Archive - Apr 1, 2011

Punchline from Dudley's Puerto Rick speech just hitting the wires: "We must not be overly optimistic about the growth outlook. The coast is not completely clear—the healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness. In particular, housing activity remains unusually weak and home prices have begun to soften again in many parts of the country. State and local government finances remain under stress, and this is likely to lead to further spending cuts, tax increases, or job losses in this sector that will offset at least a part of the federal fiscal stimulus. To sum up, economic conditions have improved in the past year. Yet, the recovery is still tenuous. And, we are still far from the mark with regard to the Fed's dual mandate. In particular, the unemployment rate is much too high." Word count of iPad: zero.

As usual the story remains the Prices Paid index, which increased again from 82.0 previously to 85, surging above expectations of 82.9. New Orders declined to 63.3 from Prev. 64.4, Employment rose again to 63.0 vs. 55.6 prior.Elsewhere, Construction Spending plunged to -1.4% on expectations of -0.2%, but it's an "improvement": last month's print of -0.7% was revised to -1.8%.

And some more bullish news for inverse consumption from JPM's Lawrence Engles Daily Note On Oil: 'As long as key economies remain on track, and given the tensions still manifest on the supply side, we remain positive on near-term price outlook and expect 2Q2011 Brent crude to average $118/bbl, prices possibly spiking towards $130/bbl, if OPEC fails act in time and raise production." Basically we are no recreating the "goldilocks" economy from late 2007/early 2008 when everyone thought crude at $150 was sustainable. And back then there wasn't quite as much "speculative actions driven by too much liquidity" as noted earlier by Charles Plosser.

Looking at today's NFP report which beat consensus by 26K jobs, it is easy to lose perspective of the big picture. Whch is as follows: in order to regain the millions of jobs lost since the start of the Depression in December 2007, and return to the same unemployment rate when factoring in the natural growth rate of the labor force of 90,000 per month (not our estimate: CBO's), the economy will need to create 245,500 jobs each and every month by the end of Obama's tentative second term in November 2016.

Goldman's Take: "Overall a healthy payroll report, but not a very large surprise relative to consensus expectations. In our view, the latest job readings will not have an immediate affect on the monetary policy outlook."

March update: civilian noninstitutional population: 239.0 million; Civillian labor force: 153,406, Employed 139,864, Unemployet 13,542. Americans not in Labor Force: 85,594. Which means that the Labor Force Participation rate continues to be at a 25 year low of 64.2%. And Birth Death adds another 117,000.

The pension system for California's teachers has $56 billion less than it needs to cover the benefits promised to its 852,000 members and their families, the fund reported Thursday, as big investment losses in 2008 continue to reverberate...

As I warned last year, Portugal is on the verge of getting bailed out. Just like its already bailed cousins in insolvency, Greece and Ireland, Portugal declared to the very last minute that they didn't need, and would not ask for a bailout. Credibility is the key!!! What many may be missing is that the cause of all of this mess is the overleveraging of banks into over valued real estate. The default or restructuring of debt in Portugal, Greece or Ireland (or realistically a combination that may include larger countries) will spike rates that will make the 2008 real estate crash look like a bull rally. Here's the lay of the land...

NFP reports March NFP at 216,000, above expectations of 190,000, and higher from an upward revised February 194K. Private payrolls at 230K on expectations of 30K. The unemployment rate at 8.8% is the lowest since March 2009. Underemployment (U-6) came at 15.7%. Average hourly earnings unchanged (0.0%), below expectations at 0.2%. Manufacturing payrolls below expectations at +17K on expectations of 30K, previous revised lower to 32K. But the kicker, as usual, continues to be the Labor Force Participation rate, which continues to be at a 25 year low of 64.2%. The average workweek was at 34.3 hours, unchanged from before, and confirming that from the Fed's perspective there continues to be a lot of slack in the economy.

Citi's economics team is forecasting +250k for Friday's NFP release, well above the median estimate of +190k. The distribution of estimates has a substantial right tail and we expect that many forecasters are erring on the side of caution. Of the 83 forecasters, 72 lie between 150k and 230k, with the other 11 stretching from 235k to 295k. The problem is that a weak number is a much clearer indication than a strong number. A significant negative surprise is likely to be very USD negative as it can not be explained away by the weather and clearly shows that the recent disappointments were not aberrations. Hold tight - the fun starts in ten minutes.

Some highlights from the just released Philly Fed president's speech, bringing yet more hawkishness into the equation:

• Says stronger rebound in economy, inflation may require aggressive policy action
• Must not be too sanguine in believing time to tighten is long way off
• Recovery will continue at a moderate pace
• US economy growing 3.5% annually this year and next
• Prospects in labour markets have improved in recent months
• Expects inflation to be about 2% over the course of 2011... so not the 8.3% which is the accurate number? Odd.

"The downgrade reflects our view of the concluding statement of the European Council (EC) meeting of March 24-25, 2011, that confirms our previously published expectations that (i) sovereign debt restructuring is a possible pre-condition to borrowing from the European Stability Mechanism (ESM), and (ii) senior unsecured government debt will be subordinated to ESM loans. Both features are, in our view, detrimental to the commercial creditors of EU sovereign ESM borrowers." Shocking

Markets in positive territory this morning in anticipation of U.S. employment figures estimated to show an improving labor market. Hawkish comments out of the Fed yesterday as the Minneapolis Fed President said that the Fed could increase rates by the end of this year, way before market expectations. The Richmond Fed President also called for a decrease in QE2. Estimates for March payroll figures due out today show declines with nonfarm at +190KE v +192K prior, private at +210KE v 222Kprior and manufacturing at 30KE v 33K prior. We think the risk is to the upside with jobs numbers, but the unemployment percentage read is difficult to say as it has dropped on lack of labor force participation versus true gains. Ireland’s bank stress tests yesterday showed its four largest banks are in need of €24B in capital. The government has created a restructuring plan which involves a combining two of the lenders together. Along with €46.3B already injected into the Irish financial sector and €30B spent on banks’ property loans, the Irish financial sector has cost an amount that is about two-thirds of the Irish economy. Chinese PMI in manufacturing rose to 53.4 v 52.2 prior. A PBoC official yesterday recommended doubling the reserve requirement ratio up to 100bps as an anti-inflationary measure.

After first it was disclosed that TEPCO does not know the different between millions and thousands, the firm which is now set to be at least partially nationalized, has decided to blame its computers for the ongoing catastrophic handling of the Fukushima disaster. From NHK: "Tokyo Electric Power Company says it will review all data on radiation
leaked from the damaged Fukushima Daiichi nuclear plant, citing errors
in a computer program. The utility says it found errors in the program used to analyze
radioactive elements and their levels, after some experts noted that
radiation levels of leaked water inside the plant were too high." In other words, every "fact" you have heard so far in the past 3 weeks - you can forget it. And since the BLS is coming, and the Nasdaq is about to fund (105% debt financed) the Japan government's multitrillion restoration effort, it will all be well from now.

The only thing that matters today is the NFP number at 8:30 am. Goldman sees 175,000 and 8.9%, consensus is 190,000, ranging from 150,000 to 295,000. NY Fed's Bill "Go Eat iPad" Dudley will speak at the E-3 summit in Puerto Rico. Expect more culinary advice on how to best cook one's deflationary plastic appliances. Also today we get the March ISM expected to come at 61.0, construction outlays, and the Dallas Fed.