Mish's Global Economic Trend Analysis

Reflections on the "Sure Trade" of 2014; Yield Curve Inversion Possible? Five "Sure Things" for 2015?
Economists Still Upbeat: Retail Sales Drop Seen as "Blip"
Retail Sales Post Huge Downward Surprise; Lower GDP Revisions Coming Up; Economists Easy to Surprise
Copper Plunges to Price Seen February 2006; Copper vs. Gold

Reflections on the "Sure Trade" of 2014; Yield Curve Inversion Possible? Five "Sure Things" for 2015?

Posted: 14 Jan 2015 08:00 PM PST

100% of economists predicted yields on the long end of the US treasury curve would rise in 2014. Instead, they dropped all year.

And just two weeks into January of 2015, the 30-year long bond made a new intraday record low of 2.39%, breaking the previous low of 2.44% on July 26, 2012.

Yield Curve as of 2015-01-14

click on chart for sharper image

Huge Rally on Long End

Duration	Color	12/31/2013	2015-01-14	PP Difference
30-Year	Red	3.96	2.47	-1.49
10-Year	Orange	3.04	1.86	-1.18
5-Year	Blue	1.75	1.33	-0.42
3-Year	Green	0.78	0.83	0.05
2-Year	Purple	0.38	0.51	0.13

In contrast to economist predictions, the long end of the yield curve fell 1.49 percentage points (149 basis points). That the equivalent of 6 quarter point cuts, not hikes.

Meanwhile, yields rose slightly on 2-year and 3-year treasuries.

Buying the extreme long end of the curve while shorting 2- and 3-year treasuries would have gained both directions especially if one did the latter on the few small yield rallies that did take place.

Spreads

Spread	12/31/2013	2015-01-14	Spread Shrinkage
30Yr 10Yr	0.92	0.61	-0.31
30Yr 5Yr	2.21	1.14	-1.07
30Yr 3Yr	3.18	1.64	-1.54
30Yr 2Yr	3.58	1.96	-1.62
10Yr 5Yr	1.29	0.53	-0.76
10Yr 3Yr	2.26	1.03	-1.23
10Yr 2Yr	2.66	1.35	-1.31
5Yr 3Yr	0.97	0.5	-0.47
5Yr 2Yr	1.37	0.82	-0.55
3Yr 2Yr	0.4	0.32	-0.08

In addition to the rally on the long end of the curve, every possible spread between 2-year and 30-year treasuries all tightened!

Recession Indicators

If the economy was getting stronger, yields on the long end of the curve would be rising and spreads would be widening as well.

Neither is happening.

The bond market does not believe the recovery will strengthen and neither do I. In fact, I suggest we are on the cusp of recession (something I have admittedly been wrong about before).

Yield Curve Inversion?

With the Fed still holding the short end of the curve near zero, collapsing yields on the long end coupled with tightening spreads to the downside is about as big a recession indicator as one could expect.

The typical sign of recession, an inverted yield curve with 3-month treasuries yielding more than 30-year treasuries (we saw in 2000 and again in 2006-2007) is not going to happen in the absence of rate hikes.

Yet, looking at actual spreads, I do see room for possible inversions on some parts of the curve. For example the 30yr-10Yr spread is only 61 basis points (narrowing from 92 basis points). The 5Yr-3Yr spread is 50 basis points (about half of what it was at the beginning of 2014).

If the Fed does pull off a round or two of tightening, we could see portions of the curve invert, and I would actually expect that.

I have not seen anyone else even discuss the possibility.

Interest Rate Bets

From Bloomberg

Treasury yields show traders are pricing in deflation for the next two years. The difference between yields on two-year notes and non-indexed U.S. government debt of comparable maturity, an indication of consumer prices called the break-even rate, fell to negative 0.13 percentage points, down from 1.96 percentage points in March 2014.
Interest-rate derivatives predict the Fed's policy rate will rise to about 0.43 percent by the end of December, about a third of the 1.125 percent rate central bank officials predicted in December, according to the median of their quarterly forecasts.
The worldwide bond rally sent the effective yield on Bank of America's global index of sovereign debt to a record-low 1.2 percent yesterday. Ten-year debt yields fell to 1.51 percent in the U.K., 0.65 percent in France and 0.26 percent in Japan.
There's a 67 percent chance the Fed will raise its benchmark rate to at least 0.5 percent by December. At the end of last year, wagers were focused on a September start.

Five Sure Things for 2015?

I strongly suspect one or more allegedly "sure things" for 2015 will not happen.

100% of those surveyed predict S&P will rise. See Ding! Ding! Ding! Pimco Plans a Push Into Stocks With 7 New Equity Strategies; No Forecaster Predicts S&P Decline in 2015.
100% predict yields on the long-end will rise significantly.
0% predict a recession.
67% think the Fed will hike at least 50 basis points by December.
Most think the dollar will rally further.

I take the other side of those bets, adding that if the Fed does manage to pull off a couple hikes, they will quickly reverse in 2016 as the entire global economy sinks.

Signs of Weakening Economy

For further discussion regarding the strength of the economy, please see ...

Retail Sales: Retail Sales Post Huge Downward Surprise; Lower GDP Revisions Coming Up; Economists Easy to Surprise
Retail Sales: Economists Still Upbeat: Retail Sales Drop Seen as "Blip"
Copper: Copper Plunges to Price Seen February 2006; Copper vs. Gold
Oil: What's Behind the Plunge in Oil? Winners and Losers? Boon to Spending or Recessionary?

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

Economists Still Upbeat: Retail Sales Drop Seen as "Blip"

Posted: 14 Jan 2015 01:09 PM PST

By the time economists see the next recession it may be half-over. Heck, it might even be over (it's happened before).

Through thick and thin economists remain optimistic. Today, despite an easily predictable decline in retail sales, economists did not see the decline coming. Instead, Huge Miss in Retail Sales Seen as a Blip.

U.S. retail sales recorded their largest decline in 11 months in December as demand fell almost across the board, tempering expectations for a sharp acceleration in consumer spending in the fourth quarter.

Economists, however, cautioned against reading too much into the surprise weakness, noting that holiday spending made it difficult to smooth December data for seasonal fluctuations.

"Faulty seasonal adjustments from shifts in holiday spending patterns are probably more to blame for the December decline," said Steve Blitz, chief economist at ITG in New York. "Looking at the last three months, spending is not collapsing."

Bricklin Dwyer, a senior economist at BNP Paribas in New York, said fewer post-Black Friday shopping days in November than normal threw off the so-called seasonal factor used to adjust the data, resulting in a lower December sales number.

"For January 2015, this seasonal factor will boost sales by the largest factor since 2006," said Dwyer.

"This combined with the fact that we have seen a massive boost to consumer's wallets as a result of the rapid decline in gasoline prices, suggests that January could be a big month that reverses much of the December drop," he said.

In December, a so-called core sales gauge that strips out automobiles, gasoline, building materials and food services, fell 0.4 percent after a 0.6 percent rise in November.

Economists had expected this metric, which corresponds most closely with the consumer spending component of gross domestic product, to rise 0.4 percent last month.

Unbridled Optimism

A decline in core spending (0.4% to the downside vs expectations of 0.4% to the upside) did not dampen economist optimism. (For details, please see Retail Sales Post Huge Downward Surprise; Lower GDP Revisions Coming Up; Economists Easy to Surprise)

While there easily could be a seasonal boost in January, what about autos? And what about declining wages?

More Blips

In December, Average hourly earnings for all employees unexpectedly declined 0.2%, $0.06 per hour in December vs. November. This was the largest month-to-month percentage drop since the data series began in 2006. (See Average Hourly Wages vs. CPI: Are You Ahead?)

On January 6, I commented on auto sales in Economists Upbeat Despite 4th Consecutive Decline in Factory Orders

"Auto sales are expected to reach their highest level in a decade this year, bolstered by strong job gains and cheap gas."

Expect More Surprises

One thing you can count on for 2015 is surprises, heavily skewed to the downside, even if the "expected" January sales bounce occurs.

Factory orders are down 4 months, wages are down, retail sales are down with November revised lower, but don't worry, these are all blips.

Very few see a storm brewing even though stock prices are in la-la land, and the recovery is quite long in the tooth.

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

Retail Sales Post Huge Downward Surprise; Lower GDP Revisions Coming Up; Economists Easy to Surprise

Posted: 14 Jan 2015 11:23 AM PST

So much for those allegedly strong Christmas sales. In fact, sales of nearly everything were down in the today's Commerce Department Retail Sales Report for December 2014.

Retail sales were down 0.9% compared to November vs. economist expectations of a 0.1% decrease. November was revised from +0.7 percent to +0.4 percent.

Retail Sales vs. November

Month-over-month retail sales, autos, general merchandise, and ex-auto sales are all lower.

The report shows store retailers down 1.9%, building materials & garden supplies down 1.9%, electronics & appliance stores down 1.6%, motor vehicles and parts down 0.7%, and general merchandise down 0.9%.

Food services and drinking was up 0.8%. Home furnishings posted a 0.8% gain as well. Gasoline was down 14.2%.

Retail Sales vs. December 2013

Take a good look at autos, one of the key drivers of overall sales growth for the past year.

Commerce reports "auto and other motor vehicle dealers were up 9.8 percent from December 2013, and food services and drinking places were up 8.2 percent from last year."

Economists Upbeat Despite Factory Orders

Once again economists were surprised when they should not have been.

Please consider a few snips from my January 6, 2015 report Economists Upbeat Despite 4th Consecutive Decline in Factory Orders; Auto Orders vs. Expectations.

Economists are among the most optimistic groups on the planet. Year in, year out they project improvements in growth.

So today, despite 4th Consecutive Decline in Factory Orders, it's no surprise that economists remain optimistic.

Auto Orders vs. Expectations

Automobiles orders down 2.0% and heavy duty trucks down 4.4% are standouts. Those numbers suggest the auto party is over or will soon be.

I have a simple question: Who wants a car, needs a car, can afford a car, and does not have a car? Subprime auto loans are a key reason car sales were as robust as they have been.

Nonetheless "Auto sales are expected to reach their highest level in a decade this year, bolstered by strong job gains and cheap gas."

Economists Easy to Surprise

The factory order evidence was right there, staring economists in the face, but they could not see it.

Surprise! Surprise! Surprise!

Link if video does not play: Gomer Pyle on Surprises.

Hmm. What happened to the theory that consumers would take gas money and spend it on everything else? At best, they drank some of it.

I have a strong suspicion the recovery is finally over and that 2015 will mightily surprise economists to the downside. If so, it's fitting the party would end on the recent upward GDP revisions.

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

Copper Plunges to Price Seen February 2006; Copper vs. Gold

Posted: 14 Jan 2015 12:32 AM PST

Fueling the broad commodities collapse, the price of copper is now back to a level seen on February 28, 2006.

click on any chart for sharper image

Bloomberg notes that copper is the worst performing non-energy raw material on the Bloomberg Commodity Index (BCOM), which fell today to the lowest since August 2002.

CRB

A chart of the Reuters-Jeffries Commodities Index (heavily weighted by oil) shows commodity prices are back a level seen in February 2003.

Gold

For all the bashing gold has taken in mainstream media, one might have thought gold would also be back at 2003 prices. But if that were the case, gold would be back below $400 an ounce.

Of course it's possible to spin that statement two ways.

Gold is stronger (and less volatile) for a reason
Gold has a lot more to plunge to catch up

Place your bets.

Here's mine: Gold is stronger for a reason. Stocks in general are headed for reversal of the last few years. If so, precious metals are poised to rise while the average stock is headed lower.

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

Economy News

14.1.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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