David Rosenberg: "Does The Fed Matter?"
Nothing materially new here from David Rosenberg's latest letter, but it is useful to keep being reminded over and over how central planning has totally destroyed the primary function of capital markets: discounting, and replaced it with a dumb terminal which only responds to red flashing headlines reporting of neverending liquidity.
Does The Fed Matter
It must. Maybe not so much for the economy, but for influencing relative asset values and investor risk appetite.
If the Fed really had its way, the economy would be booming. But it is sputtering. For all the talk of one month's employment report — look at the entire quarter for crying out loud. Looking at total labour input, aggregate hours worked, it eked out a tepid 0.8% annualized gain in Q3. We know looking at margins that productivity is softening. So put the two together and we are still talking about an economy that is barely expanding at a 1.5% annual rate or basically one-third the pace of what would be considered normal in the context of a recovery that is in its fourth year. As for profits, third-quarter earnings of S&P 500 companies are forecast to have fallen 2.4% from a year ago, which would mark the first decline since 2009 (just three months ago, the consensus was for +1.9% profit growth. And Q3 expectations have been sliced by 450 basis points over this time frame. as analysts respond to a negative/positive pre-announcement ratio which the WSJ states is the highest it has been since the height of the tech bubble - burst in Q2 2001).
That the stock market is up 16% this year (on track for the best year since 2009) with earnings contracting underscores the major success of Fed policy in 2012 — managing to deflect investor attention away from negative profit trends and towards its pregnant balance sheet. So welcome to the new normal: the Fed has managed to negotiate a divorce between the economy and equity market behaviour.
And some other observations.
Clear Sign of Global Cooling
Global central banks have certainly been able to manipulate equity prices but they simply can't do much to disguise the weak state of the global economy. Usually after these QEs, commodity prices would surge, but this time, what really stands out is the sharp decline in oil — down almost 10% since mid-September as a vivid sign of decelerating global demand growth.
The hallmark of Friday's employment data was the unwillingness of companies to take on full-time staff and the low diffusion measures showing low dispersion in terms of job growth. Goods-producing employment is contracting. Monster's employment index sank to 153 in September from 156 in August. The NFIB (National Federation of Independent Business) jobs index softened as well (-0.23 in September from -0.05 in August). According to Bloomberg, job postings in the financial sector are down 17% year-on-year. The ECRI leading economic index fell for the first time in nine weeks. And on the international front. German industrial orders slumped 1.3% in August, worse than the 0.5% decline penned in by the consensus. The German data, as bad as they were, at least looked good relative to the horrible 5.2% slide in U.S. factory orders.
And let's face it, if the U.S. consumer was alive and well, we wouldn't be seeing only 1.46 million square feet of strip mall net leasing activity in Q3, down sharply from 2.2 million square feet in Q2 (Reis data). Only 569,000 square feet of new space was open — according to the Investor's Business Daily, and this was the second lowest figure since the data first began to be collected in 1999. With vacancy rates stubbornly stuck at 10.8%, rent increases have all but stagnated.
All that said, we are looking forward to the 7.5% unemployment rate report in 3 weeks.