Uncle Al's Conundrum Part Four
The evidence supporting Scenario Two:
Last year’s energy shock in the form of $55 a barrel oil, offset pent-up demand, and caused serious stagflation to occur throughout the economy. $40 a barrel and up oil is now a fact of life, along with its attendant stagflation increasing prices across the board. Even so, stable energy quotes are likely to unmask some economic growth this year.
In addition, economists have begun to revise U.S. growth higher, and there are signs the global economy is demonstrating similar resiliency. Business conditions in early February regained nearly all the ground lost over December and January, according to the Morgan Stanley Business Conditions Index (MSBCI); the index rose another four points to 59% from a revised 55% in January.
There are important hints that an acceleration in activity is brewing: Five of six metrics in the family of MSBCI subindexes turned up in early February. Advance bookings jumped 29 points to 74%. Capital spending increased, plans to increase capex and hire over the next three months each rose, financial conditions stayed strong, and pricing firmed noticeably. The breadth of business conditions also improved in February, with 34% of analysts reporting gains, up from 30% last month, and only 15% reporting weakness.
Survey results suggest that Corporate America, rather than the American consumer, is the source of this new dynamic. Looser business purse strings accounted for most of the strength in services. Rising operating rates will likely prompt increases in capex, and increased demand probably will boost hiring. The results of this month’s survey confirm that both are underway and likely will continue in coming months. Pricing power is on the rise again, courtesy of rising operating rates and still-accommodative monetary policy.
The credit and profit margin squeeze will result in 1st qtr 05 financials and projections not looking so pretty, couple this with the overcapacity in the semiconductor market, there should be a stock market consolidation in the near term and a bigger correction in late April. The economic outlook on the surface is not so good. Commodities and oil pullback. This results in more money heading into the perceived safety of the bond market late April, early May.
Meanwhile, the economies worldwide (South America, Asia, Europe and North America) will start to slowly pick up. The results will not be noticed immediately, due to reporting system latencies, until just before mid year. During this period, the fed raises .25 at two meetings, then takes a pause after May. The bond market starts having a real party right about this time.
Capex spending increases, operating rates rise, hiring increases, energy costs and commodities are on the rise again. Don Meredith, shows up at the bond party and starts singing, "Goodnite, the partys over" just after some decent jobs numbers and the 2nd qtr 05 results start coming. And no, thats not a light at the end of the tunnel for the bond market.
Future guidance is upgraded and previous numbers are restated and suddenly the Fed steps in again. with at least three more .25bps increases before the end of the year, and maybe even a surprise .50 raise, bringing the rate to at least 3.75 to 4.0 by years end.
See: U.S. Business Conditions: Steady Growth or Reacceleration Ahead? by Richard Berner and Shital Patel http://www.morganstanley.com/GEFdata/digests/20050211-fri.html
See: Uncle Al's Conundrum Part Three February 24, 2005
http://naybob.blogspot.com/2005/02/uncle-als-conundrum-part-three.html
Last year’s energy shock in the form of $55 a barrel oil, offset pent-up demand, and caused serious stagflation to occur throughout the economy. $40 a barrel and up oil is now a fact of life, along with its attendant stagflation increasing prices across the board. Even so, stable energy quotes are likely to unmask some economic growth this year.
In addition, economists have begun to revise U.S. growth higher, and there are signs the global economy is demonstrating similar resiliency. Business conditions in early February regained nearly all the ground lost over December and January, according to the Morgan Stanley Business Conditions Index (MSBCI); the index rose another four points to 59% from a revised 55% in January.
There are important hints that an acceleration in activity is brewing: Five of six metrics in the family of MSBCI subindexes turned up in early February. Advance bookings jumped 29 points to 74%. Capital spending increased, plans to increase capex and hire over the next three months each rose, financial conditions stayed strong, and pricing firmed noticeably. The breadth of business conditions also improved in February, with 34% of analysts reporting gains, up from 30% last month, and only 15% reporting weakness.
Survey results suggest that Corporate America, rather than the American consumer, is the source of this new dynamic. Looser business purse strings accounted for most of the strength in services. Rising operating rates will likely prompt increases in capex, and increased demand probably will boost hiring. The results of this month’s survey confirm that both are underway and likely will continue in coming months. Pricing power is on the rise again, courtesy of rising operating rates and still-accommodative monetary policy.
The credit and profit margin squeeze will result in 1st qtr 05 financials and projections not looking so pretty, couple this with the overcapacity in the semiconductor market, there should be a stock market consolidation in the near term and a bigger correction in late April. The economic outlook on the surface is not so good. Commodities and oil pullback. This results in more money heading into the perceived safety of the bond market late April, early May.
Meanwhile, the economies worldwide (South America, Asia, Europe and North America) will start to slowly pick up. The results will not be noticed immediately, due to reporting system latencies, until just before mid year. During this period, the fed raises .25 at two meetings, then takes a pause after May. The bond market starts having a real party right about this time.
Capex spending increases, operating rates rise, hiring increases, energy costs and commodities are on the rise again. Don Meredith, shows up at the bond party and starts singing, "Goodnite, the partys over" just after some decent jobs numbers and the 2nd qtr 05 results start coming. And no, thats not a light at the end of the tunnel for the bond market.
Future guidance is upgraded and previous numbers are restated and suddenly the Fed steps in again. with at least three more .25bps increases before the end of the year, and maybe even a surprise .50 raise, bringing the rate to at least 3.75 to 4.0 by years end.
See: U.S. Business Conditions: Steady Growth or Reacceleration Ahead? by Richard Berner and Shital Patel http://www.morganstanley.com/GEFdata/digests/20050211-fri.html
See: Uncle Al's Conundrum Part Three February 24, 2005
http://naybob.blogspot.com/2005/02/uncle-als-conundrum-part-three.html
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