By the time the calendar turned to May, one month ago, we already knew that the economy was weakening. The jury is still out on whether the weakening in the U.S. economy is due entirely to payback from the unseasonally good winter weather, but over the course of the month it became clear to most observers that the data were coming in soft. The exception to that rule was the inflation data, but we have been assured that worry is needless.
But back in the halcyon days of April we were just beginning to realize that the Greek "bailout" had not kicked the can down the road sufficiently far. Bankia had not failed, and Spain was not yet so threatening as it is today. And certainly, the head of the ECB had not yet taken to calling the Euro framework "unsustainable," as he did today:
"That configuration that we had with us by and large for ten years which was considered sustainable, I should add, in a perhaps myopic way, has been shown to be unsustainable unless further steps are taken,"
Lest we forget how far we traveled in May, here is a quick summary of the way we were: (Source: Bloomberg)
| 4/30/2012 | 5/31/2012 | Change | |
| Crude | 104.87 | 86.54 | -17.5% |
| Gasoline | 318.44 | 282.5 | -$0.36 |
| DJUBS Ag | 160.8088 | 144.8983 | -9.9% |
| DJUBS Softs | 153.9553 | 135.8419 | -11.8% |
| DJUBS Prec Metals | 514.6371 | 477.9181 | -7.1% |
| DJUBS Ind Metals | 326.637 | 295.1249 | -9.6% |
| Dollar Index | 78.776 | 83.066 | 5.4% |
| S&P 500 | 1397.91 | 1310.33 | -6.3% |
| Spanish 10y yields | 5.77% | 6.56% | +79bps |
| US 10y yields | 1.92% | 1.56% | -36bps |
| US 10y real yields | -0.35% | -0.56% | -21bps |
| US 10y breakevens | 2.24% | 2.09% | -15bps |
Those are the financial market indicators, but we could go further. Initial Unemployment Claims for the last week of April were 368k; for the last week of May, the figure was 383k. That would seem to be the wrong direction. ADP was also weaker-than-expected at 133k. More concerning perhaps was the Chicago Purchasing Managers' Report for May, which fell to 52.7 (the lowest figure since 2009) instead of rising to 56.8 as expected. The chart below suggests that the recent numbers have been weaker than the prior numbers were strong.
Stocks sank, although slowly, until the S&P reached and briefly sank below the 1300 level again. Then, for the second time this week, the market rallied on a poll showing the largest pro-austerity party in Greece leading the largest cancel-bailout party by 26% to 24.3%. Yes, that's right: a 1% increase in the aggregate value of the equity market in the U.S. in response to a polling that was within the margin of error!
If you sold in May, I hope you went away because there weren't many places to hide. Bonds were the clear winners, but with core inflation rising in virtually every country that is obviously a limited-time offer. Today, year-on-year core inflation in Europe exceeded expectations for the second month in a row. European HICP ex-tobacco, food, and energy rose 1.6%, matching last month's figure and the high since 2009. (You wouldn't know this from the widespread headlines of "Euro Zone Inflation Drops to 15-Month Low," focusing on a headline figure that pundits hope can be interpreted as giving the ECB more room to ease. I fully expect that to happen, and for the Fed to also ease as the European disaster grows more frightening. It isn't necessary for inflation to be falling, and it won't matter that core inflation continues to rise. Central bankers simply won't consider inflation to be a matter of signal importance compared to recession/depression fears.
What a month it has been. And as May draws to a close, we are plainly getting close to a mayday cry.
