The Recovery Steady As She Goes

Today’s economic data was decent. Not spectacular, but it does indicate the economy is recovering, albeit slowly (I sound like a broken record (does anyone remember what a record is?)). CPI was higher, than but not as much as yesterday’s PPI. This indicates that businesses still cannot fully pass along price increase to consumers. Backing out the volatile and speculation-fueled food and energy inflation data, inflation was very tame. However, even when food and energy prices are included, consumer prices are up only 1.5% year over year. This is not the stuff of which less accommodative Fed policies are made.



Investors who purchased three-year, 10-year and 30-year U.S. treasury debt at auction are probably feeling good about their purchases following today’s mild inflation data. All three auctions went well. The 10-year auction was the best of the three and even the 30-year auction was close to its average figures for the past 10 auctions. I continue to hear from financial advisors about warnings they are getting from wholesalers and equity types that inflation is poised to explode. We don’t see it. Apparently, neither do foreign central banks who were major purchasers of the 10-year treasury notes and 30-year government bonds at this week’s auctions. Maybe it is that they are determined to keep long-term rates low and to support the dollar (which helps to keep inflation contained) for their own benefits.



Retail sales were higher, but missed street expectations. It could be that the street is being overly optimistic. There is still the belief that the economy is going to rebound to activity levels experienced during the last two recoveries. I don’t see the fundamentals to support such a recovery. More importantly, neither do many economists and strategists. Most experts are forecasting sustainable, but modest recovery.



A Wall Street Journal survey of economists indicates a consensus GDP forecast for 2011 of 3.2% with unemployment falling to 8.8% by year end. There is nothing surprising about these forecasts. The fundamentals for rapid growth and low unemployment simply do not exist at this time. Today’s Capacity Utilization report indicates an improvement and much surplus capacity. This usually means that there is the job market is improving and there is plenty of room to create jobs. However, one must ask how surplus capacity is being measured. If current capacity is being measured versus capacity during the last two bubbles, then it is likely that this capacity is superfluous, rather than surplus.





Most fixed income professionals do not see dramatically higher interest rates, spiraling inflation and or a reversal of Fed policy in the near future. Please keep that in mind when considering a strategy or trade idea.