15.5.14

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


An Opportunity to Bet Against Treasuries?

Posted: 15 May 2014 09:53 PM PDT

I have been a long-end treasury bull this year for two reasons.

  1. I felt the economy would not perform anywhere close to the bullish consensus GDP forecasts
  2. Yields had soared based on expectations of hikes that I still feel are unlikely.

Curiously, Michael Novogratz, principal at Fortress Investment Group LLC claims Macro's Miss Was Shunning Long Treasuries
Michael Novogratz, principal at Fortress Investment Group LLC (FIG), said most macro hedge-fund managers missed the biggest trade this year -- buying long-dated U.S. Treasuries -- and now there's an opportunity to bet against the debt.

"There's only one great trade in macro this year we missed, most macro missed -- buying duration in the Treasury market," Novogratz said at the SkyBridge Alternatives Conference in Las Vegas today. "Yields are getting to an area where being long doesn't make sense and having a sizeable short makes sense."

Long-dated U.S. Treasuries have gained 11.9 percent this year, beating stocks and junk bonds, as the U.S. economic recovery showed signs of slowing.

Bears are sticking to their call that bond prices are going to collapse even as recent evidence points to the opposite. The short trade remains popular with individuals and professional speculators who believe they will profit as the Federal Reserve pulls back on monetary stimulus.

Novogratz is co-chief investment officer of Fortress's macro funds, which seek to profit from broad economic trends by trading everything from bonds to commodities. Fortress's main macro fund, which invests across products and geographies, lost 6.3 percent this year through April 30, according to a regulatory filing.
Opportunity Knocks?

Novogratz says there is an "an opportunity to bet against the debt".

Why?

I can easily understand why one would not want to be long treasuries after this rally. Shorting treasuries is another matter unless one thinks the economy is poised to take off and there is no need for risk aversion.

If the economy is slowing more than consensus targets or if a flight-to-safety trade in conjunction with falling equities is baked in the cake (I think both are likely), one would want to be long or on the sidelines, not short.

There are always opportunities to do the wrong thing! Shorting treasuries at this juncture is likely one of them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Treasury Yields Decline in Spite of Price Inflation; Mortgage Rates vs. Treasuries

Posted: 15 May 2014 12:44 PM PDT

Curve Watcher's Anonymous has its eye on the US treasury yield curve today.



click on chart for sharper image

Chart Symbols

  • $TYX: 30-Year
  • $TNX: 10-Year
  • $FVX: 05-Year
  • $IRX: 03-Month

Yields Decline Today



The above table of US Bond Yield changes from Bloomberg.

CPI Up - Treasury Yields Down

With the CPI up more than expected, and with food inflation averaging 3% annually over the last three months (see Food Prices Soar; CPI Posts Biggest Gain in 10 Months; Real Average Earnings Decline) one might have expected yields to rise.

Instead, yields fell. Why?

The US economy is slowing more than expected. Lately, economic surprises have been to the downside.

Mortgage Rates at 11-Month Low

Bloomberg reports Mortgage Rates Dropping With Bond Yields at 11-Month Low
A rally in the mortgage-bond market may send U.S. home-loan rates to the lowest in almost a year, bolstering a slowing real-estate recovery.

Yields on Fannie Mae securities that guide borrowing costs because they're used to package new 30-year mortgages for sale fell 0.04 percentage point today to about 3.16 percent as of 1:50 p.m. in New York, according to a Bloomberg index. That would be the lowest closing level since yields reached a four-month low of 3.15 percent on Oct. 29, after they surged to as high as 3.81 percent in September.

The average rate offered on typical 30-year mortgages fell to a six-month low of 4.2 percent this week from a 2013 high of 4.58 percent in August, according to Freddie Mac surveys. Borrowing costs, which are driven by changes in lenders' profit margins as well as bond yields, are up from a record low 3.31 percent in November 2012
Divergence Between Mortgage Rates and Treasuries

There can be leads and lags in mortgages vs. treasuries but generally they are in close sync.

30-year Mortgage Rate



Chart courtesy of Bankrate.

With home prices up and mortgage yields not dropping, home affordability is declining. Sales will follow. Expect household formation to stay in the gutter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Food Prices Soar; CPI Posts Biggest Gain in 10 Months; Real Average Earnings Decline

Posted: 15 May 2014 10:15 AM PDT

The BLS released CPI for April this morning. Data shows prices ticking higher with food up substantially for the third month.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in April on a seasonally adjusted basis, the U.S. Bureau  of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment.

The indexes for gasoline, shelter, and food all rose in April and contributed to the seasonally adjusted all items increase. The gasoline index rose 2.3 percent; this led to the first increase in the energy index since January, despite declines in the electricity and fuel oil indexes. The food index rose 0.4 percent for the third month in a row, as the index for meats rose sharply.
Food Breakdown Home vs. Away

FoodFebMarchApril
At Home0.50.50.4
Away0.30.30.3
Combined0.40.40.4

Consumer Prices Post Biggest Gain in 10 Months

Reuters reports Consumer Prices Post Biggest Gain in 10 Months
U.S. consumer prices recorded their largest increase in 10 months in April, pointing to some inflation in the economy.

The Labor Department said on Thursday its Consumer Price Index increased 0.3 percent last month as food prices rose for a fourth consecutive month and the cost of gasoline surged.

That was the biggest rise since June last year and added to March's 0.2 percent rise.

In the 12 months through April, consumer prices rose 2.0 percent after gaining 1.5 percent in March. That was the biggest increase since July last year and in part reflected prices coming off last year's low base when energy costs decreased.

In the 12 months through April, the core CPI increased 1.8 percent. That was the biggest gain since August last year and followed a 1.7 percent rise in March.
Real Average Earnings Decline

Higher prices in this competitive environment generally lead to falling real wages. Sure enough, the BLS reports Real Average Hourly Earnings Fall 0.3 Percent in April
Real average hourly earnings for all employees decreased 0.3 percent from March to April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This decrease stems from unchanged average hourly earnings combined with a 0.3 percent increase in the Consumer Price Index for All Urban Consumers

Real average weekly earnings fell 0.3 percent over the month due to the 0.3 percent decrease in real average hourly earnings combined with an unchanged average workweek. 

Real average hourly earnings fell 0.1 percent, seasonally adjusted, from April 2013 to April 2014. The decrease in real average hourly earnings, combined with a 0.3 percent increase in the average workweek, resulted in a 0.2 percent increase in real average weekly earnings over this period.

Real average hourly earnings for production and nonsupervisory employees fell 0.1 percent from March to April, seasonally adjusted. This decrease stems from a 0.1 percent increase in average hourly earnings combined with a 0.3 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers
Success or Failure?

The Fed is hell bent on producing 2% inflation. The Fed succeeded, but median real wages have not kept up.

Obama's solution, now embraced by Mitt Romney and other prominent Republicans is to hike the minimum wage (see Mitt Romney, Tim Pawlenty, Rick Santorum Call for Higher Minimum Wage; Tweedle-Dum vs Tweedle-Dee)

My solution is to stop all the manipulation by the Fed, by the president, by Congress, and by state and local governments. Such manipulation not only causes the wage inequality that nearly everyone moans about, it also has led to various bubbles of increasing amplitude over time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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