Around the Street
Economic Indicators: What the Pros Are Saying
By BusinessWeek staff Ever on the alert for more "green shoots" pointing to a strengthening economy, Wall Street drew encouragement from better-than-expected reports on weekly initial jobless claims and April retail sales on June 11. Still, worries about rising interest rates—and a potential uptick in inflation—remain very much on investors' radar. What did the experts have to say about these topics? BusinessWeek compiled comments from Wall Street economists and strategists on June 11: David Greenlaw, Morgan Stanley The stronger-than-expected May retail sales report (with both overall and [sales excluding autos] up 0.5% in May) pushed our estimate for second-quarter consumption to -0.5% (from our previous -1.0%). The major swing factor was an upward revision to April sales—which largely reflected a sizeable adjustment in the grocery store component. However, we have left our tracking estimate for second-quarter gross domestic product unchanged at -1.5% because newly received information on motor vehicle inventories just about fully offset the upward adjustment to consumption. Win Thin, Brown Brothers Harriman This week's weekly initial jobless claims have taken on some added importance for market psychology. Research contained in a new National Bureau of Economic Research paper argues that past recessions typically end 4 to 6 weeks after initial unemployment claims peak. Now, it looks like initial jobless claims may have peaked for the cycle at 674,000 for the week ended March 28. Although this is a weekly number and tends to be volatile, claims stood at 601,000 for the week ended June 6 and is the lowest since Jan. 24. The four-week moving average fell to 621,750 and was the lowest since Feb. 14. On a more negative note, continuing claims rose to a record 6.816 million for the week ended May 30. Plus, we note this current downturn is certainly not your "typical" one. A recent comprehensive International Monetary Fund research piece shows that recessions which follow a financial crisis last about 1.5 times the usual duration. Also, the IMF found that recessions that take place in a synchronized global downturn tend to last longer, too. All in all, the claims data do support the green shoots story, and the dollar today is reacting positively to the better news. David Joy, RiverSource Investments Concerns regarding inflation are premature. The extent of the output gap along with subdued wage growth and low monetary velocity mean inflation is a long way off. The rise in fed funds futures is overdone. Bond yields have risen, and undoubtedly some of the increase is due to inflationary concerns. More likely, the back-up is attributable to a normalization of yields in an improving economic environment as well as the flood of supply in government debt. The Federal Reserve is not close to considering raising interest rates, in our opinion. Inflation may become a concern further into the expansion, perhaps in two years or so. Extracting excess liquidity from the economy in a timely manner without igniting inflation is, at best, a delicate undertaking and, at worst, improbable. Just as has been the case in stocks, the rally in bonds has been the strongest in the lowest-quality segments of the market. High-yield bonds are now arguably slightly overvalued. The market is now priced to expect an anticipated default rate in the vicinity of 9%, while we think it may be closer to 12%. Opportunities still exist in the high-yield sector, but they are fewer. Investment-grade bonds are currently more attractive. Municipals are also attractive from a valuation perspective, but are under pressure. Selectivity is critical.