RDQ Economics Reports and Analysis

Conference Call: Spring Cleaning—Reconsidering Economic and Market Themes

economics1 — Tue, 20 Mar 2012 18:45:16 +0000

John Ryding, RDQ Economics Chief Economist, hosted a conference call on March 20, 2012:

Spring Cleaning—Reconsidering Economic and Market Themes

Please click on the play button above or the link below to listen to a replay of the conference call:

march-20th-conference-call-replay

Email economics@rdqeconomics.com for a copy of the charts for the call.

Operation Twist or QE 2.1?

economics1 — Thu, 01 Mar 2012 18:30:12 +0000

In our Weekly Commentary yesterday (Treasury Market Out of Step) we said that “unless there is another round of QE, [the] percentage [of net Treasury issuance bought be the Fed] will be approximately zero.” Well it turns out that this isn’t quite true. While digging around the New York Fed’s website on Treasury operations today, we came to the realization that Operation Twist is resulting in net Treasury purchases by the Fed. How so? Because Operation Twist (OT) involves the sale of $400 billion of short-dated Treasuries (with maturities between three months and three years) and the purchase of the same amount of long-dated Treasuries (more than six years). However, the purchases and sales are measured in terms of par or face value. Since short-dated Treasuries are nearer to maturity than long-dated ones, it stands to reason that at current low yields, the longer-dated Treasuries will, on average, be purchased at a market price that is further above par than the market price of the securities that are sold. How significant is this effect in terms of net purchases?

We looked at all outright purchases and sales by security since September 21st (when OT was announced) and calculated the following:

Outright Purchases

Par Value $224.2 bn
Weighted Average Price 116.75
Market Value $261.8

Outright Sales

Par Value $223.5
Weighted Average Price 102.41
Market Value $228.9 bn

Since OT began, the par values of purchases and sales have matched within $1 billion. However, the operations have resulted in a net injection of reserves of $32.9 billion. If we assume that the same pattern of purchases and sales continues for the remaining $176 billion of par value of OT, then the Fed will make net purchases of some $25 billion before the end of June (roughly $6 billion per month). In total, therefore, Operation Twist will result in the net purchase of close to $60 billion of Treasuries. How clear was the Fed in spelling out that Operation Twist was really QE 2.1? The answer is not very clear. The Federal Reserve Board’s FAQ on Operation Twist is misleading, noting “Under the maturity extension program, the Federal Reserve intends to sell $400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities” (our emphasis), which implies that it is a dollar for dollar swap. The New York Fed’s FAQ is more precise but, in our opinion, downplays the impact. According to the NY Fed “The FOMC directive involves purchasing and selling $400 billion in Treasury securities in terms of par value. Given the differences in prevailing market prices for shorter-term and longer-term Treasury securities, the market value of securities purchased and sold will likely differ to some degree. Accordingly, these operations could lead to changes in the amount of reserves in the banking system, though such changes are likely to be moderate relative to the size of the purchases and sales” (again our emphasis). We think this downplays the impact in two ways. First, by saying that purchases and sales “will likely differ,” which does not imply which side of the transaction is likely to be greater. Second, by calling the difference “moderate.” Admittedly, relative to a $2.9 trillion balance sheet, an additional $60 billion increase in Treasury holdings is only a 2% increase and perhaps this is indeed moderate but we think, in the interests of transparency, the Fed could either have spelled this out or calibrated the operations in market price rather than par value terms.

Treasury Market Out of Step

economics1 — Wed, 29 Feb 2012 18:15:12 +0000

** In our view, longer-term Treasuries are out of step with U.S. economic fundamentals and other asset classes. Equities and commodities are rising again, spreads are narrowing, and the dollar has weakened—but ten-year Treasury yields remain below 2%.

** Inflation expectations cannot explain the low level of yields since ten-year inflation breakevens have risen—the problem lies with negative real rates.

** Negative real yields are fundamentally inconsistent with a growing economy and rising real equity prices and are likely to be the result of financial repression.

** Foreign official purchases may have played a role in forcing down yields during the financial crisis (as they did during the bond market conundrum period) and the Fed’s purchase of 61% of the net issuance of Treasuries last year was important. However, global FX reserves have begun to shrink, China has been selling Treasuries, and without another round of QE, the Fed will not increase its Treasury holdings this year.

** The Fed’s forward commitment to keep rates on hold until late 2014 has probably played its part in keeping yields down. However, this is a contingent commitment and we expect both growth and inflation to run above FOMC forecasts this year. In addition, even assuming the Fed does fulfill this commitment and then raise rates only gradually, one can make a good case that long-term Treasury yields are too low.

** In summary, we believe the Treasury market is living on borrowed time and that rising risk tolerance as growth strengthens and no further purchases by the Fed in 2012 will result in higher yields and a steeper Treasury curve this year.

Read on.

0229121

Conference Call: 2012 Economic and Markets Outlook

economics1 — Wed, 18 Jan 2012 18:45:17 +0000

John Ryding, RDQ Economics Chief Economist, hosted a conference call on January 18, 2012:

2012 Economic and Markets Outlook

Please click on the play button below to listen to the podcast and email economics@rdqeconomics.com for accompanying charts.

Download Podcast: 20120118_011812cc.mp3

[Audio clip: view full post to listen]

Conference Call: Fed, Europe, the Economy and Risk

economics1 — Tue, 01 Nov 2011 17:30:39 +0000

John Ryding, RDQ Economics Chief Economist, hosted a conference call on November 1, 2011:

Fed, Europe, the Economy and Risk

Please click on the play button below to listen to the podcast and email economics@rdqeconomics.com for accompanying charts.

[Audio clip: view full post to listen]

Download Podcast: 20111101_110111cc.mp3

Conference Call: The Economics of Operation Twist and Potential Market Impacts

economics1 — Tue, 20 Sep 2011 17:15:11 +0000

John Ryding, RDQ Economics Chief Economist, hosted a conference call on September 20, 2011:

The Economics of Operation Twist and Potential Market Impacts

** Operation Twist would not be monetary policy but debt management policy.

** A look back at 1961 and the original Operation Twist.

** Measuring the impact of debt maturity on bond yields.

** Operation Twist, ECB dollar lending, and risk.

** Economy and inflation round up ahead of the FOMC meeting.

Please click on the play button below to listen to the podcast and email economics@rdqeconomics.com for accompanying charts.

[Audio clip: view full post to listen]

Download Podcast: 20110920_092011cc.mp3

Conference Call: Summer Doldrums

dequadros@rdqeconomics.com — Thu, 30 Jun 2011 19:50:52 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference call on Thursday, June 30 2011:

** The economy has slowed by more than we thought was likely to happen. Why? What are the chances we are headed to a double dip? What should we look for from the June data cycle?

** Both overall and core inflation have risen this year. Why? Given the slowdown in the economy, are we headed for stagflation?

** The Fed’s dual mandate and stagflation—what lies ahead for monetary policy?

** Mid-year investment themes review: our outlook for equities, bonds, the dollar and commodities.

Please click the play button below to listen to the podcast:

[Audio clip: view full post to listen]

Conference Call: Fed Exit Strategy and First-Quarter Growth Surprise

dequadros@rdqeconomics.com — Tue, 05 Apr 2011 20:45:11 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference call on Tuesday, April 5th:

*Fed Exit Strategy and First-Quarter Growth Surprise*

** There has been a lot of Fed chatter about exit strategies. How likely is an about-turn in policy later in the year?

** First-quarter GDP is shaping up to be surprisingly weak. Why and what does it mean for policy and the outlook?

** Equities, commodities, and interest rates. What does the rest of the year have in store?

Download Podcast: 20110405_040511cc.mp3

[Audio clip: view full post to listen]

Download: 20110405_040511cc.pdf

Conference Call: 2011 Economics and Markets Outlook Call

economics1 — Tue, 25 Jan 2011 21:45:14 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference call on January 25th 2011:

2011 Economics and Markets Outlook Call

* Drivers of a stronger recovery in 2011. Risks to the outlook. Prospects for stronger job growth. * Inflation or deflation? The impact of Fed policy on prices. Phillips Curve versus gold and commodities. * Monetary and fiscal policy in 2011. QE2, tax cuts, and the economy. * Risks to the outlook–could European debt problems and China derail the U.S. recovery? What about state and local government finances? * Markets in 2011: the outlook for bonds, stocks, currencies, and commodities.

Download Podcast: 20110125_3_012511cc.mp3

[Audio clip: view full post to listen]

Download: 20110125_3_012511cc.pdf

Nonfarm payrolls rose 103,000 in December; unemployment rate declined to 9.4%

dequadros@rdqeconomics.com — Fri, 07 Jan 2011 08:05:10 +0000

** Nonfarm payrolls were below expectations, rising 103,000 (113,000 on private payrolls) in December. However, upward revisions to the prior two months totaled 70,000.

** The unemployment rate fell to 9.4% in December from 9.8% in November as the labor force participation rate declined to 64.3% from 64.5%. After two straight monthly declines, household employment jumped 297,000 in December.

*BOTTOM LINE:* This is the second consecutive employment report that showed less vigor in hiring that other labor market indicators were suggesting. Taken at face value, the November and December employment reports represent two more plodding steps in the recovery of jobs. However, the pickup in small business employment (apparently the December NFIB survey will show the strongest hiring in 27 months) that may have been behind the stronger ADP readings may take time to be reflected in these data (especially if there has been a pickup in new business formation

4% Fourth Quarter-Why Doesn’t the Fed See It?

dequadros@rdqeconomics.com — Tue, 14 Dec 2010 16:45:09 +0000

** As we close in on a deal to extend the Bush-era tax rates on incomes, the outlook for economic growth in 2011 is improving. In the last two months, there has been a very marked increase in the confidence of the small business sector, which is important for stronger job growth.

** A sharp narrowing of the trade gap in October and a strong retail sales report for November are driving estimates of fourth-quarter real GDP growth higher. We estimate that growth will be around 4% in the current quarter.

Conference Call: Elections, QE2, and the Economy

economics1 — Thu, 28 Oct 2010 17:00:13 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference
call on Thursday, October 28th at 11:00am ET:

Elections, QE2, and the Economy

* Next week’s midterm elections are the most anticipated since 1994.
What to expect and how might the outcome affect fiscal policy, the
economic outlook, and markets.

* Is the Fed going to expand its quantitative easing program at next
week’s FOMC meeting? If so, what will be the design of QE2 and, more
importantly, what will be the benefits and costs to the economy and
financial markets?

* Whatever became of the double dip? What are the forces driving the
near-term outlook for growth and how do we see the economy shaping up
over the next six months?

Download Podcast: 20101028_102810cc.mp3

[Audio clip: view full post to listen]

Download: 20101028_102810cc.pdf

Down the QE Rabbit Hole

dequadros@rdqeconomics.com — Thu, 07 Oct 2010 19:30:12 +0000

** Following New York Fed President Dudley’s ultra-dovish speech last week, Chicago Fed President Charles Evans gave an interview this week to Fed confidante Jon Hilsenrath of The Wall Street Journal.

** Evan’s interview was every bit as dovish as Dudley’s speech and we think he fundamentally misdiagnoses what is wrong with the U.S. economy. He appears to want shock-and-awe QE and thinks the economy is saving too much. He also appears to be in favor of overrunning the Fed’s inflation target.

** In contrast, Kansas City Fed President Tom Hoenig gave a brilliant presentation today on what monetary policy can and cannot do and how too much Fed ease following the 2001 recession resulted in the financial crisis and recession of 2008-2009.

** The November 3rd FOMC meeting will be a contentious one, but it looks like the votes are there to implement QE2. We think this will be bad for the dollar and bullish for gold and commodities as investors seek hard stores of value. Ultimately, we think it will create a real mess in the bond market. Real yields in the bond market have fallen sharply, while expectations of future inflation have risen. We see bonds as fundamentally mispriced and the Fed as monetizing the deficit if it goes ahead with QE2.

Read on.

National Bureau of Economic Research declares June 2009 as the recession trough

economics1 — Mon, 20 Sep 2010 07:35:11 +0000

** Â The Business Cycle Dating Committee of the National Bureau of Economic Research has determined that the recession which began in December 2007 ended in June 2009. Â (The NBER, which is viewed as the official arbiter of expansions and contractions and sees itself as establishing the historical record, takes its time over recession calls–for example, it declared on December 1, 2008 that a recession had begun a year earlier in December 2007). Â Thus, the most recent recession was 18 months in length, the longest recession in post-World War II history (the recessions of 1973-75 and 1981-82 were both 16 months). Â Also, the NBER stated “The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.”

** Â Peak to trough, real GDP fell 4.1% during this recession, making the most recent recession the deepest in GDP terms in the post-war period. Â In the first year of recovery, however, real GDP has only risen 3.0%, which compares to an average first-year recovery of 5.8%. Â From its trough May 2007, the unemployment rate rose 5.7% points, the largest increase in the unemployment rate during any of the recessions since WWII (the average increase in the unemployment rate in prior recessions was 3.1% points).

BOTTOM LINE: Â We are not the slightest bit surprised that the NBER selected June 2009 as the recession trough and there is no real significance in this pronouncement except that risk markets may have a short-term lift in confidence. Â We do not expect a double-dip recession but the recession being declared over is a matter of historical record that we agree with and has little bearing on whether another downturn is or isn’t in the offing (the shortest gap between recessions occurred between the 1980 credit-control recession that ended in July 1980 and the recession that began in July 1981). Â As far as any impact on mid-term campaigning, we suspect the declaration that the recession is over (which simply means economic activity is rising rather than falling) will ring hollow for the electorate, which is likely to be worried by the level of economic activity (particularly the unemployment rate).

Please see our attached updated Recession Scorecard. Â This one-page monitor shows peak-to-trough changes in various economic and financial market indicators during recession, along with the change in these indicators in the year following the end of recession. Â The monitor is intended to allow for a comparison of the performance of various indicators during recession.

Download: 20101028_Recession-Scorecard.pdf

Gold Marches On

dequadros@rdqeconomics.com — Fri, 17 Sep 2010 07:30:11 +0000

** Consistent with one of our long-held market themes of easy money and the impact of quantitative easing, gold prices hit a new record high in the latest week.

** We think gold prices can be understood in terms of Wicksell’s cumulative process by which prices rise when the actual rate of interest is held below the natural rate. Ultimately, we believe higher gold prices will be followed by higher inflation.

** Since the Fed’s Phillips-Curve leaning is likely to keep policy ultra easy for several years, we expect that gold prices will continue to rise. It is hard to apply a valuation metric to the price of gold but the Fed’s balance sheet is very large in relation to its holdings of gold. Moreover, although nominal gold prices are at a record, in real terms gold would have to rise to $1,650 an ounce to match the monthly high of 1980.

** If monetary policy is inflationary as shown by gold prices, why are Treasury yields so low? We think that while Wicksell’s cumulative process quickly hits gold prices, bond yields are being held down by financial repression that results from the same stance of monetary policy. We remain bullish on gold and bearish on bonds but our bearish feelings towards bonds earlier in the year were premature.

** We do not expect the Fed to expand QE at its meeting next week but further Treasury purchases by the Fed at some point cannot be ruled out. In addition, part of the financial repression of bond yields has resulted from the currency policies of several foreign countries (most notably China).

Read on.

Update on capital goods spending

dequadros@rdqeconomics.com — Wed, 25 Aug 2010 10:45:07 +0000

** The July durable goods orders report featured an 8.0% drop in nondefense capital goods orders excluding aircraft in the month. Given the contribution to economic growth from business capital spending this year and our expectation that this sector will be a leader in the second half of 2010, declining capital goods orders would be a worrying development. However, there are reasons to believe that the July capital goods orders data are not necessarily a harbinger of weakness in capital spending in the second half of the year.

Please see the attached charts.

* *

Download: 20101028_082510capex.pdf

Conference Call: Where are the Summer Doldrums?

dequadros@rdqeconomics.com — Thu, 12 Aug 2010 17:30:18 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference call on August 12th, 2010:

*Where are the Summer Doldrums?***

Review of FOMC decision and the outlook for monetary policy.

Slowdown or double dip? Outlook for the economy in the second half of the year.

Austerity or stimulus? What lies ahead for fiscal policy.

What happened to the euro crisis?

How will these macro themes influence markets?

Download: 20100812_081210cc.pdf

Download Podcast: 20100812_081210cc.mp3

[Audio clip: view full post to listen]

Disappointing employment report shows slower growth in private payrolls

dequadros@rdqeconomics.com — Fri, 06 Aug 2010 07:55:13 +0000

** Nonfarm payrolls fell 131,000 in July as temporary Census workers declined 143,000 and other government employment dropped 59,000. Private payrolls increased 71,000 in July, which was below expectations. In addition, private payrolls in the prior two months were downwardly revised by 34,000. Over the last three months, private payrolls have risen by an average of only 51,000 per month.

** The unemployment rate was unchanged at 9.5% in July as labor force participation declined to 64.6% from 64.7%. Household employment dropped 159,000 in July (this measure of employment has declined by an average of 165,000 per month over the last three months).

*BOTTOM LINE:* A disappointing employment report that points to a downshifting in the pace of private job creation and a further decline in labor force participation. Although private employment has risen in every month this year to date, the pace has slowed from a relatively solid 154,000 per month average from January

Fiscal Sustainability: Cake or Death!

dequadros@rdqeconomics.com — Fri, 30 Jul 2010 17:15:12 +0000

** In recent weeks the debate has raged between those who favor more government

July NABE Industry Survey

dequadros@rdqeconomics.com — Mon, 19 Jul 2010 10:15:13 +0000

** The National Association for Business Economics released its July industry survey today. The report presents the responses of 84 NABE members to the survey, conducted between June 11 2010 and June 29 2010, on business conditions in their firm or industry.

** The net rising demand index points to continued economic growth, albeit at a slightly more moderate pace in the second quarter. However, the capital spending and employment indexes strengthened.

** The survey noted,

Trade is Not a Zero Sum Game!

dequadros@rdqeconomics.com — Tue, 13 Jul 2010 16:15:12 +0000

** The widening of the trade deficit in May was interpreted by some as a sign of a further slowdown in economic growth

Conference Call: European Fallout: Just How Contagious is it Likely to Be?

universalmutant — Thu, 03 Jun 2010 17:00:44 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference call on Thursday, June 3rd:

European Fallout: Just How Contagious is it Likely to Be?

- Fundamentals: The state of Euro finances.
- Limiting Contagion: Greek rescue package and the “EuroTARP.”
- Is the Euro headed for a break up?
- The impact on the U.S.
- Review of U.S. economic fundamentals ahead of employment.

Download Podcast: 20100603_5_060310cc.mp3

[Audio clip: view full post to listen]

Download: 20100603_3_060310cc.pdf

Fed repeats "extended period" language; economic commentary modestly upgraded

dequadros@rdqeconomics.com — Wed, 28 Apr 2010 14:00:04 +0000

** The Federal Open Market Committee maintained its 0% to 1/4% target range for the federal funds rate today. The Fed repeated that

Investment Themes Revisited

dequadros@rdqeconomics.com — Fri, 09 Apr 2010 16:45:04 +0000

** Economic growth appears to be firming

Conference Call: Springing Ahead

economics1 — Wed, 31 Mar 2010 17:52:21 +0000

John Ryding, Chief Economist at RDQ Economics, hosted a conference call on Wednesday, March 31st:

Springing Ahead

. How is the first quarter shaping up? How much of a weather rebound might be in the March data?

. What’s bugging bonds? How rocky might the second quarter be for Treasuries? Is there any serious hope for deficit reduction?

. Equity rally grinds on. Is there any fuel left?

Download Podcast: 20100331_mar10-cc.mp3

[Audio clip: view full post to listen]

Download: 20100331_033110cc.pdf