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Main » Articles » Forecast

May 01, 2009 Monthly Forecast

Growing Recovery?

by TradetheNews Staff

The so called "green shoots" seen this spring have emerged as "less bad" data show the economic decline has clearly slowed its descent. April saw the stock market move sideways, consolidating a 30% gain off the recent market lows, even as the 10-year and 30-year Treasury yields surged above 3% and 4% respectively. The equity market gains were made in the midst of oversold conditions, as sprigs of ivy climbed the wall of worry, but there is still some concern the shoots could die at the root. For the constructive tone in the markets to continue through the month of May, the economic data, corporate developments, and government activism must continue to cultivate the "green shoots," allowing them to grow and flourish.

Sowing More Seeds

Much of the leadership in the recent equity rally has been provided by the tech sector, and two tech giants have yet to report. Cisco Systems (reports 5/6) CEO Chambers recently forecast an economic recovery starting in the Dec 2009/Jan 2010 timeframe. His commentary on quarterly results and guidance will be monitored for any revisions to this forecast, which is a bit more conservative than that of most Fed governors. Hewlett-Packard had returned to favor last year, but stumbled last quarter. It will get a chance to redeem itself when it reports this month (5/19), possibly helping tech maintain its leadership position.

On the retail front, Wal-Mart (5/14) will give us a window on the health of discount retailers, while Kraft (5/5) will illustrate any continuing trend in consumers moving toward cheaper brands in their day to day shopping. The May 7th release of the April Same Store Sales data could also give a read on how fertile the economy's soil has become. The 2.2% growth in consumer spending reported in the otherwise downbeat US Q1 Advance GDP data has been pointed to as a "green shoot," and the same store sales data could illuminate who has been the beneficiary of this spending bump. A more detailed revision of Q1 GDP will be released on May 29. Another notable data point for consumer spending will be the US April Advance Retail Sales on May 13, which is expected to rebound from the prior month.

Digging in the Dirt

Industrial commodities like crude oil and copper have fared well in the past two months alongside the rebound in equities. The strong compliance with OPEC production cuts and demand for base metals out of China have helped these commodities find a floor in recent months, though this could be jeopardized as Chinese inventories grow if demand in other countries doesn't start to pick up. OPEC meets again on May 28, but current expectations are the cartel will continue to focus on fuller compliance rather than new production cuts.

Bamboo shoots

Other green shoots have sprouted up in Asia. South Korea's economy appears to be at the forefront of recovery in Asia, with positive signs emerging in consumer confidence, production, and trade balance data. Korea's economy surprisingly dodged a recession with a positive Q1 prelim GDP figure, but that is subject to revision on May 31 with Q1 Final GDP. Look for BOK to leave rates unchanged at 2.00% again on May 11th.

In Japan, March industrial production turned positive for the first time in 6 months, and the confirmation is likely to be significant (March Final data comes on 5/19, and April Preliminary on 5/28). Government officials remain unconvinced, calling for evidence of stronger shipments. Trade figures are also turning however, with March balance registering a Second consecutive surplus after 5 months of deficits

Fixed Income in the Hot House

For the better part of April, debt markets were focused squarely on the equity space with corporate earnings in full swing. First quarter results for the major financials exceeded the beaten down expectations extending the overall rally in stock prices. April's final week saw $101B in 2,5 and 7y notes comfortably sold but the combination of supply and investors preference for riskier assets was too much for Treasury prices to withstand, pushing the yield on the benchmark 10-year note back above its pre-quantitative easing levels and firmly above 3%.

3% was seen by many as a level that could trigger an increase in the Fed's Treasury purchase program but the FOMC announced nothing to that effect at its April 29 policy meeting and appears to be unconcerned that its quantitative easing program, in so far as it aims to drive down yields, appears to be failing. Ominously, the Treasury market has broken its recent range ahead of $71B in 3 and 10y Notes and 30y Bonds hitting the street in the first week of May, with a net $86B in new 2-,5- and 7-year notes expected to follow later in the month. In recent days, the 10-year yield has been at its best levels of 2009 over 3.1%, while the Long Bond has moved into levels not seen since November 2008 above 4%.

Credit markets presented some "green shoots" in April. Interbank lending rates continue to improve with the 3-month USD Libor easing by some 15bps to reset below 1.01%. Higher-yielding corporate paper continues to rally, with junk bond prices up roughly 10% on the year after some of the largest junk and convertible bond offerings in months. Several financial institutions—most notably Goldman Sachs and JPMorgan—began to dip their toes into the water by launching debt sales without government backing for the first time since the beginning of the crisis. April also saw two of the largest taxable Muni offerings in years indicating investor's appetite for high quality municipal debt remains robust. In May traders will certainly be looking for some follow through in these corners of the long suffering credit markets for evidence of a return to normality.

Weeding Out the Garden

May 7 could be a watershed date for the US financial system as the Fed will release excerpts of the bank stress test results. The report is expected provide an overall view for the industry and some specifics for the individual banks, including estimated losses for certain loan categories and the capital needs for each bank, and detail the banks' resources for absorbing losses. Early media reports have indicated that about half of the 19 banks being tested will be required to raise more capital, and Bank of America and Citigroup may be forced to raise up to $10B, though BoA quickly denied this report. In the end the stress test may just be a showpiece to emblemize progress in the government overhaul of financial regulation. As recently stated by the FDIC's Sheila Bair, the liquidity crisis is over, and we are now in the "clean-up" phase. The sticking point with the stress tests may be on the question of transparency. The portion of the results that are released publicly must be enough to reassure the public that progress is being made in cleaning up and stabilizing the financial system and that no new landmines are being concealed under the "green shoots."

US government efforts in the auto industry will also stay on the front pages this month. Notably the markets barely batted an eye at the bankruptcy filing of Chrysler in late April as the writing was on the wall. Even as Obama's auto task force seeks to salvage the auto industry in America, GM may be the next to move into a pre-packaged bankruptcy. Though this news is being taken in stride for the moment, if the Chrysler reorganization drags on past the promised 30-60 day "surgical" bankruptcy promised, new pressure could be put on the fragile economy.

Time to Spread More Fertilizer?

Early this month, the ECB is expected to begin spreading more than its usual verbal fertilizer. The same day the stress tests are released, the ECB is expected to deliver an eagerly anticipated announcement on non-standard measures. Those expecting the ECB to join other central banks at the quantitative easing garden party will likely be disappointed, with an extension of the banks' liquidity facilities to European banks the most likely outcome. The ECB is expected to cut its Refi rate by 25 basis points to 1.00%. The BOE is also seen lowering its key rate by 25 basis points at the MPC meeting the same day, bringing it to 0.25%, another record low rate in the BOE's 400 years history.

May 8 will dump some fresh manure on the pile with the key data for the month: the US April Non-farm Payrolls and Unemployment. For the fifth month in a row over 600K jobs are expected to be lost, and the unemployment rate is expected to jump to near 9%. Unemployment is expected to continue to rise even past the nadir of the economy, but a better than expected payrolls number, may be another green shoot in that it shows the decline is slowing.

Can't See the Forest for the "Green Shoots"

The economy appears to have emerged from the depths of winter, and some signs of life have sprung up. Economic data are slowing their decline and in some cases rebounding, while optimism remains that government financial market support initiatives will be effective. But in this erratic economic season, the green shoots may still be hit by a late frost, and it may be another year before the shoots can grow into saplings.

**Calendar of Notable Events**

*May 7: US govt release on stress test results; ECB and BOE rate decisions; April Same Store Sales
May 8: US April Non-farm Payrolls and Unemployment
May 28: OPEC meeting in Vienna
May 29: Preliminary Q1 US GDP (2nd reading)

Category: Forecast | Added by: forex-market (2009-05-14)
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