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Non-Tech : Moguls Mantra to the Markets -- Ignore unavailable to you. Want to Upgrade?

To: $Mogul who wrote (179)	11/1/2001 4:30:41 PM
From: $Mogul	Read Replies (1) \| Respond to of 220

The massive flattening move in the Treasury yield curve continues, with the 2/30 yield spread narrowing 21 basis points today to 223 basis points. That follows a 31 basis point flattening Wednesday and represents the narrowest the 2/30 spread has been since Sept. 10 when the spread stood at 210 bps. A combination of steepening unwinds and new flattening trades have followed yesterday's announcement of the end of 30-year Treasury issuance. Speculative-grade credit spreads continued to widen yesterday. Investors had been moving toward increasing their risk tolerance but concerns about weak economic data, declines in equities and emerging-market problems have reversed that to some extent. Yesterday, the S&P spec index widened 9.2 basis points to 1238.9 basis points over Treasuries, the highest level since Oct. 12. That follows a 12.5 basis point widening on Tuesday. Spreads remain relatively close to the 2001 high of 1,263.2 set on October 3rd and much wider than the level seen on September 10th when the spread was +992.4 basis points. The recent widening trend is the result of four factors, mainly: weak equities, concerns about the economic outlook, shrinking liquidity in low-grade issues, and flight-to-quality buying of U.S. Treasuries. Current trends are not likely to change until these factors are mitigated but signs of stability in equities and consumer spending raise the odds that the widening in spreads could either stop an perhaps begin to reverse a bit. Although the large drop in the NAPM largely reflects the downshifting in the economy, the October data likely overstates the weakness that is likely to be seen in upcoming months. The nature of the survey methodology is to measure direction of change in economic activity rather than the magnitude of change. The NAPM is a diffusion index. This means that the index is constructed by asking purchasing managers whether they experienced an increase or decrease in their business activity. It's obvious that most purchasing managers will have said that conditions got worse rather than better. As a result, the NAPM index plunged. What we don't know yet is the magnitude of the decline and one can't easily use the October NAPM to forecast the level of manufacturing activity that will be seen in upcoming months. That said, there's little doubt that conditions will be weaker. But the October data may overstate the extent of weakness that will actually occur. The markets have already discounted the likelihood that the direction of manufacturing activity will be down, so in a way today's data is no surprise, given the nature of the survey mehtodology. It's no wonder, then, that today's data is not not carrying the oomph that one might think such a large drop might normally generate. Here is a table of NAPM data. Construction spending fell 0.4% in September to an annual rate of $843.1 billion, the slowest pace since December. That was a smaller decline than the 0.7% drop the market was expecting. August construction spending was revised down to show a 1.2% drop vs. the initial estimate of -1.1%. Construction spending is no doubt headed lower now that building permits have fallen and home builders have become pessimistic about their sales activity. The NAPM index plunged to 39.8 in October from 47.0 in September, far weaker than the 44.5 reading the market was expecting. That's the lowest reading since February 1991 when the index was at 39.4. Readings below 42.7 have generally indicated contraction in the overall economy. The new orders index, which had shown increasing new orders in the previous two months, dropped sharply, falling to 38.3 from 50.3 in September. The production component pluncged to 40.9 from 51.3. The declines in orders and production were among the largest in the history of the survey. and the employment index fell to 35.1 from 41.2. The jobless claims data is consistent with expectations for a weak employment report tomorrow. Expectations currently center on a decline of about 300k in October and for the jobless rate to increased to 5.1% from 4.9%. Given the recent surge in jobless claims, the spate of layoff announcements, weak help-wanted advertising, and plunging consumer confidence, a decline of 400k or more can't be rule out. The details of the jobless claims statistics support this conclusion; persons receiving jobless benefits on a continuing basis have increased by 400k over the past 5 weeks. Keep in mind that a large amount of weakness in tomorrow's data is already built into the market. The personal income data was as expected but the consumption data was weaker; the 1.8% drop suggests that base effects will translate into weak Q4 PCE data. The NAPM will provide the first glimpse of national manufacturing conditions for a full month following the September 11th attacks. Car sales will be stronger but the strength is rooted in pent-up demand from September and incentives that may borrow sales from upcoming months. Fed easing expectations continue to decline, with the November Fed Fund futures contract pricing in about a 35% chance of a 50 basis point rate cut on Nov. 6, down from about 45% at Wednesday's close. Of course, that assumes that the daily effective Fed Funds rate in November matches the target and that isn't the case today, as Fed Funds are trading above the 2.50% target at around 2.625% this morning. Easing expectations declined Wednesday following the smaller-than-expected decline in third-quarter GDP. Back-month contracts are also reflecting lower easing expectations, although the December contract continues to trade below the level that fully prices in 50 basis points in cuts, whether in a 50 basis point November cut or 25 basis point cuts at both the November and December meetings. A total of 50 basis points in cuts is priced into December at about 2.09%, and the contract is currently at 2.04%. Personal spending fell 1.8% in September, the largest drop since January 1987 and nearly twice the 1% decline that was expected. August spending was revised up to show a 0.3% vs. the initial estimate of +0.2%. September spending data was incorporated into yesterday's third-quarter GDP report, which showed a 1.2% increase for the quarter, the slowest since the first quarter of 1993, so the weakness in today's report should come as no real surprise. Income was unchanged in September after rising 0.1% in August (revised up from unchanged initially). The market was expecting a 0.1% rise in September. Jobless claims fell 10,000 to 499,000 in the week ended Oct. 27 from 509,000 the previous week (revised up from 504,000 initially). That was slightly below expectations of a 505,000 reading. Continuing claims, reported with a one-week delay, rose to 3.692 million, the highest since May 1983. The four-week moving average fell to 497,250 from 506,250 the previous week.