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JP Conklin 704-887-9880 office jp.conklin@pensfordfinancial.com www.pensfordfinancial.

com Leveling the Playing Field March 4, 2013 _______________________________________________________________________ Pensford has officially opened an office in New York. This was commemorated with a trip to Canal Street where one of our employees (we won’t mention any names Andrew) bought a high-end “watch” by a well-known manufacturer (rhymes with Bolex) for $100. Capitalism! Last week was a volatile one, with the 10yr Treasury ultimately ending lower on the week at 1.85%. As discussed in last week’s Newsletter, the sequestration had minimal impact on markets as it was fully priced in. Markets are frequently wrong, but it’s hard to be wrong when you are betting on the ineptitude of our politicians. Personal income did in fact take a big hit following higher taxes in January, down a whopping 3.6% - $126B from higher payroll taxes. I’m sure that money was well spent. While income was down, personal spending actually increased by 0.2%! What gives? The saving rate plummeted, falling from 6.4% to 2.4% - the lowest reading in more than 5 years. Who can afford to reduce spending when there’s a certain lifestyle to maintain? This will probably smooth itself out as consumers gradually adapt to the smaller paychecks over time and return to previous levels of saving. Somewhat surprisingly, consumer confidence surged to 77.6 in February despite the smaller paychecks. Maybe the lesson is that scheduled pain like the payroll tax is ok, it’s the unforeseen that makes Main Street nervous. Not With a Bang, But a Whimper - Sequestration The sequestration took effect Friday and the world ended. Oh wait, no, that’s just what it felt like while waiting for dinner in NYC for more than 1.5 hours after our reservations. I Heart NY! The sequestration was an intentionally ugly deal struck last year in exchange for raising the debt ceiling. The intent was to make the spending cuts so nasty that Congress was forced to reach an agreement to avoid the indiscriminate cuts. As of right now, no such agreement has been reached. But the economy seems to be improving modestly despite the best efforts of Washington. GDP was modestly higher than expected, driven in part by stronger consumer demand.

Last week Bernanke testified, “The pause in real GDP growth last quarter does not appear to reflect a stalling-out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending.” The chairman also noted that “keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods.” President Obama held a press conference on Friday and seemed to backtrack on his doomsday prophecy if the sequester took effect. He reassured the public that the sequester will not create another 2008 financial crisis. This is a notable departure from the recent buildup where he warned that there would be teacher layoffs, air traffic controller layoffs that would lead to flight delays, and increased exposure to terrorist attacks. It appears his threats failed to bring the Republicans to the table and now the administration could be losing credibility. Just as notably, he also indicated a willingness to sign a spending bill to avoid a government shutdown at the end of the month. Until now, he has indicated that tax increases must be a part of any spending modifications before he will sign a bill, effectively threatening to shut the government down. We suspect that a governmental shutdown or debt ceiling brinksmanship will be averted – the political fallout is just too great right now. That’s the good news. The bad news is that Congress and the White House seem content to allow the full sequester to take effect (“It wasn’t my fault, it was the sequester!”) rather than retroactively reduce some of the spending cuts as we were hoping. The bottom line is that the sequester won’t create a financial crisis, but it certainly will create a large enough drag to preclude strong GDP over the next two quarters. LIBOR Outlook Anchored near zero. Fixed Rate Outlook One unintended consequence of the Fed’s guidance related to the unemployment rate is increased market volatility around data releases. We have all been turned into UR forecasters and rates should swing more significantly following the release of this data point for the foreseeable future. But it was clear following Bernanke’s Humphrey Hawkins testimony last week that he believes QE4EVA is working (strength in housing and autos in particular) and he has no intention of scaling back the program any time soon.

This Week Biggest data point of this week will be Friday’s labor reports. The three month average gain has been 200k and most economists are expecting this week’s number to come in closer to a 150k gain. The unemployment rate should remain at 7.9%. A steadily improving economy should translate into a higher participation rate over the course of the year, but for this number has been remarkably steady for nearly a year. There are also quite a few Fed speeches, beginning today. It will be interesting to see how the 10yr Treasury reacts to last week’s rally. Does it continue to push lower or does it rebound back within its recent range?

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Economic Calendar
Economic Data Day Monday Tuesday Time 9:45AM 10:00AM 10:00AM Wednesday 7:00AM 8:15AM 10:00AM 2:00PM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 3:00PM Friday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 10:00AM ISM New York ISM Non-manufacturing Composite IBD/TIPP Economic Optimism MBA Mortgage Applications ADP Employment Change Factory Orders Fed releases Beige Book Initial Jobless Claims Continuing Claims Trade Balance Nonfarm Productivity Unit Labor Costs Consumer Credit Change in Nonfarm Payrolls Change in Private Payrolls Unemployment Rate Underemployment Rate (U6) Avg Weekly Hours All Employees Wholesale Inventories 34.4 0.3% 355k 3080k -$43.0B -1.5% 4.1% $15.000B 151k 166k 7.9% 344k 3074k -$38.5B -2.0% 4.5% $14.595B 157k 166k 7.9% 14.4% 34.4 -0.1% 162k -2.2% 55.0 46.0 Report Forecast Previous 56.7 55.2 47.3 -3.8% 192k 1.8%

Speeches and Events Day Monday Time 8:00AM 11:45AM 1:15PM Tuesday Wednesday 2:00PM 8:15AM 2:00PM 8:30PM Thursday 4:30PM Fed's Janet Yellen speaks Former Fed Chairman Volcker speaks Fed's Powell speaks on Too Big to Fail Banks Fed's Lacker speaks on Monetary Policy Fed's Plosser speaks on Economic Outlook Fed releases Beige Book Fed's Fisher speaks Fed releases Results of Supervisory Stress Test Report Place Washington, DC Washington, DC Washington, DC

Treasury Auctions Day Time Report Size