The bond market is sending a message

 

 - by New Deal democrat

The bond market is sending the T—-p Administration, and the US government as a whole, a message. It believes the US is in a secular inflationary trend. 

This is not only because T—-p’s tariffs, and his boneheaded war with Iran, are inflationary, but also because last year’s Big Budget Bust-out Bill which doles out $trillions to billionaires, the attempt this year to vote more $Billions to ICE, and even T—-p’s personal raid on the Treasury yesterday, all are gradually moving the US closer towards an unsustainable fiscal situation. 

To wit, yesterday yields on the 30 year US Treasury bond (dark blue) made a new nearly-20 year high, at 5.14%. The 10 year Treasury (light blue) also broke out to the upside, with a yield of 4.59%, which is not quite at the peak of its post-pandemic range, but close. Even the 2 year Treasury (orange) made a new one year high. The below graph also shows the 3 month Treasury (gold) and the Fed funds rate (red), all over the past four years beginning with when the Fed started to raise rates:

What is noteworthy over this time scale is that, with the exception of the 3 month duration, none of the longer maturities declined in yield over the past nine month, even as the Fed lowered interest rates.

And since the start of the war with Iran, all of the longer maturities have increased in yield by about .5%, as shown in the below close-up of this year:

The same dynamic has caused mortgage interest rates to rise to a new nine month high as well, which will not help the already recessionary housing market:

The emerging economic dynamic, to paraphrase Mark Twain, won’t repeat the inflationary 1960s-70s, but it likely will rhyme. Showing how that is likely is a little difficult with graphs, but bear with me.

Here are two graphs, of the 1960s and 1970s, showing (1) the increase, in percent, of the 10 year US Treasury (*10 for scale), in blue. If in a given quarter the average yield increased 0.5%, that is shown as +5% in the graph. Also in the graphs are the nominal (gold) and real (red) quarterly percentage change in GDP:

Here is what I want to direct your attention to. Inflation and the secular increase in interest rates began to take off in the mid-1960s with LBJ’s “guns and butter” stimulative economic policy. Thereafter, as interest rates and inflation both increased in any given quarter, in real terms growth in GDP was likely to decelerate or even decline. Thus, for example, in the fist part of the 1960s real GDP growth averaged about 2% annualized, but after the middle of the decade tailed off to about 1% annualized with the exception of the first two quarters of 1968. Similarly, in the 1970s real GDP growth approached 0% in most quarters where there was a significant increase in bond yields.

I expect a similar secular dynamic is beginning to take hold now. And it will likely last throughout the next decade or so. On a long term basis, bond yields tend to follow a cycle which lasts approximately one average human lifetime (i.e., polities are most likely to forget the historical lessons and repeat the same historical mistakes that they have not lived through). In the case of the US, there was a cycle that began with an interest rate peak coincident with with Civil War and lasted until 1920:

Then there was a second cycle that began in 1920 and ended in about 1981:

And we are currently living through the next cycle, that began in 1982 and made its trough in the last decade:

As I’ve noted elsewhere, the Founders’ generation, like the political theorists of earlier times, worried that in a democracy the masses would likely simply vote themselves money out of the Treasury. What they did not foresee was that the very wealthy would put together a victorious coalition and then vote *them*-selves money out of the Treasury.

I cannot say what will happen with bond yields in the next day, month, or year. But the evidence is clear and convincing that an inflationary secular trend of rising interest rates is here.

What’s driving the stock market Boom (or Bubble)?

 - by New Deal democrat

In the past month or two, a number of times I have been asked by friends and neighbors why, if the economy feels so bad, does the stock market keep making new record highs? And is this a Boom or a Bubble?

Here is what I have been telling them.

There are two current drivers of the stock market: (1) AI data center related spending, and (2) domestic energy company profits.

Let me tackle the second one first, because it is relative simple and straightforward. As we all know, the Strait of Hormuz, through which most of Middle Eastern oil flows, remains closed. But the Gulf of Mexico is wide open! And that means that countries and companies that need oil are bringing their empty tankers to Gulf Coat ports and loading up. US oil exports have thus hit a new record:

Further, because the price of oil is set globally, they are loading up at that price. Which means that domestic producers like ExxonMobil and Chevron are making out like bandits:

So while consumers may be suffering at the gas pumps, US based producers most certainly are not.

Now let’s turn to AI data center related spending. Below are three components of industrial production that are tied to AI data centers: semiconductors (blue), computer and electronic products (orange), and electric and gas utilities (gold, right scale):

All three have increased much more than industrial production as a whole over the past several years, particularly semiconductor production, which is up over 60%! As I have written before, once you take out AI related spending, manufacturing and production have gone basically nowhere in the past several years.

So, in answer to the first question, these two sectors are what have been driving the stock market higher.

But is it a (sustainable) Boom, or an (unsustainable) Bubble?

To give you my sense of that, I have to get into the weeds on some data I don’t normally concern myself with, which are called “stock market internals.”

Last week I wrote that half of all S&P 500 profits have come from just 5 companies:

That’s not exactly a widespread Boom.

Next, here is an update of a stock market indicator I touched on a few times last year: the advance-decline line. This tells us how many more stocks are increasing in value than decreasing. If the economy is doing well, such increases ought to be widespread. But if only a few companies are advancing, that tells us that the majority of the economy is not doing so well. Here’s what that looked like late last year when I wrote about it:

And here is what it has looked like so far this year:

While compared with last year, there has been an increase in the total number of advances vs. declines, in the past month this number has fallen fairly sharply, back to where it was in February, and only a little better than late last year.

A similar lack of widespread health is shown by the number of new highs vs. new lows in stock prices:

In the recent advance, only a few more stocks made new highs than made new lows.

Finally, let me touch on one other measure of relative health: the stock vs. bond dividend gap. This is the difference between the amount of dividends paid on S&P 500 stocks, vs. the interest rate an investor can get by holding bonds. The higher the gap, the more investors are relying on stocks rising in prices to cover their risks.

And to start with, the S&P 500 is at or near record low dividend payments, at only 1.06% of their price:

Dividends on the S&P 500 have generally drifted lower for decades, but at least during 1981-2020, so did interest rates on bonds.

So here is how the current dividend yield on the S&P 500 compares with the yield on a 10 year Treasury, currently at about 4.5%:

And here is the same comparison with the 2 year Treasury note:

Both of these measures are at their worst levels for stocks since before the Great Recession 20 years ago.

Finally, here are the yields on AAA and BAA investment grade corporate bonds:

These are at levels equivalent to just after the Great Recession. Put another way, you are currently being paid about 3.5% more than S&P 500 stock dividends to own a 10 year Treasury, about 4.5% more to hold an AAA rated corporate bonds, and about 5.0% more to own a BAA investment grade bond. All to bet that the stock market will continue to increase in price in the next year. 

This does not tell us in *absolute* terms whether stocks or bonds are a “good” deal. What it does tell us is that in *relative* terms, you are taking more risk than at any point in the past 20 years to gamble on stock price appreciation making up for the puny dividends you are earning on them. Bonds could still be a bad deal at present — but stocks are relatively speaking at far more risk.

The present situation reminds me very much of 1999, when the advances in the stock market were focused on the dotcom issues. But the advance decline line deteriorated for about a year before the dotcom implosion kicked in. 

So my conclusion is that, at the moment, the momentum in the AI sector, joined by the windfall profits for domestic oil producers, are more than outweighing the difficulties by most consumers. But that momentum looks extremely risky. Like a bubble.

 

Weekly Indicators for May 11 - 15 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

Unsurprisingly, the big move among the high frequency indicators in the past week was interest rates. There was also a secondary big move, which is also inflationary, and reflects the ongoing idiocy of the current Administration in Washington: international shipping rates spiking, in one case to a 24 month high.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and toss me a penny or two towards my next outing for lunch.

Two manufacturing reports show increased expansion, but with a nasty side of inflation

 

 - by New Deal democrat

One of the things I used to harp on was that many forecasters make the mistake of simply taking an existing trend and projecting it forward. Often it is paired with the idea of “all things being equal,” i.e., that there won’t be countertrends in other sectors of the economy. This is one of the big reasons I have relentlessly updated my “weekly high frequency indicators” for about the last 15 years - because although they can be noisy, it is where you will first pick up a change in trend.

One prime recent example of this was when I noticed late last year that the regional Fed manufacturing indicators were improving - despite the “Liberation Day” tariffs and the general chaos coming out of Washington. It appeared that manufacturers had found a modus vivendi and had adapted to the new environment.

And that is what we continued to see this morning, both with the Empire State Manufacturing Survey and the Industrial Production report.

I used to call Industrial Production “the King of Coincident Indicators,” but with the shrinking of manufacturing as a share of the US economy to about 25%, that is no longer the case. Nevertheless, it is an important coincident indicator, with the emphasis on *coincident.* It doesn’t tell us where we are going, but is an important signpost about where we *are.*

For the past six months or so, the general trend in manufacturing production had been rangebound, contrasted with a sharp increase of likely AI-related spending in utilities. There was an important change this month, as manufacturing (red in the graph below) broke out of that range to the upside, increasing 0.6% for the month, while the more noisy utility production (gold, right scale) increased 1.9%, driving total production (blue) to a 0.7% increase and a new post-pandemic high:

Similarly, both the coincident headline number (blue) in the Empire State Manufacturing Survey and the leading new orders component (red) increased to new 4+ year highs at 19.6 and 22.7, respectively:

Just one month and just one regional survey, but the new orders subindex has been positive every month but one since last October, and has broken out to the upside in the last two months.

Employment in this regional survey (blue) has also been positive for the past few months. The big problem - and this has extended to virtually all the regional surveys, both in manufacturing and services - is on the inflation side. Both increases in prices received (orange) and even moreso prices paid (red) have turned extremely widespread, with new highs this month not seen since the summer of 2022, and close to their post-pandemic highs:

So, the message from this morning’s reports is mixed: manufacturing has been picking up, but the already bad inflation appears to be worsening.

April retail sales: consumers may be switching to “wait and see” mode

 

 - by New Deal democrat

Consumer spending is about 70% of the economy, and retail sales is our first wide measure of that spending. For the second month in a row, this morning’s update for April was unsurprisingly dominated by what happened at gas stations. 

Nominally, total retail sales rose 0.5% in April, But after taking the monthly 0.6% increase in consumer prices into account, real sales declined -0.1% (blue):

But let’s take a look at the impact of gas prices. The below graph shows total retail sales (blue), and also retail sales minus gas (gold), both nominally. As per the above, total sales rose 0.5%. But sales ex-gas only rose 0.3%:

Now let’s look at real sales ex-gasoline. The below graph shows real sales ex-gasoline, deflated two ways; first, by the headline CPI number (blue); and second, by CPI excluding energy (gold):

Deflated by headline CPI, retail sales excluding gasoline declined -0.4% in April, and remain below their peak last August. Deflated by CPI less energy, they declined -0.1% from their peak in March. And although I won’t show the graph this month, it is interesting that the same phenomenon occurred in the 20006-07 period before the Great Recession, where total real retail sales trended slightly higher, but excluding gasoline trended lower.

On a YoY basis, nominal total retail sales were up 4.9%, but in real terms were only up 1.1%:

Excluding gasoline, nominal sales YoY were up 3.7%, and in real terms *down* -0.1% using headline CPI, and up 0.8% using CPI excluding energy:

In the March personal income and spending report, we saw that consumes handled the first month of gas prices increases by essentially just putting the extra spending on their credit cards. While it is certainly within the range of noise, the retail sales report for April suggests that consumers have transitioned to a “wait and see” pattern, withholding additional purchases until they see what happens next with gas prices.

Finally, since consumption leads employment, here is the update of YoY total real sales (/2 for scale) together with employment (red):

This suggests that on a YoY basis the stabilization we have seen in the last two jobs reports is likely to continue in the next several months. Which means it is not likely to be recessionary, but more likely to be in “wait and see” mode as well.

How mass immigration raids might explain the historic lows in jobless claims

 

 - by New Deal democrat

I want to write an extended discussion of the April retail sales report released this morning, to tease out the effect of the spike in gas prices, but first let me do my usual weekly update on jobless claims. These have historically been a good short leading indicator for the economy, but it is possible that is being distorted now.

As per the last six months, new jobless claims, along with the Boom (or maybe bubble) in the stock market, are the most positive of all of the current economic indicators. For the week, initial claims rose 12,000 to 211,000, while the four week moving average rose 750 to 203,750. Although I won’t put up the long term historical graph, these continue to be lower than at any point between 1970 and 2018, and at the low end thereafter. Continuing claims, with the typical one week delay, rose 24,000 to 1.782 million. Historically this is also lower than at any point between 1975 and 2018, although they were much lower in the immediate post-pandemic Boom of 2021 through mid-2023:

As per usual, the YoY% change is more important for forecasting purposes, and so measured initial claims were down -6.6%, the four week average down -11.1%, and continuing claims down -5.4%:

Since it is early in the month, I’ll dispense with my typical look at what that might mean for the unemployment rate. But let me briefly address why jobless claims might be so historically low, particularly as the US population has doubled since 1970. Indeed, as a percent of the labor force, or of the US population as a whole, the number of claims in the past six months has been tied for the lowest ever with brief periods of time in 2022 and the end of 2023, as shown in the below historical pre-pandemic graph that is adjusted to show the current rate at the “0” line:

Is business humming in a way it never has before? Probably not. The most likely explanation has to do with immigration and the deportation raids that became more widespread in the past year. 

Let me state right off the bat there is really no good, on-point statistic that I can find. The situation is opaque, but if we look at monthly employment and unemployment statistics by native vs. foreign born status, and by ethnicity, at least some light may be shed.

Every month the Household Survey in the Employment report includes numbers for the employment level of native vs. foreign born persons. Since these are not seasonally adjusted, the best way to look at them is the YoY% change:

I should note that the Household Survey has shown absolute YoY declines in employment for the past several months. What is noteworthy for this discussion in the above graph is that the YoY employment level for immigrants turned negative rapidly last summer as immigration raids became more widespread, and with one exception has remained negative ever since.

Similarly, the Household Survey tracks the unemployment rate by several ethnic groups, including Hispanic or Latino. Again, these are not seasonally adjusted, so the below graph tracks the change in the percent unemployed YoY:

Note that the change in the unemployment rate turned lower for immigrants (gold) by last summer, and with two exceptions has remained lower ever since, even as the unemployment rate in total (dark blue) and for the native born (purple) has remained higher. And the unemployment rate for Hispanics has generally been the lowest of all (red).

Either uniquely immigrants, especially HIspanics, are not being laid off — *extremely* unlikely — or they are not making claims or even willing to discuss their job status with Census Bureau phone interviewers, which is much more likely. This seems particularly true since both the employment level and the rate of those who are unemployed have *both* declined, suggesting a reluctance to interact with the system.

I want to point out that the above explanation is necessarily speculative, and based on information that remains murky. But it does seem to explain the unusual information about jobless claims we’ve been getting for this year.

The inflationary, “K”-shaped T—-p economy

 

 - by New Deal democrat

There are times when the economy is undergoing such a profound shift that there is suddenly a lot to say. This is one of those times. I have been meaning to put up a post like this for several weeks. Let me at least make some of the important points today.

Sixteen months into this (mal-)Administration the fundamentals of the paradigm shift are apparent. It is:

(1) inflationary, and 

(2) K-shaped (i.e., the top 10% or so is doing very well, while the lower 50% or more are just barely holding their heads above water, if that).

It helps to think of the T—-p economy as a mafia bust-out, where the “mark” is the US Treasury.  In a bust-out, the mafia takes control of a legitimate business, runs up credit as much as they possibly can, they and their cronies profit handsomely, and then they leave the mark with a bankrupt shell. Translated to the US economy, the nation’s credit (i.e., the national debt) is being run up with wild abandon. T—-p, his family, other insiders, and the GOP zealots he needs to keep on board are profiting handsomely. Ultimately it is the mass of US taxpayers who will be left with the bill.

Let’s start with the inflationary aspect, beginning with this morning’s producer price index report. In the month of April alone, the price of goods used in production increased 2.0%, services increased 1.2%, and the total index increased 1.4%. Again, that is for one month alone. On a YoY basis, goods prices increased 6.3%, services prices increased 5.5%, and the total (blue in the graph below) increased 6.0%. Further back in the supply chain, the prices of raw commodities (gold) increased 2.7% in April alone, and 9.8% YoY. The below graph also includes YoY headline CPI (red) for comparison:

All of these are on the upswing, and sharply so. In each case, the YoY increase has been the highest since at least three years ago.

Further, because at least some of the producer prices increases have yet to make their way to consumer prices, even if producer price inflation were to halt here, we could expect a continuing spike in consumer inflation in the months to come.

The sources of this surge in inflation are not hard to spot: the closure of the Strait of Hormuz and all the products flowing through it due to the monstrously foolish Iran war; and also the continuing effects of T—-p’s tariffs (remembering that even though the Supreme Court struck down the first batch, the Administration immediately used another source of purported authority to impose a second batch).

And the 800 pound financial gorilla in the room, the Treasury bond market, has noticed. Here is a graph of interest rate yields on the 10 year (red) and 30 year (blue) Treasury bonds for the past 4 years since the Fed started to increase interest rates:

The 10 year bond closed yesterday at 4.42%, and as I write this is trading at 4.48%. And the 30 year bond closed yesterday at 4.98%, and is at this moment trading at 5.04%. With the exception of a brief period during late 2023, both of these since T—-p started office in January 2025 are at levels not seen since 2007. 

Simply put, bond traders are demanding a higher return for taking the risk of holding on to longer dated US Treasurys.

Now let’s turn to where this cornucopia of new debt is winding up. And the answer is, into the pockets of those uppermost on the income scale — hence, the “K-shaped” economy.

Let’s start with a graph of the labor share of income for all workers (blue) vs. corporate profits as a percent of GDP (red):

In this Millennium, the corporate share has surged from 5% to 12% of the entire GDP, currently very close to its highest level, while the labor share has declined by 15% to it lowest ever level as of Q1.

And consumer spending has become ever more concentrated in the hands of the 10% of highest incomes, now accounting for almost half of all spending:

Indeed, as of this week, consumer spending YoY increased by 9.6%, the highest such comparison since the Boom year of 2022:

Further, not even counting March, since the middle of last year, real spending by lower income consumers has actually been in a declining trend, while upper income consumers spending made new highs at the end of last year:

And in March, upper income consumers real spending declined much less than that of lower income consumers.

Specifically as to gas purchases, upper income consumers simply added the increase to their credit cards, while lower income consumers cut back on gas purchases the most:

Meanwhile, on the other side of the ledger, profits as reported by the S&P 500 companies made a new all-time high:

Further, just 5 companies, all associated with AI, have accounted for half of all of the growth in the past year:

This is the most concentrated advance ever.

Finally, let me pan back to focus of aggregate real payrolls. The below graph shows real aggregate payrolls for all workers (blue) and nonsupervisory workers (red). The thin blue and red lines show the same information, but adding 0.2% to YoY inflation as a result of the undercounting of shelter prices during the government shutdown last autumn. Which means you can ignore those lines before that time, but can compare them with the thicker lines predating the shutdown to see the more likely trajectory of real aggregate payrolls:

If there is a faltering of nominal payroll growth, and/or more months of big increases in consumer prices, these will both be negative YoY within several months, and based on past experience over the past 60+ years, that would almost certainly mean that a recession is imminent.

April CPI report shows further surge in gas and electriity prices, raises “yellow flag” recession caution

 

 - by New Deal democrat

As almost universally anticpated, the April CPI continued to reflect the big increase in gas prices - although it didn’t pack quite the wallop that March did. Headline CPI increased 0.6%, following March’s +0.9%, causing the YoY% gain to increase to 3.8%.  Meanwhile the core measure increased 0.4%, causing the YoY% gain to increase to 2.8%. 

In addition to my usual practice of focusing on shelter and any other “problem children” with outsize numbers, this month even more than last month it is important to note the impact on real wages and incomes. Additionally, as I have done for the past few months, please note this IMPORTANT CAUTION: Because the October-November kludge in shelter prices of a mere 0.1% increase for two months is still present in the YoY calculations, and will be until this coming November, this is probably continuing to lower those comparisons by roughly -0.2%. In other words, take out that kludge and YoY headline CPI would probably be 4.0%, and core 3.0%.

First, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which is up 4.1% YoY, the highest in three years:

Before I examine these components further, let me put front and center the impact on consumer incomes. As of April, nominally the average hourly earnings for nonsupervisory workers increased 0.3%, meaning that in real terms they declined -0.3%. Further, aggregate nonsupervisory payrolls increased 0.5%, meaning that in real terms they declined as well, by -0.1%. Here’s what real wages and payrolls look like in absolute terms normed to their recent peaks:

Real wages are down -0.9% from their peak and real aggregate payrolls are down -0.4%.

Neither of these mean that we are in a recession now. But the YoY comparisons are further cause for great concern. On that basis, real hourly wages are down -0.1%, and real aggregate payrolls only up 0.7%:

The former is frequently associated with a near in time recession, and the latter usually crosses the “0” line to the downside within a month or two before or after the onset of a recession. In fact, real aggregate nonsupervisory payrolls have only been higher YoY by 0.7% or less in four months over the last 60+ years without a recession ensuing shortly: once in 1968 and 1996, and two months in 2011. And note that if we add 0.2% to the YoY inflation measures to deal with last autumn’s shelter “kludge,” real aggregate nonsupervisory payrolls are only up 0.5% YoY, and only up 0.2% since last June, as suggested by the below graph, which increases real wages YoY by 0.1% and decreases YoY aggregate payrolls by -0.7%, so that the current YoY values show at the “0” line:

The bottom line is that, with this month’s further surge in inflation, both measures of real wages and payrolls are sending a “yellow flag” recession caution. This puts us back to just above where we were last September. Further, as I wrote recently, a -0.7% decline from peak in real aggregate payrolls is about the median decline at the onset of past recessions.

And the news was worse this month, because shelter costs unexpectedly increased 0.6% for the month, their biggest monthly increase since September 2023. This caused YoY shelter to increase to 3.3%, breaking down to 2.9% for rent, and 3.3% for Owner’s Equivalent Rent:

Finally, several other sectors showed inflationary problems.

Transportation services (mainly vehicle repairs and insurance) followed vehicle prices higher, but recently had calmed. Not in April. Prices increased 0.3%, meaning YoY prices were now higher by 4.3%:

Since vehicle prices themselves have been flat, this may reflect insurance premium increases.

Secondly, and more importantly, electricity prices continued to jump, increasing 2.1% in April alone, and rising 6.1% YoY:

This is almost certainly due to the impact of the building of AI data centers.

Put this all together, and you get a picture where gas prices have continued to surge, and several old problem children -shelter and transportation services - have acted up again. This has had a real, negative impact on ordinary consumer finances.

Needless to say, not a good report.