Best of the Week
Most Popular
1.Trump Delirium Triggers Stock Market Brexit Upwards Crash Towards Dow 20,000! - Nadeem_Walayat
2.The Future Price Of Gold Will Drop Below $1000 In 2017 -InvestingHaven
3.May Never Get Another Opportunity to Buy Gold at this Level Again - Chris_Vermeulen
4.Delirium - The Real Reason Why Donald Trump Won the US Presidential Election - Nadeem_Walayat
5.Why Nate Silver / Fivethirtyeight is one of the Most Reliable Election Forecasting Indicator? - Nadeem_Walayat
6.Gold Price Forecast: Nasty Naughty November Gold Price Trend - I_M_Vronsky
7.Gold Mining Stocks Screaming Buy! Q3’16 Fundamentals - Zeal_LLC
8.Delirium of Trump Mania Win's Mr BrExit US Presidential Election 2016 - Nadeem_Walayat
9.The War On Cash Goes Nuclear In India, Australia and Across The World - Jeff_Berwick
10.Hidden Signs for Gold and Silver - P_Radomski_CFA
Last 7 days
Gold and Silver Bullion Buying Opportunity for 2017? - 4th Dec 16
First UK BrExit then Trump, Next BrExit Tsunami Wave to Hit Italy HARD Sunday! - 3rd Dec 16
The 10YR Yield and SPX Stocks Bull Markets - 3rd Dec 16
Gold And Silver – Do Not Expect Much Difference With Trump Compared To Obama - 3rd Dec 16
Gold, Currencies and Markets Critical 61.8% Retracements - 2nd Dec 16
Gold Junior Stocks Q3’16 Fundamentals - 2nd Dec 16
Adventures in Castro’s Cuba - 2nd Dec 16
We Are Putting Off the Inevitable - 2nd Dec 16
Macroeconomic Cycles & Demographics - A Fuse, An Explosive and The Igniting Catalyst - 2nd Dec 16
How Moving Averages Can Identify a Trade - 1st Dec 16
Silver Prices and Interest Rates - 1st Dec 16
America, is it Finally time for us to say Goodbye? - 1st Dec 16
Blockchain Technology – What Is It and How Will It Change Your Life? - 1st Dec 16
Burn the Flags, Can Trump Salvage The Sinking US Economic Ship? - 1st Dec 16
Will US Housing Real Estate Market Tank in 2017? - 1st Dec 16
Referendum Puts Italy's Government to the Test - 30th Nov 16
Why We Haven’t Seen Gold Price Rally after Trump Victory - 30th Nov 16
Breakdown and Slide in Crude Oil Price - 30th Nov 16
A 'Wicked Rally' in Gold Price Predicted - 30th Nov 16
Silver Market Sentiment Looks Golden - 30th Nov 16
Indian Demonetization Denotes Severe Stress in the Global Gold Market - 30th Nov 16
Owning Gold and Silver in Troubling Times - 29th Nov 16
Trump's Presidency - Stock Market Crash or Start of New Mega-Trends - 29th Nov 16
Prime Minister Modi's War Against Corruption, Black Money and Fake Currency Notes in India - 29th Nov 16
Can President Trump Really Drain the Swamp? - 29th Nov 16
President Trump’s Economic Plan Isn’t Going to Work - 29th Nov 16
The US Bond Bear Market Has Begun! - 29th Nov 16
Simple Yet Powerful Technical Trading Tools - 28th Nov 16
Public Infrastructure – Welcome to the World of Waste, Fraud, and Abuse - 28th Nov 16
Fifty Years Later, Moore's Computing Law Holds - 28th Nov 16
An Elusive Stock Market Top - 28th Nov 16
This Past Week in Gold - 27th Nov 16
Italian Bank Collapse European Sovereign Bond Carnage, Criss-Crossed Fuses & Lit Bonfire - 27th Nov 16
How to Beat UK Savings Crisis with Child Junior Cash ISA, Pension's and Life-time ISA - 27th Nov 16
Castro Was Not Who You Thought He Was - 27th Nov 16
Understanding the Trump Presidency , Beyond Merkel - 26th Nov 16
US Stocks Bull Market New All Time Highs - 26th Nov 16
Silver Mining Stocks Q3 2016 Fundamentals - 26th Nov 16
MSM's Stock Market Druck'n Suck-In Continues - 26th Nov 16
Gold Price Down 13.5% In 13 Days - Opportunity For Geometric Price Cost Averaging - 26th Nov 16
Tips for Trading Options with Elliott Waves - 26th Nov 16
Germany Pulls the Plug on Market Oracle site for 24 hours, German Election BrExit GerExit Warning Shot? - 26th Nov 16
New NS&I 2.2% Savings Bond Ahead of 2017 Stealth Inflation Theft of Purchasing Power - 24th Nov 16
Establishment Controlled Mainstream Media Launches War on Alternative 'Fake' News - 24th Nov 16
Black Friday Cheap Christmas Lights, How Long do they Last ? B&M Stores Review Video - 24th Nov 16
War On Cash Goes Global – India and Citibank In Australia - 24th Nov 16
Stocks, the Politically-Driven S.O.D. to Lose Again - 24th Nov 16
One of the best buying opportunities in history? - 24th Nov 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

$10000 Gold

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

© 2005-2016 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

Catching a Falling Financial Knife