Thursday May 20, 2010

The parallels to the 1930's seem to be growing more apparent (to some that is) and the 'stickiness' of the jobs situation seems to be glossed over as 'we just have to wait and watch it grow slowly'...and yet we keep spending (fed, state and local governments) like drunken sailors....add to it the issues in Europe (more stress based upon irresponsible 'social' spending) and then China and its growing issues (inflation, cutting bank lending, et al) and it appears that with what we have going on (and those who are in power) this will continue to be a WILD RIDE....

prb

Date: Thu, 20 May 2010
From: Stone & Youngberg Portfolio Strategy Group


* Yesterday (5/19), the Federal Reserve released the minutes of its April 28 FOMC meeting. Although there were no surprises in the 10 pages, the minutes reflected what can best be described as frustration on the part of Fed, that its accommodative monetary policy has not produced a more robust recovery. One of the impediments to economic growth in the US is tight credit conditions especially for small businesses. From the minutes... many participants (Fed board members) noted that while financial markets had improved, bank lending was still contracting and credit remained tight for many borrowers. Smaller firms in particular reportedly continued to face substantial difficulty in obtaining bank loans. Because such firms tend to be more dependent on commercial banks for financing, participants saw limited credit availability as a potential constraint on future investment and hiring by small businesses, which normally are a significant source of employment growth in recoveries. Small businesses do not have the access to the capital markets that larger firms do and as such are almost entirely dependent on bank loans for both working capital and investment capital for expansion. Unless and until businesses have easier access to credit, the economic recovery will remain weak.


* The turmoil in Europe continues unabated, and market concern is being manifested throughout the financial system. This unrest in being seen in small, but steady increases in LIBOR. When the Greek crisis began to unfold in mid-April, three month US LIBOR was 0.30%, +5 basis points over the fed funds target rate of 0.25%. LIBOR is typically a few basis points in excess of the fed funds rate. Since then it has climbed steadily higher. At this morning's(5/20) close in London, three month LIBOR was 0.48%, a +18 basis point run-up in roughly 30 days. Although many factors may influence the level of LIBOR, it appears that financial institutions are becoming nervous over the unrest in Europe and the "cost" of lending among such banks is rising.

* The Department of Labor reported this morning (5/20) that initial jobless claims for the week ended May 15, rose +25,000 to 471,000. This represents a reversal of a trend in which initial claims had declined in each of the past four weeks, and today's figure was noticeably above the consensus projection of 440,000. Many areas of the country are still in the grips of the economic downturn and the labor markets are weakening. For example, in California there was an increase of 8,351 in initial claims from last week, bringing the total to 73,800.


* The Labor Department reported an encouraging development in continuing claims, which fell -40,000 to 4,625,000 for the week. There was also a drop of -73,000 in extended benefits to 5.34 million.



* Although somewhat encouraging, the jobless claims data continues to paint a rather bleak picture of the US labor markets overall. Some progress is being made, with both initial and continuing claims down significantly from a year ago; however, things seem to have stalled out and the current level of claims remains stubbornly high. Given the fact that we have had three consecutive quarters of positive GDP growth and the end of the recession was probably in July of 2009, 11 months ago, we should be seeing more job growth at this stage in the business cycle - but we are not.


* The Treasury market is staging a big rally in early trading this morning, Wednesday May 20. However, it has less to do with today's jobless claims data than with surge in Treasury buying from overseas and a substantial sell-off in equities both here and abroad. The 30 year UST long bond is now a full +2 points higher in price since yesterday's close and the yield is 4.12%. By way of perspective, the last time the long bond was yielding 4.12% was 7 months ago in mid-October 2009.


* The price of the 10 year UST is also surging and is now up +¾ of a point and the yield is 3.27%; down -10 basis points from yesterday's (5/19) close. The 2 year UST is also up in price and the yield is now 0.72%; down
roughly -5 basis points in yield from yesterday.