BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow...

BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Don't look now, but the bear steepener is on. And it is on big. How big? Well in the chart at the bottom, you will see the spread between 3 month bills and 10's. The spread now? 92 basis points. Yes, this is much steeper than the inversion we were used to. Previous steepeners go to 400 basis points over the past 15 years. Considering all the global dislocations and the dollar, and a Fed that is insistent on blowing bubbles, 400 may be be a bit conservative. 1 - Depending on where one starts measuring (let's assume 5.25 for the sake of argument) a steepener accomplished solely on short end dropping with the long end staying flat would take the short end down to 1.25. 2 - Option #2 is achieved if Bernanke is done cutting yet after one move, yet yields on the long end continues to rally. I suppose it is 3 - The problem with option #3 (assuming one is looking for a 400 basis point move) is that Bernanke will run out of room. Interest rates won't go negative. 4 - Option #4 suggests Bernanke is about to start hiking. With weakness in housing and worries over financial contagion, this scenario seems unlikely unless you buy the Goldilocks mid-term cycle correction theory with everything coming up roses. I don't buy that rosy outlook for numerous reasons. 5 - If one starts measuring from the first rate cut then option #5 is what has happened so far. Long end yields have risen as Bernanke did a shock and awe campaign during two consecutive options expiry weeks. But with the continued spillover in housing, if the long end yield rallies as the short end drops, Bernanke might be forced to stop his rate cutting campaign. Again, this option does not seem likely. To help resolve which one of the above is most likely one must ask: Are the conditions now more like mid-cycle 1994, late-cycle 1999, or more like 2001 when Greenspan slashed and burned rates to 1% in a panic move to stave off deflation? When looking at the figure above, it’s hard to go along with the mid-cycle slowdown mantra when the two above indicators look nothing like they did in the mid 1980s and mid 1990s mid-cycle slowdown periods. In the mid 1980s period, retail sales bottomed near 5% with the change in employment dipping below 100,000 only slightly and briefly before both reaccelerated. Both employment and retail sales were even stronger during the mid 1990s mid-cycle slowdown with a recession averted. However, the three month moving average for the current change in monthly employment is 44,000, declining sharply from last month's reading of 108,000 and retail sales on the verge of falling below the 4% level with a current reading of 4.14%. If both trends continue we may enter a recession as early as the fourth quarter of this year as recessionary risks increase. Well stated Chris. That is a compelling rebuttal to the mid-cycle correction thesis. But let's also take a look at the yield curve from 1999 to present to see what clues we can find. Does anyone remember Greenspan's Conundrum? He was puzzled as to why long term rates barely rose in the face of 17 consecutive hikes on the short end. What about a Reverse Conundrum? Why can't the long end barely budge relative to the short end when Bernanke continues his shock and awe campaign. I think that's likely, which is the scenario presented in option #1. I just somehow doubt we see 400 basis point but at least the overall idea seems plausible. If so, I would expect the long end to drop somewhat (just not much compared to the short end), and certainly not enough to help because the problems are with mortgages on the long end. For more discussion why rate cuts won't help, please see. An objection presented was that Bernanke hit his mark, because his mark was bailing out banks. Yes his target was in reality banks (and the stock market) and I have said before that 'banks, banks, and banks' are his top three concerns. So yes I was aware of it. Thus a better way of saying things is Bernanke missed the mark in helping those who need help most (cash strapped consumers). The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.