Friday January 8, 2010

Friday, January 8, 2010
Some interesting economic information....
1) jobs status continues to stumble along
2) the consumer's ability to spend money to increase aggregate demand (thus improve the economy and increase job growth) continues to be flat to shrinking - and the decrease in consumer debt will not improve this facet (the deleveraging of the average consumer is a good thing for the future of our economy but it hurts today!)
3) the China syndrome will be very interesting to watch - how will they respond as we move forward (dollar/yuan price level, debt purchases, free market processes within their country, geopolitical issues) and how will their leveraging process effect their country in the future !

prb

Subject: S&Y PSG Morning Market Update for Friday January 8th

* Today's (1/8) December unemployment report showed a decline in the all-important monthly nonfarm payrolls of -85,000. The Bureau of Labor Statistics (BLS) also reported the December unemployment rate remained at 10.0%, changed from November. The markets had been expecting (hoping for?) a positive number for nonfarm payrolls.

* From a macroeconomic perspective, the lack of growth in jobs is disappointing. A review of recent labor statistics suggests companies are not laying-off workers, but neither are they hiring. The fact that businesses are not adding workers is a symptom of weak aggregate demand. Firms, both large and small, are not seeing improvement in current demand, nor do they expect it to rise in the future. As a result businesses are reluctant to expand output and hire new workers until they can be assured of more demand.

* The Treasury market reaction to today's (2/8) nonfarm number was as expected, and prices moved higher. The 10 year UST is up roughly +¼ of a point in price and he yield (when issued) is down -4 bps from yesterday to 3.78%. The 30 year long bond is up only +2 ticks in price and the when issued yield is 4.65%. The 2 year UST yield dropped below -1.00% and is now 0.94%. The Treasury yield curve remains very steeply sloped and will continue to exhibit this pattern for some time.

* Next week the Treasury will auction $74 billion in notes and bonds;
$40 billion of 3 year notes on Tuesday (1/12), $21 billion of 10 year notes on Wednesday (1/13) and $13 billion of 30 year bonds on Thursday (1/14).

* In an interesting side note. During 2009, more cars and trucks were
sold in China than in he US. For the first time in 100 years, a country other than the US purchased more vehicles. China vehicle sales for 2009 are estimated at 13.6 million compared to 10.3 million in the US. This occurred despite the fact that US GDP is 335% greater than that of China. (In 2008, US GDP was $14.4 trillion and China's GDP was $4.3 trillion.)

* A relatively large part of China's very powerful economic engine is being driven by demand from the US and other countries for its exports. This trade flow is being maintained by China's refusal to allow their currency to float in the FX markets and instead pegging their currency (yuan) to the US dollar. Very shortly, China will have the second largest economy in the world, behind the US. At some point in the not too distant future, as China's economy expands at double digit rates, it will undoubtedly be forced to stop tying its currency to the dollar and allow it to float, similar to all other major currencies. When this happens the yuan will probably appreciate significantly, and the cost of Chinese goods across the globe will surge. Consequently, China's comparative export trade advantage with the US and other countries will come under a great degree of pressure. Chinese leaders are trying to address that issue by stimulating domestic demand, hence the big increase in vehicle sales.

* Later today, the Fed releases consumer credit for November. The consensus is projecting a -$5 billion drop for the month, which is slightly worse than the -$3.5 billion decline in October. During the past 7 months (Jan - Oct) consumer credit has declined -$54 billion. Although the consumer may be reducing the debt load, which is certainly good in the long run, the short run effects for the US economy are problematic. The US economy depends on the consumer to spend and a contraction in credit will have an adverse effect on the spending level.