Money & Business
Money Watch: Hey, Is the Maestro Running Short of Magic?
Call it the revenge of the bond market. In February, Federal Reserve Board Chairman Alan Greenspan questioned why bond traders were driving down long-term interest rates just as the Fed was hiking short-term rates. He called this a "conundrum," since the economy was growing fast enough that inflation was a concern. But the bond market may have had good reason to push rates lower, with recent data showing the economy slowing, including a disappointing first-quarter report on gross domestic product. Last Tuesday, when the Fed raised short-term rates for the eighth straight time, bond traders defied Greenspan again by pushing down long-term rates, effectively putting him in a box. The spread between short and long rates has narrowed significantly now that 10-year treasury yields have fallen, from 4.62 in June to 4.24 percent. If Greenspan raises rates much more, he could invert the yield curve, where short rates are higher than long ones. "Would the Fed risk inverting the yield curve, knowing that, historically, this is a leading indicator of recession?" asks Nick Sargen, chief investment officer for Fort Washington Investment Advisors. The bond market, in other words, could force Greenspan to stop raising rates quite a bit sooner than he planned.
Money Watch: Better News on the Job Front--But Only for Americans
Some U.S. companies, it seems, have found something new to outsource: layoffs. Last week, IBM divulged plans to cut up to 13,000 jobs--but in a twist, most of the layoffs will occur in Europe, not America. It's part of a longer-term trend that has gone largely unnoticed, says Joseph Quinlan, chief market strategist for Bank of America's Investment Strategies Group. "In fact, some of the deepest cuts in manufacturing employment among U.S. firms have taken place abroad--in places like the U.K., Brazil, South Korea, and Japan." This could be a real shot in the arm for the domestic labor market and may help explain why layoffs here are slowing down. Last week, the government said a surprising 274,000 new jobs were created in April. According to the outplacement firm Challenger, Gray & Christmas, planned job cuts announced in April fell to 57,861, the lowest tally since November 2000. Even better news: Job cuts tend to slow down in the summer months.
Money Watch: The Return of the Long Bond
Nearly four years after it stopped issuing the beloved long bond, Uncle Sam is weighing whether to bring back 30-year treasury securities. This would be good news for pension funds, which would welcome the higher yields of 30-year bonds. But the move could lead to higher mortgage rates because mortgages track 10-year treasuries. If the reissuance of the 30-year cuts demand for the 10-year, warns Mark Zandi, chief economist for Economy.com, it could drive up yields--and mortgage rates.
The Week Ahead: Piling Up
Wanna know how the economy's doing? Take a peek into a few stockrooms and warehouses. Early in an economic recovery, rapidly accumulating inventories at manufacturers and retailers are good news. But "this late into an economic cycle, a buildup in inventories is probably involuntary," meaning consumers aren't buying goods as fast as businesses want, says Robert MacIntosh, chief economist for Eaton Vance. In the first quarter, inventories shot up more than expected, accounting for 1.2 percentage points of the economy's 3.1 percent growth. "Normally, you'd like to make sure it's not accounting for more than a quarter of GDP growth," says MacIntosh. "Here, it accounted for more than a third." So, economists will be paying close attention Friday when the Commerce Department updates recent business inventory trends.
The Week Ahead: Shopaholics
The big fear on Wall Street is that consumers, fearing high gas prices, will decide not to jump into their SUVs to head to the mall. But several retailers, like Nordstrom, last week reported decent business, so economists are predicting modest retail sales growth of around 0.4 percent in April.
Still Hitting the Mall
[Chart data are unavailable.]
[Chart labels]
Monthly growth in retail sales
May 2004
April 2005
0.4 pct.*
-0.5, 0.0, 0.5, 1.0, 1.5, 2.0 pct.
*Estimate
Sources: U.S. Census Bureau, Reuters
Chart by USN&WR
This story appears in the May 16, 2005 print edition of U.S. News & World Report.
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