<------OT------economics-----<an 'easing' in the offing?>
'morning Lee
I've noticed over the past month or so that on many days there is a correlation between tyx (long bond rates) and SP8U. When tyx is declining, SP8U has also been declining; however, when tyx goes up, the S&P rallies...
This a very interesting observation that you have made,the correlation sounds intriguing,it would be nice to know if you find any long term trend here.
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Easing is soothing and if it happens we will have the additional fuel needed for a lengthy and sustainable bull market barring of course any unforeseen disasters-perhaps wishful thinking but it could happen,no??Any comments?????
Source:from the economiester.
ANALYSTS: JOBS RPT KEEPS FED ON HOLD; NEXT MOVE LIKELY EASE
By Steven K. Beckner
Market News Service - Although Federal Reserve Chairman Alan Greenspan indicated recently that the Fed remains biased toward a tighter monetary policy, a variety of analysts said after the morning's employment report they see an eventual easing of policy following an extended stay at the current 5.5% federal funds rate.
The July jobs data Friday morning were somewhat stronger than expected, particularly after allowing for the effects of the now-settled GM strike, but analysts detected an undercurrent of weakness in the manufacturing sector and a deceleration of wage gains. They said there is no justification for any change in policy at the Fed's August 18 Federal Open Market Committee, given Asia's dismal prognosis and the apparent squeeze on corporate profits.
After remaining on hold through the remainder of the year and perhaps well beyond, Fed watchers, including some who had previously looked for tightening, said the central bank is more likely to need to cut short-term interest rates sometime next year than to raise them.
The Labor Department announced that non-farm payrolls rose a greater-than expected 66,000 -- and 207,000 excluding GM strike effects -- as strong gains in service sector jobs (especially retail) offset factory job declines. The unemployment rate remained at 4.5%. Average hourly earnings rose 0.2% for the third month in a row following previous more rapid gains. And the aggregate hours index rebounded by 0.3%, though average weekly hours were unchanged at 34.6.
Greenspan, in his semi-annual Humphrey-Hawkins report to Congress July 21, said he sees a greater risk of inflation, implying that the Fed may need to tighten policy. And San Francisco Fed President Robert Parry reaffirmed his hawkish stance in a speech in Salt Lake City Thursday this week. But analysts were skeptical.
"I do not think that is a serious prospect," said Mickey Levy, chief financial economist for NationsBanc. "The Fed is comfortably on hold. The next move is most likely an ease, but way off."
Levy doubted the Fed will raise rates for three reasons: first, the Asian financial crisis is "even more serious than before in light of Japan"; second, "the economy is slowing down, and I can't remember when the Fed has tightened when inflation was low and growth was decelerating," and third, "there has been a marked deceleration in money growth."
Levy said the jobs report is "consistent with real GDP bouncing back" from the second quarter's estimated 1.4% growth pace, but said it also shows "the moderating effect of the Asia crisis and the slowdown in inventory building."
Most importantly from the Fed's standpoint, Levy said, was the third consecutive 0.2% hourly earnings rise. He noted that earnings rose more rapidly in some sectors, but said most companies lack the power to raise prices in the face of strong domestic and global competition and are consequently suffering thinner profit margins.
Other analysts also seized on this issue. David Jones, chief economist for Aubrey G. Lanston & Co., said the consumption-driven expansion is headed for a "reverse wealth effect" stemming from a lack of corporate pricing leverage, lower earnings and in turn a fall in stock prices that will hurt consumer confidence and curb spending.
In addition, Jones said the economy will feel the more direct effects of the Asian crisis in the form of reduced exports.
"I would have to say Asia is more a priority in the thinking of the Fed than any single month's employment number," Jones said, adding, "I firmly believe Greenspan is holding off the hawks by emphasizing the potential weakness from Asia." Although the economy initially benefitted from the effects of Asian capital flight on U.S. interest rates and from lower commodity prices, he said the economy will now increasingly feel the negative effects of the region's woes.
"I don't see any change in policy, perhaps through the end of the year," Jones said, adding, "The next change in policy will be in the direction of ease, but not perhaps until early next year."
Matthew Alexy, chief market strategist for C.S. First Boston, said the employment report suggests that "the third quarter is off to a good start" with growth perhaps as high as 3.5%. "It doesn't look like we're going to get as much of a drag from production as people thought going forward ... . I don't see any evidence here of a big turndown in activity."
However, Alexy concurred that the Fed is not apt to tighten policy. On the contrary, he agreed that the Fed will ultimately ease rates, but not until "a year out."
Alexy said inflation risks and corporate earnings risks (the apparent inability of companies to raise prices to protect profit margins) look "pretty balanced." He said there is "more evidence that earnings are under pressure" than that prices are under pressure. Besides, he noted, the three-month moving average of hourly earnings gains have decelerated to 3.6% from 4.6% earlier in the year. (Year-over-year, the Labor Department said hourly earnings were up 4.2% in July).
Alexy said the policy outcome will depend on the strength of final demand, which for now remains "good," but "not enough to generate inflation pressures."
Alexy's C.S. First Boston colleague Neal Soss said he is "mindful that the greater risk is tightening," but said he nonetheless believes "the greater risk at this juncture is an easing." But for the economy's continued momentum, he said the Fed might ease soon given uncertainties about Asia and about corporate profits.
Aside from Asia's troubles, Soss noted that Latin American countries are "deliberately slowing" their economies in an "outbreak of prudence" to avoid widening current account deficits and to "make themselves less vulnerable." He said this will further weaken U.S. exports and manufacturing output.
David Resler, chief economist for Nomura Securities International Inc., also emphasized the softening of the manufacturing sector, noting factory employment has declined three months in a row and that the Bureau of Labor Statistics' manufacturing diffusion index is at its weakest level since 1992. He said this manufacturing weakness will steadily spread to other areas of the economy, including transportation and retail sales.
Although Fed officials keep talking about "tight labor markets," Resler echoed other analysts in noting that companies are unable to convert higher wage costs into higher prices and that, in any case, wage gains have been decelerating.
Resler concluded that "monetary policy is on hold indefinitely," although he declined to predict whether the next rate move will be up and down. He said Greenspan's Humphrey-Hawkins message was intended not to signal actual tightening, but as "a warning shot to everybody that the Fed will not tolerate any translation of wage pressures to prices."
10:44 EDT 08/07
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