Consumers, Bond Yields Signal Something's Amiss:
By Caroline Baum - 04/24 16:03
New York, April 24 (Bloomberg) -- Bonds didn't get a chance to rally on news
that consumer confidence took another dive in April because stocks got there
first.
Oh, sure, there were lots of Johnnys-on-the-spot to explain why the 7.7 point
drop in the Conference Board's Index of Consumer Confidence to a four-year low
wasn't as bad as it looked. It was compiled before the Federal Reserve's
surprise 50 basis-point inter-meeting rate cut last week. It didn't capture the
continued improvement of the stock market throughout April. It will reverse itself
next month when consumers incorporate these variables into their outlook.
The truth is, the confidence survey provided good reason to be concerned about
the economy, especially for those of us who think it will manage to skirt
recession. The present-situation index, which correlates well with the labor
market, plunged almost 12 points, its first significant one-month fall since
October 1997, when the Asian financial crisis was rattling stock markets around
the globe.
In fact, the April decline was the biggest since the 24.3- point drop in October
1990, when the U.S. economy was four months into recession.
Into the Breach
Why is this significant? If the loss of confidence telegraphed by the Conference
Board's present-situation index reflects the true state of the job market and not
just anxiety about it, it means the economy will start to experience secondary
effects: income loss, spending cutbacks, production cutbacks, more job losses,
etc.
It's this spiral that the Fed is hoping to interrupt with its aggressive easing
campaign begun on Jan. 3.
Unlike the University of Michigan Consumer Sentiment Survey, whose questions
are geared toward financial and business conditions, the Conference Board asks
specific questions about the employment situation. Half of the present-situation
index is derived from respondents' appraisal of current employment conditions.
In the April survey, 40 percent of respondents said jobs were plentiful, the lowest
in four years.
At the same time, the number of persons who said jobs were hard to get remains
low, rising 1.6 percentage points to 14.2 percent. That compares with an all-time
low of 9.6 percent last July.
Acronyms
It's no surprise that this component correlates well with the unemployment rate,
which has been rising grudgingly from a three- decade low of 3.9 percent in
October to 4.3 percent in March.
The other survey question used to calculate the present- situation index is an
appraisal of current business conditions. Given the subjective nature of a survey,
it's easy to see how employment and business conditions might be confused as
one and the same.
So that brings us back to why bonds can't do anything with the bad news. The
usual suspects include an agglomeration of initials: ECI, GDP, HU.
The first-quarter Employment Cost Index on Thursday and Gross Domestic
Product on Friday are expected to show a deterioration of inflation. HU is the
New York Mercantile Exchange's designated symbol for unleaded gasoline,
which rose to within a penny of last year's 10-year high following an explosion at
a California refinery.
Gassing Up
Gasoline inventories are 4 percent below year-ago levels, demand is up, refinery
runs are approaching flat out, and the summer driving season hasn't even begun.
Now, most folks are convinced that any inflation will be a temporary
phenomenon, given the fall-off in demand. The bond market is starting to suggest
otherwise, even as the law of diminishing returns kicks in.
Two-year note yields are higher today than they were two weeks ago even though
the federal funds rate is 50 basis points lower. The Fed is getting a smaller bang
for its buck, at least in terms of market yields, with each successive rate cut.
In the long end, bond yields are higher now than they were at the start of the
year, when the funds rate was 200 basis points higher. The Fed can continue to
lower short-term rates, which the policy-makers seem ready to do, but there's no
guarantee long rates will follow.
The ghost of inflation future may be starting to look worse than the ghost of
inflation past. And it's not only bond investors who are starting to sniff it out.
Asked about inflation expectations, consumers surveyed by the Conference
Board in April said inflation would be 4.8 percent a year from now, the highest
since October 1993.
It's one thing to say that; it's another thing to behave as if prices are going to be
higher tomorrow than they are today. That's something that would concern Fed
Chairman Alan Greenspan and undercut his current agenda.
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