October 4, 2005
ONE MORE DIP?
Don't let yesterday's surprisingly upbeat manufacturing news for September fool you. The economy's set to stumble, and perhaps fairly soon, triggering another descent in long-term interest rates, or so warns Pimco's Bill Gross in his latest missive.
There are several potential catalysts for the pending stumble, Gross writes. The list of gremlins includes energy prices, China’s economy, and interest rates. Then there's real estate, he adds. "Make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence," Gross predicts. "The [property] bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable. If higher yields simply slow the pace of appreciation to a more rational single digit number, then we could escape with a 1-2% GDP economy."
Either scenario will bring lower interest rates, Gross concludes. Timing, as always, is open to debate.
If the Fed will soon start lowering rates, the clues at present are still missing, suggests BCA Research in a report last week. "A flurry of speeches by Fed officials in the past two days have confirmed the message delivered at the September 20 FOMC meeting: the reduction in growth caused by Hurricanes Katrina and Rita will be temporary and the Fed must continue to tighten monetary policy," BCA counseled on September 30.
The bond market of late seems inclined to agree with BCA. Yesterday's ISM Manufacturing report for September, which registered a sharp gain from August, has further stoked the fires of optimism for the notion that the economy's not dead yet. The benchmark 10-year Treasury Note's yield of roughly 4.36% at mid-morning today was near its highest in months, according to data from BarChart.com. As recently as late August, the 10-year's yield was briefly under 4.0%.
"The market is still adjusting to the fact that it has underestimated the strength of the economy,'' Thomas Roth, head of Treasury bond trading at Dresdner Kleinwort Wasserstein Securities in New York, told Bloomberg News earlier today.
Adding insult to injury to the bond bulls' ego is today's stronger-than-expected factory orders report for August. New orders for manufactured goods in August, the Census Bureau reported. That's well above the consensus forecast of 2.0%, according to TheStreet.com.
Yes, the factory orders report reflects mostly pre-Katrina trends. But the post-Katrina numbers so far don’t seem to be suggesting anything less, based on yesterday's ISM Manufacturing release. What's more, early signs of the global economy's post-Katrina trends depict growth as the path of least resistance. "September data suggested that the trend in global manufacturing operating conditions recovered sharply, supported by robust growth of new business and production," observes a report published yesterday from JP Morgan.
To be sure, the risks that Gross points out are hardly worthy of dismissal. Real estate in particular may or may not be a bubble, but signs that its momentum may be slowing are emerging. "A real estate slowdown that began in a handful of cities this summer has spread to almost every hot housing market in the country, including New York," reports The New York Times (free subscription required) today. Whether this is a sign of tougher times ahead in real estate, or merely a pause that refreshes, remains to be seen.
In the meantime, the burden of proof remains on the shoulders of the bond bulls, at least for today.
Posted by jp at October 4, 2005 11:22 AM
I couldn't agree more with the above poster. I am so tired of hearing about how Bill Gross thinks we are heading for a recession - 5 years is enough already. Mere mention of his name at this point should cause instant smirks.
Posted by: Gee at October 6, 2005 9:04 AM
The self obsessed intro to this peice had me dashing for a sick bag. Bill Gross "set a goal to become an Empathy Prince in addition to a Bond King" ? oh dear, oh dear. Maybe it is because I am British, but please no more of this stuff it is such a turn off!
Posted by: Nick Game at October 5, 2005 10:01 PM