The Marta Report December 20, 2009
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COMMENT: Disparity grows between economic rebound and strains on financial systems and sovereigns
The developments this week highlight why some economists are claiming a victory over the Great Recession even as some strategists (myself in this camp) remain exceedingly wary about the sustainability of the recovery. The economic data mostly showed continued recovery, but the growing pressures in the financial and sovereign systems continued to vie for the market's attention.
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ASSET DEVELOPMENTS: Trying (vainly) to look on the bright side
Equities slipped as credit concerns outweighed signs of continued economic recovery. Eurodollar futures removed some Fed tightening priced for 2010 and 2011, although the market continues to price in overwhelming odds of Fed tightening by yearend 2010. Treasury yields tested higher but ended the week lower. The US dollar looks to be recovering on perceptions that it remains the best of a bad lot of choices for a global reserve currency.
Disparity grows between economic rebound and strains on financial systems and sovereigns
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Economic recovery remains on display
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US data mostly strong
Manufacturing/production data proved mostly better than expected. Industrial production jumped 0.8%m/m in Nov, well above the 0.5% consensus, with much of the strength coming from construction and motor vehicle activity - thanks to the cash for clunkers and homebuyers' rebate programs. The Philadelphia Fed survey unexpectedly jumped from 16.7 to 20.4, a new high since 2005. And the leading indicators index rose more than expected (0.9%m/m), showing that while the pace of the recovery is moderating, it remains strong. Only partially countering these strong prints was the Empire manufacturing survey, which took a surprising tumble from 23.51 to 2.55, although it does remain expansionary.
Housing remains depressed
Housing starts during Nov rose exactly as expected (574K), while building permits rose a bit more than expected (584K). These series continue to trace out a bottom at very depressed levels. Homebuilders' confidence mirrored the depressed state of activity, slipping again in Dec to 16, a low since June.
Overall inflation pressures normalized
Overall CPI rose y/y in Nov for the first time Feb'09, hopefully closing the chapter on deflation. Core CPI rose only 1.7%y/y, suggesting that pipeline pressures are not leaking through to core prices - or at least overwhelming the ongoing slack in the economy. But the pipeline pressures continue to build, with overall PPI jumping 1.8%, at least partially due to rising fuel prices, which stems at least partly from the weak dollar.
FOMC - held the line
In the face of these economic developments, the Fed chose to leave its target rate steady at zero to 0.25% and to maintain its view that the rate would be kept "exceptionally low" for an "extended period".
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Data elsewhere mixed but still evidence of recovery
In continental Europe, the German IFO rose more than expected to a high since Jul'08. The German and Eurozone PMIs all rose more than expected, adding to the perception that the recovery continues to gain momentum. The ZEW surveys for Germany moderated, as expected, although the EC ZEW fell more than expected, to 48.0.
In the UK, unemployment unexpectedly fell from 5.1% to 5.0%, but UK retail sales unexpectedly fell.
In New Zealand, the RBNZ business confidence for Dec fell for the 3rd consecutive month after reaching a 10yr high in Oct.
The stance of Australia's RBA was not as confident as expected. The minutes from the last meeting showed that policymakers had thought about leaving rates unchanged until they had more information about the sustainability of the Australian recovery. Deputy Governor Ric Battellino characterized monetary policy as being back in "the normal range" after the recent hike.
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Financial system anything but healthy
President Obama took American bank executives to the woodshed a couple days ago for failing to lend despite receiving billions in government aid.
For the week ended Dec 2, commercial bank lending stood at $6.8tn, down sharply from the record $7.3tn in Oct'08, barely off the recent low of $6.7tn in Oct, and roughly equal to the amount in Dec'07, near the beginning of the crisis. Banks can't / shouldn't lend when they are either sitting on toxic assets that have yet to be recognized or are bracing for rising retail defaults, and the commercial real estate tsunami that is about to strike. Unfortunately, the problem truly is so bad that despite the massive government infusions, banks are still not in a position to provide the financial intermediation necessary for a sustainable economic recovery.
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