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Breakfast With Dave. 01252011.
Market commentary by chief economist David Rosenberg at Gluskin Sheff.
From econotwist
David A. RosenbergJune 5, 2009
Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
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MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
WHILE YOU WERE SLEEPING
You don’t even have to go to the equity market page on Bloomberg to know whatsort of day it’s going to be — just check out the Yen-Euro cross rate, anotherbarometer of investor risk appetite. We see that it is on the decline, which is a thumbs-up for everything that is not a safe-haven. The Aussie dollar is up 0.5%as neither the Reserve Bank of Australia (or the Bank of Canada for that matter)can keep these beta-currencies down (Sterling, as an aside, is being hit byintensifying concerns over the longevity of Gordon Brown’s government).Emerging market equities rallied 0.9% today and are up 2.0% for the week; Asiafinished today’s session with a healthy 0.6% advance. We see that the FT-SE isup more than 1.0% (politics ostensibly only matter for currencies and bonds, notfor equities) and the rest of the continent has gained 0.7%.U.S. futures are in the green and Treasuries are selling off once again,apparently caught in a no-win situation; if the Fed doesn’t step in and buy moregovernment bonds, investors are going to conclude that there is not enoughdemand to absorb all of the new supply coming on stream. Yet, if the Fed wereindeed open to the idea of expanding its bloated balance sheet further, then the‘monetization of debt’ would cause the inflation-phobes to panic and sell theirlong-duration paper. As we said, a no-win situation.With the economy still in recession, little hope of a vigorous recovery when itdoes come around, and widening excess capacity (not to mention a hugelypositive ‘carry’) one would have expected the yield on the 10-year T-note to be ina 2.0-3.0% range as opposed to the near 3¾% yield we have today. The 10-yearnote is on a knife’s edge having given up most of its recent rally. We are stillconstructive on the bond market, but let’s just say that at this point we arenervous bulls. No sense being dogmatic.But fixed income is not limited to govies. We have for some time, and still do,favour high-grade corporates regardless of what Treasuries do — at least this is amarket where, in classic ‘Fisherian’ fashion, supply is creating its own demand — the amount of global issuance in the last year has tripled and spreads havecontinued on a narrowing path. Look for that to continue.
IN THIS ISSUE
• Canadian employment — abig decline in May• The Investor Intelligencesurvey shows that 42.5%of PMs are now bullish on the equity market; 25.3%are now bearish• It’s employment day inNorth America; we alreadygot the Canadian number,it was B-A-D• Consumer spending andhousing still in thedoldrums• Bank of Canada talksdown the loonie (withoutmuch success)• Deleveraging cycle in theU.S. is far from over
June 5, 2009
– BREAKFAST WITH DAVE
Page 2 of 8
As for commodities, oil is bid around $69/bbl — up 5.0% for the week — as iscopper (also up around 5.0% for the week). Gold is consolidating. The U.S.dollar is stable today but with the 50-day crossing below the 200-day moving average the bear market is entrenched, which is a net positive for thecommodity complex. (Though why the Euro should strengthen on an ongoing basis given the region’s deep problems is a bit of a mystery — for one example, turn to
Baltic Storm Threatens Euro Banks
on page C12 of the WSJ).On the data front, all we saw were some benign inflation data across the pond —UK input prices +0.4% MoM in April and -9.4% on a YoY basis (steepest deflationrate in seven years) while core output prices edged up 0.2%; and the ECRIleading inflation index for the EMU hit a historic low in April — down to 82.4 from84.1.
WE CAN UNDERSTAND ALL THE ANGST SURROUNDING INFLATIONWe just don’t agree with it.
Inflation is about a sustained uptrend in theabsolute price level; commodities going up only really tell us about what ishappening to relative prices, that’s all. Because precious few final-statemanufacturers or domestic retailers have any pricing power at all, the run-up inbasic material costs either comes at the expense of profit margins or, as we justsaw in the Canadian employment data, the labour market. For a taste of whatwe are talking about, go to
Discounting by Pricier Chains Fails to Give RetailSales a Lift
on page B3 of the WSJ. When we read about price cuts failing to liftsales volumes, we start to contemplate the prospect that this cycle is turning more Japanese with every single data point. (Japan also enjoyed sporadic‘green shoots’ too — they are called cherry blossoms over there — andintermittent stock market rallies and bond market selloffs, but the fundamental trend was really in one direction for the last 10-15 years for the economy and the asset classes.)
IT’S NONFARM PAYROLL SURVEY DAY
The consensus is looking for a 520,000 decline — the optimists would inevitably treat this as a ‘green shoot’ since it is a second-derivative improvement relative to the 539,000 falloff in April, not to mention the -741,000 print posted inJanuary. But do they realize that the worst number we ever saw in the 2001recession was -325,000? Just to put a 500,000+ decline into perspective.ADP recorded a 532,000 decline; the Monster employment index also dipped two points last month; non-manufacturing ISM employment is a lowly 39; and jobless claims have remained above 600,000 now for 18 straight weeks — thelongest stretch ever. Not until they fall below 500,000 will it be safe to call therecession as being over.
When we read aboutprice cuts failing tolift sales volumes,we start tocontemplate theprospect that thiscycle is turningmore Japanese
June 5, 2009
– BREAKFAST WITH DAVE
Page 3 of 8
WE ALREADY GOT THE CANADIAN NUMBER! B-A-D
•
Canadian employment -41,800 in May, double the decline expected by themarket
•
All the drop was in full-time too — down 58,700 — which more than wipesout the 39,400 gain in April (Canada has lost 224,000 full-time jobs thisyear — some ‘green shoot’)
•
The unemployment rate surged to an 11-year high of 8.4% from 8% (was6.6% at the start of the year)
•
Manufacturing employment plunged 58,400 — brings YTD carnage to162,100
•
Ontario employment slid 60,000 — the unemployment rate in the provinceis now 9.4% — the highest since June 1994!Bottom Line: This is bullish for GoC bonds and rather bearish for the Canadiandollar; the slide in manufacturing jobs attests to the high degree of CADovervaluation even with the commodity price backdrop. I still maintain it shouldbe closer to 83 cents right now and I am pretty sure the BoC would agree.
TOO MUCH BULL?
The Investor Intelligence survey shows that 42.5% of portfolio managers are nowbullish on the equity market; 25.3% are now bearish. This looks to be anoverbought market, from our vantage point. As a sign of how selective themarket is right now regarding the data, the ISM orders number that came out onMonday — highest since November 2007 — was the toast of the town. But thefact that non-manufacturing ISM orders FELL 2.6 points to 44.4 (and this covers90% of the economy) has been hardly mentioned in the media or researchcommentaries.
CONSUMER SPENDING IN THE DOLDRUMS
The chain store sales that came out for May in the U.S.A. were very soft — same-store receipts down 4.6% YoY in May. The consensus was looking for a 3.6%gain so this also lacked ‘green shoot’ veracity — not only that but fully 66% of retailers fell short of their revenue targets! Apparel sales slipped 5% YoY,department store sales fell 9.4% and luxury retailers posted a whopping 18.1%falloff. We must still be in recession because the only positive performer was the drug stores — a 0.9% gain. Discounts stores are down but outperforming —off 3.5% on a YoY basis.
BANK OF CANADA TALKS DOWN THE LOONIE (WITHOUT MUCH SUCCESS)
“In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly.If the unprecedentedly rapid rise in the Canadian dollar (which reflects acombination of higher commodity prices and generalized weakness in the U.S.currency) proves persistent, it could fully offset these positive factors.
“
Canadian joblessrate surged to an11-year high;Ontario’sunemployment ratehits a 15-year highMay U.S. chain storesales lacked ‘greenshoot’ veracity
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Breakfast With Dave June 5
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