E-piphany

Meandering March continues, with the bond market taking this rainy Monday in New York to drift mostly sideways. June 10y Note futures lost 0.5/32nds, with the 10y note yield at 3.87%. Other markets, however, were not as quiescent. In a rare quin-fecta, the top five percentage gainers among commodity markets included one meat, one industrial metal, one precious metal, one soft, and one energy (Hogs, Nickel, Silver, Sugar, and Crude Oil, respectively), each of which gained 2.95% or more.

Front Crude, at $82.50, is flirting again with the post-crisis highs. Surprisingly little is being made of the doubling of oil prices over the last year. Partly, this is because oil at these levels is comfortably between the $40 lows and the $150 highs and doesn’t look as extreme as $82 oil did the first time around; partly the casual attitude in the market is due to an assumption that “this time, the economy can handle it – we’re not teetering on the edge like last time.” But while Crude in USD has retraced only 44% of the bust from $147 to $32, oil in Euro has rebounded 54% of the way back to the high, and oil in sterling has recovered 64% of that loss. It is reasonable to ask whether those economies, with the pressures they are already under, may sustain meaningful damage from the rise in petrol. And, as we know, what happens in Europe doesn’t necessarily stay in Europe.

Nevertheless, stocks continued their recent ebullient run, rising 0.6%. The talisman chant of “canary in the coal mine” helped. Last week, former Fed Chairman Greenspan uttered the opinion that the recent rise in interest rates was a “canary in the coal mine” warning that current deficits are dangerous; as a direct result, every fourth word on financial TV today was “canary.” By “confronting” the issue, financial cheerleaders and some investors believe that they have disarmed it. This subconscious approach, which I remember being used in the early 2000s with “corporate governance” (as if talking about it and blaming the equity weakness on corporate governance issues would make it go away), is either a sign of nervousness about the market’s actual vulnerability to the development or a sign of weak creativity genes. It may be the latter. Last year, no one could think of any other way to say “green shoots” for months on end. One thing you can say about Greenspan…he did not, and does not, lack for creativity.

Whatever happens on Monday and Tuesday, though, is mere prologue with a highly-anticipated Payrolls release due on Friday. I think the bond market will be hard-pressed to stay steady until then, especially if ADP on Wednesday shows any strength at all. With bond yields clinging to recent highs, probably the biggest jobs gain in months on tap, and anticipating thin market conditions with the stock market closed? If I was long, I’d be trimming positions here; if I was short I’d be more confident that the pot odds are in my favor (since a small selloff might well cascade through several support levels). I suspect that we may see these higher yields before the Payrolls number ever prints.

In the meantime, though, Tuesday brings a couple of less-crucial reports that still have the potential to move markets. First, the Case/Shiller home price index is expected to fall -0.6% from a year ago, versus last month’s -3.1% year-on-year figure. Failure to fall isn’t the same as rising, but if somehow a flat number shows up the bears will be in control. More important is the later Consumer Confidence release (Consensus: 50.0 vs 46.0), which plunged 9.5 points last month. The consensus is expecting a retracement, which seems reasonable but is still pretty miserable. Unlike a number of other surveys, 50 isn’t the dividing line between expansion and contraction in the Conference Board’s measure; it is indexed so that the level of confidence in 1985 is equal to 100. The record was nearly 150. So a level of 50 is merely a little less grim. Still, a positive surprise here won’t be overlooked.

As always with the Consumer Confidence figure, look at the “Jobs Hard To Get” response. That response is very well correlated to the Unemployment Rate for the simple reason that normal people responding to the confidence survey are much more in tune with what the employment situation is than a bunch of ivory tower economists in Brooks Brothers suits on Wall Street. (I shouldn’t contribute to the class warfare that is so currently en vogue, even for a cheap laugh. The real reason is that simple binary situations – can I find a job, or not? – are much more effectively evaluated by the collective observations of thousands of survey participants than by the isolated wisdom of a few really smart economists). The chart below (Source: Blooomberg) shows that that indicator has made no move to roll over yet, although it at least has stopped rising.

Why Do People Say Jobs Are Hard To Get When Economists Say They're There?

A final event to be aware of tomorrow is the talk around noon by former Fed Chairman, former Legend, and former Rational Thinker Paul Volcker on the topic of financial reform. One side effect of the passage of the health care bill has been that the Administration has been able to turn its attention to other ways to damage the economy. Higher taxes on capital gains, financial reform that will have the effect of limiting risk budgets among market-makers and driving up transactions costs and driving down liquidity for every investor in the market…these all sound like great ideas in a recession. That’s what the canaries in the coal mine are really afraid of.