Market Talk

Don't cry, this isn't 2008 all over again.

An interesting, although not necessarily disconcerting, phenomenon is taking place in the Treasury market. Some short-term Treasury bill rates have turned negative today after inching below zero yesterday, meaning investors are effectively paying the government to hold their money.

The last time this occurred was in late 2008 when people were worried about the impending doom of the financial system. Those fears have prompted some to wonder if another devastating event is on the horizon.

“Could there be something more pressing and/or catalytic? We have not heard peep from any of the big banks in a while,” Tyler Durden writes at Zero Hedge.

But the consensus seems to believe that negative short-term T-bill yields are merely “a technical phenomenon” and not reason to start panicking again, John Jansen writes at Across The Curve.

“There is a massive wall of liquidity, a pile of cash which needs a home,” he says, which is helping drive yields lower. “Typically as the year end approaches clients tend to unwind profitable trades and reduce balance sheets. I think that some of that deleveraging process has created new piles of cash and that money needs a place to park.”

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Not an 'exceptionally' chatty bunch, that Fed, but mind what they say all the same.

The two-day FOMC meeting begins today and based on all the discussion on exit strategies from Fed officials to financial journalists, investors should closely watch tomorrow’s statement and see if any hints are dropped on the Fed’s next move.

Almost a month ago Fed Chairman Ben Bernanke said the central bank will raise rates when the economy recovers, a pretty ambiguous statement as he didn’t say what would entail a recovery and didn’t offer a time frame. GDP rose 3.5% in 3Q, is that enough of a recovery to raise rates?

Not likely. As we detailed earlier, don’t expect the Fed to boost rates until after unemployment peaks. In the early 1990s, the Fed waited more than a year and a half after the jobless rate peaked before raising rates. And after unemployment peaked in 2003, the Fed waited a year to boost rates.

Currently, unemployment is still on the rise and doesn’t seem close to peaking. October’s nonfarm payrolls report is expected Friday and analysts are expecting to see another 175,000 jobs lost.

“I do not believe that the FOMC will significantly tweak the statement and leave an impression that a tightening of monetary policy is imminent,” Across The Curve blogger John Jansen says. “With the personal belief that the Treasury and Federal Reserve are working in tandem to revive the economy, I hold it unlikely that the FOMC would take any steps which would undermine a very fragile recovery.”

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Bernanke's doing a lotta talking, but when will he take action?

Hot off the presses: Fed chairman Ben Bernanke says the central bank will raise rates when the economy recovers.

Revelation? Not quite. Across The Curve blogger John Jansen said it best: “I wonder who would have been so obtuse as to think otherwise?”

Key issue, of course, is timing – when will the Fed decide a rate-hike is warranted? We’re not any closer to figuring that out (and probably neither is the Fed.)

For now, however, the mere mention of increasing rates at some distant point is enough to give the US dollar a much needed boost.

Still, don’t expect the Fed to boost rates until after unemployment peaks, despite recent Fedspeak from Bernanke and other policy makers, Calculated Risk predicts. In the early 1990s, the Fed waited more than a year and a half after the jobless rate peaked before raising rates. And after unemployment peaked in 2003, the Fed waited a year to boost rates.

Unemployment’s expected to keep rising into 2010, which has Calculated Risk believing the Fed won’t raise rates until late 2010 at the earliest, and more likely sometime in 2011. Waiting for the economy to “improve sufficiently,” as Bernanke puts it, likely means the Fed will wait for a meaningful decline in unemployment, blog adds.

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I'll say, we all look smart! Why would the Fed limit our pay?

The Fed’s hoping its latest plan to expand its role in the compensation structures for large banks will reduce risk-taking in the financial sector. The Journal has the details:

The Fed’s plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees – from chief executives, to traders, to loan officers – to take too much risk. Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.

Sounds good on paper, but remember, the plan isn’t a done deal yet, Yves Smith points out at naked capitalism.

“Expect gnashing of teeth and tons of pushback from industry lobbyists,” she says, similar to the stress tests earlier this year “where the big banks managed to beat back the regulators on many key issues.”

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We don't see trade tensions in this recovery's recipe.

Bloggers aren’t fans of the new China tariff.

The Obama administration’s decision to impose a 35% tariff on Chinese tire imports is getting bashed in the blogosphere as observers question the timing of the move, not to mention the fact that China is one of the biggest holders of US debt.

But Obama’s decision is seen as a signal to labor unions that he wants to strictly enforce trade laws. United Steelworkers, which represents American tire workers, is seen as a major winner.

It didn’t take long for China to retaliate. It said yesterday it’s considering imposing tariffs on American exports of cars and chicken, prompting thoughts of a trade war occurring sooner rather than later.

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Cross at the green, not in between.

Just because much of the economic data throughout the last three months have been characterized as “better than expected” doesn’t mean the economy’s improving.

For instance, take the May employment report. The fact that 345,000 jobs were lost last month was certainly better than economists expected. But make no mistake; an economy that’s losing 345,000 jobs a month is an economy that’s still in decline.

Despite the better-than-expected headline jobs number, Harvard economist Jeff Frankel, who sits on NBER’s recession-dating committee, says the labor market still hasn’t signaled a turning point.

“Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy,” he says, noting the length of the work week usually responds at turning points for the economy faster than the actual headline jobs number.

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In the War of Wealth, everybody loses.

The Financial Accounting Standards Board agreed to ease their mark-to-market accounting regulations, and while the market appears to like it, other observers are more skeptical.

Perhaps hostile is the better word.

Banks have been howling that the accounting rules have unfairly pushed down the valuations of their assets since the onset of the downturn. But supporters think mark-to-market gives investors a fair assessment of what assets are worth and changes would allow banks to overvalue their assets.

The Dow Jones Industrial Average gained more than 300 points in earlier trading as the financial sector praised the plan, but bloggers have met the rule changes with trepidation, noting the unintended consequences of the reforms and a lack of trust surrounding the banks.

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