December 15, 2013

Treasuries' poor auction and the job market.

Weak Auction
What and when the Fed may or may not do has obviously resulted in poor action in U.S. Treasuries since the kneejerk bounce after the no-taper in September, and this is continuing as longer-term rates are normalizing on their own. This is healthy in the long term, as the market takes a greater role in pricing the cost of money, but possibly very disruptive throughout the process -- just as any addict deals with the pains of withdrawal.

The Jobs Data
The job openings/labor turnover survey (JOLTS) of the government showed job openings in October of 3.925 million vs. expectations of 3.898 million and 3.883 million in August. This is the best since mid-2008 and consistent with the better labor data reported in the recent government payroll report and this morning's survey of small businesses.

The better labor market data is important because as mortgage rates should move higher so should home prices. To offset these impacts on housing affordability and keep the benefit to consumer spending from better home prices, employment/income growth must accelerate.

Wholesale inventories lifted a large 1.4% month over month in October vs. expectations of 0.3% in September. Wholesale sales increased by 1%. Inventory build has been substantial in the last few months, but the inventory-to-sales ratio has only lifted slightly. Third-quarter real GDP growth has a very heavy component of inventory building, so fourth-quarter real GDP growth should be 2% or a bit less vs. third-quarter growth of 3.6%. Fourth quarter should be a quarter when a big third-quarter inventory build is digested.

More important with respect to inventories, there is no excess inventory overhang that would signal a cutback in production/manufacturing sector employment. It is almost always the case that excess inventory precedes a recession -- no such excess exits currently.