19 Jun THE PHILLY FED WAS THE VERY DEFINITION OF A “V” RECOVERY
Yesterday’s jobless claims were not as good as many hoped but the regional Philly Fed Survey was literally off the chart. It read 27.5 versus an expected -21.4, a reading that was 70.6 points higher than the May reading and the second highest print of the year. In my view this is the very definition of a “V”.
I must caution all that these regional surveys are volatile and may not be indicative of the rest of the economy, but this is the third such positive surprise for a regional manufacturing index.
Commenting further about the Survey, the six-month outlook was the highest since June 1992. The question at hand is this telling us more about the magnitude of an economic rebound or the breadth of increases. In other words, is the level of activity really surging back to pre-Covid levels or is just the case that everybody is seeing a bit of a bounce?
As for claims, both initial and continuing claims held fairly steady from the prior week, showing only slight declines and coming in above the consensus forecasts.
Several times I have commented the strength in the rebound should not be a surprise given the amount of stimulus injected and surging M-2.
Yesterday Bloomberg wrote there is a possibility that the US government may spend $10 trillion to stop Covid, an amount more than spent in all wars ending in 1945. This amount is equivalent to 51% of GDP.
Congress has already authorized $4.71 trillion. The House has already passed another $3 trillion spending bill. It is rumored the President may request a $1 to $3 trillion infrastructure bill.
Wow! Who is going to pay for this…our grandchildren children’s children?
There are only two ways to overcome massive debt…inflate or default.
Legendary hedge fund investor Ray Dalio warned yesterday of a possible “lost decade” for stocks for a number of reasons including massive federal debt. [Note: He also emphasized margin compression, the result of a change in supply chains that will now emphasize reliability and reliance over cost.]
Several times I have opined the next economic crisis may be inflationary growth. The vast majority of statistics have indicated a “V” recovery is perhaps at hand and if this is the start of a trend, the odds of inflationary growth rises exponentially. All must remember crisis are never predicted.
This inflationary growth will inflate tax revenue but may also increase interest rates which could cause margin pressure. A scenario could unfold where the economy is booming but markets remain unchanged, the inverse of the last 10 years.
Radical thought? Who ever thought in a span of four months there would be an impeachment, a pandemic, the sharpest decline in jobs and economic activity in history and riots, all of which has contributed to a record 80% of Americans thinking the country is spiraling out of control.
Commenting on yesterday’s market activity, equities were spooked about rising coronavirus claims, claims which are disingenuous given the cases rose by 1.1%, lower than seven-day average of 1.2%.
What will happen today?
Last night the foreign markets were up. London was up 1.26%, Paris up 1.22% and Frankfurt up 1.06%. China was up 0.96%, Japan up 0.55% and Hang Sang up 0.73%.
The Dow should open moderately higher on a breakthrough with Chines trade negotiations and stimulus talks in Europe. Oil is up about 3% to over $40/barrel as global demand is recovering “very sharply” from its nadir and supplies are “rapidly contracting” according to commodity powerhouses Vitol Sa and Trafigura Group.
The 10-year is off 4/32 to yield 0.73%.