| Week shows solid econ data, yields recover after Fed scare |
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Jon
Preferred Member
Cash: $ 50.02
Posts: 193
Joined: 13 Apr 2005
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| Week shows solid econ data, yields recover after Fed scare |
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Despite the market�s inability to move on the week, there was a slew of positive economic data, both newer and older, that indicate the economy is not dead yet.
The few earnings announced were solid and projections were solid as well. FDX, ODFL, and Inco reported strong results and good times to come. BBY jumped its dividend 25% after its strong earnings, CC followed with its own strong results and projections. DRI (casual restaurants) sees strong profits for the year. Target reported June sales would run at the upper end of the range. Those are looking into the future and companies still see solid consumer and business spending even with gasoline hovering around $3/gallon.
The economic data was also better though still mixed in some circles. The regional manufacturing reports improved in the new orders category after a weaker May. Weekly same store sales are holding at 3% or better gains over last year, again even with gasoline at $3/gallon. Jobless claims fell back to near 300K after rising well above that level for about a month.
On the negative side, the LEI fell 0.6%. ECRI indicators slipped again for the week as well. Overall, however, ECRI is not showing a major decline, just a slowdown. The big caveat for ECRI is the Fed and what it does with rates. ECRI�s FIG (future inflation gauge) continues to show inflation to have peaked in this cycle. Unfortunately the Fed relies on its own methodology versus using ECRI, and we are all very aware of the Fed�s track record.
Bond yields rise ahead of FOMC meeting & lingering talk of 50 BP hike.
The stronger economic data in part has helped move bond yields back up. Lower yields as seen two weeks back, especially long yields lower than the Fed Funds rate at 5%, indicate anticipated lack of demand for money down the road and thus the lower rates. The return of rates to levels well above the Fed Funds rate indicates an improved outlook (5.26% 2 year versus 5.23% 10 year).
It also shows reality setting into the bond market. This close to the FOMC meeting and with the Fed�s tough talk, the market is making the adjustment to the inevitability of another 25BP rate hike. That has less to do with economic strength as it does with hedging bets. It will be important to see what rates do after the FOMC meeting, i.e. whether they move right back down in anticipation of a slower economy. Higher interest rates in general are not typically good for the economy.
The yield curve remains slightly inverted at 5.26% to 5.23% as noted. The spread has narrowed as bond yields moved to 4 year highs. That suggests improving sentiment about the future but it is also very notable that even with the surge back up in rates the curve remains inverted. That is still pricing in concern about the future with the Fed overdoing it.
What concern? More talk of a 50BP rate hike given all of the signs of a continuing solid economy, even though there are enough counterbalancing indications that would warrant keeping it at 25BP if you are going to hike at all. The Fed has a history of getting right up to the end of its rate hiking campaign and then zinging the market with 50BP �insurance� hikes right at the end. It apparently feels the 50BP gives its some cover in the event economic activity remains strong in the pause that often follows a 50 BP hike. We say pause because that is what the Fed launches the 50BP point hike for: it wants to stop and see what is going to happen.
What typically happens at this juncture in the hiking campaign is that the Fed is very close to pushing too hard, and that 50 BP hike usually does just that. Indeed, after the 50BP hike the Fed is cutting rates within 9 months. Just reporting history and watching how thus far it has been repeating itself as we anticipated back in 2005.
Nonetheless, we are almost pulling for a 50 BP hike. If it means the Fed is over and done as opposed to prolonging the water torture that the speculation puts us through, it would be worth the larger hike. We have often said we would prefer the Fed tell us where it thinks rates need to be and then move them there. A 50 BP hike would most likely mean the Fed is finished, and with the economy regrouping and recouping some of its expansion strength that could spark a rally as the market senses the Fed is through.
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Tue Jun 27, 2006 4:35 am |
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