Green Shoots Rule Over Safe Havens in Small Signs of Progress

The much awaited emloyment situation report has been released and it delivered both positive and negative surprises. The unemployment rate was higher than anticipated while the drop in non-farm payrolls was lower than expected. The shorter end of the yield curve responded to the fewer job losses with an increased yield on the two year note.

Notes & Comments for June-05-2009

• Employment Data: For the month of May-2009, the Employment Situation Report saw the nation’s unemployment rate jump to 9.4%, its highest level since August 1983. Consensus expectations were 9.2%. Non-farm payrolls dropped -325k vs. consensus estimates at -530k and previous month’s -539k. The average workweek now stands at 33.1 hours vs. consensus estimates of 33.2 and previous month’s 33.2. The -325k non-farm payrolls number leaves me a little suspicious and I would prefer to wait for the final revision. Even though the report is notorious for its volatility, this positive surprise cannot be ignored. The economy is still losing jobs and the downtick in average workweek hours reveals that employers are in no hurry to hire. Another factor to consider is the growing labor force which introduces high school & college graduates to the work force. Many of these job candidates are not having much success finding work, but the report does not take this into account. However, it certainly has an impact on consumer activity. We may be witnessing a deceleration in job losses, but while waiting for this trend to revert to zero losses or positive growth, the unemployment rate will continue to climb which could make it all the more difficult for a timely recovery. Related Securities: XLP; XLY; RTH; ADP; MWW; KNXA

• Consumer Data: Not getting much attention Friday was the Consumer Credit report since its results were released at the beginning of the final hour of trading. While unemployment ranks continue to swell, banks are tightening credit. For the month of April-2009, revolving credit shrank -$8.6bn and non-revolving credit declined -$7.1bn. Total consumer credit contracted -$15.7bn and March’s numbers were revised lower to -$16.6bn vs. the initial release of -$11.1bn. The market did not have enough time to digest this news, but I’m sure investors will ponder it over the weekend. You can bet your bottom dollar (pun intended) that the Fed and Uncle Ben certainly are scratching themselves on this number.

• Bond Watch: The two year treasury note bumped up 25 bps as some traders speculate that Friday’s employment report shows the recession is easing and the Fed will raise interest rates this year to reduce liquidity. Approaching 10% is hardly a cause for celebration. If the Fed raises rates, it will be because the bond vigilantes have placed a gun to its head to do so. Yes, a rise in rates can occur, but I do not think this is something the Fed will do voluntarily. Related Securities: TLT; UUP; GLD; DBA; DBC; USO; TIP; TBT

• Bond Watch: Bloomberg News reported that China is considering a $50bn investment in IMF Bonds. Its requirements are security of principle and a reasonable return on investment. Like everyone else, the IMF is strapped for cash as it seeks to place loans with its member countries in need of capital. Typically, developed western economies representing Europe and the U.S. held the keys to the vault. This time around it is different as China and Brazil, two developing nations with surplus reserves who have long protested for more power in decision making processes, are being courted to aid the IMF. Strategically, it makes sense for China to diversify its currency $1.95trn currency reserves and increase its influence within the IMF. This does not mean that it will pull the rug out from under the U.S. Treasury. China shares a mutual interest in propping up the U.S. economy, but diversification of its foreign reserves with an opportunity to increase its global political influence is a competing force for the Fed and Treasury. Something to chew on… Related Securities: TLT; UUP; GLD; DBA; DBC; USO; TIP; TBT

• Currency Watch: Luxembourg Finance Minister, Jean-Claude Juncker, commented that a gradual rise in the euro would not be welcomed. The euro has appreciated 13% since mid-February vs. the dollar. With Europe trying to recover from its own recession, our neighbors across the Atlantic can hardly be happy about the currency advantage the U.S. has for its exports. This can be interpreted as further intolerance for "beggar thy neighbor" monetary policy and added to Chancellor Angela Merkel’s concerns expressed earlier in the week.

• Baltic Dry Index: This shipping rate index declined -284 points Friday to 3809. Related Securities: SEA

That’s all for Friday’s economic data and related news events. The bond market’s reaction to the employment report tells me that green shoots supersede the safety of parking money in short term instruments and earning relatively nothing on cash. I am still not convinced that we are out of the woods yet, but acknowledge small signs of progress. No further comments.

(These notes and comments are not intended to be a comprehensive analysis, but instead merely highlight current themes and events for the convenience of readers and encourage them to make and share their own conclusions.)

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[whidbey:]

Wild!! Your advice seems bold and short range, or is this a long range guess? In any case why believe the employment report?? The BLS manipulation of the Birth/Death matrix was shameless and so are you for blindly accepting the hoax. Go easy on your advice someone might think you know something.

"The bond market’s reaction to the employment report tells me that green shoots supersede the safety of parking money in short term instruments and earning relatively nothing on cash."

How soon we forget, quickly we come to believe.

Jun 07 02:10 PM

[J Clinton Hill:]

Whidbey,

The original title of the article on my website reads: "Green Shoots Rule Over Safe Havens as Consumer Credit Contracts". The editor has modified the title and unfortunately it does not accurately reflect my intentions.

In the bond market, we have only seen rising rates at the long end of the curve. This time we saw a bump up at the short end because some traders speculate that the Fed may raise rates.

This observation should be monitored to see if it develops into a sustainable pattern. I am skeptical of the employment #s & state this in my report. I would prefer to see the revision and even take this with a grain of salt. I've also noted that the employment report does not take into account high school & college graduates joining the labor force. Even if the BLS manipulates the "birth/death matrix", census stats numbers show the U.S. population is steadily growing and it doesn't take too much effort to connect the dots and realize the BLS is telling a whopper.

If a shift in sentiment is underway towards the short end of the curve, then the implications deserve respect. Rising short-term rates typically forecast economic recovery. I happen to believe that we still have a long way to go before seeing any daylight in these woods and that consumer weakness does not support the late 2009 or early 2010 recovery that many anticipate.

The purpose of this report is not to offer advice but share notes on economic events and what I perceive to be the market's reaction towards them.

I am not sure if this answers your question. Hope it clarifies things...


On Jun 07 02:10 PM whidbey wrote:

> Wild!! Your advice seems bold and short range, or is this a long
> range guess? In any case why believe the employment report?? The
> BLS manipulation of the Birth/Death matrix was shameless and so are
> you for blindly accepting the hoax. Go easy on your advice someone
> might think you know something.
>
> "The bond market’s reaction to the employment report tells me that
> green shoots supersede the safety of parking money in short term
> instruments and earning relatively nothing on cash."
>
> How soon we forget, quickly we come to believe.

Jun 07 05:07 PM