FMX | Connect – www.fmxconnect.com - (Reported 8/12/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
BONDS HAVE MORE FUN
With the policy rate at 0%, and the longer-end of the Treasury curve some 100 basis points higher today than they were at the cycle lows, the Fed is embarking on action that it hopes will re-stimulate the economy. All the more so now that the public’s appetite for more fiscal largesse has clearly waned.
Political gridlock is probably what we will get out of the November mid-term elections, and in periods when nothing needs fixing, gridlock is not good – but today what we need is strong leadership. Mr. Bernanke has already spoken out on his views over the Bush tax cuts being extended, and that is because he has the prospect of a 1937-38 renewed collapse on his mind. And so after taking policy rates to 0%, and beginning the process of quantitative easing a year-and-a-half ago, he refrained from shrinking the Fed’s balance sheet as he had hoped to start doing last March and on Tuesday ratified that in the press statement.
The pledge to ramp up the Treasury buying program at rough estimates of $200 billion annually could just be the thin edge of the wedge because all the Fed did was to adjust lower its near-term economic view — it still is calling for 3.5-4.2% real GDP growth for 2011, as of June. Remember when the Fed was calling for 2008 real growth of 1.8-2.5% back in October 2007 even though it was becoming so apparent at the time that the credit system was imploding (though the equity market was making a last gasp to a new high at that time) and what did we end up with? Try -2.8% for 2008. As a result, the Fed got aggressive and the funds rate went from 4.5% that month to near-zero just over a year later.
But the Fed cannot cut the funds rate any more. So it comes down to the experimental took kit. As a result, we have to continue to read and re-read what Dr. Bernanke said he would do in these circumstances — pushing on a string with deflation risks staring us in the face — in that famous speech he gave on November 21, 2002 when he was still a Fed Governor (Deflation: Making Sure “It” Doesn't Happen Here). He laid out the guidepost for investors on how to navigate through this, and the bull flattener in bonds is the obvious strategy. One of his recommendations involves an explicit ceiling on long bond yields at 2½%!
We know that Ben Bernanke, even with his sky-high IQ, is not the world’s best economic forecaster. And, we know that he is reactive, not proactive. But based on what he did in late 2008 and early 2009, we also know how aggressive he is willing to be, and he also knows deep inside that we are dealing with a modern-day depression.
U.S. TRADE — BIG DOWNWARD REVISION COMING FOR Q2 GDP
What was key in the U.S. trade number was the “real,” or volume data, which showed a huge deterioration in June, to $54.14 billion deficit from $45.99 billion in May. This was much higher than what the Commerce Department was estimating, and taken together with yesterday’s weak wholesale trade and inventory data, strongly suggest that we will see a downward revision to Q2 real GDP growth to 1.5% at an annual rate from the first estimate of 2.4%.
Moreover, there is such a weak “handoff” in the consumer sector going into Q3, along with a collapse in housing and a slight moderation in capital spending and little or no contribution from inventories, that I think we could very well see a flattish GDP performance for Q3; my guess right now is 0.5% at an annual rate.
Out of the data, I see that exports were down 1.3% MoM, with sharp declines in semiconductors (-7.5%), telecom equipment (-5.0%) and industrial supplies (-3.1%). However, what really caught my eye were the import data — up 3.1% and almost all in the consumer space — apparel imports rose 1.3% and are up now three months in a row and yet over this timeframe retail sales of clothing/accessories have fallen at a 5% annual rate. So much of this imported items are stuck on the shelf — I would be looking for some steep discounting ahead in this space as we move through back-to-school season.
CANADIAN TRADE — LOOKS LIKE 2.5% GDP GROWTH OR LOWER FOR Q2
The Canadian trade data was also a negative surprise. The consensus expected a narrowing in the deficit to $300 million in June but instead got a $1.1 billion gap, and from an upwardly revised $700 million imbalance in May.
Exports sagged 2.5%, doubling the import decline. So foreign trade looks set to drain about four percentage points from Q2 GDP growth a time when housing is rolling over and the U.S. mini-inventory cycle has run its course — setting us up for a big slowing to 2.5% from 6.1% in Q1.
Auto exports took a big hit (-4.6%) and on the import side, what stood out (at a time when total imports fell 1.2%) was the 2.1% increase in industrial goods (+29% YoY) and a 0.5% increase in machinery (+10% YoY). These are encouraging signs that the strong Canadian dollar has made imports of capital goods more attractively priced for domestic businesses, with potentially positive implications for productivity growth. (One of Mark Carney’s pet peeves is Canada’s lagging productivity performance — currency strength is usually a good cure for this.)
It looks like Q2 growth is coming in close to 2.5% with downside risk; the Bank of Canada is at 3%. I fail to see how the Bank can hike interest rates given what the Fed (and Bank of England) just told us about the future, especially with the Canadian housing market rolling over and the latest data point on employment casting some doubt over the veracity of the recovery. I think a policy pause is in order. Next BoC policy meeting is on September 8.
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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