Conference Board Data Moves Markets

June 29, 2010

The global data calendar today was a heavy one.  While including several key Japanese end-of month releases, euro area sentiment indices, and the Case-Shiller house price index for 20 metropolitan areas, two indicators compiled by the Conference Board stole the show.

The CB has crunched a U.S. index of leading economic indicators for years, which rarely stirs markets because most of the information on which it is based each month is already public knowledge.  A separate LEI index for China was introduced recently.  Ordinarily, it takes a while for investors to gain enough trust in a new measure to react.  Often, new constructs can be misread for a while until a good feeling is established for what they do and do not show.  The ADP measure of U.S. private employment, which arrives tomorrow and each month two days before the Labor Department report, went through a period, for instance, of not correlating well with the government figures.  Today’s Chinese LEI news was actually a correction of the original report caused my a measurement mistake.  The increase was reduced substantially from 1.7% to 0.3%.  The leaders index is intended to herald changes in trend within the coming six months, but investors can have only a vague notion of what a single month’s corrected figure really means.

The other release from the CB covered U.S. consumer confidence, which reversed the prior two months of improvement.  The 52.9 reading for June was down from 62.7 in May but similar to a score of 52.3 in March.  The street consensus forecast wasn’t looking for much change at all between May and June.  Forecasts of consumer confidence or business confidence are not much more than the toss of a dart, and so analysts often consider the prior month’s outcome to be the best predictor of the ensuing month’s level.  Other than that, it’s actually surprising that a big decline wasn’t anticipated.  Many retail figures over the past month or so have been disappointing, and the stock market has lost considerable ground.

An old axiom of market watchers stipulates that the market reaction to news tells one more critical information than the news itself.  Markets around the world responded very sharply to these two bits of news.  Dare I say they over-reacted?  Neither release was for a major indicator.  The U.S. indicator merely confirmed other evidence of a loss of momentum in the U.S. recovery, something that the Fed conceded in last week’s policy statement.  The central bank’s future policy is not going to be affected by this report.  I stick by the view I adopted late in 2009: the Fed will not change rates before 2011, if then.

As for China, it’s well established that Beijing officials want growth to cool.  The 11.9% jump in GDP between 1Q09 and 1Q10 was a shocker on the upside, and CPI and WPI inflation in May of 3.1% and 7.1% were higher than they want.  Policies on the fiscal and monetary side have been taken to show growth.  It’s always hard to tell how much needs to be done to effect the desired result in GDP.  It’s possible that policy restraint may be overdone.  What is clear is that officials in China do not want to over-steer their economy.  9-10% growth would be fine.  Too sharp a slowdown would risk too little worker absorption and the possibility of social restlessness, which is to be avoided at all costs.  In the long run, steps will always be taken to avoid excessively low growth for more than a brief spell.  We saw in the world recession that Beijing official policies can wag the world economy and certainly decouple China from advanced economy trends.  Bottom line, I wouldn’t be overly worried about the CB report today on China.

But the market reactions, not the data, reveal the truth.  And in this case, the truth is that investors have a gut feeling that economic conditions are going to get worse before they improve, that deflation is a greater 1-3 year risk than inflation, and that the plunge in stock prices prior to March 2009 had more validity than the subsequent rebound. It is my further belief that not all of this pessimism stems from economic factors.  Obama’s dismissal of General McChrystal will prove to be a big error caused by his confusion over its similarities and differences with Lincoln’s dismissal of McClellan in November 1862.  The names roll off the tongue similarly.  Each disparaged the president’s men.  McClellan even opposed Lincoln on the 1864 Democratic Party ticket.  McClellan was the wrong man for his job.  Like McChrystall, he was a West Pointer, but he was trained and used mostly as an engineer, not a troop commander prior to his appointment in the civil war.  McChrystall, in contrast, had the perfect background of Special Forces, counter-insurgency, and troop commander that the task needs.  In short, he was better trained for his job than Obama with a background of 20 years in community service and four years in the senate was for his.  History must deal a clear-cut U.S. victory in Afghanistan, or the switch will forever be second-guessed. 

The G-20 Toronto Summit looked like a real bust to old-time watchers of these kind of events like myself.  The communique includes some double talk, and basically every country was given a green light to do whatever its government pleases.  Foreign exchange policy coordination in particular has suffered a setback.  Softening recoveries, weak leadership, violence in the streets, distrust of all institutions, doubts about current policies, and a lack of coordination between countries are some of the ingredients that are making this summer hot, dirty and gritty in a frightened marketplace.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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