Bizarre Bond Reaction, and Invading the Great White North (Rosenberg)

by David Rosenberg, Chief Investment Strategist, Gluskin Sheff

Breakfast with Dave, January 27, 2011 [PDF]

BIZARRE BOND REACTION

The bond market, for whatever reason, did not want to believe what it saw yesterday. First, the 5-year note auction went better than expected. No dice — the bondies still headed for the hills. Then the Fed, despite a moderate upgrade to its economic assessment in the post-meeting press release, stated that growth was still too tepid to generate any lasting improvement in the labour market and that core inflation risks were still squarely to the downside. To wit:

“The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.”

“Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”

Maybe the Treasury market thinks the Fed is behind on the inflation curve. If so, it will be as mistaken on this as it was in the summer of 2007 and spring of 2008. To be sure, the fiscal situation remains very fluid — the Congressional Budget Office just announced new deficit forecasts. The deficit-to-GDP ratio is expected to rise to 9.8% from 8.9% in 2010 (see below for more on the new CBO projections)

HERBERT OBAMA?

A long-standing colleague and reader sent this off to me yesterday and it blew me away. Read on:

Obama’s State of the Union:

“Two years after the worst recession most of us have ever known, the stock market has come roaring back. Corporate profits are up. The economy is growing again.”

Herbert Hoover, May 1st 1930, US Chamber of Commerce Meeting:

“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover.”

Obama’s State of the Union:

“Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.”

Herbert Hoover, October 22, 1932, campaign speech in Detroit:

“It can be demonstrated that the tide has turned and that the gigantic forces of depression are today in retreat. Our measures and policies have demonstrated their effectiveness. They have preserved the American people from certain chaos. They have preserved a final fortress of stability in the world.”

Obama’s State of the Union:

“But now that the worst of the recession is over...”

Herbert Hoover, June 1930, to a delegation requesting a public works project:

“Gentlemen, you have come sixty days too late. The depression is over.”

Obama’s State of the Union:

“The steps we’ve taken over the last two years may have broken the back of this recession...”

Herbert Hoover, State of the Union, December 6, 1932:

“The unprecedented emergency measures enacted and policies adopted undoubtedly saved the country from economic disaster...”

INVADING THE GREAT WHITE NORTH

We’re not the only ones bullish on Canada. Coming on the heels of Target’s announcement to set up shop here, Walmart plans on opening 40 “supercenter” stores (with eight of these being brand-new stores) over the course of the next year. See the article in yesterday’s WSJ: Walmart Growth Signals Canada as a Hot Spot.

HOME SALES GOOD BUT MORE WEAKNESS COMING?

First the good news: Total new home sales spiked 17.5% MoM in December, eclipsing the 3.5% median expectation by economists. This takes the level of new housing sales up to 329k (annualized), the best we’ve seen since April 2010. Inventories slipped, leaving month’s supply at 6.9 months’, a welcome decline from the 12+ months’ reading in January 2009, signalling a more balanced market. We saw better price action as well, with prices jumping nearly 12% in December.

The bad news is when we dig further into the data, we were less jubilant over the numbers. The gain was led by a huge jump in new home sales in the West — up over 70% MoM in December. The non-seasonally adjusted numbers painted a worse picture — every region was flat in December, with the exception of the West. So all it took was a pop from 4,000 sales to the oh-so-grand total of 7,000 sales in December in one region, the West, to generate a national seasonally adjusted at an annual rate 17.5% surge in new housing activity. It should be said, we remain a bit skeptical of the December surge.

On top of that, the weekly Mortgage Bankers Association is painting a weak picture of sales going forward. Mortgage applications for purchase slipped 8.7% for the week of January 21, making it the fourth consecutive weekly drop. This means that so far January purchase applications are tracking nearly 9% lower than in December — and point to softer numbers ahead for home sales.

CBO’S DEFICIT PROJECTIONS A SEA OF RED

The Congressional Budget Office projected yesterday in its Budget and Economic Outlook a federal deficit of $1.48 trillion for 2011, or 9.8% of U.S. GDP — a sizeable increase from their previous forecast of 7% back in August. To put this in historical context, we’re back around the ratios last seen in 1945.

Looking further down the road, the CBO expects the deficit-to-GDP ratio to decline over the course of the next several years to 7% in 2012 and down to 4.3% in 2013, reducing gradually to average around 3.1% from 2014 to 2021.
Copyright (c) David Rosenberg, Gluskin Sheff