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The Week That Was And The One To Come: Meet Me At The Fair

 July 16, 2012 09:34 AM
 

(By Kevin Donovan) Here's a bit of wisdom: The trend will continue until it doesn't.  Initial jobless claims took a deep dive, China didn't fall off a cliff and JP Morgan's (JPM) second-quarter earnings report swatted away a $5 billion-plus trading loss with all the insouciance of Croesus minting gold coins.  And inflation is nowhere in sight.  The producer price index for June rose just 0.1%, with the core index up 0.2%.

One would think the "Goldilocks" economy of the 1990s had returned except for the troubling fact unemployment remains stubbornly high and the fiscal and monetary policy mix is as cold as Momma Bear's porridge. 

Just look at what the bond market is telling us. Yields on the 10-year Treasury note had fallen for six straight trading sessions, ending the streak on Friday when the stock market exploded out of its funk.  The yield, at 1.49%, remains near the all-time low of about 1.47%.    

Here's what we make of it.  Sure, inflation expectations are low and the Eurozone mess makes Treasuries a safe haven, but the real driver has been the conviction that the economy has slowed to stall speed. 

For evidence, we have a favorite indicator of current economic conditions you won't find on anyone else's radar – the attendance at municipal festival events.  Take two of them in the South.  Early in the year, The New Orleans Jazzfest drew record crowds, a sign all was well.  This spring, Little Rock's Riverfest attendance was down sharply from 2011.  Both predicted upticks and downswings in jobs growth.  We'll keep an eye on similar events.  State fair season is approaching.

Of course, low long-term rates is something the Federal Reserve explicitly is aiming for with "Operation Twist," but so far those low rates haven't had the desired effect of igniting economic growth and boosting employment.

That could be about to change, and we think the Fed, ironically, will be happy when it sees rates rising for the right reason.  For now it is committed to keeping the rate it directly controls, the Federal Funds rate, at essentially zero until at least 2014 and has said it is prepared to do more if warranted.  Policy makers won't be happy until market interest rates start to rise, so we expect more stimulus ahead.

In that regard, the big event of the week will surely be Fed Chairman Ben Bernanke's appearance before the Senate Banking Committee to discuss the outlook for the economy and monetary policy.  Markets will dissect his remarks for any glimmer of what it will take for the Fed to ramp up another go at quantitative easing.  The first two rounds of that money-creating mechanism have yet to translate into job-creating economic growth.

Also on tap are retail sales and the Empire State index of manufacturing activity on Monday, the consumer price index and industrial production on Tuesday, Bernanke's testimony Wednesday and existing home sales and the Philly Fed index on Thursday.

And earnings season gets into full swing with reports due from Citigroup, Google, Bank of America and other big names.

Meanwhile, we'll be taking the pulse of demolition derby popularity at state fairs this year.


Rich
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