Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
New Profit Points in the Shifting Balance of Power, Welcome to Saudi America - 24th Oct 14
QE Failure & Folly Of Paper Mache, Treasury Bond Integrated Lifeline Patches - 24th Oct 14
U.S. Economy Faltering Momentum, Debt and Asset Bubbles - 23rd Oct 14
Annuities - Afraid Your Money Will Vanish before You Do? - 23rd Oct 14
What Debt Deleveraging? - 23rd Oct 14
How to Profit from Massive Spin-Offs with Just One Play - 23rd Oct 14
Evaluating Ebola as a Biological Weapon - 23rd Oct 14
Euro, USD, Gold and Stocks According to Chartology - 23rd Oct 14
Why You Should Always Be Invested in the Stock Market (Even Now) - 23rd Oct 14
Five U.S. Housing Market Warning Signs Point to Real Estate Market Downturn - 23rd Oct 14
The Better Short: Gold or Silver? - 23rd Oct 14
Focus on Graphite Companies with Green Energy and Technology Strategies - 22nd Oct 14
Crude Oil Price Hitting Bottom - 22nd Oct 14
Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - 22nd Oct 14
Gold Or Crushing Paper Debt Stocks Crash? - 22nd Oct 14
India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High - 22nd Oct 14
Bitcoin Stock Exchange Could Be "More Valuable than Alibaba" - 22nd Oct 14
Currency War - How to Profit from a Stronger U.S. Dollar - 22nd Oct 14
Banks Hold Treasuries and Make Loans- 22nd Oct 14
Gold and Silver Timing is Everything - 22nd Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VII) - 22nd Oct 14
Follow the Baby Boom to Biotech Stock Profits - 22nd Oct 14
Copper, Nickel and Zinc Won't Be Cheap for Long - 22nd Oct 14
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

US Recession Masked by the Fed Dumping Treasuries to Support Banking System

Economics / US Economy Jun 20, 2008 - 09:07 AM GMT

By: Paul_L_Kasriel

Economics Best Financial Markets Analysis ArticleFor the second month in a row, the Conference Board's index of Leading Economic Indicators (LEI) increased by 0.1% in May. And for the second month in a row, the interest spread between the yield on the 10-year Treasury security and the fed funds rate made a large positive contribution to the change in the LEI, 0.14 in April and 0.19 in May. All else the same, had it not been for the positive contributions from the interest spread component, the LEI would have contracted in April and May. Is there any reason to hypothesize that the spread component is biased upwards?


Of course, or I would not have mentioned it. Since the Fed has opened up all of its different "facilities" to provide reserves to the financial system and destigmatized borrowing from the discount window, more and more reserves have been injected via these facilities. So as not to lose control of the fed funds rate on the downside, the Fed has had to "sterilize" these massive reserve injections via the facilities by reducing its outright holdings of U.S. Treasury securities. Chart 1 shows that in the 27 weeks ended June 11, the Fed's outright total holdings of U.S. Treasury securities had declined by $297.6 billion , $58.6 billion of which were Treasury notes and bonds. This represents an annualized decrease in the Fed's outright total holdings of U.S. Treasury securities of $573.2 billion and of Treasury notes and bonds of $112.8 billion . Chart 1 also shows that up until 2007, when it opened up these new reserve-injection facilities, the Fed had been a significant net acquirer of U.S. Treasury securities.

Chart 1

The Fed is a price-insensitive buyer/seller of U.S. Treasury securities. But other participants in the U.S. Treasury securities market are more price or interest rate sensitive. It stands to reason that Treasury yields would rise, all else the same, if rate-sensitive participants in the U.S. Treasury securities market had to acquire the holdings of these securities being disgorged by the rate-insensitive participant, the Federal Reserve. Therefore, I argue that at least some of the increase in yield on Treasury 10-year securities in recent months is related to the decline in the Fed's holdings of Treasury securities. If so, then some strength in the LEI in recent months, modest as this strength has been, is related to the Fed's reduced holdings of U.S. Treasury securities.

Another Fed District Weighs in with Weak June Factory Report

On Monday, the Buffalo branch of the New York Fed reported a decline in its Empire State Manufacturing Survey, with the new orders index dropping from minus 0.5 in May to minus 5.5 in June. Today, it was the Philadelphia Fed's turn to rain on the parade of *****-eyed economic optimists. The Philly Fed reported that its new orders index dropped from minus 3.7 in May to minus 12.4 in June. Both of these reports bode poorly for the June national Institute for Supply Management report on manufacturing scheduled for release on July 1.

On Tuesday of this past week, the Federal Reserve Board reported that its index of manufacturing output declined 0.02% in May after contracting 0.87% in April. On a year-over-year basis, the Federal Reserve Board's index of manufacturing output declined 0.02% in May after contracting 0.87% in April. On a year-over-year basis, the Federal Reserve Board's index of manufacturing activity in May fell by 0.43% -- its first year-over-year visit south of the zero border since June 2003 (see Chart 2). Assuming the U.S .economy entered a recession in February, as suggested by Macroeconomic Advisers' monthly GDP index (see Chart 3), this recession has had a relatively modest negative effect on the manufacturing sector. I believe that manufacturing will suffer less in this recession than in the past one because exports should be the relative strong performing sector over the rest of 2008. The sector that will suffer the most in this recession will be the financial sector. Those who keep looking at manufacturing to judge the severity of this recession will be mistaken.

Chart 2

Chart 3

Continuing Unemployment Claims Continue to Suggest Recession

Seasonally adjusting weekly economic data is an ambitious undertaking. With regard to the weekly unemployment claims data, I prefer to look at the behavior of the four-week moving average of the unadjusted data, taking the year-over-year percent change. A picture of this transformation is shown in Chart 4. In the four weeks ended June 6, the average of continuing unemployment claims is up a cycle-high 23.6% from a year ago. This percentage increase is a little low compared to the early months of the 2001 recession but a little higher than it was in the early months of the 1990-91 recession. Rest easy, continuing claims are going significantly higher before this recession is over.

Chart 4

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jerry C
09 Jan 09, 03:31
Unemployment

Given the weakening economy and the increasing number of unemployment in the country, the idea of getting a payday loan to head to the Consumer Electronics Show in Las Vegas is somewhat appealing, but you may want to cool your jets there, turbo. The show is following current economic trends – that is, it is shrinking. Salespeople are going to be on the warpath, and will be trying to get anyone within earshot interested enough, to buy something, and boost their bottom line. If you've managed your finances so that you've stayed ahead of the curve, or have gotten assistance with a payday loan, then you may want to go ahead and go for it, as many of the devices that will be featured are geared to be energy efficient money saving appliances. However, as we all know, you have to spend money to save money. But, who knows, taking out a Think Twice Before Taking out Payday Loan to go to Las Vegas Consumer Electronics Show" rev="vote-for" now to buy a device that will save you money in the future might turn out to be worth it.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014