BondSquawk Daily

BondMoves would like to thank BondSquawk.com for allowing us to reprint the following information. All copyrights are retained by BondSquawk.

August 23rd, 2012

• More Fiscal Cliff Scenarios
• Manufacturing Activity Survey Improves But Still Lackluster
• New Home Sales Riding an Upward-Tide
• Jobless Claims Climbs but Signals a Subtle Improvement
More Fiscal Cliff Scenarios
Posted: 24 Aug 2012 03:00 AM PDT
By Walter Kurtz – Sober Look
August 24, 2012
Back in May we discussed the impact of several possible “fiscal cliff” scenarios on the US GDP growth (the GDP drag). Those projections were developed by Goldman. We now have a similar analysis performed by Credit Suisse. CS broke down the various possibilities into four likelihood “baskets”:
Basket 1 – The CBO’s “other spending and revenue changes” and the Obamacare tax increases. In our judgment, both highly seem likely to phase in. This would impart the smallest amount of fiscal drag.
Basket 2 – The payroll tax cut, which is losing support and doesn’t appear likely to be extended, but there is still some chance it will. Basket 1+2 is our “most likely” scenario.
Basket 3 – This includes the upper income tax hikes, budget sequester, and expiration of emergency unemployment insurance benefits and the “other expiring provisions” (including the bonus depreciation allowance). These are “on the table” but not part of our baseline.
Basket 4 – The expiration of tax rates below the $200K/$250K threshold, failure to patch the AMT, and failure to enact the “Doc Fix.” In our view, all are highly unlikely.
Then each scenario would represent a combination of these baskets as a cumulative effect.
 Best Case = Basket 1
 Most Likely = Basket 1 + Basket 2
 Plausible Downside = Basket 1 + Basket 2 + Basket 3
 Worst Case = Basket 1 + Basket 2 + Basket 3 + Basket 4
And here is the impact of these scenarios on nominal US GDP.

Source: Credit Suisse
Clearly there is a significant chance that, if not addressed, the “fiscal cliff” will tip the US economy into a recession. This was discussed months ago by numerous economists. But today the Congressional Budget Office made the news by stating the obvious – with timing that certainly feels politically motivated.
Politico: – A trip over the fiscal cliff would likely send the U.S. economy into a recession in 2013, the Congressional Budget Office said on Wednesday, underscoring the impact that congressional gridlock will have if a deal to prevent scheduled tax hikes and spending cuts cannot be struck by the end of the year.
Visit Bondsquawk on Facebook!
Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Manufacturing Activity Survey Improves But Still Lackluster
Posted: 23 Aug 2012 09:00 PM PDT
By TJ Kim
August 24, 2012
Manufacturing activity improved slightly in July suggesting that the recovery is still intact for the U.S. economy according to a survey. Markit released today its Flash Purchasing Managers’ Index for August which was up 0.50 to 51.90.
Although the increase was minimal, the data was appealing in that growth came from the Output, New Orders, and Quantity of Purchases components, all of which direct to active production activities. This month, manufacturers made larger purchases of inputs while consuming their inventories at a faster rate than the previous month, indicating larger output in the subsequent months.

Meanwhile, though at a slower rate than the previous month,both Employment and New Export Orders expanded in August. However, the increase was not significant enough to capsize the unemployment rate standing above at 8%.

Despite some improvements in the PMI, it does not appear that the economy is fragile since it is likely to grow slowly at best. Given the slow economic progress and endless talks of another round of Quantitative Easing, bond yields may remain low in the interim as evident by the U.S. 10-Yr Treasury Yield down at the mid-1.60%.
The above data were collected by Markit from a panel of participating companies in its survey. The data that Markit collected here have no relation to the ISM’s monthly Manufacturing Composite Index which captures a more comprehensive view on manufacturing. The ISM’s Manufacturing Composite will be released on September 4th.
Visit Bondsquawk on Facebook!
Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

New Home Sales Riding an Upward-Tide
Posted: 23 Aug 2012 09:00 PM PDT
By TJ Kim
August 23, 2012
While mortgage rates are slowly returning from their lowest points and housing prices remain fairly low, consumers are still finding opportunities in the housing market.
In today’s report on New Home Sales, New Home Sales rose 3.6 percent in July to an annualized rate of 372,000. The result surpassed the consensus which came out at 362,000, indicating an increase in demand in housing sector for the month of July.

Due to relatively strong readings in sales, supply at the current sales rate is down 0.2 months from June’s 4.6 months and 1.1months less than a year ago. The slowly depleting inventory in housing might invite more builders to the current market which may fuel future housing permits.
Although today’s report may bode well for both housing and the economy, it is too early and uncertain to announce any substantial changes, since New Home Sales has been pretty steady over the past 3 months with ups and downs offsetting each other. Moreover July’s Housing Starts released last week fell short of the consensus, bearing the possibility for a decline in August New Home Sales.
Regardless given the improvement in New Home Sales, housing continues to recover from the crisis. If and when the housing recovery fully takes shape and finds the momentum that the economy is searching for, bond yields should increase. However given the lack of clarity coupled with the possibility of another round of policy easing from the Federal Reserve, bond yields may stay low and stable for the time being as evident by the U.S. 10-Year trading in the mid-1.60%.
Visit Bondsquawk on Facebook!
Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Jobless Claims Climbs but Signals a Subtle Improvement
Posted: 23 Aug 2012 08:53 AM PDT
By TJ Kim
August 24, 2012
While the unemployment rate stagnates at above the 8% level, last week’s jobless claims suggests a mild improvement from the previous month.
In the week ending August18, the number of the first-time applicants of unemployment insurance rose to 372,200, an increase of 4,000 from the previous week’s figure of 368,000. As a result, the 4-week moving average edged up to 368,000.
Although today’s jobless claims was a bit disappointing, it still nudged down August’s average by 8,000 from July’s average of 376,000.

Economics research analysts from Barclays Capital and Deutsche Bank are on the same page, forecasting a moderate recovery in the labor market. Barclays’ Mr. Gapen writes,
“Overall, we view this report as suggesting that the modest improvement in labor market conditions that began in July have continued into August.”
Mr. LaVorgna and Mr. Riccadonna write in Deutsche Bank’s Data Flash,
“This gives us confidence that payroll growth in August will be similar to the prior month. Hence, we expect +150k for headline payrolls (+160k private) and a one-tenth decline in the unemployment rate to 8.2%.”
There has been an inverse relationship between jobless claims and payroll growth which is one of more definitive indicators for the job market. Having said this, the August to July basis analysis on jobless claims still bodes well for August’s employment but it still cautions a tempered growth in payrolls.
Visit Bondsquawk on Facebook!
Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

© Bond Market News Built for Bond Trading | BondMoves.com
CyberChimps