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Air Conditioners In January


It sure would be a wonderful thing if I could start ignoring the stock market for a change. For the last couple of days, it has looked like I may be able to. Another near-unchanged day in equity-land, this time on exceedingly light volume (Friday’s spike appears related to the Russell 3k rebalancing), leaves little to talk about there as the S&P closed a mere 0.2% lower.

But bonds – that was a different story. September 10y Note futures rallied 21/32nds with the 10y yield down to 3.01%. The Dallas Fed Manufacturing Activity report was weak, but … this wasn’t about that third-tier report, I am fairly sure. A different article in the UK Telegraph, this one talking about RBS’s warning to clients that the Fed may be forced into a “monster” monetization (available here), drew attention and some chatter around the Street, but inflation markets actually softened so it seems unlikely that this was the driver.

It may, however, be part of the same general angst that is growing (at least, in the bond market) about the economy. While speculation about future monetization and (therefore) future inflation ought to be bearish at some level, it is losing mind-share to investors who are saying “we’re not sure about that, maybe later…but right now, the economy’s in bad shape and the Fed isn’t going to be letting short rates rise soon.” In other words, this might be the last little moon shot to higher bond prices before the fuel runs out in a couple of months.

It would be ironic if the Fed’s monetization engine got re-revved right about now, and inflation started moving from core-ex-housing to broader measures, because just today I closed the doors – at least figuratively – on our startup inflation-focused investment management firm. Reflecting on the fact that the recent focus has been on the exceedingly soft core inflation figures a friend commiserating about our business prospects said to me, a couple of weeks ago, “it’s hard to sell air conditioners in January.” The problem is, it isn’t January but merely an unseasonably cool June. July will come as a bit of a shock, especially when the number to the air conditioner guys isn’t answering any more. Philosophically, I can also observe that the best trades I have ever recommended have been the ones that no one liked at first, and the absolute worst ones were the ones that every client wanted to jump on. I have a funny feeling that this will be another one of those situations. As Douglas Adams once wrote, “The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair.”

The economic releases due Tuesday and Wedenesday, in the run-up to Friday’s Main Event (the Employment report), are not insignificant. Tomorrow Consumer Confidence (Consensus: 62.5 from 63.3) will start the ramp-up. On Wednesday the Chicago Fed Manufacturing Report (Consensus: 59.0 from 59.7) will be more carefully scrutinized than was the Dallas equivalent. Prior to that release, though, the ADP number (Consensus: 60k from 55k) will definitely draw attention this month. It has been much steadier than the Employment numbers, since it is not perverted by Census workers, and last month provided early warning of the weak Jobs report. I think economists are hoping for the 60k more than really forecasting it.

Interestingly, looking ahead to Friday I notice that Bloomberg is now showing economist forecasts not just for the total Payrolls number but also for “private payrolls,” since the headline number is likely going to be negative. I don’t recall Bloomberg pointing out the weaker private payrolls number when the headline number was being pumped up by Census, but now that the Census is dragging the number down…I don’t think it’s an intentional marketing of the data; I just think that news outlets today simply don’t know how to be objective. It also makes economists’ jobs easier. Hey, if you’re having trouble hitting the target, add another target!

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