FMX | Connect – www.fmxconnect.com - (Reported 6/25/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
ONWARD AND DOWNWARD
U.S. real GDP was marked down again for the first quarter – to 2.7% QoQ at an annual rate from 3.0% in the first revision, 3.5% in the estimate before that, and now a halving of the 5.6% pace posted in Q4 that helped the equity market to fresh recovery highs in the opening months of the year.
Once you strip out the huge contribution from inventories, you can see what is really happening in the economy and it is far from encouraging. Real final sales
are now estimated to have come in at a tepid 0.8% annual rate – down from the prior revision of 1.4% and the 1.6% rate of growth when the data were first released at the end of April.
Over the past four quarters, real final sales – the key guts of demand in the economy – have registered the grand total of 1.2% at an average annual rate in what is the weakest recovery in modern history and must be viewed in the context of an unprecedented amount of bailout, monetary and fiscal stimulus lavished on the economy from the benevolent Uncle Sam. To put this 1.2% pace in perspective, this is less than one-third of the 4½% bounce in real final sales that is
typical of a post-WWII recovery. If a one-handle is the ‘new normal’ rebound, someone better tell the consensus bottom-up crowd who cling to the view that we
are miraculously heading back to peak corporate earnings as early as next year.
THE BIG PICTURE
I’m here in Toronto where the downtown core is in lockdown mode for the G20 meeting and all the policy discord is such a stark contrast to a year ago when it was all about rampant fiscal stimulus to bolster the global economy. Now we come to this G20 meeting with a completely different tone, and it has nothing to do with the sustainability of the recovery, which is now in doubt, but rather the focus is on fiscal stabilization because of the growing investor anxiety over bloated government balance sheets. This cannot possibly be constructive for risk assets, which owed last year’s humongous rally to all the efforts by governments across the planet to sacrifice their balance sheet at the expense of the private sector, specifically the banks.
So let’s cut to the chase. If I haven’t been clear enough in my daily musings, I strongly believe that escalating global economic imbalances have dramatically increased the vulnerability of the global recovery. The chances of a growth relapse in the second half of the year are higher than the equity market, and to a lesser extent the credit market, have priced in. Treasuries seem to be the asset class that most closely shares my cautious views. Anyone with a pro-cyclical bent has to answer for why it is that the yield at mid-point on the coupon curve is below 2%, a year after a whippy rally in equities and commodities and what appeared to be a sizeable policy-induced GDP jump off the bottom.
U.S. JOBLESS CLAIMS: GOOD & BAD
The market really dodged a bullet in the latest claims report, although the week of June 12th was revised higher to a recession-like 476k, which exaggerated the
decline in the June 19th week, to 457k. The key is the trend, which, on a fourweek moving average basis, is now at 463k and has been north of 450k since the beginning of April. Ordinarily, this is consistent with flat to lower payrolls, butwe really need to see this metric below 400k before sustained job growth can take hold, which is where jobless claims were seemingly headed before theimprovement stalled out over three months ago. Ostensibly, the improvement in large-cap goods-producing jobs is being offset by lingering weakness in financials, construction, state/local government and small businesses who are still credit-constrained.
KANSAS YES, ROYAL NO
Following in the footsteps of some other notable regional economic surveys, we just got hold of the Kansas City Fed manufacturing index and the main production index slipped again in June, to a 10-month low of 3 from 5 in May and the nearby peak of 24 posted in April. Of note, payrolls slipped from 1 in May to -1 in June – the first move into negative terrain since February. Ditto for the workweek, which swung from 9 to -2 in June.
U.S. DURABLE GOODS – HEADLINE WEAK, DETAILS STRONG
We had some good news out of the manufacturing sector yesterday with a constructive durable goods report. While total durable goods new orders fell 1.1% MoM in May (less than expected), the drop was due to a 22% drop in aircraft orders (which are very volatile month-to-month – in April, aircraft orders jumped nearly 80% to give you a sense). Outside of aircrafts, orders rose by 0.9% MoM, close to expectations – not bad in a month when European debt woes roiled the markets. April orders were revised up, another positive.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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