THE ECONOMY:
Treasury finally looking into refinancing our debt at low rates.
They are in the business of watching our money, yet they wait until interest rates start to rise (or at least threaten to) to refinance our debt into lower interest vehicles. We had a surplus in the late 1990's that siphoned off too much investment capital from the economy and helped trigger the slowdown when the Fed dried up the money supply. The economy was already starting to slow from the high drain those tax surpluses took from the economy, and when the Fed let the water out of the pool, the economy hit bottom.
Many feel those surpluses were some security blanket. They were, but only for Congress because they gave Congress a big piggy back to break open and spend, spend spend. What those surpluses mean is that we were taxed too much. We were told in 1994 that we had to raise taxes to pay for Congress' spendthrift ways. It was not put that way, but that is what it was all about. No one, and I mean no one, was expected the boom from the 1980's to reignite the way it did after the 1991 recession slowed it down.
Indeed, the economy was already in recovery mode well before these tax hikes, and the tax revenues would have mushroomed anyway. Indeed they would have been even stronger because the higher taxes bled money from the economy that would have been invested in the economy not in Congress' pork. What Congress should have done when those surpluses came in is say we made a mistake and raised taxes too much; here is your money back. Instead they acted as if it was theirs in the first place, and indeed they still do, bemoaning the lost surplus. The ONLY thing that the lost surplus did is prevent Congress from spending like a drunken sailor even more. Instead that money was turned back and put into the economy via tax cuts. Without that fiscal stimulus to jumpstart the economy, the debt would be even worse today: the surplus would have evaporated just as quickly as tax revenues plunged even more than they did. Now revenues are up 10% and growing; that beats the hell out of a continued recession. You know as well as we do that there was NO investment ongoing in the US economy until the tax cuts were passed that gave incentives to invest where none existed before.
The point is that there is moaning about how the reissue of the 30 year bond is an admission that the deficit is here to stay. So what? Is it better to not admit we have a deficit and issue higher yield bonds that cost more to retire? NO! Deal with reality. It is a good move even if it is almost two years late. Why not consider 50 year bonds as well? Again, let's face reality. Corporations used to issue 100 year bonds. This is not new ground and it can save us all money.
Oil recovers over $50/bbl even as crude and gasoline inventories surge.
Crude inventories jumped another 2.6M bbl and gasoline reversed last week's fall and rose 2.2M bbl, both well above anticipated levels. Oil continues to leak out of the ground here in the US, but that is not pushing price lower, at least it is not giving up easily.
Oil had dropped below $50 again after a rebound to test the prior break lower, and that typically indicates deeper selling ahead. Even with the jump in inventories once again, after initial selling, oil rebounded to close back above $50/bbl (50.13, +0.63). It is being very sticky at the $50 level and we still feel that in order for oil to start having a positive impact on the economy (or more accurately, a less negative impact), it needs to dip well into the forties. Right now it is not doing it, though the move is still underway.
ISM Services declines less than expected.
Services were down along with manufacturing in April, but it was no collapse. At 61.7 (61.2 expected and 63.1 in March) the service sector is still humming along quite nicely. That is good for the US as the services sector is the bulk of what we do. As with the manufacturing ISM, all categories were lower: employment 53.3 (57.1 prior); new orders 58.8 (62.1 prior); prices paid 61.9 (65.6 prior).
This is no real surprise with the general weakening in the economy from March that bled over into April. It is still a strong reading and suggests continued GDP growth, but the concern facing the market is whether this is a new trend brought on by the pairing of Fed rate hikes and higher energy prices. After all, the Fed has a poor batting average in managing the economy (and that is really what it tries to do with its consideration of so many different inflation indicators), with 8 recessions out of the 10 last rate hiking rounds.
That is keeping the market on edge, but you have to wonder if the move seen of late is some sort of recognition that the Fed may be closer to the end than it thinks or lets on. We have discussed the Fed funds futures contract indicating just two more hikes despite what the Fed says about a continuing measured pace on into the future. The bond market seems to think the Fed will have to stop or if not, drive the economy into recession. The move in the stock market was a start, but it is much too early, and there is still much too much ground to cover and overhead resistance to wade through to know for certain. You just have to do what the market tells you, and with bond yields refusing to move higher and stocks starting to rally with some better pop, you have to go with that. |
