Fears Grow Over Double-Dip Recession



Double Dip Recession Anybody?



One fund manager calls it a horror show, others are predicting the Federal Reserve will have to extend its unconventional measures and stocks across the world are falling heavily.

The data from the world’s largest economy has fallen so sharply that investors have been caught off guard, raising fears over a double-dip recession.

It was a big fall in ISM Manufacturing PMI data on Wednesday that triggered the fall in stocks and saw money pour into Treasurys, pushing the yield on the 10-year note below three percent.

The index fell from a very healthy 60.4 to 53.5 and while still indicating growth the scale of the fall has worried some economists who say it is too early to call this anything more than a slowdown.

US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing.

So the move down wasn’t so surprising, as the headline index usually doesn’t hang above the 60 level for too long. That said, the large decline in the May new orders index (-10.7 points) does raise the concern that the slowdown may have a bit further to go.

Pointing to the dramatic turnaround in the Citigroup "Economic Surprise Index" for the United States, this tumble in a matter of months to negative from positive is almost as bad as the situation before the collapse of Lehman Brothers in 2008.

The correlation between the economic surprise index and Treasury yields is very close, so the lesson is that whatever your long term macro views are regarding hyper inflation vs. deflation or the risk of the US defaulting, the reality is that if you want to have a view about government bond prices, the best thing you can do is look at the economic data to see what’s actually going on.

And right now, the economic data is suggesting that however measly you may think a 3 percent yield is on a 10-year Treasury, the yield should probably be a fair bit lower given what’s going on in the US economy

The sharp decline in the ISM manufacturing index to a 19-month low of 53.5 in May, "will only add to fears that the economy has hit another 'soft patch' which, for a recovery that is less than two years old, is troubling to say the least.

Analysts at Danske Bank in Copenhagen blame the weak data on a confluence of factors hitting all at once but do not see a prolonged downturn.

High Prices of Oil



Higher oil prices and the Japanese earthquake are the main explanations we are going through as a reaction to involuntary inventory building as production has outpaced demand quite a bit in the first quarter.

And now we see a correction to this that may take some months. The earthquake in Japan has only added to the weakness making the decline more brutal. So we will be in a soft patch for a while, but then I believe we will recover again.

With ADP jobs data coming in at its weakest reading since September the market is now getting very worried about Friday’s non-farm payroll data. Strategists have been lowering forecasts for the jobs number and questioning what impact a weaker labor market will have on the US economy.

Companies have responded to the rise in oil prices as though it is a mortal threat to the recovery, increasing the pace of layoffs and reducing the pace of hiring. It does not take much to push the payroll numbers from the robust expansion zone, where the April data sat, to the seriously disappointing zone, where the May numbers ended up at.