After careful consideration, I remain bearish
By Andrew Lees, UBS
I highlighted in today’s daily that M2 money supply jumped by a massive USD76.1bn in the last week of June which was the biggest leap since the 22nd September 2008 when it leapt by USD178.3bn lifting the S&P 11.6% intra week.
Various explanations have been offered; seasonality, outflows from money market funds – (money market funds are apparently part of M3 which the Fed doesn’t publish but not part of M2) – as they have seen redemptions due to their exposure to European paper, and finally it may be related to the end of Rule Q which had prohibited the payment of interest on corporate deposits.
This is the largest rise since September 2008 so seasonality is not all of it and July 4th hasn’t historically given it much of a boost. Money market outflows during the week were just USD17bn and USD65bn for the month as a whole, while Rule Q doesn’t get implemented until 21st July. Perhaps it was one last roll of the dice by the Fed although it doesn’t show up in its balance sheet. Whatever the reason, money supply surged and with it the S&P. Coincident or not?
Today’s payroll figures were horrible. You can bet the macro surprise index will be back below -100 on Monday, which as you will recall had recently fallen both further and faster than its previous record in Q4 2008 (although from a higher starting point and not to the same low). The headlines were bad enough but the U6 measure jumped from 15.8% to 16.2% These are part time workers, included in the payroll figure who want to work full time but cannot due to economic reasons. In other words these are the guys that are having to scrape the bottom of the barrel working in whatever is out there presumably to service their loans etc. Payrolls would have been worse but for this jump in temporary workers. Overall the participation rate fell to a 25 year low of 64.1%. What are the prospects of the US cutting its budget deficit with these figures overhanging them, and what happens if they don’t?
If we then go back to the chart I showed at the start of the week showing that the difference between the ISM forward looking index – (of new orders minus inventories) – and the overall ISM index which as you can see has only been worse in 1973 resulting in a recession, 1979 resulting in a recession, 1984 resulting in a 175bpt rate cut from 11.75% to 10% in one go, followed by 2 further 50bpt cuts in the following month – (two cuts in one month) – and then of course last year which resulted in QE2, an annualised printing of money equivalent to 7% US GDP which has now ended.
The S&P has gone from 2 standard deviations below the 20-day moving average on the 16th June to 2 standard deviations above it now, something it did prior to the 87 crash when it rallied 6.4% in the week prior to the crash. It has been doing this more and more frequently recently although not of the scale of swing we have just seen. Our economists have already said that a single payroll figure is not sufficient to cause QE3 to which I agree. Commodity prices are telling us that further Asian stimulus is not going to happen unless offset by demand destruction elsewhere in the world.
The risks are clearly mounting up.
The payroll numbers were diabolical, yet they are greeted as “better than expected”. The US needs many times that figure each month just to cope with new entrants to the job market each year. The only thing that is keeping the unemployment low is they are falling off the rolls as time wears on, and they exhaust benefit entitlements.
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