Wednesday, April 27, 2011

FOMC Statement Summary

From Econoday:
There were no surprises in today's FOMC statement. The Fed retained its "extended period" language for keeping the target rate extremely low. The vote for the policy decision was unanimous.

Regarding the economy, the statement said that "the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually."

While noting that some prices have risen significantly, the FOMC participants overall see inflation expectations as stable and underlying inflation as subdued.

"Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."

The Fed does appear to be giving expectations greater consideration as it is now given as one of the reasons allowing for the continued and exceptionally low policy rate. Also allowing this are low rates of resource utilization (primarily unemployment) and subdued inflation trends (meaning for core rates).

Despite some District bank presidents questioning in earlier speeches the need for the second round of quantitative easing, the FOMC voted to complete the $600 billion in expansion of the Fed's balance sheet in QE2.

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter."

There was no discussion of what should happen with the balance sheet level after June. That is, we do not know if the Fed will let the balance sheet unwind with pay down on mortgage-backed securities and agency debt and maturation of Treasuries. Or the Fed could continue to reinvest pay down. This decision will need to be made at the next FOMC meeting.

Scanner: For a simple point of reference, here is a chart showing the level of Excess Bank Reserves held at the Fed. These excess reserves have been suspected of having the ability of being in more than one place at the same time! As the balance grows, so does the benefactor of the hidden use (the stock market). Observe the increased balance since the implementation of QE1 in November 2008 and of QE2 in November 2010.

When the Fed is utilizing its quantatative easing program, the new cash is called monetary base. Here is a chart of the Monetary Base for the past ten years. When the Fed is creating monetary base it is also, and obviously, creating excess reserves at banks. The banks are free to use it as they wish. It's the Fed that has little wiggle room. The Fed is essentially following orders to create more money or take it away in a partnership that does not fit conventional understanding.

Monday, April 25, 2011

Market Data: Week Ending April 22, 2011

Market Index 12/31  Close 4/22    Close Week Change Simple YTD %
Dow Industrials Avg 11,577.50 12,506.00 1.33% 8.02%
S&P 500 1,257.64 1,337.38 1.34% 6.34%
Fed Funds Rate 0.10% 0.11% -0.02% 10.00%
10 yr T-note Yld 3.29% 3.39% -0.02% 3.04%
5 yr T-note Yld 2.01% 2.11% -0.01% 4.98%
5 yr TIPS - 'Real' Yld -0.06% 0.15% 0.79% 350.00%
Implied 5 yr Inflation % 2.07% 1.96% -0.80% -5.31%
2 yr T-note Yld 0.59% 0.65% -0.04% 10.17%
2-10 Yr Slope 2.70% 2.74% 0.02% 1.48%
90 day T-bill Yld 0.12% 0.05% -0.01% -58.33%
Gold ($/oz) $1,421.40 $1,503.80 $17.80 5.80%
WTI Oil ($/brl) $91.38 $112.29 $2.63 22.88%
VIX "Worry Index" 17.75 14.69 -0.63 -17.24%

Credit Spreads 12/31  Close 4/22    Close Week Change Simple YTD %
Inv Grade Credit Idx 4.78% 4.59% -0.03% -3.97%
Low Grade Credit Idx 8.32% 7.78% 0.01% -6.49%
Markit CDX Inv Grd Idx 85 93 -2.11% 9.41%
Markit CDX Mid Grd Idx 131 149 -1.97% 13.74%

Monday, April 18, 2011

Market Data: Week Ending April 15, 2011

Market Index 12/31  Close 4/15    Close Week Change Simple YTD %
Dow Industrials Avg 11,577.50 12,341.80 -0.31% 6.60%
S&P 500 1,257.64 1,319.68 -0.64% 4.93%
Fed Funds Rate 0.10% 0.13% 0.05% 30.00%
10 yr T-note Yld 3.29% 3.41% -0.19% 3.65%
5 yr T-note Yld 2.01% 2.12% -0.22% 5.47%
5 yr TIPS - 'Real' Yld -0.06% -0.64% -0.06% -966.67%
Implied 5 yr Inflation % 2.07% 2.76% -0.16% 33.33%
2 yr T-note Yld 0.59% 0.69% -0.14% 16.95%
2-10 Yr Slope 2.70% 2.72% -0.05% 0.74%
90 day T-bill Yld 0.12% 0.06% -0.05% -50.00%
Gold ($/oz) $1,421.40 $1,486.00 $9.40 4.54%
WTI Oil ($/brl) $91.38 $109.66 -$3.62 20.00%
VIX "Worry Index" 17.75 15.32 -2.55 -13.69%

Credit Spreads 12/31  Close 4/15    Close Week Change Simple YTD %
Inv Grade Credit Idx 4.78% 4.62% -0.09% -3.35%
Low Grade Credit Idx 8.32% 7.77% -0.05% -6.61%
Markit CDX Inv Grd Idx 85 95 1.06% 11.76%
Markit CDX Mid Grd Idx 131 152 0.00% 16.03%

Monday, April 11, 2011

Market Data: Week Ending April 8, 2011

Market Index 12/31   Close 4/08    Close Week Change Simple YTD %
Dow Industrials Avg 11,577.50 12,380.00 0.03% 6.93%
S&P 500 1,257.64 1,328.17 -0.32% 5.61%
Fed Funds Rate 0.10% 0.08% -0.02% -20.00%
10 yr T-note Yld 3.29% 3.60% 0.16% 9.42%
5 yr T-note Yld 2.01% 2.34% 0.10% 16.42%
5 yr TIPS - 'Real' Yld -0.06% -0.58% -0.07% -866.67%
Implied 5 yr Inflation % 2.07% 2.92% 0.17% 41.06%
2 yr T-note Yld 0.59% 0.83% 0.03% 40.68%
2-10 Yr Slope 2.70% 2.77% 0.13% 2.59%
90 day T-bill Yld 0.12% 0.11% 0.05% -8.33%
Gold ($/oz) $1,421.40 $1,476.60 $47.70 3.88%
WTI Oil ($/brl) $91.38 $113.28 $5.34 23.97%
VIX "Worry Index" 17.75 17.87 0.47 0.68%

Credit Spreads 12/31  Close 4/08    Close Week Change Simple YTD %
Inv Grade Credit Idx 4.78% 4.71% 0.01% -1.46%
Low Grade Credit Idx 8.32% 7.82% -0.03% -6.01%
Markit CDX Inv Grd Idx 85 94 -2.08% 10.59%
Markit CDX Mid Grd Idx 131 152 -1.30% 16.03%

Tuesday, April 5, 2011

Economic Condition Review 1Q2011

Looking back on the end of 1Q2011, the world is still reeling from the tsunami and earthquake damage in northern Japan, and traces of radiation turning up in unwanted places like certain food and drinking water sources and in ocean water along the plants. In northern Africa, the civil revolt in Egypt has resulted in the departure of the 4 decades long dictatorship of Hosni Mubarek leaving a power vacuum which will be resolved later, hopefully with a democratically run election. Next door to Egypt, the dictator of Libya is fighting his own countrymen who want him, Muammar Gadhafi, to give up his dictatorship. Other uprisings are beginning to build in several other oil producing countries in the region, including the Arabian peninsula. The threat of crude oil shipments being interrupted is a big concern for all countries importing from this region and is the reason for the multi-lateral military action intensifying now, particularly targeting Libya.

In Europe, the government of Portugal has collapsed. The government voted to not accept more austerity measures which was recommended by the former prime minister and his finance minister. This development is expected to lead to a bailout of the country's sovereign external debt by the European Central Bank and/or the IMF. The financial conditions attached to bailouts have been painful so far for Greece and Ireland. Both of those governments are debating how to incorporate the painful bailout conditions or to default on them. Default is immediately easier and politically popular in the countries. China is concerned with internal high and climbing food and shelter inflation threatening the massive lower classes, potentially destabilizing the power of the ruling party. Published reports claim that interest rate increases are on the calendar in China now to slow lending and personal discretionary consumption.

In the US, the Treasury market is finding some strength on a risk-off move recently. The US$ is weak, currently near the 76 mark. New and existing house sales numbers were reported recently by the Commerce Department and are lower than projections. Nationally, median house prices are now at December 2003 levels. Banks, the primary source of credit for economic expansion, both consumer and commercial borrowers, are lending only to prime customers, letting growth of credit remain below trend. Bank closings totalled 11 in January, 12 in February and 3 through March 25, according to the FDIC. Most businesses do not have pricing power, so prices are holding the line so far despite rising commodity prices. Exceptions are businesses with pricing power such as universities, health care services, food and energy producers. Inflation (see Q4 CPI) for gasoline in 2010 came in at 13.8%, the overall energy component at 7.7%, and in the major grocery store food groups, the index for meats, poultry, fish and eggs posted the largest increase at 5.5 percent.

The Federal Reserve is pulling the strings to guide global perception about the strength of the US$. The Fed has no choice but to continue it's zero interest rate policy and money printing practice. They will attempt to support the Treasury market when the primary dealers and global participants back away more than they have now. How the Fed uses it's power may look different and they will call it by another name to put watchers off the scent. But we are talking about a global economy here. Not just the US. Other major economies are directly impacted by the Fed's actions. So they become partners in the deed and will cooperate to the greatest possible extent. This will buy time. The possible time frames are wide ranging from many months to years. Unforeseen events, natural and physical, with financial consequences are wild cards that can, of course, shorten the time frame by changing the delicate balance in place now.

Monday, April 4, 2011

Market Data & Graphs: Week Ending April 1, 2011

Market Index 12/31  Close 4/01    Close Week Change Simple YTD %
Dow Industrials Avg 11,577.50 12,376.70 1.28% 6.90%
S&P 500 1,257.64 1,332.41 1.42% 5.95%
Fed Funds Rate 0.10% 0.10% -0.05% 0.00%
10 yr T-note Yld 3.29% 3.44% 0.00% 4.56%
5 yr T-note Yld 2.01% 2.24% 0.08% 11.44%
5 yr TIPS - 'Real' Yld -0.06% -0.51% -0.03% -750.00%
Implied 5 yr Inflation % 2.07% 2.75% 0.11% 32.85%
2 yr T-note Yld 0.59% 0.80% 0.07% 35.59%
2-10 Yr Slope 2.70% 2.64% -0.07% -2.22%
90 day T-bill Yld 0.12% 0.06% -0.02% -50.00%
Gold ($/oz) $1,421.40 $1,428.90 $1.30 0.53%
WTI Oil ($/brl) $91.38 $107.94 $2.54 18.12%
VIX "Worry Index" 17.75 17.4 -0.51 -1.97%

Credit Spreads 12/31  Close 4/01    Close Week Change Simple YTD %
Inv Grade Credit Idx 4.78% 4.70% 0.08% -1.67%
Low Grade Credit Idx 8.32% 7.85% -0.03% -5.65%
Markit CDX Inv Grd Idx 85 96 1.05% 12.94%
Markit CDX Mid Grd Idx 131 154 0.65% 17.56%

Friday, April 1, 2011

Non-Farm Payroll Perspective

Today, the Labor Department reported that nonfarm payrolls (jobs) increased by 216,000 in March. Today's chart puts the latest data into perspective by comparing nonfarm payrolls following the the end of the latest economic recession (i.e. the Great Recession -- solid red line) to that of the prior recession (i.e. 2001 recession -- dashed gold line) to that of the average post-recession from 1954-2000 (dashed blue line). As today's chart illustrates, the current jobs recovery is much weaker than the average jobs recovery that follows the end of a recession. Today's chart also illustrates that the current jobs recovery is slightly stronger than what occurred following the recession of 2001 and that the trend is up.

One Eye on The Fed: 'Dual Mandate' is Camouflage

Today New York Fed President William Dudley spoke about the condition of the US economy. His record reflects that of a supporter of current Fed policy. Here is a brief statement from his speech that illustrates his overall sentiment about the economy and the need for the Fed to continue its money printing and intervention in certain asset markets.

"On the activity side, a wide range of indicators show a broadening and strengthening of demand by households and production by firms. For example, on the demand side, after an unusually deep retrenchment during the recession, consumer spending has begun to recover, and that recovery strengthened considerably in the final months of 2010. Not surprisingly, businesses' orders and production are following suit.
These factors led to a 3.1 percent growth rate in our most comprehensive measure of national output (real, or inflation-adjusted, gross domestic product or GDP) in the fourth quarter of 2010. Growth for the first quarter looks likely to be similar, near 3 percent. In my view, the revival in demand and production—while not as strong as desired—suggests that we may be much closer to establishing a virtuous circle that will support stronger growth. What I have in mind is a cycle in which rising household and business demand generate more rapid income and employment growth, which in turn bolsters confidence and leads to further increases in spending. This is why we upgraded our assessment of the economy at last month's FOMC meeting, noting the economy is now on a "firmer footing". The major missing piece of the puzzle has been the absence of strong payroll job growth. We will need to see sustained strong employment growth in order to be certain that this virtuous circle has become firmly established.
With respect to the labor market, we have seen some conflicting signals. On one hand, the unemployment rate has fallen sharply over the past four months, dropping to 8.8 percent from 9.8 percent in November. On the other hand, payroll employment gains have been relatively modest."

Dudley's message is that there is still work to be done by the Fed before he can feel assured of an economy that will sustain itself in terms of employment growth and consumer spending growth (maybe GDP above 3.0). This is camouflage to the real purpose of QE.