David A. RosenbergMay 29, 2009
Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
WHILE YOU WERE SLEEPINGIN THIS ISSUE
• Risk appetite back with avengeance• Global data mixed, butoverall constructive• Mortgage delinquencieshit a new high• Industrial activity recedessharply• Jobless claims point toworrisome employmentpicture• Home sales stagnating despite record stimulus
Investor risk appetite is back with a vengeance today:
•
The world MSCI index is up 0.7% so far, the third advance in a row.
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Asia-Pac rallied 1.2% today. Emerging market equities pulled in a net$2.1bln in fund flows this past week (15 weeks in a row of inflows); thisfollowed a $2.5bln inflow the week before.
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Gold just hit a three-month high of $973/oz (up 1.4%) and silver is coming of its best month in 22 years.
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Oil has broken above its 200-day moving average; energy stocks do notappear to be priced for a sustainable $65/barrel crude price (U.S. oilinventories have declined for three straight weeks — last week’s 5.4 millionbarrel draw was far larger than expected, though we hear that a largeamount of crude is being stored in tankers ready to come to port — seepage C6 of the WSJ).
•
Commodity currencies are on a tear, with the Aussie leading the pack. Thesharp rally in the CAD along with the weak U.S. consumer is a dead-weightdrag on Canadian manufacturers.
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Despite the heightened risk appetite, government bonds are rallying (off massively oversold levels) — yields are down 7bps in the U.K. and Germanyand down 3bps in the U.S.A. This week’s Treasury auctions went fairly well; the next crucial test will be the 10- and 30-year auctions in early June (forsome reason, supply concerns don’t seem to affect other markets — therehas been a huge $20 billion of new junk bond issuance so far in May withhardly a peep about it in the business media). As a contrarian, I just love itwhen I see headlines like this (page C10 of the WSJ) —
Deflating the Bubblein U.S. Treasuries
. The Treasury market was never in a ‘bubble’, folks.Nothing that is fully guaranteed and pays a coupon semi-annually with nocall or prepayment risk goes into a ‘bubble’ just because it was expensiveat the yield low. Sentiment never got wildly bullish; the public neverbecame enamoured of Treasuries; there was no widespread ownership or‘new paradigm’ thoughts. At the lows in yield, there were legitimateconcerns over a depression-like economic backdrop and deflation. Thatwas the story for the bond market — it never ever met the classiccharacteristics of a bubble as was the case with the dotcoms or housing.
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May 29, 2009
– BREAKFAST WITH DAVE
•
One of our long-standing themes has been the deflation that has hit thelabour market in a way that we have not seen in the last six decades. Formore on this file, have a look at
Still Working, but Forced to Make Do WithLess
on the front page of the NYT. Also take a read of Paul Krugman’sexcellent column on page A23 (
The Big Inflation Scare
).
Short-covering still a major source of buying power for the equity market.
Indeed, according to Bloomberg data, short interest in the S&P 500 fell anadditional 1.7% in the first half of May.
For all the talk about how foreign central banks, led by China, wouldimpose a buyer’s strike against U.S. bonds
, we see that in the week ending May 27, total custodial holdings of Treasuries at the Fed rose $8bln to$1.191trln.
Intel was the latest to post a decent bottom line
— beating estimates by apenny per share (at 24 cents) — but like so many others, missed its revenue target. Sales dropped 23% YoY to $12.3bln versus the $12.7bln consensusestimate.
KEEP AN EYE ON THE U.S. DOLLAR:
IT IS BASIS POINTS AWAY FROM SEEING THE 50-DAY M.A. (83.8) CROSS BELOWTHE 200-DAY M.A. (83.6). THE ‘SPOT’ INDEX IS 79.9. IN THE EVENT OF THE‘CROSSOVER’, WHICH LAST OCCURRED THREE YEARS AGO, THE COMMODITY COMPLEX AND PRECIOUS METALS WILL LIKELY RECEIVE AN EVEN LARGERPUSH TO THE UPSIDE.
ON THE DATA FRONT, MIXED NEWS BUT OVERALL … CONSTRUCTIVE:
•
The U.K. is pulling out of its morass. GfK consumer confidence hit a year-long high in April and is up now three months in a row (to -27 from -30). TheNationwide home price survey showed a 1.2% pop to home prices in May — the best result since December 2006 (but still down 11.8% YoY).
•
Real retail sales in Germany came in as expected, at +0.5% (inflation-adjusted) in April — the third increase in a row (but still down 0.8% YoY).
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Despite all the good economic news, pricing power is tough to come by asEurozone inflation hit zero last month for the first time in at least 13 years.
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There was a slate of data out of Japan today, and what investors are fixatedon is the massive 5.2% surge in industrial production in April on top of the1.6% pickup in March (expectations were for a 3.3% gain); and, thegovernment (METI) says that output should bounce 8.8% in May and 2.7%in June too. The Japanese government raised the economic outlook lastweek just in the nick of time. Or so it seems. While export-led activity isimproving after what was a data-detonation in January, domestic spending indicators are still quite moribund. Housing starts in April were down 32.4% YoY, the fifth month in negative terrain. Household spending alsocontracted 1.3% YoY, and the labour market is imploding there as it is in the U.S.A. — the unemployment rate hit 5.0% in April from 4.8% in Marchand the key job offers-to-seekers ratio fell to 0.46 from 0.52.
Page 2 of 8
May 29, 2009
– BREAKFAST WITH DAVE
Chart 1: REFI BOOM IS OVER
United States
MORTGAGE DELINQUENCIES HIT NEW HIGHThe Mortgage Banker’s Association delinquency rate data came out forthe first quarter, and they were bad:
A year ago, the markets and thefinancials would have taken a big hit on data like this, but heck, when thegovernment steps in to guarantee the longevity of the large commercial banks,reports like this are now easily dismissed. Still, they attest to the deteriorating level of credit quality, fully 18 months into this crisis. The all-in mortgagedelinquency rate rose to a new record of 9.12% from 7.88% in the fourthquarter and 6.35% a year ago. Subprime delinquency rate jumped to 24.95%from 31.88% and prime delinquency rates rose to 6.06% from 5.06% in Q4(3.71% a year ago). Amazingly, fully 27.58% of the subprime ARM space isnow past due; and 12.04% for prime (double where this was a year ago).
MBA: Volume Index: Mortgage Loan Applications for Refinancing
(March 16, 1990 = 100)
What’s amazing is that the homebuilding stocks slid 4.4% on the data, because they ostensibly are not to big to fail. The big banks are to big to fail, so on dayslike this when we get the worst delinquency data in modern history, the stocks of these companies can muster a rally (financials advanced 3.6% yesterday)because everyone knows that the Obama economics team is going tocompletely backstop the banking system. You really have to start wondering if the Fed has lost control — or at least, it’sprobably safe to assert that monetary policy has lost much of its effectiveness.After announcing the bond-buyback program in March, the yield on the 10-yearnote has surged over 100 basis points and this has taken place with the data for the most part still coming in on the soft side. The Fed remains focused on thehousing market and yet mortgage rates have now backed up to three-month highs(up 40 bps from the lows to 5.44%) with only faint signs of stabilization at hand.Meanwhile, mortgage refinancing activity has turn down after a brief bounce —down 19% last week and now down 43% from the mid-March peak. The loss of cash-flow support here coupled with higher gasoline prices and lingering 500kmonthly job declines puts at risk the view that we are going to see GDP swing topositive growth terrain next quarter.
INDUSTRIAL ACTIVITY RECEDES SHARPLY
Having digested the U.S. durable goods report that came out for April, the onlyconclusion that can be reached is: (i) the fiscal stimulus (infrastructure part) isnot hitting the economy yet; and, (ii) with over one-third of manufacturing capacity sitting idle, the incentive to embark on new capital spending projectsis basically nil. All signs point to a GDP contraction at this point of between3% and 4% at an annual rate this quarter. A turnaround for Q3, as per theconsensus, seems like pure guesswork right now, though the equity marketseems to believe in the recession-is-about-to-end view.
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Source: Haver Analytics, Gluskin Sheff
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Breakfast With Dave May 29
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