Beauty is in the eye of the beholder, and so is the risk (or lack thereof) for recession. Almost everyone agrees that the threat of a new economic contraction is higher today than it was a few months back, but the consensus ends there. What looks like a fait accompli to one dismal scientist appears as a minor hazard to another. For some perspective on the debate, and a bit of context for monitoring the risk of a new recession, read on…
DEFLATION RISK IS STILL RISING
When we last left the Treasury market on Friday, the market’s forecast of inflation for the 10 years ahead had fallen at the steepest pace in a year.
MODEST PRIVATE SECTOR JOB GROWTH IN JUNE
The decline of 125,000 in nonfarm payrolls for June isn’t a surprise. Most economists were forecasting a decline of 100,000 or so. Nor is the tumble necessarily an omen for the economy. A big factor in the retreat in the headline number is the termination of temporary Census workers. And if we strip out the government’s influence, there’s good news: private-sector employment added 83,000 new jobs last month, a rebound from May’s tepid 33,000 gain. But the modest rebound in private sector employment isn’t a revelation either, based on the consensus forecast among dismal scientists. Overall, the debate about whether the labor market is on a sustainable path of recovery is still alive and kicking.
MORE RISK AVERSION IN JUNE
June was another rough month for risky assets, although the losses were considerably deeper with U.S. stocks from a dollar-based return perspective. REITs also took a hit: for the first time since the opening months of 2009, real estate securities dropped by more than 5% for the second month running. Bonds, on the other hand, did quite well in June. With the threat of deflation taking a toll on investor sentiment, the safety of fixed-income (even at unusually low yields) attracted capital flows last month like moths to a flame. And commodities overall, as per the Dow Jones-UBS Commodity Index, managed to eke out a fraction gain.
IS IT TIME TO CRANK UP THE PRINTING PRESSES…AGAIN?
The stock market isn’t a happy camper. Yesterday’s 3% drop in the S&P 500 was a sign that the deflationary worries that revived in May are still considered a real and present danger, including the possibility that the disease may affect the mother of all headline pricing series: GDP. No wonder that with a renewed worry over the D risk, government bonds are hot once more, with rising demand pushing the yield on the benchmark 10-year Note under 3% yesterday for the first time since April 2009.
ANOTHER DIP IN THE INFLATION FORECAST
SPENDING & INCOME RISE IN MAY, BUT ECONOMIC RISK IS STILL LURKING
The markets tanked last month, signaling trouble ahead. Yet consumer spending and income rose in May, the government reported this morning. Were the bears wrong? Maybe, but that’s not yet obvious, despite the gains in today’s economics stats.
EMERGING MARKET EQUITY ALLOCATIONS
“The rapid growth of emerging economies has led to a shift in economic power,” the OECD reported earlier this month, offering quantitative support for what everyone already knows. “Forecasts based on analysis by late economist Angus Maddison suggest that the aggregate economic weight of developing and emerging economies is about to surpass that of the countries that currently make up the advanced world.” The economic and financial turmoil of late is accelerating the trend, according to analysis from the OECD.
GOOD NEWS, BAD NEWS & STILL WAITING…
Last week’s new jobless claims dropped by a strong 19,000 to a seasonally adjusted 457,000, the Labor Department reported today. That’s a welcome change, but it’s too early to say if this is the start of a new round of declines or just more statistical noise of bouncing around in a range. If recent history is a guide, prepare yourself for the latter.
THE FINER POINTS OF BEING WRONG
Most interviews with money managers are all about success and how wonderful the ABC Fund’s performance has been over the years. But once in a while you find a discussion on the opposite end of the spectrum, and maybe that’s a good thing if you can learn more from mistakes than from victories. In any case, author Kathryn Schulz–no stranger to analyzing mistakes via her book Being Wrong: Adventures in the Margin of Error
