Leading Indicators are Leading Us Where?

Leading Indicators were up 0.4% versus a Street consensus of 0.2% and a prior revised -0.4% (down from -0.3%). Headlines following the report decried that expansion is underway. Does not anyone look at the tables? The data components indicate that much of the cause for a positive reading of Leading Indicators was due to Stock Prices (0.10%), Interest Rate Spread (0.15%), Building Permits (0.18%)and Jobless Claims (0.18%). Readers are probably wondering: what is wrong with that? There is nothing wrong with having these positive components, but we do not believe that they tell the entire story. For one; higher stock prices only tell us that the demand for dividends and better earnings (until recently) have created investor demand. Building permits are encouraging, but they are centered at the upper end of the market and are centered on larger builders. New Home Construction also delays the price recovery of existing homes, keeping many home owners underwater. Jobless claims were juiced in July by a lack of seasonal auto plant closures. August data has seen more "normalized" figures in the mid-360,000 range. Although these are truly positive developments, they were nearly offset by some negative developments. For instance, the work week, which was up 0.7% in June was flat in July. If this persists, it would not be good for job creation. ISM New Orders were down .15%. Consumer Expectations and Economic Conditions was down 0.10%. The data indicates a modest recovery which is vulnerable to the fiscal cliff. It also indicates that, while the economy may not need QE3, it certainly cannot with stand the removal of policy accommodation. Notice how price of U.S. Treasuries are rallying today, in spite of the "good" leading indicators data? This is because of a few factors. 1) The numbers were better, but not fantastic. 2) The yields of long-dated Treasuries are reaching a point at which buyers might be attracted. 3) The prospects for QE in September have dimmed, somewhat. Remember, all easing, quantitative or traditional, is potentially inflationary and can put upward pressure on long-term interest rates (unless the Fed "twists" and buys long-dated securities to artificially hold down yields).' 4) It is the weekend. There is short covering underway. 5)Does anyone really believe that, with many market participants on the beach, this week's bond market action is truly indicative of broad market participant sentiment. Lastly, beware the Interest Rate Spread component of Leading Indicators. The component is reporting that the yield curve has steepened. Not good for curve-flattening strategies, such as some structured notes and Libor-floaters. Fear not, we believe that the curve will flatten, if only a bit, when market participants return in September. www.bond-squad.com 347-927-7823 Twitter: @Bond_Squad