Tuesday, July 3, 2012

Factory orders are weak, but fear is declining



Nondefense factory orders in May proved to be stronger than expectations (+0.7% vs. 0.1%), and capital goods orders were revised a tiny bit higher, but neither series shows any meaningful growth. This is more confirmation of the already-known fact that economic growth has been weak in recent months. We've seen slowdowns and pauses such as these before without it being the precursor to a recession, so this does not necessarily bolster the bearish case for the economy.


I think it's more likely that the recent economic weakness is the by-product of Eurozone fears, rather than the beginnings of a recession. Fortunately, those fears are once again subsiding, as the chart above suggests. Spanish 2-yr yields are down almost 150 bps in the past two weeks, as the near-term likelihood of a Spanish default has dropped meaningfully. The Vix/10-yr ratio has backed off its recent highs at the same time, driven mainly by a decline in the level of market fear—the Vix index has dropped from a high of over 27 a month ago to 16.4 today. 2-yr Eurozone swap spreads are in the low 70s, which is still elevated, but substantially lower than the 100+ numbers we saw at the end of last year. 10-yr Treasury yields remain extremely low, however, which means that the rise in risk assets of late (commodities are up over 8% in the past two weeks, and the S&P 500 is up over 7% in the past month) is being driven by a decline in pessimism, not a rise in optimism.

3 comments:

brodero said...

Did you see the auto sales for June...these numbers are not recessionary numbers....

Unknown said...

^
Yeah, so far it's looking like it'll hit 14 million SAAR, though we've still got to hear from Honda and Hyundai.

Bill said...

Are the ISMs looking more and more like emotional reactions to the headlines as opposed to reliable economic data for forecasting purposes?