The Latest from the ISM
Yesterday morning, the Institute for Supply Management released its index covering the economy's non-manufacturing activity during April. This measure's prices-paid component, like that of the ISM's manufacturing index ("PMI," released on Monday, see 5/3 missive entitled, "More Bad Inflation Karma), showed some disconcerting trends.
The non-manufacturing measure is constructed in similar fashion to the ISM's manufacturing index. It's a diffusion measure constructed such that a reading above 50.0 indicates expansion.
The overall index measuring non-manufacturing activity during April came in at 68.4, with the prices-paid component reported at 68.6, up 2.9 points from March. Moreover, April marked the 25th consecutive month in which prices rose (versus 26 consecutive months for the PMI).
The table below breaks out results during 2004 to date.
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INSTITUTE FOR SUPPLY MANAGEMENT
NON-MANUFACTURING INDEX -- TOTAL
INDEX AND PRICES-PAID COMPONENT
(Prices-Paid Index Is Seasonally Adj.)
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Respondents Reporting
Higher, Lower, or
Prices Unchanged Prices
Month/ Overall Paid ---------------------
Year Index Index Higher Lower Unch.
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04/04 68.4 68.6 53% 3% 44%
03/04 65.8 65.7 43% 3% 54%
02/04 60.8 57.3 31% 9% 60%
01/04 65.7 59.7 26% 4% 70%
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Next week sees a spate of inflation-related data due for release:
Wednesday, 5/12 -- Import Prices
Thursday, 5/13 -- Producer Prices
Friday, 5/14 -- Consumer Prices
With the recent behavior of energy prices alone, it is unlikely any of these will show much that is too encouraging. On the other hand, government data can and often does produce "surprising" results.
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The Treasury's May Refunding
In the midst of next week's data releases, the Treasury will be conducting its May refunding operation. Based on information provided by Treasury yesterday, the refunding will consist of three auctions totaling $54 billion. These are designed to refund $32.81 billion of maturing issues and raise $21.19 billion in new cash. Here are the highlights:
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MAY 2004 TREASURY REFUNDING OPERATION*
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Auction Amount 02/04 When-
Date (Bils.) Maturity Coupon Issued Yield
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05/11 $24.0 05/15/07 @ NA#
05/12 $15.0 05/15/09 @ NA#
05/13 $15.0 05/15/14 @ NA#
----
$54.0
====
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*To refund $32.81 billion in maturing issues
and raise $21.19 billion in new cash. @Coupon
to be established through auction process.
#At 4:00 PM (ET) on 5/5, the current on-the-
run 3-year, 5-year and 10-year issues (2.250s
of 2/15/07, 3.125s of 4/15/09 and 4.000s of
2/15/14) were trading at respective yields of
2.80%, 3.68% and 4.59%.
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In addition to the maturing issues that are publicly held, Federal Reserve banks hold an additional $8.9 billion in maturing debt. Assuming the Fed rolls this over, the allocation will be over and above the $54 billion scheduled for public sale.
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Speaking of the Fed
How well did Greenspan do on Tuesday in "comforting" (euphemism for "fooling") the markets? Based on the behavior of longer-dated open-market Treasury yields subsequent to the Federal Open Market Committee meeting, I would have to say, "not too well."
From Tuesday's missive ("Today's FOMC Meeting"):
"From an expectations perspective and using open-market proxies as the benchmark, the Federal Reserve is clearly behind the curve, although I'm certain the Fed does not see it this way. Potentially, this makes the situation more dangerous, since it leaves the central bank prone to additional tardiness in getting on with the mission. You can be sure political considerations are also on the minds of some of these folks, Greenspan in particular.
"Nevertheless, I believe the FOMC will probably appreciate that being too clever with today's pronouncements will inflame open-market interest rates even more, at the longer end of the curve in particular. So I expect language that makes it clear (or as clear as Greenspan gets) that the first increase in years in the Federal Funds Rate is on the way. And if the FOMC were listening to me, it would make clear the hike was coming sooner than later -- at the June meeting (scheduled for 6/29-30)."
The FOMC's post-meeting statement is posted on the website ("Topical" links). Generally speaking, however, I think the communique was indeed "too clever."
Regarding a change in monetary policy, the FOMC got "patient" out of its message, but only to substitute it with "measured." This certainly did not leave me with any sense of urgency, and the longer end of the Treasury curve interpreted it the same way I did. As of Monday's close, the yields on the current 10-year and 30-year issues were 4.50% and 5.28%, respectively. Late yesterday, they were 4.59% and 5.36%. While not exactly a plunge in prices, it certainly doesn't represent a big vote of confidence, either.
As for the federal funds futures market, it did not read the FOMC's statement as a cogent indication that the fed funds rate would definitely be hiked at the June meeting, either.
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FEDERAL FUNDS FUTURES -- 05/05 VS. 05/03*
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05/05 05/03 BP Scheduled
Contract Close Close* Chg. FOMC Meetings
----------------------------- -------------
May '04 1.01% 1.02% -1 May 4
June '04 1.02% 1.03% -1 June 29-30
July '04 1.13% 1.11% 2 No Meeting
Aug. '04 1.28% 1.27% 1 Aug. 10
Sep. '04 1.40% 1.39% 1 Sep. 21
Oct. '04 1.53% 1.51% 2 No Meeting
Nov. '04 1.69% 1.68% 1 Nov. 10
Dec. '04 1.85% 1.83% 2 Dec. 14
Jan. '05 1.97% 1.94% 3 NA
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*Day before latest FOMC meeting.
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NOTE: The Bank of England raised its "Repo Rate" by 25 basis points today, to 4.25%, the third rate hike since last fall. Further details appear on the website ("Topical" links).
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Stocks
I'm planning an update on the stock market for next week. In the meantime, a few thoughts here.
Just as growing inflation concerns have had an increasing influence on open-market interest rates recently, so have interest rates been having a growing influence on the behavior of the equity market. I continue to view 1/26 as something of a watershed close for the stock market, and as of the end of trading yesterday, my seven-measure tracking group stood, on average, 4.2% below 1/26 levels. From respective highs, the group ended yesterday an average 4.7% below those.
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SELECTED STOCK-MARKET MEASURES
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Recent Highs 05/05
05/05 ------------ 02/11 01/26 From
Close Close Date Close Close 01/26
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NYSE Comp. 6554 6780 03/05 6751 6672 -1.8%
S&P 500 1122 1158 02/11 1158 1155 -2.9%
Wil. 5000 10938 11314 03/05 11293 11282 -3.0%
DJIA 10311 10738 02/11 10738 10703 -3.7%
Value Line 367 387 04/05 384 384 -4.4%
Russ. 2000 570 606 04/05 597 602 -5.3%
NASDAQ 100 1428 1554 01/26 1514 1554 -8.1%
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Average -4.2%
Median -3.7%
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While this week to date has seen a respite from last week's pummeling, a respite is all I believe it is. I continue to think that the June-July period is going to be pretty traumatic for the stock market, although I also continue to think the market could have a decent rally going into those troubled waters. Nevertheless, I continue to believe that the rally will commence from levels lower than those existing at present.
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