We e k l y D a t a P r e v i e w
janney fixed income strategy
O c t o b e r 1 , 2 010
Fedmania pervaded much of this past week, and
the tide looks turned in favor of a “wait and
see” approach to price defaltion and QE2.
CONTENTS
DATA PREVIEW
CALENDAR
INFORMATION & DISCLAIMERS
We have six Fed bigwigs on record over the course of three days—and at least seven opinions. This
past week has been heavy with Fedspeak, with everyone from Bernanke to Rosengren voicing their
opinions on the need for and probability of a QE2 asset purchase program. At present, it looks like
the score is 3-2 against, with 1 abstaining (that one being, not surprisingly, The Chairman of the
bigwigs). Rosengren of Boston and Dudley of New York appear to be the only two Fed governors
vocally in favor of launching a QE2 program in the immediate future. What’s crucial here is that their
apparent disagreement with the Fed’s “wait and see” party line underscores the uncertain evolution
of future conditions. The dominant forces controlling economic activity are beyond the bounds of
experience, which leaves plenty of room for estimating, but little confidence for acting. Please note
that the October 1 Weekly Data Preview includes two weeks of forecasts, as we will not be publishing a Preview on October 8.
Monday October 4
Factory Orders (Janney -0.6%, consensus -0.3%)
Pending Home Sales (Janney 2.0%, consensus 3.5%)
G uy L e B as
Chief Fixed Income Strategist
215 665 6034
[email protected]
While demand for residential real estate has clearly slowed since the expiration of government tax
credits in April, we believe home sales have found a bottom—for the second time. Unfortunately,
those same sales numbers are likely to scrape along this bottom for some time to come, which leads
us to our pending sales forecasts for August, which reflect said bottom scraping. At the core of this
scraping is ongoing weak home ownership demand, evident in consumer confidence data which
shows only 1.9% of individuals plan on purchasing a home in the near future, a number down from
2.8% in the tax-credit days of early 2010. Additional evidence for this lack of housing demand
comes from reduced job turnover killing relocation purchases, the low number of single family building permits, an elevated savings rate, and record high rental vacancy rates north of 10% which
indicate renter pricing power is quite strong. While it looks like pending sales will improve modestly
for August, any increase pales in comparison to a 20% year-over-year decline as of July.
Tuesday October 5
ISM Non-manufacturing (Janney 50.7, consensus 52.0)
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information regarding
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system as well as other
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© 2010 Janney Montgomery Scott LLC
Member: NYSE, FINRA, SIPC
WEEKLY DATA PREVIEW • PAGE 1
Although we frequently point out that the manufacturing sector has held up impressively well
through the current and likely long-lived soft patch, non-manufacturing businesses have also displayed a resiliency that seems to contradict the lack of consumer demand present in the domestic
economy. Part of the reason behind that resiliency has been strong demand from overseas, which,
in part because of a soft dollar in comparison to non-Euro currencies, is an outgrowth of relatively
cheap US services exports. Still, with many European economies facing their own problems, we
doubt that exported services will prove substantial enough to hold the non-manufacturing sentiment above that magical ‘50’ mark which separates expansion from contraction. Business activity
and new orders, meanwhile, continue to display a several months long weakening trend that we
anticipate will continue for several months more.
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O c t o b e r 1 , 2 010
CONTENTS
Wednesday October 6
DATA PREVIEW
CALENDAR
INFORMATION & DISCLAIMERS
ADP Employment Change (Janney 15k, consensus 20k)
Thursday October 7
Consumer Credit (Janney -$2.5bln, consensus -$3.0bln)
At serious risk of stepping on over into broken record territory, we’re going to reiterate a key theme
in our long term outlook: consumers are undergoing a cultural shift that has the spend versus save
decision skewed in favor of the latter. In combination with demographic trends, weakening creditworthiness of the consumer, and loan defaults, we look for this increased savings to result in declining borrowing balances. These declining balances will be most evident in the Fed’s consumer credit
numbers, for which we’re forecasting a $2.5 billion monthly decline. This monthly forecast focuses
on the revolving, or credit card, segment of the borrowing markets, although other forms of loans,
such as mortgages, margin borrowings, etc., are also experiencing volume declines. In our Sept 27
FI Weekly, we estimated that roughly 40% of the decline in both mortgage and non-mortgage consumer borrowing was the result of default; that number is likely to ease as the worst credits shake
themselves out of the markets. As a result, the pace of consumer credit declines will likely begin to
slow into year end and 2011, though all of the improvement will come from the “non-critical” segment of borrowers who are, on balance, not today’s biggest spenders to begin with.
Friday October 8
Job growth remains quite
sluggish; at this rate, the
economy is adding ~80k
too few jobs per month to
cover new entrants into
the workforce.
Nonfarm Payrolls (Janney -12k, consensus +5k)
Private Payrolls (Janney +55k, consensus +79k)
Manufacturing Payrolls (Janney +0k, consensus +6k)
Unemployment Rate (Janney 9.7%, consensus 9.7%)
Employment has become the Holy Grail of economic indicators, and in Monty Python style, it looks
like the numbers are moving at about the speed of migratory coconuts. Next Friday will offer up
the first reliable indications of joblessness in the wake of summer job terminations and the end of
the back to school retail season. Overall, the picture is looking slightly rosier than in August, as
the four week average initial claims numbers have descended about 30k to 458k as of Sept 24.
Continuing claims, a slightly more reliable indicator, posted a similar improvement. Together, these
two numbers point towards a seasonally-adjusted improvement in payrolls data, which we estimate
will fall slightly in the red, thanks largely to shrinking state and local government payrolls. While
the municipal arena was once considered to be one of the more stable components of payrolls,
it’s now become the most likely source of weakness, as reduced tax revenues and growing budget
deficits necessitate a substantial measure of spending cuts. Within the private sector, we expect
manufacturing industry payrolls to bounce back to unchanged after August’s 27k loss and construction payrolls to post a softer performance versus last month. As a result, the bulk of private sector
payroll growth will need to come from the services industries, primarily the health sector. Household
survey data is a different matter, as the outsized gain reported in August’s numbers (a 290k gain in
employment) is apt to see the usual normalization back to trend, indicating a probability of an uptick
in the unemployment rate to 9.7%. Don’t put too much stake in the increase, however, as labor
market stagnation remains the norm.
Wholesale Inventories (Janney 0.3%, consensus 0.6%)
JANNEY MONTGOMERY SCOTT
www.janney.com
© 2010 Janney Montgomery Scott LLC
Member: NYSE, FINRA, SIPC
WEEKLY DATA PREVIEW • PAGE 2
janney fixed income strategy
O c t o b e r 1 , 2 010
CONTENTS
DATA PREVIEW
CALENDAR
INFORMATION & DISCLAIMERS
Date
Event
1)
4-Oct
Factory Orders
AUG
-0.6%
-0.3%
Follows soft durables
2)
4-Oct
Pending Home Sales MoM
AUG
2.0%
3.5%
Dead cat splat
3)
5-Oct
ISM Non-manufacturing
SEP
50.7
52.0
4)
6-Oct
ADP Employment Change
SEP
+15k
+20k
5)
7-Oct
Consumer Credit
AUG
-$2.5bln
-$3.0bln
6)
8-Oct
Nonfarm Payrolls
SEP
-12k
+5k
7)
8-Oct
Private Payrolls
SEP
+55k
+79k
8)
8-Oct
Manufacturing Payrolls
SEP
+0k
+6k
9)
8-Oct
Unemployment Rate
SEP
9.7%
9.7%
Wholesale Inventories
AUG
0.3%
0.6%
11) 13-Oct Import Price Index MoM
SEP
-0.2%
-0.3%
12) 13-Oct Import Price Index YoY
SEP
3.8%
13) 14-Oct trade Balance
SEP
-$45.0bln
14) 14-Oct PPI MoM
SEP
0.1%
15) 14-Oct PPI Ex-Food & Energy MoM
SEP
0.2%
16) 14-Oct PPI YoY
SEP
3.7%
17) 14-Oct PPI Ex-Food & Energy YoY
SEP
1.5%
18) 15-Oct CPI MoM
SEP
0.2%
0.2%
Consumer inflation
19) 15-Oct CPI Ex-Food & Energy MoM
SEP
0.1%
0.2%
risks dipping lower
20) 15-Oct CPI YoY
SEP
1.1%
21) 15-Oct CPI Ex-Food & Energy YoY
SEP
0.9%
22) 15-Oct Advance Retail Sales
OCT
0.2%
0.4%
Back to school
23) 15-Oct Retail Sales Ex-Auto
NOV
0.2%
0.4%
hangover means
24) 15-Oct Retail Sales Ex-Auto & Gas
DEC
0.1%
25) 15-Oct Business Inventories
JAN
0.3%
10) 8-Oct
As we will not be publishing
on October 8, we are including two weeks of forecasts.
+
-
JANNEY MONTGOMERY SCOTT
www.janney.com
© 2010 Janney Montgomery Scott LLC
Member: NYSE, FINRA, SIPC
WEEKLY DATA PREVIEW • PAGE 3
Forecast Consensus Trend Comments
Trending towards faster economic growth or higher inflation
Trending towards slower economic growth or lower inflation
-
Softeness in demand
-
Continued paydowns
No real job growth
+
thanks largely to
state & local gov't
-
Slight decline in
oil prices
-$44.5bln
-
Weaker Euro demand
slower core sales
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O c t o b e r 1 , 2 010
CONTENTS
Analyst Certification
DATA PREVIEW
CALENDAR
I, Guy LeBas, the Primarily Responsible Analyst for this report, hereby certify that all of the views expressed in this report accurately
reflect my personal views about any and all of the subject sectors, industries, securities, and issuers. No part of my compensation was,
is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
INFORMATION & DISCLAIMERS
Definition of Outlooks
Positive: Janney FIS believes there are apparent factors which point towards improving issuer or sector credit quality which may result
in potential credit ratings upgrades
Stable: Janney FIS believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in
either potential credit ratings upgrades or downgrades.
Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may
result in potential credit ratings downgrades.
Negative: Janney FIS believes there are factors which point towards weakening in issuer credit quality that will likely result in credit
ratings downgrades.
Definition of Ratings
Overweight: Janney FIS expects the target asset class or sector to outperform the comparable benchmark (below) in its asset class in
terms of total return
Marketweight: Janney FIS expects the target asset class or sector to perform in line with the comparable benchmark (below) in its asset
class in terms of total return
Underweight: Janney FIS expects the target asset class or sector to underperform the comparable benchmark (below) in its asset class
in terms of total return
Benchmarks
Asset Classes: Janney FIS ratings for domestic fixed income asset classes including Treasuries, Agencies, Mortgages, Investment Grade
Credit, High Yield Credit, and Municipals employ the “Barclay’s U.S. Aggregate Bond Market Index” as a benchmark.
Treasuries: Janney FIS ratings employ the “Barclay’s U.S. Treasury Index” as a benchmark.
Agencies: Janney FIS ratings employ the “Barclay’s U.S. Agency Index” as a benchmark.
Mortgages: Janney FIS ratings employ the “Barclay’s U.S. MBS Index” as a benchmark.
Investment Grade Credit: Janney FIS ratings employ the “Barclay’s U.S. Credit Index” as a benchmark.
High Yield Credit: Janney FIS ratings for employ “Barclay’s U.S. Corporate High Yield Index” as a benchmark.
Municipals: Janney FIS ratings employ the “Barclay’s Municipal Bond Index” as a benchmark.
Disclaimer
Janney or its affiliates may from time to time have a proprietary position in the various debt obligations
of the issuers mentioned in this publication.
Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Fixed Income Strategy & Research (Janney FIS).
This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published
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purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements,
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Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions
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WEEKLY DATA PREVIEW • PAGE 4
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