The survey's Index of Consumer Sentiment, a closely watched indicator of the economy's current health, fell to 62.6 in April, a drop of 6.9 points from the previous month and the lowest level since 1982. The Index of Consumer Expectations, which economists use to help determine the economy's future direction, fell to 53.3 in April, a drop of 6.8 points from the previous month.
According to the survey, only 30% of consumers plan to spend their upcoming tax rebate, while the rest said they would use it to pay off debt or put it into savings. The first cheques from that rebate go out Monday night. Around $US162 billion will be paid out to 130 million people, give or take a few. That could be enough to get the Fed to pause at its meeting this week.
It remains to be seen what happens to confidence and rates when the Fed kicks the supports away of lower interest rates and the Term Auction facility and the twice a month exchange of T-Notes for other lesser securities, which it has to start doing soon. But the bond market reckons things are rapidly getting back to normal. While equities and commodities have mostly enjoyed April, bond investors have found it hard going as it has gone on.
The Financial Times remarked on Friday that April has been the cruelest month for government bond markets in years, with prices falling and interest rates rising sharply in the US, Europe and Japan. Investors who jumped into the safety of government securities, especially at the short end of three to six months, have been badly burned this month on the optimism that the worst is over.
Helping change attitudes about bonds and fixed interest has been the surge in oil and food prices, which have in turn triggered the worries about inflation. (You only have to look at what is happening here in Australia, to get a taste of that.)
The FT says a global index of government bonds from 33 countries compiled by Lehman Brothers has fallen 3% this month, its first decline since December and the worst performance since a fall of 4.3% four years ago, while Lehman's US Treasury index has fallen 2.1%, its worst performance in four years. In contrast the Standard & Poor's 500 has risen 5.7% so far this month.
The change in expectations has been noticeable for about a week as confidence levels in equity markets and especially in financial stocks on the flood of refinancing, led more and more analysts to conclude that at best the US Fed will cut rates 0.25%, or even leave them unchanged at its meeting this week.
The two-year US Treasury note yield reached a high of 2.50% on Friday, up from 1.6% at the start of the month. It closed at 2.41%, above the current 2.25% Federal Funds for the first time since the middle of 2006. In Japan bonds suffered their biggest one-day drop in five years on Thursday and Friday, sparking a sell-off in other bond markets around the world.
The yield on 10-year Japanese government bonds surged 0.125% to 1.6%. Futures trading was halted for 15 minutes at one point to allow the market to calm down and yields on five-year notes jumped even higher, rising 0.19% to 1.24%. Hedge funds had started selling earlier in the week, creating bearish sentiment in the world's largest bond market. They were rumoured to be selling bond futures and buying equity futures.
The Bank of Japan produces its latest economic outlook this week and there's a suspicion that despite more signs of a slowing economy, Japanese interest rates could be nudged higher because of rising producer and consumer inflation.
The headline core CPI rate, which includes fast-rising energy prices, rose 1.2% in the year to March, the highest in 10 years and a better reflection of how consumers perceive price changes. And the drivers? Of the 1.2% rise in the headline CPI, 0.73 percentage point was due to energy and 0.41 percentage point from food.
So while poor and developing countries struggle with supplies and the price of grain and other foods, richer economies are finding a 'price shock' from higher oil and food prices that transcends the statisticians fiddling with the numbers to try and find core prices. In Australian food and energy were influential in boosting core inflation to 4.1% on the RBA's preferred measure, compared to the headline CPI of 4.2% in the year to March.
That's why bond markets have re-awakened. Eventually equity investors will awaken to the dangers of inflation. Is that the next part of this odd financial crisis to be played out? Now, will the bond markets' battering have an impact on share markets?
Well, apart from China, not until we've seen what the US Federal Reserve will do this week. China's markets rose on Friday, extending Thursday's sharp rise, but not by much. The CSI 300 Index which measures the top 300 Yuan denominated shares on the Shanghai and Shenzhen exchanges, rose 28.57 on Friday, or 0.8%, to close at 3,803.07 at the close.
The index rose 16%, including a 9.3% rise on Thursday, the biggest single-day gain, after the Chinese government lowered the share trading tax in the latest measure to revive stocks. The larger Shanghai Composite Index fell 0.7%, but the smaller Shenzhen Composite rose 1.4% on Friday. The central government cut stamp duty on stock trading to 0.1% from 0.3% on April 24 to try and arrest a sharp slump in sharemarkets.
The move came two days after Shanghai's market sank to more than 50% below its October record. China was the worst performing stockmarket in the world in the first three and a bit months of 2008.
Analysts said however the rally will continue to peter out because fundamentals are not driving the rebounds, but government policy changes. The underlining concerns about inflation, earnings and the property crunch have not gone away: merely been pushed to one side for the time being by the latest policy change. Before the tax cut, Chinese regulators had required shareholders selling more than 1% of a stock to do so in single trades, to keep the transactions off the open market. That was on April 20.
In December China tripled to $30 billion the amount overseas institutions can invest in Yuan- denominated stocks and bonds. Two months later, regulators ended a five-month freeze on the sale of new mutual funds.
And sales from escrowed holdings were limited to prevent a slab of shares being dumped onto the market. This indicates that the Chinese government is more worried about the sentiment of Chinese investors and markets than many western analysts understand. But because of the better tone in China and a strong rise in Japan, the MSCI Asia Pacific Index rose 4.9% last week.
The MSCI gauge has bounced 12.3% since closing at a two-month low on March 17, after JPMorgan Chase & Co and the Fed rescued Bear Stearns and the Fed cut interest rates to shore up confidence in the financial system.
Tokyo's Nikkei rose 2.9% after bond yields rose sharply, rounding off its first six-week rally since December 2005. US shares posted the first back- to-back weekly gains since February after first quarter earnings last week were better than expected.
The Dow rose 42 points on Friday, or 0.3%, to 12,891, giving it a 0.4% gain on the week; the S&P 500 Index added 9 points, or 0.7%, to 1,397, pushing it 0.5% higher over the week, but Nasdaq fell 5.9 points, or 0.3%, to 2,422, which left it 0.8% higher than the previous Friday. In Europe stocks rose for a second week with the Dow Jones Stoxx 600 Index edging up 0.3% to 321.70, extending last week's 3.2% advance. The measure is still off 12% this year so far.
National indexes gained in 12 of 18 western European markets last week. Germany's DAX added 0.8%, while France's CAC 40 rose 0.3% and London's FTSE 100 climbed 0.6%. Australia's market ended down 65 points on Thursday or 1.16% at 5587. But the futures market reckons there will be a 90 point rise this morning..
