March 11. Fed’s own Flow of Funds report argues for removal of accommodation
Mar 11. Friday’s employment data was stronger than expected, sending US interest rate futures lower. Ten year yield was up over 6 bps to 205.5. All deferred calendar spreads in euro$’s made new highs, with red/gold pack spread up nearly 10 bps to a new recent high of 174. 2/10 treasury spread up 6 bps to 180. There was size buying throughout the day in Blue March 98.625p for 0.5 to 0.75 (expires Friday, EDH6 underlying, 9878.0s). Open interest was up 59k in the strike, so these buys are new.
–It was about a year ago in the middle of March that red/gold pack spread hit its high of around 205 bps and 2/10 treasury spread also reached 200 bps. Even though the internal breakdown of the payroll data wasn’t as strong as it could have been, there’s no reason that the curve can’t steepen to last year’s levels (except for the uncertainty in the eurozone). Late in the day Fitch downgraded Italy, but US markets barely responded.
–If the Fed looked at its own flow of funds report released last Thursday for Q4, it would be difficult to justify its super-accommodative stance. http://www.federalreserve.gov/releases/z1/Current/
For example, household net worth rose 9% from the year before to a near record level; it’s about 30% higher than the nadir in 2009. Corporate borrowing rose at 10.7% in Q4 and total non-financial credit growth was 2.4%, the highest since Q1 ’08. In fact if stocks close at current levels at the end of March, then Household net worth will be at a new record in Q1 ’13. Owner’s equity as a % of household real estate has improved from below 40% at the crisis low to nearly 47% now. According to Doug Noland of Prudent Bear, “…As a percentage of GDP, Household Net Worth jumped to 421%, down from the 2006’s real estate Bubble spike to 490% but still significantly above the 385% average for the period 1985-2003.”
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10770
–In fact, according to my calculations using St Louis Fed’s Fred graphs, household net worth is over 480% of GDP vs high of about 510%. In any case, these levels of household net worth/GDP certainly suggest that trying to further juice “wealth-effect” spending from households may not be worth the risk.
*Note* St Louis Fred Graph in case it doesn’t appear below is Total Net Worth Households (TNWBSHNO) divided by GDP (GDPC1)
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