April 03, 2010

Market Insights - 3 April 2010

Here is the latest issue of Market Insights, due to the long Easter week-end in abbreviated form.

As always, please email any questions to: info@fxistrategies.com

In This Week's Issue
• Weekly Snapshot
• Chart Of The Week
• Weekly Barometers 
• Uptick In US Employment  Numbers
• More On Inflation
• Wall Street & Dishwashers

Weekly Snapshot
• China offer on free-trade talks with India. Mutual trade expected to rise to $60bn this year (FT)
• US nonfarm payroll employment increased by 162,000 in March, unemployment rate at 9.7% (BLS)
• Oil rose above $85 on Thursday, highest level in 2010 (AP)
• The Euro reached a new low against Swiss Franc @ 1.4144 on Thursday (eSignal)
• Annual iron ore contract system collapses; steel prices set to soar (FT)
• US home prices post smallest annual decline in 3 years  - 0.3%  (AP)
• US consumer confidence rebounded in March to 52.5, up from 46.4 in February (Conference Board)
• US Personal income in February 2010 increased less than 0.1% from January 2010 (ESA)
• US Real and nominal personal consumption expenditures (PCE) rose 0.3%(ESA)
• China's Geely inks binding deal to buy Sweden's Volvo Cars from Ford for $1.8 billion (AP)

Charts Of The Week
Please consider the (left) chart below courtesy of Calculated Risk Blog which has some of the best charts on housing and other economic data.  Another way of deciding whether the US housing market is on a way to recovery is to examine the cost of housing versus renting.  Both versions of the Case-Schiller Index on US home prices versus rent appear to have made small recovery.  But while pondering whether this is indeed a recovery or just a small pause in the continuation of the massive downward trajectory since early 2006, let us compare the price-t0-rent ratios in other countries.  The chart on the right is from last year but it shows how insane the assumption was (in hindsight of course) that housing prices must continue to climb if it was so much more expensive to buy than to rent.  It also shows that the US housing market was not the “most insane” of all – at least by that measure.

US Price-to-Rent Ratio

 

International Price-to-Rent Ratios

PriceRentDec2009   housing_bubbles_chart

Weekly Barometers

Stock-2010-0402   FX-2010-0402

Uptick In US Employment  Numbers
As reported by the US Bureau of Labor Statistics on Friday, nonfarm payroll employment increased by 162,000 in March and the unemployment rate held at 9.7 %.  Slightly less new jobs than the consensus forecast but hey, at least more jobs have been created than were lost in March.  Is it time then to uncork the champagne bottle that has been sitting in your cabinet for the past two years?

Let’s look a little deeper into Friday’s employment report:

Among the major worker groups, the unemployment rates for adult men (10.0 per-
cent), adult women (8.0 percent), teenagers (26.1 percent), whites (8.8 per-
cent), blacks (16.5 percent), and Hispanics (12.6 percent) showed little or no
change in March. The jobless rate for Asians was 7.5 percent, not seasonally
adjusted.

The number of long-term unemployed (those jobless for 27 weeks and over) in-
creased by 414,000 over the month to 6.5 million. In March, 44.1 percent of
unemployed persons were jobless for 27 weeks or more.

The civilian labor force participation rate (64.9 percent) and the employment-
population ratio (58.6 percent) continued to edge up in March.

The number of persons working part time for economic reasons (sometimes re-
ferred to as involuntary part-time workers) increased to 9.1 million in March.
These individuals were working part time because their hours had been cut back
or because they were unable to find a full-time job.

About 2.3 million persons were marginally attached to the labor force in March,
compared with 2.1 million a year earlier. (The data are not seasonally adjusted.)
These individuals were not in the labor force, wanted and were available for
work, and had looked for a job sometime in the prior 12 months. They were not
counted as unemployed because they had not searched for work in the 4 weeks pre-
ceding the survey.

While the 162K additional jobs are encouraging at first glance, that number includes 48,000 temporary workers hired for the US Census which brings the total closer to the number of additional jobs needed to keep up with the growing US demographics (the US needs to grow about 120,000 new jobs each month to keep up with the growing population). 

The more concerning element of this report however, is the fact that a record 6.5 million or 44.1% of the unemployed have been out of work for 27 weeks and longer.  As the chart from Calculated Risk indicates, that is now a rather disheartening record 4.3% of the civilian workforce.

UnemployedOver26Weeks

In comparison to other employment recessions since WWII, this time around the long-term unemployed are putting a significant dent in the employment picture and underscore the essentially jobless growth we have seen in the past 12 months.  To turn things around and to bring the long-term unemployed back to work, structural improvements rather than crowd-pleasing short-term stimulus projects are needed.  It takes a lot more economic activity before the 8 million job losses since the beginning of the Great Recession can be reversed. Tough choices ahead...

EmployMarchRecessions

For the time being, the labor market has stopped declining and this is indeed very encouraging news.  The direction is positive and if the chart above is any indication of things to come, we can take a  somewhat  optimistic view of the future.  The red line indicating the current employment recession seems to approach the end of the trough.  Extrapolating an optimistic way going forward, purely based on a chartist’s perspective, the curve is about to reverse and hoping for symmetry in the curve development, things should get back to normal within approximately 2 years.

More On Inflation
Inflation versus deflation, the discussion continues...Readers of this blog know that I am typically more hawkish i.e. concerned about inflation than fearing deflationary pressures.  While the risk of further deleveraging particularly in the housing market still exists and a still very cautious US consumer may continue to put a lid on consumer prices, we cannot ignore signs of inflation creeping in at various levels now.

• Copper reached the highest level since July 2008
• Oil prices topped $85 this week, the highest level in 18 months 
• Gold and Silver remained within a narrow range of their all-time highs
• The CRB Index increased about 25% since last March and continues along an upward trend line
• Annual iron ore contract system collapses, steel prices set to rise and may push up product prices
• Initial signs of an upward move in Bond yields; 10-year US Treasury at 3.93% highest since last June.

We also like to refer to a very interesting article questioning the validity of the consumer price index.  Please consider  http://www.shadowstats.com/article/consumer_price_index which is the basis for the chart below.

sgs-cpi

While it is open to interpretation as to how realistic these statistical measures are, the alternative measures of CPI depicted on this chart sure make for a good debate.  The blue line in the chart is probably closer to what many average consumers would consider the felt-inflation, something we discussed in a previous commentary.

Wall Street & Dishwashers 
Liz Claman explains how Wall Street is a casino where the dishwashers have to pay for the bankers' insane bets. Enjoy!

Best wishes for a Happy Easter!

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