To Bernanke Or Not To Bernanke
Saturday, March 31, 2012
The week started with hopes that Bernanke’s statements equate with QE3, especially when he said in a speech to the National Association of Business Economics that “we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.” He also acknowledged that “weak demand is the primary factor behind the weak labor market,” while observing that the drop in unemployment is out of sync with the growth pattern. He also used the word “accommodative” quite often. At the same time, Charles Plosser, a Fed member, stated that “our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times," but his remarks were no match for Bernanke.
But what is interesting is that while the Fed wants rates to remain low, the bond market has been heading the opposite way, and while Treasuries rose after Bernanke's remarks, the trend turned negative once again. Are we listening to Bernanke, or not?
The NAR reported that the “Pending Home Sales Index, a forward-looking indicator based on contract signings, eased 0.5 percent to 96.5 in February from 97.0 in January but is 9.2 percent above February 2011 when it was 88.4.” Case/Shiller reported a decline of 0.8% in home prices, the fifth monthly decline in a row and the lowest level since early 2003, with a drop of 3.8% over the last 12 months. The highlight of a weak housing market was the 30-year fixed-rate mortgage average that fell to 3.99% in the week ending March 29, from 4.08% in the prior week.
Richmond Manufacturing Index came in short of expectations, dropping to 7 from 20, while the Conference Board’s consumer confidence retreated to 70.2 from a revised 71.6, but the conflict is best described in the CB’s release.
Consumers' appraisal of current conditions improved in March. Those claiming business conditions are "good" increased 14.3 percent from 13.7 percent. However, those claiming business conditions are “bad” also increased, to 32.7 percent from 31.7 percent. Consumers' assessment of the job market was mixed. Those saying jobs are "plentiful" increased to 9.4 percent from 7.0 percent, while those stating jobs are "hard to get" also rose, to 41.0 percent from 38.6 percent.
Durable goods, the jumpy indicator, increased 2.2%, and only 1.6% when the volatile transportation sector was excluded. GDP was reaffirmed at 3%, and although much was made about it, we didn’t see anything different except for the fact that company earnings were up 0.9 percent from the third quarter, the smallest advance since the last three months of 2008.
Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 billion, or 0.2 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent – or a troubling sign that consumption is not supported by income growth. University of Michigan consumer sentiment rose to 76.2, a good sign but still a neutral reading. Thus, the U.S. economy is still feeble, and we’re at a cross roads.
GLOBAL: German unemployment rate is 7.2%, defying reality for the time being, and even with high oil prices, the European CPI was a bit subdued at 2.6%, and has been in decline since November 2011 when it registered 3%. Although French consumer spending rose 3%, the first increase since July 2011, German retail sales fell 1.1%, and it was the 4th consecutive monthly drop.
Angela Merkel on Monday said Germany may be open to boosting the overall size of the euro-zone bailout funds to around 700 billion euros ($930 billion), and then it happened by week’s end. Germany had previously resisted calls to increase the region’s firewall, but Spain is having an impact on Merkel’s resolve. In addition, Spain announced a 27 billion euro budget cut, while Deputy Prime Minister Soraya Sáenz de Santamaría shared his opinion that “the government is stuck between a rock and a hard place” — and that is the understatement of the year.
Foreign investors have become heavy sellers of Japanese bonds over the past two weeks, the latest government data showed and as noted by WSJ, with some assuming that a search for higher returns is under way. I am not sure that the phenomenon is easily explained by the safe-heaven exit because equities have rallied for a while now, albeit low volume, and U.S. bonds have also come under pressure recently.
Japanese factory output slid 1.2 percent from the previous month, after a 1.9 percent gain in January. The median estimate in a Bloomberg News survey was for a 1.3 percent increase, and the recent strength failed to follow through. Meanwhile, housing starts in Japan increased 7.5%, but one must keep in mind that the country is an export nation, not a domestic consumption story.
TRENDS: Bernanke got the ball rolling, but the implied QE3 lost its luster as the week wore on, with the dollar ending virtually unchanged by week’s end. The euro is holding its ground, and the upcoming data will impact the direction and overall trend, while gold is still stuck in the $1,650 zone. Oil turned negative, and although stocks are positive, there’s a continued trend toward the neutral zone, which will be resolved this coming week. The yen reversed course and is negative once again, and copper, a proxy for the global economy, continues its subtle decline. The 10 year treasury rate held the 2.18% level, rebounded to 2.21%, and is waiting for further hints.