Yesterday turned out to be another day where the economic statistics indicated a healthier US economy than recent fears have suggested. Accordingly US equity markets had a better day with the Dow Jones Industrial Average rising by 50 points to 10320 and Far Eastern and European equities followed this rally.I have written many times on here that the evidence that had emerged previously could just as easily point to an economic slowdown as a collapse but some markets such as the US government bond markets seemed set on assuming much more than just a slowdown.Currency markets have been a little calmer of the last day or two but one trend that has emerged is a slight strengthening of the Euro which has rallied against the dollar to 1.282,to 108.01 versus the Yen and 1.2030 versus the pound.The Bank of Japan will be particularly grateful for the rally versus the Yen and will hope it continues.
The media are again discussing what I have labelled as “agflation” with talk of food riots in Mozambique but the Commodity Research Bureau spot index only edged higher to 458.84 and wheat is at around US $7.30 per bushel. So in fact there has been no great change in reality from the moves I have documented before. One commodity which has been rising recently however has been gold which if you take the front month futures price has rallied to US $1252 per ounce or back to the highs of late June this year,which sits somewhat oddly with the equity rally in my view. So oddly that I have checked the chart of its performance and since late July come equity market rally or fall gold has pretty much been on the march from around $1160 to here.
US economic statistics; a better housing number for once
As ever on a Thursday we got the figures for initial jobless claims which are our weekly guide to the state of US employment which has been something of a hot potato recently. For once the figures for weekly jobless claims came in pretty much where they were expected too at 472,000 particularly if you allow for the fact that the previous week’s figures were revised higher by some 5000 to 478,000 (if you read the BEA report some care is needed here at times as they do rather disappointingly put some spin on the numbers). One hopeful sign was the fact that the four-week average I have been following dipped by 2,500 to 485,500. So these were a marginal improvement but one needs to remember that such levels of initial claims still indicate falls in employment in the US economy and thus likely rises in unemployment.
Rather against the recent trend for US housing the figures for pending home sales showed an improvement yesterday. The index of purchase contracts from the National Association of Realtors rose by 5.2% in July which compares with June’s revised fall of 2.8%. So this number was unexpectedly good and leaves the position of the US housing market in a slightly confusing state. Just to add to the relatively good news same store retail sales were reported as rising by 3.5% in August.
We have seen a turn in the last couple of days in the data coming out of the US economy. To my mind it reinforces the view that it is slowing down but is not collapsing as some have seemed to think. Such numbers as we have been updated on should for now have placed some questions on the collapse scenario but as ever we need more data. For the third quarter of 2010 it looks as though growth will be lower than the second’s but by how much it is hard to say. This afternoon at 1:30pm UK time we will get a first line statistic as we receive unemployment and non-farm payroll numbers which represent job creation and hence employment numbers in the US.
With these I suggest some caution as non-farm payrolls are often revised heavily (and the recent trend has been for them to be revised adversely which needs to be addressed I feel for the numbers credibility) and I often worry as to whether an increase or decrease in the unemployment rate might be by the smallest amount as in a move from 9.549 to 9.55 leading to the rate being reported as 9.6% rather than 9.5% on the headline figure. However we all know that markets will not show such caution!
Implications: US government bonds
Perhaps the clearest effect of the slightly better news for the US economy has been on the US Treasury market or government bonds. The yield on the long bond (30 year) closed at 3.71% last night which compares with recent lows at just over 3.5%. Putting this into price terms means that the long bond has fallen by around four points from its highs and is now at around 102.25 so bond investors will certainly not have welcomed recent moves. However just to reinforce what I think has been an extraordinary trend since the spring of this year in mid-April 2010 the yield was over 4.8% so longer-term investors are still sitting on large profits.
Other countries government bonds: The euro zone peripherals may struggle
This reversal has led to the other government bond markets which have followed this rally to reverse course somewhat too. So yields on ten-year German bunds are now 2.23% while those on the UK ten-year gilt have retraced to 2.96%. Again small reversals compared to the rise but should this be a reversal of the recent trend it means that there may well be issues for the peripheral euro zone countries whose spreads to the German bund have been rising. In other words it may not have been so bad to have a rising spread when yields are falling but what happens when they rise is a more disturbing problem.Apart from Greece the current two outliers are Portugal at 5.66% and Ireland at 5.79% for the ten-year maturity.
The problem can be put into context I feel by the following figures. Over the past year government bond yields have in general fallen. However Ireland’s ten-year yields have risen by 0.96% and Portugal’s by 1.74%.
On the subject of Portugal I have seen two charts presented by a Portuguese economist Luís Aguiar-Conraria and they are concerning. He has plotted economic growth for Portugal since 1988 and put a trend line on it which has a downward slope and looks like we are now at or below zero. Also he has a chart for Portuguese unemployment since 1990 showing a trend which has been upwards and he further offers the view that Portuguese unemployment seems to rise whenever economic growth is below 2%. Sometimes charts are very revealing and these I have to confess are troubling for Portugal’s future as the problems and issues highlighted here began well before the credit crunch. Adding the view implied by these charts on what are likely to be a difficult couple of years gives a worrying future for Portugal.
The UK economy
We are starting to see one or two concerns about the UK economy. Now as regular readers will know I have various long-term concerns myself but these concerns are based on much shorter-term economic data and furthermore I notice from the Financial Times that some are using this as an excuse to call for further asset purchases or QE from the Bank of England. Some of this seems to have come from the UK obsession with house prices as on the measure used by the Nationwide building society they fell by 0.9 in August. This has been added to by a purchasing mangers survey on the construction industry which showed a fall in August to 52.1 from July’s 54.1.
Seeing as our most recent economic growth figures surprised on the upside at 1.2% and seeing that much of this was caused by an increase in the construction industry of some 8.5% then many might find these recent calls rather curious to say the least. If you look at the UK housing market one of the real problems has been the fall in the volume of sales which may have led to prices being somewhat unrealistic due to illiquidity in the market but until we get a bit more clarity on this then it is conjecture and not fact. Also the wealth effect of a fall in house prices may be offset somewhat by the fact that it may make house more affordable for first-time buyers.
However you look at it the information we have received hardly justifies the claims made on its behalf. Also if those siren voice perhaps stopped and thought for a second it might occur to them that we have had some 200 billion pounds of QE in the UK. As their claims by definition are implying that it has not worked as they might have wished perhaps they will furnish us with an explanation as to why they now feel more of it will be a solution to the UK’s economic problems. Whilst they are at it they might like to figure out a way we can reverse it one day….
Today at 1:30pm
I will be looking at the numbers and will update later on them as in spite of the caveats I have listed above they are one of the best data sources we get.
US non-farm payrolls and unemployment they look better than expected on an initial viewing
The headline figure for non-farm payrolls was -54,000 which was better than expected. The most significant figure in the report is private-sector job creation which was +67,000 and again a positve surprise, the reason for the contrast is that the government is shedding census workers as their temporary work is complete.
Also we saw,for once, some favourable revisions with the headline non-farm payroll figures revised from -131,000 to -54,000 in July and from -221,000 in June to -175,000.
These numbers are likely to more than offset the rise in the unemployment rate from 9.5% to 9.6%. I will look more into the detail of the numbers as I have more time but initially equities will like this but government bonds will not.