Market briefing --- Lane (medium)
What the disappointing numbers mean for investors --- Paul (slow)
>> welcome back to “world financial report.” i’m lane bajardi. recapping the day on wall street, down day for the dow jones industrial average to the tune of 1.5%, same for the s&p 500. nasdaq composite down 2.5%. a check on u.s. treasuries, different story. going in the opposite direction, 10-year note up nearly 1.5 points -- more on the jobs report and its implications for the economy. michael mckee spoke with pimco’s paul mcculley. they manage more than $400 billion in assets, home to the world’s largest bond fund. mike asked what the disappointing numbers mean for investors.
>> i think investors rationally saw it as a big negative surprise for economic growth. i think it was particularly a surprise in the context of what mr. greenspan had said last month when he stressed there had been a temporary slowdown and pause or soft patch, as secretary snow said, and i think there were uniform expectations that mr. greenspan would be proven preckiant that there will be a snapback and there wasn’t a snapback so i think the marketplace is rationally debating today when the soft back becomes a ditch and whether or not we’re in the ditch.
>> do you think this may be something related to the terrorism warnings, to the fear of what oil prices might do or the fundamentals going south?
>> i think it’s a little bit of all of the above, mike. the biggest thing that’s happened in the last couple of months that hasn’t gotten sufficient attention in the marketplace is that the consumer sector has been hit hard by the oil price shock. we don’t just have creeping oil prices. we’ve had an oil price shock, which has a disproportionate effect on the lower income of our economy who have the highest propensity to consume so we saw in retail sales in the month of june, weakness and we also are seeing that corporations are pulling back with respect to hiring so i attribute much of what’s happening now to the tax hike-like effect of oil prices and i think that is the achilles heel of mr. greenspan’s scenario of a big snapback. not that it’s his fault. he doesn’t control oil prices but oil prices spiking in a negative way for the economy is greenspan’s worst case scenario. they act like a tax hike on the economy and statistically lift inflation so it’s not a very comfortable situation for greenspan to be in right now. not of his own doing except for the fact he pounded the table a little too strong at humphrey hawkins about the notion of a rebound.
>> the fend tends to look at things in a risk management way, whether or not waiting is worse than going ahead. where do you think the fed will come down on tuesday and does that differ from where paul mcculley would come down?
>> oh, i don’t know if it differs from where i would come down. i think the fed will go ahead and hike 25 basis points next week even though we had distinctly weak data today. and it’s because, as we discussed last month, the fed is on a mission right now and greenspan told us that at hump free hawkins. they went to 1% for the fed funds rate which is a negative rate by about 100 basis points if you assume 2% underlying inflation rate and they went to that negative 100 basis point real short-term interest rate to truncate the risk of deflation, the big concern a little over a year ago. that risk has passed so the fed is on a mission to normalize back up the fed funds rate. it doesn’t mean the economy is on fire, but with the deflation risk passed, they want to remove the happy-hour price for money so i think he communicated a mission, said it would be measured and they could do more if necessary but it would be measured so if greenspan’s feeling good about one thing today, it’s those who were criticizing him for using the word “measured” can take a long walk on a short pier. you wouldn’t want to be anything but measured in here and i think he will go next week to complete the 50 basis point first step back towards neutrality. i think the real issue is the data between here and september, because if we still see the soft patch morphing into a ditch in the next six weeks, i think the fed will sit on its backside in september. measured will mean doing nothing.
>> pimco’s paul mcculley speaking with michael mckee. looking ahead to asia and europe trading next week is coming up next.
