Wednesday, August 5, 2009

Service sector conditions disappoint

The Institute for Supply Management's service sector data for July was a bit disappointing, since conditions deteriorated instead of improving in line with manufacturing conditions. And since the service sector is by far the largest sector of the economy this is reason to be concerned. Is the July data just a random blip (note all the wiggles in the second chart), or is it a meaningful deterioration? I'm inclined to say July was just noise, and that we are not on the cusp of another downturn, but that's only a guess at this point. Still, I base my guess on the preponderance of evidence (e.g., commodity prices, credit spreads, swap spreads, auto sales, unemployment claims, corporate layoffs, equity prices), which to me shows that the economy is now improving.


Alex said...


I know you have been bearish on treasury bonds for some time now and bullish on TIPS..and to your credit, that has been a great trade.

I am sure you saw in the WSJ "China, the largest holder of U.S. government debt, is among investors that have indicated to the Treasury that they want to buy more of the securities (TIPS), which offer protection against rising inflation, the people said."

By requesting more TIPS, is China pretty much saying they have little desire to buy 10 year and 30 year bonds at 4%? Do you think this has any further implications for the bond market?

Scott Grannis said...

I don't think China will make any huge changes in their positions; they tend to do things gradually. As such I don't think they are a swing factor, especially for long maturity Treasuries, since most of their holdings are shorter maturities. In any event, they seem to be moving in the same direction as everyone else, and the result is a gradual increase in the breakeven spread on TIPS that is caused by a widening gap between nominal and real Treasury yields. In other words, demand for TIPS on the margin is a bit stronger than demand for Treasuries.

MW said...

Less scope for an inventory correction in services, therefore less of a bounce? Just a thought.

As ever, thanks for posting.

Public Library said...

This is not really surprising. All of the money has gone to banks and your risk measures are there to prove it.

Problem is, the banks do not make up 70% of the economy so if the plan was to make the banks rich and happy in hopes that everyone else would feel the same way too, they might want to rethink that plan.