What The Fed Is Looking At

by Tyler Durden

A sense among investors that the global economy is unraveling has injected tremendous volatility into the markets. As Bloomberg's Rich Yamarone notes, if the global equity market decline is not a “Sell in May” event, but the beginning of a great unwinding, then the economy, skating on thin ice, may be even more susceptible to recession. However, most of the US equity disconnect from the reality of weak data (and other markets) can be laid at the feet of the Fed's ever-generous monetary policy. However, given all of this 'weakness' - or missing of Fed benchmarks that we discuss below - that the Fed is well aware of, we ask again, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions.

Via Bloomberg,

The World Bank reduced its global economic forecast to 2.2 percent in 2013 – from a previous 2.4 percent estimate, and lower than the 2.3 percent performance in 2012.

From an economics perspective it was just a matter of time before conditions began to break down; gains in equity indexes to record highs amid sluggish economic performance were simply unsustainable. The bifurcation between the CRB index and the S&P 500 first appeared in December 2012. The S&P 500 now looks as if it will rejoin the commodity benchmark.

In the U.S. continued signs of frailty have surfaced, perhaps underscoring the likelihood of an economic slump. Detroit is on the brink of bankruptcy, and several top tier indicators are flashing warning signs. Economists polled by Bloomberg forecast U.S. GDP to increase a lowly 1.9 percent in 2013, after a 2.2 percent gain in 2012.

Last week’s economic tea leaves revealed that job openings declined in April and retail sales advanced 0.6 percent in May. Retail sales excluding autos were only 0.3 percent higher. The total business inventory-to-sales ratio increased to 1.31 months – the highest level since October 2009 (1.32) when the U.S. economy was in the initial stages of recovery from the Great Recession.

Import prices were decidedly deflationary as the overall figure fell 0.6 percent last month, and were 1.9 percent lower than in May 2012. All of the associated core measures (ex food, energy, etc.) were also contracting on a year-over-year basis.

Deflationary pressures may also be seen in the wholesale channel. Core intermediate producer prices, a closely followed barometer for potential inflationary or deflationary pressures, fell 0.3 percent in May and was 0.2 percent lower than a year ago. This is not an economically compromising level, but it should keep the Fed from tapering its accommodative monetary policy.

The final major economic release last week was the Fed’s industrial production report for May. The second quarter is off to a very slow start as total production was unchanged in May and contracted 0.4 percent in April. Industrial production peaked in mid-2010 (8.5 percent versus 1.61 percent today), and the regional Fed manufacturing indexes are all in contractionary territory.

Electricity output has fallen in each of the last five weeks (on a year-over-year basis), and shipments of nondefense capital goods excluding aircraft plunged 1.5 percent in April – all in all, a messy beginning to the second quarter.

So once again we ask - given all of this 'weakness' or missing of Fed benchmarks- that the Fed is well aware of, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions. We fear an equity market positioned far too enthusiastically given the risks of a disappointing Fed.

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