E-piphany

The market continues to tread water and lose momentum as we wait for the seemingly-inevitable election results and second round of quantitative easing. However, the bond market didn’t get the “treading water” message, and the 10y yield rose to 2.64%, with 10y note futures losing 22.5/32nds in a steady bleed all day. Inflation breakevens rose modestly.

November was once a dangerous month for fixed-income, because many dealers had their fiscal year-ends in that month. As a consequence, market-making liquidity could occasionally seem December-like but investors remained nearly as active as normal. This produced big moves, especially when mortgage convexity was a big deal, and often to higher yields.

Now, though, some of the dealers (Lehman, e.g.) that had year-ends in November have ceased to exist and others (Goldman) enjoy a December year-end as the consequence of creating a 1-month “rump” period in 2008 where losses could be chucked. So November isn’t as chilling a prospect for bond investors as it once was.

On the other hand, general liquidity is lower thanks to various dealer-unfriendly regulatory actions implemented over the last year or so. I bring this up simply because an 8bp selloff on nothing, when other markets were essentially flat, is the sort of move we might have seen in November once upon a time. I wonder if it is a one-off seller in size, or whether bond market investors generally are merely lightening up before the equity investors decide to head for the exits. I suspect the latter.

Economic data today was once again not revelatory. Consumer Confidence came in near expectations, but with “Jobs Hard To Get” edging higher. The FHFA Home Price Index rose month-on-month (versus expectations for a fall), but the S&P/Case Shiller index was softer than expected.

Tomorrow we will continue marking time. Durable Goods Orders (Consensus: +2.0%/+0.5% ex-transportation) is expected to show that Q3 followed the same pattern as the last three quarters: a decline in core durables in the first month of the quarter, followed by a rise in the last two months. Even so, if the consensus estimates obtain then the average over the quarter of core Durables will be the lowest it has been since the first quarter of 2009 (at around 1% annual rate). Indeed, the 6-month rate of change in core Durables will decline to around 1.5% (annual rate) if the consensus obtains, as the chart below shows.

The bounce appears to be over in Durables, too.

In other words, the post-Lehman easy comparisons are now fully past. For some time, it has been clear that this was happening in Initial Claims, where the average for the last year has been almost exactly what it was just prior to Lehman’s demise. The horizontal line in the chart below shows the level of Claims for 9/12/08. I have shown charts of this type before, and readers will be familiar with the message: the “recovery” of early this year, so trumpeted by politicians, equity market shills, financial journalists, and even the NBER, is only a “recovery” because the baseline is taken to be the Lehman/Fannie Mae/Freddie Mac/AIG/etc calamity, and not the recession that was already in place prior to those events. It is as if a man walking along the bottom of the Grand Canyon falls into a hole; when he climbs out of the hole he is relieved to be “back on top” again. Of course, he is still in the Canyon…

Thanks to Lehman, 2009-10 looked like a recovery. It wasn't.

Insert whatever observation you wish to make about the effectiveness of the trillions of dollars that world governments have thrown at the recession. Whatever your observation is will be correct, if you choose your perspective correctly. The trillions “worked” because we were able to climb back out of the hole. The trillions “failed” because we are still in the canyon, and that was our only rope. Fine. All I know is that we’re trying to borrow more rope if anyone will lend it to us.

Also tomorrow, New Home Sales (Consensus: 300k) is expected to show an improvement, and may well exceed the consensus estimates as Existing Home Sales did. Again, your point of perspective matters. Prior to the last four months’ of sales (282k in May, 312k in June, 288k in July and 288k again in August), the lowest tally of New Homes sold ever was the 338k of September, 1981. So contain your enthusiasm.

Actually, containing enthusiasm seems to have been the easiest task for this market for some days now, and for the next few days the most likely occurrence would seem to be continued contained enthusiasm, or even ebbing enthusiasm as we are beginning to see in bonds.