18 May 2012 Recovery Concerns
Stock market averages continued down for their third week to levels last cleared in January. The S&P average, which peaked 13% above its January 3rd open is now up only 3.8% trimming more than a trillion in market value in May. The Vanguard Total Market is up 2.4% year to date. Yields on the 10-year US Treasury have tumbled from about 4% just two years ago when Greece’s debt crisis began to 1.73% today. The 7-10-year Treasury is up 21% (not counting interest) over the same period.
Investors worried about Greece’s possible exit from the European Union, JP Morgan’s $2 billion trading loss (or more), and signs of possible slowing in the stalwart US manufacturing area. The Fed also revealed their concern about US fiscal policy (or lack thereof). The president met with congressional leaders this week and found little common ground. The impasse probably portends an ugly budget fight after the election.
No one really knows how disruptive Greece’s exit from the Euro could be. But most agree that it serves as warning for the potential for political and civil turmoil in Spain and other countries with similar budget deficits. German Finance Minister Wolfgang Schaeuble said he expects turmoil in the financial markets caused by Europe’s debt crisis to last another two years. The Group of Eight is meeting today to discuss Greece and its impact on the global economy.
JP Morgan’s announcement last week of a 2 billion trading loss couldn’t come at a worse time for the banking industry which is fighting Washington’s growing regulatory tide. The administration is moving to tighten the interpretation of the so-called “Volker rule” which prevents banks from making bets with their own money. The issue is becoming a hot political topic for both parties.
On Wednesday it became known that the Fed is on record as being more skeptical about the strength of the US recovery. In minutes released from its April 24th and 25th meetings more members were open to new measures to boost the economy than the previous meeting in March. According to the WSJ, several Fed members noted a “sizable risk” that the federal government would sharply cut spending and raise taxes this year, as scheduled by current law.
Fed Chairman Ben Bernanke has warned lawmakers about economic dangers posed by this “fiscal cliff,” which includes the expirations of the Bush-era tax cuts and a payroll-tax break at the end of this year, as well as more than $1 trillion in spending cuts scheduled to kick in at the beginning of 2013.
Headline inflation slowed sharply in April as core inflation (food and energy removed) remained steady. The consumer price index posted at unchanged in April after a 0.3% boost the prior month. Retail sales slowed sharply to 0.1% in April after a strong March of .07%. Capacity utilization improved to 79.2% from 78.4% in March.
On the business side, economic reports continued to mostly support the recovery trend. Utilities played a key role in a pickup in April for industrial production. Overall the Industrial Production index jumped 1.1%, following a decline of 0.6% in March. The New York Fed strongly supported the national manufacturing charge, but Philadelphia stepped out to the line. It’s business activity index turned decidedly negative, at minus 5.8 vs a plus 8.5 in April. The contraction did not appear to be a blip either as most areas followed reversed convincingly.
Home builders reported significant improvement in demand this month, pulling the housing market index five points higher to a new recovery high of 29 and more than reversing April’s revised four point drop, according to Econoday.
A separate report showed that housing starts rebounded 2.6% in April after declining 2.6% in March. The April pace of 0.717 million units posted higher than analysts’ forecast for 0.690 million and is up 29.9% on a year-ago basis. In April, the comeback was led by the multifamily component but single-family also was healthy, according to Econoday.
It’s too early to tell if markets will suffer as badly as they did last summer, but the bullish story, perhaps even the recovery story, are becomming tougher sales. The G8 is meeting to find some common ground between fiscal austerity (now a very bad word) and growth. Germany’s Merkel maintains that growth and fiscal rigor (translated austerity) are mutually compatible. French President Francois Hollande met two days ago with Merkel for the first time and agreed to support Greece as long as voters there committed to the austerity demanded to remain in the currency region.
That’s the real challenge for leaders both in Europe and here in the US, to find some common ground between growth and austerity. Clearly, the familiar, wide, and well-traveleled road of increased government spending is now closed. People in Europe seem to want nothing to do with austerity, judging from recent elections. We face the same question in November. Until then, significant remedy or movement in any direction seems remote.