments regarding the efficacy and costs of additional purchases and the extent of progress toward its economic objectives. To highlight its willingness to adjust the flow of purchases in light of incoming information, the Committee included language in the statement to be released following the meeting that said the Committee was prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. 

And there was this line from the latest Fed policy statement:

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. 

See this post from Barry for an explanation.

Market Analysis: Mexico

On May 16th, I highlighted the current Mexican president's reform agenda along with an upgrade in Mexican debt -- both of which were positive developments for the economy.

Yet the next day, 1Q GDP was issued, and the news was decidedly bearish:

Gross domestic product in the first three months of the year rose 0.8 percent from the year-ago period, less than the 1.1 percent median estimate in a Bloomberg survey of 18 economists. GDP grew 0.5 percent from the previous quarter, an annualized rate of 1.83 percent. The median estimate from seven analysts surveyed by Bloomberg was for a 0.3 percent gain. 

The economy is growing at its slowest pace since GDP contracted 6.2 percent in 2009 in the aftermath of Lehman Brothers Holdings Inc.’s collapse. Today’s report showing industrial output is contracting increases the probability policy makers will cut rates as soon as July, said Gabriel Casillas, chief economist and head of research at Grupo Financiero Banorte SAB.

“It’s a very low growth figure and shows the economy is decelerating,” Casillas, who is based in Mexico City, said in a telephone interview. Mexico was hurt by “the slowdown in manufacturing of the U.S. that started in the fourth quarter of last year.” 

And retail sales have contracted on a year over year basis for the second month in a row:


Mexico’s retail sales (MXWRTRYO) surprised analysts in March by contracting for a second straight month for the first time since 2009, bolstering bets policy makers will cut interest rates again this year. 

Sales fell 2.4 percent from a year earlier, the national statistics agency said today, more than forecast by any of the 19 analysts surveyed by Bloomberg. The median estimate was for an increase of 0.3 percent. Retail sales climbed 0.25 percent from the previous month. 

Also consider that recent fund flow data indicates that foreign investors are decreasing their inflows. 

Other economic data in recent days have added to the worries. Foreign direct investment last year plunged to $12.7 billion, from an average of around $23 billion during the past decade, according to CEPAL, a UN-linked research organisation. It said the figure was affected by one-offs, such as a decision by Spain’s Banco Santander to list its Mexican subsidiary, raising $4 billion. That counted as an outflow of foreign investment. Some economists pointed to concerns that high levels of drug-related crime may also be taking a toll on investment, notably in tourism. Last year Mexico slipped out of the top ten of global tourist destinations.

As a result the Mexican market has sold off over the last week:

Technical support for the ETF was around the 70 level.  Prices moved through that level last week in a convincing manner on large volume spikes.  Support exists at various Fib levels; currently, the 61.8% Fib level from the June-April rally along with the middle Fib fan are supporting prices. 

The Unknowing John Hinderaker

At some point, a leading figure in the conservative movement told John Hinderaker that he had a tremendous amount of economic knowledge which he should share with the world, and, in doing so, provide enlightenment and deep economic insights for his blog's readers.

Whoever said this to Mr. Hinderaker lied with impunity.

Remember, this is the same person who still believes that hyper-inflation is around the corner, the CRA led to the economic collapse and that the economy just hasn't grown at all in the last four years.  I demonstrated the depth and degree of Hinderaker's economic incompetence and ignorance in this piece a few months ago. 

Now Mr. Hinderaker is back with a piece titled, The Uncivil Mr. Krugman.  Here's the money quote:

For the last year or two, Krugman has been campaigning in favor of public debt. As a liberal, the end point of his ambitions is the expansion of government, and Krugman has argued vociferously that ballooning debts around the world should not constrain the relentless march of big government. As part of that effort, he has viciously attacked academic work by Harvard’s Carmen Reinhart and Kenneth Rogoff, which shows that at a high level (90% of GDP), government debt impairs economic growth. Reinhart and Rogoff have finally had enough, and on Saturday they published an open letter to Krugman

Mr. Hinderaker: over the last few months, the 90% threshold has been shown to be non-existent.  Mike Konczal over at the Next New Deal was the one who best summarized the work which exposed the fallacy of RR's claim.  Since this data was published, there has been a fair amount of back and forth between RR on one side and Krugman/DeLong on the other debating the impact of RR's original work, with RR attempting to downplay their actual impact and rehabilitate their reputation while Krugman and others (most notably Brad DeLong) have shown that RR are at best being disingenuous regarding their attempted rehabilitation.

Over the weekend, Brad DeLong pretty much destroyed RR's attempt at a rebuttal to the debunking.  For me, the money paragraph is here:

The third thing to note is how small the correlation [between high debt and lower growth] is. Suppose that we consider a multiplier of 1.5 and a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. Suppose that all of the correlation is causation running from high debt to slower future growth. And suppose that we boost government spending by 2% of GDP this year in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by… wait for it… 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?….

Also read this post from Robert's Stochastic Thoughts which thoroughly dismantles RR's open letter to Krugman.

But here's the real issue: like all issues economic, Mr. Hinderaker is a day late and a dollar short.  First, the debunking of RR's 90% claim occurred over a month ago.  Since the revelation that the paper's data was caused by an Excel coding error (very much a rookie mistake and something that if it had occurred in the economic left would have been touted by Powerline from all points on high), the entire austerity argument has come off the rails.  While this occurred, there was not a peep from the political right on the topic -- and remarkably little from the economic right.  In fact, in his post, Mr. Hinderaker obviously still believes the 90% line exists, when in fact it does not (see DeLong's post above).  That shows just how behind the eight ball Mr. Hinderaker is regarding the current state of the austerity debate.


But more to the point: Krugman's analysis of the current economic scenario has been dead-on accurate for the last four years and  Krugman's work on an economy at the 0% lower band has proven to be the best model for understanding and interpreting current macro-level economic events. Like him or not, there is no ignoring the fact that his analysis has been correct.

Mr. Hinderaker, on the other hand, has proven to be 100% wrong regarding his economic analysis.  He still believes in hyper inflation, when the exact opposite is happening.  He still claims there is no growth in the economy.  He has yet to acknowledge that the stock market is making new highs or that housing is growing again.  In short, if he took his own advice regarding economics, he'd probably lost money the last four years because his ineptitude is that severe.

So, please, Mr, Hinderaker: you're really embarrassing yourself now.  The amount of economic ignorance you've displayed in your two most recent economic posts indicates that you're not competent to participate in an economic discussion.  Please stop trying.

Market Analysis: US

First, let's review the economic news of the US from last week.  The trend from the numbers was very positive; none of the numbers released was negative.
  
The Good

The Chicago Fed's national activity index's three month moving average ticked up from -.05% to -.04%.  However, the month to month reading was negative, with three of four broad categories declining and no section making a positive contribution.  This is a "just barely good" level, especially considering the negative reading (and negative breadth of the underlying data) on the month to month basis.

The housing rebound continues: Existing home sales increased .6%.  As CR notes, the best part of this news is the low inventory level, which will lead to further upward pressure on prices.  New home sales increased 2.3%, with previous months readings revised upwards. with low inventory as well.  As with the existing home market, this is leading to an increase in prices.

Durable goods orders increased:  New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent  Even without transportation numbers, we see an increase.

The Markit "flash" reading declined but was still positive: The Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 fell for the second month running in May, falling to its lowest reading since last October. At 51.9, down marginally from April’s 52.1, the flash PMI index, which is based on around 85% of usual monthly replies, was consistent with a moderate improvement in overall manufacturing business conditions. 

As noted in the report, the one big negative reading came from the employment sub-series, which printed at a 7-month low.  However, this reading is relative, as it printed at a 52.2 level (with 50 being the level marking the line between expansion and contraction).

The Kansas City Fed manufacturing number was positive, but just barely:  The month-over-month composite index was 2 in May, up from -5 in both April and March (Tables 1 & 2, Chart). The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The rise in production came from both durable and non-durable goods-producing plants, with the biggest increase coming from machinery and metals manufacturing. Other month-over-month indexes were mixed. The production index edged up from 1 to 5, and the shipments, new orders, and new orders for export indexes also rose. In contrast, the employment index fell from -3 to -7, while the order backlog index was unchanged. The raw materials inventory index rebounded from -17 to 0, and the finished goods inventory index moved slightly higher.

There has been an odd divergence between the ISM/Markit numbers and the regional numbers, with the former being strong and the second showing weakness to being just barely positive.

The Bad: 

None of the numbers issued was negative.

Last week we had testimony from Fed Chair Bernanke on the overall condition of the US economy.  Here's his summation:

Economic growth has continued at a moderate pace so far this year. Real gross domestic product (GDP) is estimated to have risen at an annual rate of 2-1/2 percent in the first quarter after increasing 1-3/4 percent during 2012. Economic growth in the first quarter was supported by continued expansion in demand by U.S. households and businesses, which more than offset the drag from declines in government spending, especially defense spending. 

Conditions in the job market have shown some improvement recently. The unemployment rate, at 7.5 percent in April, has declined more than 1/2 percentage point since last summer. Moreover, gains in total nonfarm payroll employment have averaged more than 200,000 jobs per month over the past six months, compared with average monthly gains of less than 140,000 during the prior six months. In all, payroll employment has now expanded by about 6 million jobs since its low point, and the unemployment rate has fallen 2-1/2 percentage points since its peak. 

Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur. 

Consumer price inflation has been low. The price index for personal consumption expenditures rose only 1 percent over the 12 months ending in March, down from about 2-1/4 percent during the previous 12 months. This slow rate of inflation partly reflects recent declines in consumer energy prices, but price inflation for other consumer goods and services has also been subdued. Nevertheless, measures of longer-term inflation expectations have remained stable and continue to run in the narrow ranges seen over the past several years. Over the next few years, inflation appears likely to run at or below the 2 percent rate that the Federal Open Market Committee (FOMC) judges to be most consistent with the Federal Reserve's statutory mandate to foster maximum employment and stable prices. 

Over the nearly four years since the recovery began, the economy has been held back by a number of headwinds. Some of these headwinds have begun to dissipate recently, in part because of the Federal Reserve's highly accommodative monetary policy. Notably, the housing market has strengthened over the past year, supported by low mortgage rates and improved sentiment on the part of potential buyers. Increased housing activity is fostering job creation in construction and related industries, such as real estate brokerage and home furnishings, while higher home prices are bolstering household finances, which helps support the growth of private consumption.
 
Severe fiscal and financial strains in Europe, by weighing on U.S. exports and financial markets, have also restrained U.S. economic growth over the past couple of years. However, since last summer, financial conditions in the euro area have improved somewhat, which should help mitigate the economic slowdown there while also reducing the headwinds faced by the U.S. economy. Also, credit conditions in the United States have eased for some types of loans, as bank capital and asset quality have strengthened.


Let's turn to the US markets, starting with the SPYs:

The overall uptrend in the market is still very much intact.  While there is a trend line connecting the mi-November and early 2013 lows (the blue line), the better trend line is the one connecting the early 2013 and mid-April lows (the red line).  Last week's action led to some negative technical developments.  First, notice the sell-off on a volume spike, indicating there was a rash to traders looking to get out.  Prices are now below the 10 day EMA and are using the 20 day EMA for technical support.  The MACD is about to give a sell-signal as well.

Given last week's price action, a sell-off the the 159-160 level (the mid-April highs) seems more likely now.

The 60-minute chart shows the price action in more detail.  Notice the rally from April 21 to May 21, with last week's price action breaking the trend.  Also note the 159 price level is not only a price high, it is also a Fib level on the 60-minute chart, adding gravity to that level.

Despite the continued ups and downs of the treasury market, the IEFS are still in a trading range bound by ~105 at the lower end and 107.75-108.5 at the top end.  With the Fed still buying bonds in the open market, there is little hope for a drop in this market.

Despite several efforts to move through the 21.5 level, prices found support there.  Starting in early February, we see a rally as prices moved to the Fib mid-levels during March and April, then moved through resistance to move to the 23 price area.  Prices moved lower last week, finding support in the 22.7 area.

In memoriam: Lincoln's Gettysburg address

The observance of Memorial Day, specifically reserved to honor US war dead, began as Decoration Day, when fresh May flowers were picked and laid upon the graves of the nearly 600,000 Civil War dead, observed independently for both the Union and the Confederate soldiers.

In solemn observance, here is Lincoln's speech dedicating the cemetery for the Union fallen at Gettysburg:

Four score and seven years ago our fathers brought forth on this continent a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battlefield of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate, we can not consecrate, we can not hallow this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us—that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion—that we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.

An appreciation: Ray Manzarek

- by New Deal democrat

I'd like to address this post to our younger readers.

Long time readers of this blog know that one of my guilty pleasures was being a big fan of the Doors. When their lead singer died over 40 years ago, he did more than destroy his own 27 year old body with booze and drugs, he also left three other extremely talented musicians high and dry.

The band collectively was the Edgar Allen Poe of rock music. And just like the poetry of Edgar Allen Poe, I outgrew the overwrought florid poetry of Jim Morrison by the time I hit college. But the virtuoso embellishments of the three musicians, especially keyboardist Ray Manzarek, remained. Truth be told, even as a teenybopper it was the keyboards more than the voice or lyrics that I paid attention to most. Every now and then, I still went back and listened.

You may disdain most of the Boomer music (and actually most of the popular music of most generations is forgettable), but it would be a shame if the overhyped legend of Morrison caused you to avoid the great contributions of the other musicians. In that spirit, here is "Spanish Caravan," a 3 minute piece 2/3's of which has no singing at all. The first half is a duet between flamenco guitar and harpsicord, and the second half an acid rock recapitulation between electric guitar and organ:



With the passing of Ray Manzarek, I am feeling very old. Someday it will all pass. Really, truly, YOLO.

Weekly Indicators: no one here gets out alive edition

 - by New Deal democrat

April monthly data reported this past week included new and existing home sales, both up modestly, and durable goods orders, up significantly, but still less than March's decline.

And in very sad news, my favorite rock musician from my childhood, Doors' keyboardist Ray Manzarek, died at age 74.

Let's start our look at the high frequency weekly indicators again with transport:

Transport

Railroad transport from the AAR

• +5300 or +1.9% carloads YoY


• +1400 or +2.3% carloads ex-coal


• +8500 or +3.5% intermodal units


• +13,600 or +2.6% YoY total loads

Shipping transport

• Harpex unchanged at 398


• Baltic Dry Index down 15 to 826

Rail transport had a third decent week after turning negative for three recent weeks.  The Harpex index continues to improve slowly from its January 1 low of 352, and the Baltic Dry Index remains above its recent low.

Consumer spending

• ICSC +0/2% w/w +3.1% YoY


• Johnson Redbook +2.4% YoY


• Gallup daily consumer spending 14 day average at $87 up $13 YoY

Gallup's YoY comparisons have generally been extremely positive since last December, and were so again this week.  The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%. This week both were in the upper part of those ranges.

Employment metrics

Initial jobless claims

•   340,000 down 20,000


•   4 week average 339,500 down 250

American Staffing Association Index

• 93 unchanged w/w, down -0.1% YoY

Tax Withholding

• $125.3 B 17 days into May vs. $112.4 B last year, up $12.9 B or +11.5%


• $149.0 B for the last 20 days vs. $133.7 B last year, up $15.3 B or +11.4%

Initial claims declined after spiking last week, and remain within their recent range of between 325,000 to 375,000.  The ASA has deteriorated to the point of being essentially unchanged from last year as well. Tax withholding was robust compared with the first few months of the year.

Housing metrics

Housing prices

• YoY this week +6.8%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase is tied with its 6 year record.

Real estate loans, from the FRB H8 report:

• unchanged w/w


• unchanged YoY


• +2.1% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have softened significantly.

Mortgage applications from the Mortgage Bankers Association:

• -3% w/w purchase applications


• +10% YoY purchase applications


• -12% w/w refinance applications

This year purchase applications have finally established a slightly rising trend.  Refinancing applications were very high for most of last year with record low mortgage rates, but decreased slightly since then.

Interest rates and credit spreads

•  4.74% BAA corporate bonds up +0.09%


• 1.93% 10 year treasury bonds up +0.10%


• 2.79% credit spread between corporates and treasuries down -.01%

Interest rates for corporate bonds, although rising in the last month, have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012.  Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012.

Money supply

M1

• +0.1% w/w


• -2.3% m/m


• +10.3% YoY Real M1

M2

• +0.1% w/w


• +0.2% m/m


• +5.8% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since.  This week's YoY reading increased sharply.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It has increased slightly in the last couple of months.

Oil prices and usage

•  Oil $93.83 down -$2.19 w/w


• Gas $3.67 up +$0.07 w/w


• Usage 4 week average YoY -3.3%

The price of a gallon of gas, after declining sharply in March and April, has risen again in May. The 4 week average for gas usage remained negative after previously spending nine weeks in a row being positive YoY.

Bank lending rates

• 0.23 TED spread down -.01 w/w


• 0.1930 LIBOR down -0.007% w/w

The TED spread recently increased again, but is still near the low end of its 3 year range.  LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices

• down =0.33 to 125.16 w/w


• +4.61 YoY

After months of gradual deterioration, two weeks ago there were no negatives in the weekly indicators. Last week was a great big "meh." This week was mixed but more positive than negative.

Positives included the decrease in initial jobless claims, house prices, and YoY purchase mortgage applications. Money supply was positive. Overnight bank rates are somnolent. Consumer spending was strong again. Rail traffic had another decently positive week.

Negatives included real estate loans, temp staffing, increasing bond rates, and the Baltic Dry Index, but these were all minor.

Sooner or later, we all belong to the ages. And the ages don't care. So enjoy today.

Weekend Weimar, Beagle and PitBull

We'll be back on Tuesday, although NDD will be here over the weekend with his indicators.

I'm still having issues uploading the pictures.  I have no idea what the issue is, but I'm not a tech guy.

So, have a safe and happy weekend.

Maybe We Should Be Rebuilding Our Infrastructure?

Market Analysis: France

I'm still bearish on the French economy (see here and here).  The big reason is the terrible history of GDP growth.  In 2011 the economy was barely positive and in 2012 the economy has printed three quarters of negative GDP growth.

The latest GDP read is also negative.  From the report:  In Q1 2013, French growth domestic product (GDP) in volume* decreased again: –0.2% after –0.2% in Q4 2012. It is the third decrease in the last four quarters. 

Let's look at the overall data:

First note this is the third quarter in the last four where the economy has contracted.  And the respite from contraction in 3Q12 is hardly encouraging, as the economy only grew .1%.  Last quarter we see contraction across all major GDP categories: PCEs decreased .1%, government spending decreased .8%, all categories of invested dropped and exports declined -.5%. 

Let's now turn to the French Markit PMI survey:

The downturn in French private sector output continued in May. Unmoved from April’s reading, the Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, posted 44.3. Although remaining above the levels registered in Q1, the latest reading was indicative of a marked rate of contraction in overall activity.

The decline was broad-based across the manufacturing and service sectors, with equally sharp falls signalled in each case. The latest drop in manufacturing production was fractionally weaker than in April, and the slowest in nine months, whereas service providers noted an unchanged rate of contraction in activity.

Here's a chart of the data:

The reading has been below 50 and declining for the last year.  But going back to mid-2011, we see a large drop in overall output and production.

Let's go to the French ETF:

Despite my bearishness on the French economy, the French ETF continues to move higher.  We essentially see three market stages over the last year: a rally from 17.5 to 25 over the June-February time period, a market consolidation from February to the end of April when we see an ~10% correction, and then a rally from mid-April to now as the market rallies in response to the return of the risk on trade.

Initial jobless claims stay just above normal expansionary level

- by New Deal democrat

At 340,000 this week, and with the 4 week moving average at 339,500, initial jobless claims continue to hover just slightly above what would be a normal expansionary number of 335,000 or below.

We also continue in the track of our new range, as shown in the graph of weekly claims since the first of last year:



Last year we rarely got below360,000. This year since January we have rarely been above it. Given the fiscal headwinds of the payroll tax increase and the Sequester, this is pretty robust. We continue to make progress. Frustrating and maybe even glacial, but progress nevertheless.

Let's Be Honest About Europe: They're In a Depression

For the last five quarters, the GDPs annual growth rate and been negative.  More importantly, it's getting worse.

The quarterly rate of growth has been negative for six straight quarters.

While the rate of contraction is mild by historical comparison (most depressions see larger percentage contractions), the bottom line is growth has not existed in this region for over a year.

From hereon, I will be referring to the EU's economic situation as a depression.  There is no other way to describe it.

Market Analysis: Japan

From Bloomberg:

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami. 

Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions. 

Let's take a look at the underlying data:

In the official data, notice that private consumption was strong in the 1Q12, but weakened throughout 2012.   But in 1Q13, it bounced back strong.  Private residential investment contracted in 1Q12, but has been expanding at varying rates since.  The real problem has been gross private non-residential investment, which is now in it's fifth quarter of contraction.  However, Abe says he wants to specifically target this area of GDP going forward:

Abe said he aims to get annual private investment back to 70 trillion yen ($682 billion), the level before the 2008 financial crisis, through deregulation, taxes, spending, and equipment leasing deals. He also outlined a target of tripling infrastructure exports to about 30 trillion yen by 2020. Abe has said he will reveal his full growth plan ahead of the Group of Eight summit in Northern Ireland on June 17-18. 

The measures are part of the “third arrow” of the prime minister’s strategy to revive the world’s third-largest economy through structural changes to improve competitiveness. His push for increased Bank of Japan monetary easing combined with fiscal stimulus has persuaded Japanese to open their wallets and sent stocks soaring as the yen weakens.

“We have gained international understanding for Abenomics,” Abe said.

As we've noted before (see here and here), Abenoics is paying off.  First, we've seen a large decline in the yen.  Despite having a weak economy post-recession, the yen rallied as traders perceived the currency to be a safe haven currency, leading to a long-term rally.  This hurt Japan's exporters -- a primary driver of overall Japanese growth.  Recent BOJ moves have been targeted to lower the yen's value -- a move that is for now being accepted by the G-7:

Finance ministers and central bankers reaffirmed their February commitment to “not target exchange rates” at a meeting in Aylesbury, near London, U.K. Chancellor of the Exchequer George Osborne told reporters May 11. 

The Bank of Japan “can and should ease again if the current measure does not seem to be working,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said in an e-mailed response to questions. 

While signaling acceptance of the yen’s decline through 100 per dollar for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen 15 percent against the dollar this year and 13 percent versus the euro as the Bank of Japan stepped up monetary stimulus. 

Here is how the Bank of Japan characterized the economy in their latest policy statement:

Japan's economy has started picking up. Exports have stopped decreasing as overseas economies have been moving out of the deceleration phase that had continued since last year and are gradually heading toward a pick-up. Business fixed investment continues to show resilience in nonmanufacturing and appears to have stopped weakening on the whole.  Public investment has continued to increase, and housing investment has generally been picking up. Private consumption has seen increased resilience, assisted by the improvement in consumer sentiment.  Reflecting these developments in demand both at home and abroad, industrial production has stopped decreasing and signs of picking up have become increasingly evident.  Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been negative, due to the reversal of the previous year's movements in 2 energy-related and durable consumer goods. Some indicators suggest a rise in inflation expectations.

Let's take a look at the daily stock chart of the Japanese ETF:

The daily chart shows a strong rally starting in mid-November, with a nice balance between rallies and consolidation.  The EMAs are bullishly aligned with prices using the EMA for technical support.  The MACD is strong, but it has stalled over the last month and a half.  However, the CMF remains strong.

The Dollar is Rallying

The dollar ETF bounced along the 21.6 price area for the September-February period, with a brief rally to the 50% Fib level from the July-August sell off.  Starting in February we see a rally, the hit resistance at the 61.8% Fib level from the same sell-off.  Now prices have cleared resistance at all Fib levels and have room to rally to the lower 23s/.

How the Case For Austerity Crumbled

Over the weekend, The New York Review of Books published a long article written by Paul Krugman on how the case for austerity fell apart.  It's a long read, but well worth the time.  Here are the opening paragraphs:

In normal times, an arithmetic mistake in an economics paper would be a complete nonevent as far as the wider world was concerned. But in April 2013, the discovery of such a mistake—actually, a coding error in a spreadsheet, coupled with several other flaws in the analysis—not only became the talk of the economics profession, but made headlines. Looking back, we might even conclude that it changed the course of policy.

Why? Because the paper in question, “Growth in a Time of Debt,” by the Harvard economists Carmen Reinhart and Kenneth Rogoff, had acquired touchstone status in the debate over economic policy. Ever since the paper was first circulated, austerians—advocates of fiscal austerity, of immediate sharp cuts in government spending—had cited its alleged findings to defend their position and attack their critics. Again and again, suggestions that, as John Maynard Keynes once argued, “the boom, not the slump, is the right time for austerity”—that cuts should wait until economies were stronger—were met with declarations that Reinhart and Rogoff had shown that waiting would be disastrous, that economies fall off a cliff once government debt exceeds 90 percent of GDP.

Indeed, Reinhart-Rogoff may have had more immediate influence on public debate than any previous paper in the history of economics. The 90 percent claim was cited as the decisive argument for austerity by figures ranging from Paul Ryan, the former vice-presidential candidate who chairs the House budget committee, to Olli Rehn, the top economic official at the European Commission, to the editorial board of The Washington Post. So the revelation that the supposed 90 percent threshold was an artifact of programming mistakes, data omissions, and peculiar statistical techniques suddenly made a remarkable number of prominent people look foolish.

The real mystery, however, was why Reinhart-Rogoff was ever taken seriously, let alone canonized, in the first place. Right from the beginning, critics raised strong concerns about the paper’s methodology and conclusions, concerns that should have been enough to give everyone pause. Moreover, Reinhart-Rogoff was actually the second example of a paper seized on as decisive evidence in favor of austerity economics, only to fall apart on careful scrutiny. Much the same thing happened, albeit less spectacularly, after austerians became infatuated with a paper by Alberto Alesina and Silvia Ardagna purporting to show that slashing government spending would have little adverse impact on economic growth and might even be expansionary. Surely that experience should have inspired some caution.

Does Oil Now Have A Price Ceiling In the $98-$100 Area?

The chart above shows that since the beginning of 2013, oil has hit the $98-$100 price area four times.  Each time, it has retreated.  The question is, why?

There are several potential reasons:

1.) Overall, world growth is slow.  The strongest country -- China -- is in the midst of a slowdown (albeit from 10% growth to 7%).  All other economies are experiencing similar slowdowns.  Some parts of the globe (the EU) are in the middle of a prolonged recession.

2.) Commodities are losing their investment luster: the drop in gold was perhaps the icing on the cake, but all other commodities are struggling to make price gains.  With inflation low and the dollar stronger, commodities just aren't needed right now.  Hence an exit from this asset class by hedge funds:

Money managers are the most bearish on commodities in more than four years as a majority expected a weaker Chinese economy for the first time in 14 months, a Bank of America Corp. survey showed. 

A net 29 percent of the fund managers surveyed were underweight the asset class in May as their positions “collapsed” to the lowest level since December 2008. One in four now consider a “hard landing” in China as the biggest risk to their investments. The bank surveyed professional investors who together oversee $517 billion.

3.) The development of the US shale oil market has sent "shockwaves" through the oil markets:

North America will provide 40 percent of new supplies to 2018 through the development of light, tight oil and oil sands, while the contribution from the Organization of Petroleum Exporting Countries will slip to 30 percent, according to the International Energy Agency. The IEA trimmed global fuel demand estimates for the next four years, and predicted that consumption in emerging economies may overtake developed nations this year. 

“The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the Paris-based adviser to 28 oil-consuming nations said in its medium-term market report today.

The development of U.S. shale resources, enabling the nation’s highest level of energy independence in two decades, is creating a “chain reaction” in the global transportation, processing and storage of oil that may escalate as other countries try to replicate the American oil boom, according to the IEA. Crude futures for settlement in 2018 are trading at a discount to current prices, signaling expectations for increasing supplies and constrained demand.

Deficit Declining

From the CBO

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP. 

From the CBPP

Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear  Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period). 

. . . Aaannd gas prices roar back

- by New Deal democrat

One thing I hope I'm clear about when I discuss the Oil choke collar is that I claim no special knowledge as to what will happen with energy prices in any kind of short term timeframe. My impression is that large speculators can and do push gas prices up and down over the short term roughly between $3 and $4 a gallon, and constantly relieve the suckers of their betting money. Once you get past a few months, the economy reacts to the relatively high or low price by accelerating or decelerating. In this way the price of gas acts like a governor on the speed of the economy. I do believe that increased efficiency, alternate sources of energy, and new discoveries of petroleum will act over the longer term to lower prices, and that may have already started this year, but we will see.

In any event, after retreating just below $3.50 a gallon by the end of April, in just the last 20 days it has zoomed back up over 5% to about $3.70. Here's the relevant graph from Gasbuddy:



Following my back of the envelope formula, take this increase, divide it by 10 (or 16 if you want to be conservative), and add 0.1%, and you should be very close to the non-seasonally adjusted inflation rate for the month. This gives us a +0.5% or +0.6% increase in prices for May - as of now. Since there is no significant seasonal adjustment this month, that will also be the adjusted inflation rate.

This will also have a significant effect on real wages and sales.

US Employment: Employer Behavior

Once again, I'm going to turn to the new employment graph started by the Macroblog website, this time focusing on employer behavior.  And for that, I'll be looking at JOLTS data.  This is a relatively new data set -- in only goes back to the beginning of the 2000s.  This means we don't have the ability to do any historical comparisons.  However, it does give us an objective reading on what employers are doing in the jobs market, which in turn gives us an idea to what they're thinking.

Let's start with a graph of layoffs:

Total layoffs are now at levels below the last expansion.  This tells us that employers aren't adding to the unemployment rate at a high rate.

Here's the definition used by the BLS for this data: a job opening is [a] specific position of employment to be filled at an establishment; conditions include the following: there is work available for that position, the job could start within 30 days, and the employer is actively recruiting for the position.  Put another way, if an employer is looking to add to his workforce, he will advertise a job opening to fill. 

This number -- like most employment numbers -- cratered during the recession.  But, it's been slowly bouncing back to levels seen during the last expansion.  However, note that during 2012 the data series appeared to stall between the 3.6 and 3.8 million level.  This was also during the period when employment growth seemed to stall at moderate levels.

Let's turn now to total hires:

 
Like the openings data, this number appeared to stall during the 2012 period.  However, the level at which the data series stalled was a the lowest point of the previous expansion.  This tells as that the rate of hiring is still at very low levels.

These two data points are interesting.  While the job openings number has bounced back, the job hires numbers have not.  So while employers want to increase their labor force by posting an opening, they are very unwilling to make the final commitment and hire a person.

Australian Dollar ETF Breaks Key Support Level

Three reasons why this might be a more permanent move:

One is the weakness in commodity prices. Iron ore, Australia’s most valuable commodity export, slipped into bear market territory last week amid concerns about slowing economic growth in China.

“Iron ore is down 20 per cent from the highs in February and coking coal has seen similar price action,” notes Robert Rennie, global currency strategist at Westpac.

A second is the slowdown in foreign direct investment as large resources companies slash spending on new projects and expansion in Australia.

The recent reduction in the RBA’s benchmark rate to 2.75 per cent has also eroded the attractiveness of the Aussie by narrowing the interest rate differential with the US, where rates are effectively zero. Many economists believe the RBA will be forced to lower rates again to help rebalance the economy as the resources investment boom peaks.

Ample Supply of "Softs" Are Keeping Prices Low and the Market Depressed

From Investing.com:

Coffee futures have been under heavy selling pressure in recent sessions as traders worried over ample global supplies and speculators pushed prices lower.

.....

Sugar prices fell to the weakest level since August 2010 last week as farmers in Brazil started to accelerate harvesting of the nation's sugar crops.

Sugar growers in Brazil's center-south region, which accounts for about 90% of the country's production, are forecast to harvest a record 589.6 million metric tons of sugar cane in the 2013-14 season, according to Unica, Brazil's sugar industry association.

Let's go to the chart:

Prices are in a classic downtrend.  Most importantly, notice the 200 day EMA is clearly moving lower and that prices are below this key indicator.  The shorter EMAs are also moving lower and are below the 200 day EMA.  Mathematically, this will continue to pull the 200 day lower.  Candles are using the 10, 20 and 50 day EMAs are technical resistance, which is another sign of a bear market.  Prices are moving lower lows and lower highs as well.

Short version: this is a great example of a bear market chart. 

Market Analysis: US

Last week, we received continued confirmation that the US economy is growing, although at a weak pace.  Let's look at the day.

The Good

LEIs Increased: (From the report): The Conference Board LEI for the U.S. increased in April after a small decline the month before. Large positive contributions from building permits, initial claims for unemployment insurance (inverted) and all the financial components offset negative contributions from consumer expectations, average workweek in manufacturing and ISM® new orders. In the six-month period ending April 2013, the leading economic index increased 1.7 percent (about a 3.5 percent annual rate), faster than the growth of 0.5 percent (about a 1.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

Of the 10 components, 3 were negative.  This tells us there was a fair amount of breadth to the latest reading.  In the preceding LEI reading, the components were equally balanced between positive and negative, leading to the .1% contraction.  Most concerning in this data is the continued weak reading in the average workweek for production workers, which has been stable for seven months. 

Consumer Sentiment Increased: Consumer spirits are improving dramatically this month in what very well may be a reflection of improvement in the jobs market. The consumer sentiment index jumped to 83.7 for the mid-month reading vs 76.4 for the final April reading and vs April's mid-month reading of 72.3. The Econoday consensus was looking for 78.0 with the high-end estimate at 82.5. The latest reading is near the recovery high set in November.

Consumer activity has been remarkably resilient after the increase in withholding taxes at the beginning of the year.  Considering this is still 70% of US economic activity, this increase is a good thing.

Prices are contained: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.  Producer prices decreased .7%/

As I noted several times last week (see here, here, here and here) inflation is a non-issue right now.  In fact, one could argue that the greater threat is still one of potential deflation rather than inflation.

The Bad:

Housing metrics took a hit: housing starts decreased 16.5% from the previous month.  However, housing permits increased 14.3%.   As of now, this is a one month statistical point that could simply be noise.  However, we do want to keep an eye on this metric as the housing market's rebound is a very important part of the ongoing recovery in the US economy.

Manufacturing took more hits:  As I noted above, the near stagnation in the workweek for production workers over the last seven months is concerning.  In addition, the Empire State manufacturing number fell to -1.4, the Philly Fed manufacturing number fell to -5.2 and industrial production contracted .5%.  The IP contracted was especially concerning as it's decline was very broad based.

Manufacturing renaissance in the US has been a most untold story for this expansion.  However the recent spate of data -- especially its broad base -- indicates an overall slowdown may be occurring.  This does not appear to be a contraction, but a reading just above expansion on the next ISM number (a reading just above 50) looks more and more likely.

Conclusion: we're still where we've been for an extended period of time.  The US economy is growing, albeit weakly.  Both internal and external demand is weak at best.  We're also probably seeing some effects from the sequester kick in.

Let's turn to the US markets:

The SPYs are still very much in a bull market.  The uptrend started in mid-November continues to move higher, with the index printing a series of higher highs and higher lows.  The EMAs continue in their bullish orientation -- all are rising, the shorter EMAs are above the longer EMAs and prices are above all the EMAs.  Momentum is positive and increasing and money is flowing into the market. 

The weekly chart displays the exact same patterns.  Prices are printing higher highs and higher lows with a bullish underlying EMA picture.  Momentum is positive and strong and the CMF reading shows a big influx of money. 

A thought for Sunday: Four years ago - "Do we need another WPA?"

From Bonddad: NDD wanted to re-post this piece with which I heartily agree.  Repeat after me: borrow $1 trillion dollars at today's record low rates, hire the out-of-work manufacturing and construction workers and rebuild our nation's crumbling infrastructure.

It's really not that complicated.

- By New Deal democrat

"So the point I'm making -- and Blanche is exactly right -- we've got to be non-ideological about our approach to these things. ...  We don't want to be looking backwards.  We can't just go back to the New Deal and try to grab all the same policies of the 1930s and think somehow they'd work in the 21st century."
- Barack Obama, february 3, 2010

Four years ago on Friday, Bonddad and i published a joint essay entitled, Do we need another WPA? I'm republishing it in a mildly truncated form below, deleting graphs and a little other information that is no longer timely. Obviously not all of our prognostications were perfect, but they have proven close enough that, wIth unemployment still at 7,5%, the u-6 employment rate including discouraged workers still at about 14%, and employment still about 6 million short of a population adjusted full recovery, it's fair to suggest that Bonddad and I have been proven right, and Barack Obama wrong.

This is the road not taken. The Very Serious People should be asked on what basis they can still justify their decision not to take it. How much better the conditions would be now for millions of American families had we taken it!
 

- - - - -

    Regardless of when this recession ends, the malaise of working and middle class America will not be relieved until wages increase, and employment rates return to a robust level.  Since unemployment is a lagging indicator, the news on that score is grim.  Almost every analyst believes that there will be another "jobless recovery" such as those that followed  the 1990 and 2001 recessions.  Even after GDP bottomed and those recessions technically ended, there was an average 17 month increase in unemployment of .9% (or a 15% percent increase in the rate) followed by a 13.5 month decrease back to the rate at the "bottom" of the recession.  If that pattern holds true again, then even if this recession bottoms shortly, unemployment will be 10.1% by July, rise to 11.3% by December 2010, and take until at least early 2012 to decrease back under 10%, looking like this graph:



Note this is U3 unemployment, so U6 unemployment will be correspondingly worse.     It is safe to say that there will be major social and political consequences from an unemployment rate over 10% for 2 1/2 or more years -- and that's under the optimistic scenario that in GDP terms, the recession bottoms shortly.  As this graph of reconstructed U3 and U6 unemployment since 1900 shows, such a rate would surpass 1981-82 and be second only to unemployment during the Great Depression itself:



    If ever there was a time to reinstitute the CCC and the WPA, the large scale public works employment programs which were the cornerstones of the "RELIEF" element of the New Deal, now is it!  Even extended unemployment benefits will run out far too soon, leaving many able - bodied and - brained workers sitting unproductively and sullenly at home.  Putting them to work on public sector projects would not just be  important symbolically to society, and psychologically to the workers and their families, but would produce real and long-lating tangible benefits as well. The Civilian Conservation Corps, a work relief program for young men ages 18-25 from unemployed families, was established in 1933. The CCC became one of the most popular New Deal programs among the general public and operated in every U.S. state and several territories in 2600 work camps.  The young men were paid wages, but were expected to share their wages with their families.  They built such things as fire trails, camp sites in parks, and also cleared swamps and planted trees.

In a similar vein, the Works Progress Administration, so named in 1935, was the largest New Deal agency, employing millions of people and affecting most every locality in the United States, especially rural and western mountain populations. Between 1935 and 1943 the WPA provided almost 8 million jobs and income to the unemployed. ..., the programs built many public buildings, projects and roads and operated large arts, drama, media and literacy projects, employing actors, artists, musicians, and writer (nearly 4 million in 1936 alone). It fed children and redistributed food, clothing and housing. Almost every community in America has a park, bridge or school constructed by the agency, and most public buildings of a certain age will feature architecture or a mural created by one of its artisans:

....

    Obama's $787 Billion stimulus program has a lot in common with FDR's: An author, economist and historian who have all studied the Depression agree Obama's stimulus plan might do for a somewhat different crisis what FDR's public works programs did for even worse times. Author Nick Taylor said both FDR and Obama made job creation through infrastructure improvements the "main thrusts" of national initiatives to solve economic crises each inherited from prior administrations.  The author of "American-Made: The Enduring Legacy of the WPA," he said Obama's critics don't acknowledge that creation of the WPA and CCC helped lower unemployment from 25 to 14 percent between 1933 and 1937.

.... Associate Professor Harold Petersen, who teaches economics at Boston College, believes ... FDR and Obama both made sound decisions, based on the valid principle that spending drives economic growth, to create job programs that put money in peoples' hands. .... Professor William Keylor, who teaches history at Boston University, said ...."It does indeed sound like what FDR was up to. Our infrastructure is in bad shape. If done efficiently, these projects could really improve our communities."

So -- why do we need to look at the idea of creating another WPA?  Because looking at the overall structure of the US economy there are no areas that appear to be ready to drive the economy into a recovery.  Let me illustrate this point.  Let's break down GDP into its four basic components -- personal consumption expenditures, gross domestic investment, exports and imports and government. While I do think retail sales have bottomed I also don't think they will be the driver of an expansion.   As I wrote previously:

Let me make clear: I don't think we're going to have a gangbusters, consumer led recovery. The US consumer still faces a weak job market, massive debt and a big destruction in his wealth over the last few years. This is not an environment where people will go out and spend. However, I do think that the overall trend of durable, non-durable and retail sales numbers indicates the decline is moderating and we will see a clear bottom over the next 4-6 month Let's take the above points one at a time.  As this graph demonstrate, the rate of unemployment claims is topping:

Yet the number of unemployed people remains at high levels as I noted in this article.  These is no reason to see this situation ameliorating any time soon.  In fact, I expect that we'll be hearing about a "jobless recovery" when things start picking up.  In short, this is not an environment when people ramp up spending. Combine that with a high level of household debt. Total household debt outstanding is almost as high as total US GDP.  Simply put, people need to de-lever their financial position.  Leading to that de-leveraging is the massive loss of household wealth that has occurred over the last two years.  Total household wealth stood at $64.3 trillion in 2Q07 and currently stands at $51.4 trillion -- a decrease of 20%.  All of these factors add up to a consumer who will not be driving the recovery.

And overall investment won't help us either.  Here is a chart of the percentage change in total gross investment:

It has dropped in 9 of the last 12 quarters -- and one of the quarters where we saw in incease was only an increase of .4%.  In addition, last quarter saw a decrease of 51.8% from the preceding quarter.  Simply put, that number is terrible.

Let's break this number down into its sub-parts -- residential investment, non-residential investment and equipment and software investment.

Residential

Do we really need any more houses?  No.  (Thanks to Calculated Risk for the graphs)

The existing home inventory is still at very high levels.  And this number does not include the "shadow inventory" of houses in foreclosure that are still on bank's balance sheets.

While the new home inventory is down to a more normal level

The months of available supply are current sales levels is still at sky high levels.  In addition,

The vacancy rate is still at abnormally high levels, indicating we're not using all the houses we've built.  As a result:

Housing starts are at multi-decade lows.  In other words, we're not building our way out of this recession. Non-residential Here is a chart of the percentage change from the preceding quarter in non-residential structure investment.

Last quarter this number dropped by 44.2%.  Also note this number continued to increase until the 4Q08.  In other words, this area of the economy is just starting to contract.  Considering the severity of last months drop and the continued tight credit conditions it's difficult to see this area of the economy picking up any time soon.

Software and equipment

Here is a chart of the percentage change from the preceding quarter in software and equipment investment:

Finally, capacity utilization is at its lowest level in over 40 years:

There is no reason to invest when you've not using what you already have.

OUR CONCLUSION

While the overall trend of economic numbers is moderating that does not mean we have the driving force to get us out of the hole we're in.  People don't just start spending money; businesses don't just start investing.  Someone has to make the first move.  And that's where  Keynsean policies come into play.  A WPA would accomplish several tasks.  It would lower the overall long-term unemployment rate for a period of time.  In addition, it would also increase domestic investment in areas we need like infra-structure.  Finally, it would provide the force to get us out of the hole.  While the economic numbers are getting better we need that "something" to get the numbers moving higher.  And no other area of the economy appears ready to provide that push.

Obama's program works mainly through private employers, and is not focused on manual labor.  If as it appears, we are about to undergo a sustained period of over 10% unemployment, there is a real and pressing need to get even the relatively unskilled into even manual labor cleaning, building, rebuilding and repairing our infrastructure and parks. they should not just rely on the states and the private sector.  Congress and the Obama Administration should not wait.  Both for real, and important symbolic reasons connecting them to the FDR legacy, they should enact legislation now laying the foundation to re-establish the WPA and the CCC immediately and for the duration of double-

Weekly Indicators: more of the month of 'meh' edition

 - by New Deal democrat

April monthly data reported this past week included significant declines in industrial production and capacity utilization, declines in several regional manufacturing indexes, and a big decline in both monthly consumer and producer prices. due mainly to declining gas prices. Retail sales were positive. Michigan consumer sentiment, mainly as to present conditions, reached a multiyear high, while future expectations remained in the basement. Due mainly to soaring building permits, the April LEI rose 0.6. Housing starts had a big decline.

Let's start our look at the high frequency weekly indicators again with transport:

Transport

Railroad transport from the AAR

• +0.6% carloads YoY


• +0.5% carloads ex-coal


• +3.9% intermodal units


• +2.1% YoY total loads

Shipping transport

• Harpex up 1 to 398


• Baltic Dry Index down 43 to 841

Rail transport had a second decent week, after turning negative for three recent weeks.  The Harpex index continues to improve slowly from its January 1 low of 352, and the Baltic Dry Index remains above its recent low.

Consumer spending

• ICSC -2.0% w/w +1.2% YoY


• Johnson Redbook +2.8% YoY


• Gallup daily consumer spending 14 day average at $91 up $20 YoY

Gallup's YoY comparisons have generally been extremely positive since last December, and were so again this week.  The ICSC varied between +1.5% and +4.5% YoY in 2012, so this was an extremely poor week. By contrast, the JR report this week also rebounded the upper part of its typical YoY range for the last year.

Employment metrics

Initial jobless claims

•   360,000 up 37,000


•   4 week average 339,750 down 3,000

American Staffing Association Index

• 93 unchanged w/w, down -0.1% YoY

Initial claims spiked, but remained well within their recent range of between 325,000 to 375,000.  The ASA is still running slighty below 2007, but now essentially unchanged from last year as well. In other words, the comparison has been generally deteriorating on a YoY basis.

Housing metrics

Housing prices

• YoY this week +6.8%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase makes another new 6 year record.

Real estate loans, from the FRB H8 report:

• down 18 or -0.5% w/w


• up 7 or +0.2% YoY


• +2.1% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have softened significantly.

Mortgage applications from the Mortgage Bankers Association:

• -4% w/w purchase applications


• +10% YoY purchase applications


• -8% w/w refinance applications

This year purchase applications have finally established a slightly rising trend, and this week's number was the best in 3 years.  Refinancing applications were very high for most of last year with record low mortgage rates, but decreased slightly since then.

Interest rates and credit spreads

•  4.65% BAA corporate bonds up +0.13%


• 1.70% 10 year treasury bonds up +0.13%


• 2.82% credit spread between corporates and treasuries unchanged

Interest rates for corporate bonds have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012.  Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012.

Money supply

M1

• -2.3% w/w


• +2.5% m/m


• +11.9% YoY Real M1

M2

• unchanged w/w


• +0.2% m/m


• +5.8% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since.  This week's YoY reading increased sharply.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It has increased slightly in the last couple of months.

Oil prices and usage

•  Oil $96.02 down -$0.02 w/w


• Gas $3.60 up +$0.06 w/w


• Usage 4 week average YoY -3.1%

The price of a gallon of gas, after declining sharply in March and April, has risen again in May. The 4 week average for gas usage remained negative after previously spending nine weeks in a row being positive YoY.

Bank lending rates

• 0.24 TED spread down -.01 w/w


• 0.2000 LIBOR unchanged w/w

The TED spread recently increased again, but is still near the low end of its 3 year range.  LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices

• down -0.75 to 124.83 w/w


• +3.81 YoY

After months of gradual deterioration, last week there were no negatives in the weekly indicators. This week was a great big "meh."

Positives included house prices, and YoY purchase mortgage applications. Money supply was positive. Overnight bank rates are somnolent. Consumer spending as mesured by same store sales were mixed, with two strong positives and one very week reading. Rail traffic had a decently positive week in over a month.

Negatives included commodities, real estate loans, mortgage applications, and the Baltic Dry Index, but these were all minor. The only real negative was the spike in initial jobless claims, which may or may not portend anything.

All in all, Meh. Have a nice weekend.

Weekend Weimar, Beagle and Pit Bull

For reasons unknown, blogger and I are having a debate about uploading pictures.  NDD will be here over the weekend and I'll be back on Monday.

Until then ....