Rising Bond Yields (or, The Magazine Cover Indicator Lives!)

Wall Street analysts have been rising stock ratings lately. I have found that stock ratings, clollectively, are closely associated with the direction of interest rates.

I wish we sent VP Cheney to the G8, in case there is an arrest on the agenda.

The same situation occurs in Europe analysts are rising stocks ratings at a fast pace. They do not factor interest rates in their forecasts (for eg see telecom’s Italia debt as a percentage of the Italian GDP)
Of course al the paper which has been absorbed during the distribution has to be recycled at ….a price

“Of much greater concern than petty payback, it isn’t too hard to imagine some point in the future where Oil or even Gold is priced in Euros – THATS a situation with grave consequences.”

U.S. reliance on the petro dollar as the world’s unit of trade is the Achille’s heel of the giant that is the U.S. economy.

Syria, I believe, is the latest to abandon this standard.

It may of interest to know that in term of flows speculative funds are now NET SELLERS of the SP 500 as of may

the fed is toothless….it can do nothing but raise rates in the face of the data that it produces (highly suspect)and what it reacts upon.

If it lowered rates it would be nothing nore than pandering to the very few (who are unfortunately in control).

I asked this question several months ago when the scores of peole were pining for a rate cut:

Why are we the only CB in the world that is even considering a rate cut in the fact of slow growth, and higher inflation??

We know have the worst GDP in four years, housing market sick and getting sicker.

The fed has no choice but to raise rates however the bush administration will not let them as it has too much influence on the CB with it’s goldman executives running the economy. Oh , I forgot said executive said just a week ago that the housing marklet has bottomed….does’nt sound anything like they will raise them soon with that rhetoric.

Ciao
MS

Another day, another Bush Derangement Syndrome post from Michael Schumacher. At least he didn’t use obscenities or attack any other posters this time. The day is early, however.

Winston, BR, I don’t understand the connection between repricing oil in, say, Euros instead of dollars. Isn’t the important thing what the oil-seller/dollar-buyer does afterwards with its dollars? I see the pricing change as nothing more than symbolic.

Or does the “convenience” of starting off with a different currency mark a commitment by oil sellers to recycle far less of their revenue into Treasuries?

MS,

I don’t think the Fed was seriously considering a rate cut. I was just silent on the Street hope for a rate cut.

Even if it was considering it would not be alone. The brazilian CB is cutting rates steadily, but then it is is second highest in the world and needs to control the BRL appreciation.

Barry: The odds of a rate cut this year aren’t 50-50. After ISM and Ben, it’s only a 16% chance of a rate cut (according to CBOT prices). Call it 50-50 (more or less) whether the next move is up or down.
In just the last 2 days, Goldman and Merrill have both abandoned their rate cut calls. Just a few holdouts are left: UBS, most prominently.

Meanwhile, we in the US are having some serious issues with govvie levels. I see where the 10 yr. note has breached a 4.95 and stocks are tumbling right along with the latest in higher yields. I am wondering if this has anything to do with the buck’s demise which is also underway. The latest talk of the town? The Yen is absolutely in the doghouse, having hit a record low vs. the Euro. You can make a few inferences from that: 1. carry trades continue, supported by 2. wide expectations that the ECB will raise rates at its meeting tomorrow (RBA also decides tomorrow; RBNZ and BOE meet Thursday; these 3 are all expected to give a nothin’ done but should also keep tightening biases) as is evidenced by 3. Japanese money moving offshore to pick up yield … BUT THE TWIST THIS TIME is that they are not comin’ here. No sir, they look to be headin’ for Euro-denominated and other high-yielding assets. The Aussie $, a noted high yielding currency for example, hit a 6-wk. high vs. the buck overnight and a 15-yr high vs. the Yen. Ditto the Kiwi which marked a 17 yr. high vs. the Japanese currency.

B’berg notes, too, that the spread between JGBs and bunds is at a 5-yr. high, an irresistible attraction, no doubt.

Meanwhile the buck is the butt of all this clamoring for high yield. This is probably owing to the continued farce in which we deny having any inflationary pressures. On the strong-economy side, the spin is that NFP was robust along with ISM. At the same time, we are touting a modest +.1% increase in April’s core PCE deflator. Y/y it’s lookin’ even better: +2.0%. Thus, as far as the buck is concerned, our benign state of price stability, hallucinatory though that might be, is trumping any strong economic data. Thus the FED is viewed with little excuse to raise rates. Voila, the rate-seekers are avoiding us at the moment.

Here’s what Bernanke said in November:

http://www.federalreserve.gov/boarddocs/speeches/2006/20061128/default.htm

Let’s examine the remarks, and I’ll **make my own comments afterward:

“Thank you for inviting me to speak today. I will take this opportunity to present an update on the economic outlook.”

**I tend to take that seriously, in that I expect when he says this that he does intend to as accurately as possible ‘present an update on [his and/or the Fed’s] economic outlook.’

Then he says:

“Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy’s long-run sustainable pace.”

**If he’d have thought that 1st quarter GDP would soon be 0.6%, annualized, would he have said so?… Or, did he in fact suspect it would be this low and was unable to say so?… I don’t think 0.6 fits to a description of an economy that is expected to ‘expand at a moderate rate, close to or modestly below the economy’s long-run sustainable pace.’ So, what I’m saying is that if the chairman of the Fed, at the rather late date of November 2006, wasn’t able to tell us, then, that 1st quarter GDP would be 0.6, then why does anyone think he can now tell us the economy will grow at or modestly below trend over the next few quarters?

**My point is that no Fed chairman would ever (never, ever, e-v-e-r, NEVER, EV-ER) downgrade GDP to at or near recession level, except in the most academic sense of the present-to-past tense. In other words, a chairman might recognize the current status of a weak economy and make comments accordingly when the event has become a fait accompli, but he will nEvER EvER pReDiCT one. Predicting that weak of an economy is not in the cards for any Fed chairman.

**We got better economic forecasting from Roubini than we got from the Fed, and Bernanke is sitting on an entire army of staff assistants, researchers and statisticians… and he has the advantage of being made privy to at least some information likely not available anywhere in the public sector, so why is it so hard for a government official with such power of influence to simply get it right?

**The answer is that the Fed will only forecast either robust economic growth or, at the worst, they will forecast a kind of lamenting recognition of growth that is ‘at or slightly below trend.’ If the Fed ever were to forecast a recession, you would later find that you’d been least likely to have been forewarned of it by them, unless you’re Rip Van Winkle.

Here’s what Bernanke said just on March 28th, 2007: **my comments to follow.

http://www.federalreserve.gov/boarddocs/testimony/2007/20070328/default.htm

“Economic growth in the United States has slowed in recent quarters, reflecting in part the economy’s transition from the rapid rate of expansion experienced over the preceding years to a more sustainable pace of growth. Real gross domestic product (GDP) rose at an annual rate of roughly 2 percent in the second half of 2006 and appears to be expanding at a similar rate early this year.”

**This was said in late March and Bernanke at that time was still holding to an estimate that GDP would be at or very near 2% for “early this year.” You can’t get any earlier than the 1st quarter, and late March is already 9/10s of the way through the 1st quarter, so why would anyone believe now that the chairman could accurately forecast the economy going forward, when he couldn’t forecast it, then, when it was already 90% history? I would have more confidence in the Fed if it refrained from making economic forecasts, but only because it is probably philosophically prohibitive for it to make a bad one. If it is predisposed to never make a bad one, then most all of its forecasts must be discounted if one is to maintain a consistent logic about the veracity of the institution. Rick Santelli on CNBC has said Bernanke doesn’t make forecasts. He’s wrong. Here’s an example of the forecasting from last July:

http://www.federalreserve.gov/boarddocs/hh/2006/july/testimony.htm

“Overall, the U.S. economy seems poised to grow in coming quarters at a pace roughly in line with the expansion of its underlying productive capacity. Such an outlook is embodied in the projections of members of the Board of Governors and the presidents of Federal Reserve Banks that were made around the time of the FOMC meeting late last month, based on the assumption of appropriate monetary policy. In particular, the central tendency of those forecasts is for real GDP to increase about 3-1/4 percent to 3-1/2 percent in 2006 and 3 percent to 3-1/4 percent in 2007. With output expanding at a pace near that of the economy’s potential, the civilian unemployment rate is expected to finish both 2006 and 2007 between 4-3/4 percent and 5 percent, close to its recent level.”

And again from the same testimony:

“The projections of the members of the Board of Governors and the presidents of the Federal Reserve Banks, which are based on information available at the time of the last FOMC meeting, are for a gradual decline in inflation in coming quarters. As measured by the price index for personal consumption expenditures excluding food and energy, inflation is projected to be 2-1/4 percent to 2-1/2 percent this year and then to edge lower, to 2 percent to 2-1/4 percent next year.”

**Well… they’re 0 for 2, since they missed the aught-point-6 Q1 GDP, and I think most reasonable people will also assume they missed on in-flaggelatin’ in-flation, which they can’t do anything about without runnin’ the risk of blowin’ up housin’ or trippin’ the light fantastic of the dee-riviting derivatives markets.

Earlier in that prepared testimony Bernanke said this: **my comments to follow.

“With respect to the labor market, more than 850,000 jobs were added, on net, to nonfarm payrolls over the first six months of the year, though these gains came at a slower pace in the second quarter than in the first. Last month the unemployment rate stood at 4.6 percent.”

**That was said on July 20, 2006, and while it’s of course generally accurate regarding jobs during the first half of 2006, almost every rational observer of macroeconomics was already at the time sending up warning flares regarding the rapidly reversing condition of the housing industry, which directly and indirectly employs better than 20% (some claim as high as 35-40%) of all workers in the U.S. We now know that the at least implied continued jobs-gaining momentum of the Fed chairman’s comments regarding a somewhat healthy 850K jobs in the preceding 6 months, even though he said the gains were at a ‘slower pace’ later in the period, was, although unintentionally, totally misleading regarding what the job situation was at that time developing into. Let’s suppose the chairman had said this instead: “We’ve had 850K jobs created during the last 6 months, but it looks like we’ll have possibly near zero new jobs, net, created over the next 3 months.” I’m not saying he could’ve known this in advance, although many rational commentators were at that time evidencing real fears that it was happening, but I am saying he’d never have said it… never, ever, n-e-v-e-r, e-v-e-r… and that is something that is so hard to understand as to be practically equivalent to the average person’s understanding of theoretical physics. The human heart simply can not accept the philosophical inconsistency found in situations in which public figures may think one thing and yet say the opposite. Often when it is more important than EVER to have the truth about something, that is precisely the time in which public figures will distort it, either for their own purposes or as a sort of benevolent and paternalistic pep-talk that they generally assume is for our own good.

Here’s The Big Pic on July 13, 2006 regarding the subject of a job slowdown:
http://bigpicture.typepad.com/comments/2006/07/chart_of_the_we.html

And here’s Caroline Baum’s story linked in that Big Pic topic:

http://bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=aaXf9jqqr1cs#

**Both of these items were far better than Bernanke at predicting the upcoming jobs slowdown, and consequently a worse GDP for Q1 2007 than he was still predicting even as late as March 28, 2007, so what do we need the Fed for? Too, the 606K NFP (or a little under 500K prior to final updates) jobs that BLS declared during the quarter in which these pieces were written (that now BED tells us were actually only 19K) gave all the ammunition needed by optimists and slowdown naysayers to discount the reality of what was happening to jobs at that time, that has now largely contributed to the near recession level of 0.6% GDP (annualized as Barringo reminds us) for Q1 2007.

Rick Santelli, here’s some more pretty specific forecasting by the Fed as recent as Feb 2007, if you’re paying attention to The Big Pic:

http://www.federalreserve.gov/boarddocs/hh/2007/february/testimony.htm

“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. Such an outlook is reflected in the projections that the members of the Board of Governors and presidents of the Federal Reserve Banks made around the time of the FOMC meeting late last month. The central tendency of those forecasts–which are based on the information available at that time and on the assumption of appropriate monetary policy–is for real GDP to increase about 2-1/2 to 3 percent in 2007 and about 2-3/4 to 3 percent in 2008. The projection for GDP growth in 2007 is slightly lower than our projection last July. This difference partly reflects an expectation of somewhat greater weakness in residential construction during the first part of this year than we anticipated last summer. The civilian unemployment rate is expected to finish both 2007 and 2008 around 4-1/2 to 4-3/4 percent.”

It’s A Low, Low, Low, Low Medium-Rate World

I would be remiss in my duties if I failed to point out that this recent run up in yields — fundamental explanation here — occurred a few short months after the cover of BusinessWeek declared: It’s A Low, Low, Low, Low-Rate World Back in November, I …