THE BASIS POINT

Rates, stocks down on Greece austerity protests & weak U.S. manufacturing and homebuilding

 

Rates were down today as bonds rallied (FNMA 4% coupon +53 basis points) to regain most of yesterday’s sharp losses. The rally came as citizens clashed with police in Athens to protest a new round of income-reducing austerity measures, plus U.S. manufacturing and homebuilder data were resoundingly weak. This outweighed U.S. consumer inflation that some considered higher. Full recap and a word on the core inflation debate below.

Today Greek prime minister George Papandreou offered to step down to facilitate forming a unity government to pass more new austerity measures. Up to 40,000 protestors turned out in Athens for an anti-austerity demonstration organized by two major unions.

This is the latest flare up since austerity measures were announced May 6, 2010 when Greece got started on its ever-expanding bailout.

Some say the failure of Greece could lead to a global market freeze similar to what happened after Lehman failed, and others disagree.

Nevertheless, today U.S. mortgage and Treasury bonds are benefitting from Greece concerns.

As for U.S. data also fueling the bond rally, let’s start with manufacturing.

Each month, different regional Fed banks conduct surveys of manufacturers to gauge overall activity and inflation pressure. Today’s June Empire State Manufacturing Survey showed that, while inflation has calmed down, manufacturing activity in New York, New Jersey and Southern Connecticut dropped to its lowest level since November.

The Empire State Index for June was -7.8 versus +11.9 in May. Economists were expecting +10 to +12, and a reading greater than zero signals expansion.

Also today, the National Association of Homebuilders released figures showing that June builder confidence dropped in June to the lowest level since September. The quote below sums it up, and was further fuel for the bond rally.

“Builders are being squeezed by the continuing weakness in existing-home prices – against which they must compete — as well as rising material costs,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. “In addition to the ongoing impacts of distressed property sales on home prices, appraisal values and consumer confidence, rising costs for materials such as roofing, copper, wallboard, vinyl siding and other components have made it extremely difficult to construct a new home and sell it at a price that covers the costs.”

And finally consumer inflation came in at what you could argue is tame if you’re looking at “Core” numbers that ignore food and gas (see table). But 3.6% annual inflation for everything including food and gas of is well above the Fed’s 2% comfort zone.

However, the Fed has been insistent that “Core” inflation is what matters in an unstable economic environment. You see just how complicated this debate is when you compare the inflation findings in today’s Empire State vs. Homebuilder surveys.

The homebuilder comment above suggests rising inflation. But this isn’t actual data.

The Empire State data showed declining inflation:

Price indexes posted their first declines in several months. The prices paid index fell fourteen points, to 56.1–still a relatively high value, but a sign that price increases were smaller in June than in May. The prices received index retreated seventeen points to 11.2, with the share of respondents that reported an increase in selling prices falling from 33% last month to 17% this month.

The Fed’s case is that weaker economic activity will eventually cause a moderation of inflation. This Empire Survey data suggests that’s the case.

This month anyway. Not a trend yet. Next look tomorrow with Philadelphia Fed survey.

 

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