The information below indicates trends and is not a predictor of what rates are going to do in the future. You might tend to agree or disagree with the information below. This is not my opinion. Many of us look at trends and have established opinions of our own, supplying data to back up your opinion is important and here is some data that supports these observations.
Every picture tells at least a few stories
With credit to Rod Stewart for his 1971 hit song the US economy shows a clear picture but there seems to be strong disagreements between the Fed and economists as to what action should be taken over the remaining 7+ months in 2007. The background begins with global growth (China, Europe, UK) stronger than the US and central banks raising short rates to combat a fear of inflation (UK). Friday morning's US retail sales number of -0.2% shows the American consumer is spending hard earned money on gasoline at the expense of other household items. With gasoline prices soaring and oil prices falling due to a surplus of oil and a scarcity of operating refineries the future for retailers looks bleak. Normally a slowing economy would bring the Fed out of its hibernation and into an easing mode that would surely be welcome by the majority of the real estate industry. But this is not a Greenspan Fed that focused on economic growth but a Bernanke Fed that wants to send the inflation monster into permanent retirement. Wednesday's FOMC release http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070509/default.htm stated a concern that inflation (2%) fails to moderate as expected. That is not surprising but what happens if inflation slows, the economy slows but the stock market continues to rise? This Fed is inexperienced with only 16 months on the job and is using the market as a judge (TIPS & 10 yr. Treasury) but must remember that the collective wisdom of investors is not always correct. Former Fed Chairman Greenspan had an impressive batting average but was clearly wrong on many occasions but was smart enough to correct his mistakes within a few months. Mr. Bernanke wants to make sure that his first ease will not be reversed quickly due to the negative impact on his building credibility.
Stock market, interest rates, commodities, etc.
We are just 7 weeks away from the second half of the year and our favorite seasonal pattern for long-term interest rates which shows a 75% chance of lower rates based on data back to 1966. The seasonal pattern is the opposite for the first half of each year and 2007 has seen a 28 basis point increase from low to high (4.62 - 4.90) and it occurred in 25 days (1/04-1/29) the lowest rise in 41 year database. The second lowest rise occurred in 1976 and was only 53 basis points and was followed by a 120 basis point decrease in the 2nd half of that year. For the first 4+ months of this year the bond market has been the tail to the stock market's movements. Yesterday's stock market decline was accompanied by a decline in treasury rates and today's stock advance was followed by a rise in long rates. It is clear that the bond market is not following economic fundamentals because the negative retail sales news should have created a bond rally that carried through the day. Commodity prices continue to rise and fall at the same rate as an amusement park roller coaster with Corn leading the way today on a better than expected crop forecast. The yen carry trade continues to provide unlimited liquidity to worldwide hedge funds but of course does NOT guarantee profits. The downside of this liquidity is that violent market moves occur frequently and many times randomly, leaving market players confused, dazed (for those on the wrong side) and seeking explanations when none are to be found. Gold falls this week (Spain central bank selling?), oil falls and gasoline rises (refinery outages?), etc. The importance of this to the average consumer? The Fed is seeking certainty before it can move to lower short-term interest rates and the overwhelming evidence from the economic picture has Mr. Bernanke and his crew thoroughly confused so they just sit and sit and sit while waiting for 1) The 10-year US treasury to drop below 4.50% for at least two weeks, 2) the unemployment rate to rise above 5% (12/07?), 3) the stock market to at least not make new highs (9/07). One of the these three requirements will move the Fed to the on deck circle, two of the items will move the Fed into the batters box and three will have the Fed swinging for the fences with a full blown ease. It's time to take a seat behind home plate, grab a hot dog and cold drink and sit back and watch the game between the Fed and the worldwide markets which could easily go into extra innings
Question: Why does the US government like an advancing stock market?
Answer: The Treasury announced that in April the US budget recorded a $177 billion surplus which is the second highest in history. (4/01 was $190 billion)
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