A Hint - Just A Hint - Of A Breather

By: Michael Ashton | Thu, Apr 21, 2011
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It may have been predominantly the 'bots trading today (or, equivalently, the junior traders), because the market mostly ignored information that was mostly bad. Here is a quick run-down:

Initial Claims did not decline back to the prior trend, but rather printed at 403k and last week's surprise was revised higherto 416k. This news caused a reaction in the bond market, as I had thought it would if it happened, but that jump in bond prices was erased quickly. The chart below shows 'Claims. The couple weeks of higher numbers are not cause for alarm; only a couple weeks of data in this volatile series doesn't add a lot of information. If you put your hand over the pre-March period, it looks like an uptrend, but this is an optical illusion. The fairer supposition is that Claims have temporarily stabilized around the 380-410k level. If that turns out to be true, it should be discouraging for those who are bullish on the economy because that level of Claims is not consistent with the steady job growth the economy bulls require (and the Fed desires).

US Initial Jobless Claims
It's not an uptrend in Claims, but neither is it still a downtrend.

There is a more benign possibility behind the jump in Claims. It could be that this bump higher is related to Japan-supply-chain disruptions. Goldman Sachs put out an analysis today about the effects of the supply chain disruptions on GDP, and made the point that one main supplier (40% market share) of auto microcontrollers has "several key facilities in the affected area [of Japan]." Goldman's auto analysts expect roughly a 10% decline in North American vehicle production in Q2, due (mostly) to a shortage of MCUs. This is just a guess (albeit an educated one), but my point in bringing it up is to note that this by itself is clearly a disruption large enough to cause a mild blip higher in layoffs. And auto manufacturing will not be the only industry affected by supply chain issues.

As I said, though, this is a relatively benign interpretation, because if it is accurate then once MCU production and auto production and other supply wrinkles are ironed out then 'Claims could and should move lower once again...assuming that the bullish view of the economy is correct.

Also casting a shadow on the economic outlook was the sharp and unexpected decline in the Philly Fed Index to 18.5 from 43.4, when 36.9 was expected (there followed another jump in bonds, and another retracement). That also is not a cataclysm: an index above 0 indicates that things are getting better, and this just means they are getting better at a slower pace. But, as with Initial Claims, this is a little discouraging to the economic-boom crowd because a moderation now in the recovery process is too early if we're going to get unemployment from 9% to something reasonable in a bearable period of time.

The FHFA Home Price Index report isn't usually worth pointing out, but in this case I will take administrative note of the fact that the 1.6% month/month decline was the second-worst on record behind only November 2008. There is a ton of noise in this series, but this is still a bad month. Nevertheless, even here you could try for a positive spin if you really worked at it: one might argue that higher home sales numbers at lower prices suggests that sellers are finally capitulating and the inventory is clearing. That's a stretch, however, since the inventory numbers themselves haven't declined.

Finally, the dollar today broke marginally below the December 2009 low in very light volume. This helped push commodities higher yet again.

To be clear, on my vacation next week I am not going to worry about automotive supply chain issues, the weakening in the Philly Fed survey, home price indices, or the dollar index. These are all concerns, but they are not big concerns at the moment. Evidently this is also true for equity investors. We will see what a week's seasoning will do and what spin (if any) the FOMC puts on the deceleration in its statement after Wednesday's meeting. And I will write again on or about May 2nd.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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