Wednesday, May o1, 2013 - May Day

May Day

by Sinclair Noe

DOW – 138 = 14,700
SPX – 14 = 1582
NAS – 29 = 3299
10 YR YLD - .04 = 1.64%
OIL – 2.54 = 90.92
GOLD – 19.10 = 1459.10
SILV - .70 = 23.75

It's May Day. Maybe you all gathered round the May pole with colorful ribbons. Or maybe you commemorate the workers' protests of 1886. Or maybe you think it's all just a communist plot and you won't celebrate May Day at all, you will take the advice of President Eisenhower and observe Law Day.

Actually, the history of May Day is kind of interesting. It started with pagan celebrations dealing with Spring and fertility. May 1, 1886, protests erupted all across the United States, with some 340,000 workers taking part, demanding an 8-hour workday. An estimated 190,000 went out on strike. In Chicago, a center of the eight-hour day agitation, some 80,000 workers walked off the job, with most of them joining a vast parade through the city streets. Chicago police launched an assault on union members by gunning down locked-out workers at the nearby McCormick Harvester Plant. When an explosion of unknown origins went off at a subsequent protest rally at the Haymarket, a large open square in the city, police also opened fire on that worker gathering, killing some and wounding hundreds of others in what became known as the Haymarket Massacre. Radical labor agitators were arrested and blamed for the bloodshed, although most of them were not present at the rally. Four of them were executed.

After the Haymarket Massacre, the new American Federation of Labor vowed to continue the eight-hour day movement, and set May 1, 1890 as a day for further action. Joining the call for May Day protests, the International Socialist Workers Congress, in 1890, helped organize May 1 parades, meetings, and rallies throughout Europe in support of the struggles of American workers. Starting in 1891, May Day demonstrations became annual events in the United States and many other countries.

Communist governments later picked up on the idea of workers' rights and usurped May Day. In the 1950s Ike tried to get it changed to Law Day. In 1958 Congress declared May 1^st to be Loyalty Day.

All the protests and demonstrations resulted in the 1938 passage of the Fair Labor Standards Act, which brought about the 40-hour workweek and established minimum wages for American Workers. Maybe someday we can get back to those ideals. There are plenty of people working much longer than 40 hours a week, putting in extra hours at a job that doesn't have much security or working two or three jobs, or putting heart and soul, sweat and tears and precious hours to build their own business. And then there are plenty of people who would love to get up to 40 hours a week, if they could just find the work.

The Federal Reserve has said that they will keep interest rates low and continue to buy up bonds and mortgage backed securities until inflation hits 2.5% or until the unemployment rate drops to 6.5%. Today, the Fed FOMC wrapped up a two-day policy meeting and they announced they will stick with the Zero Interest Rate Policy and Quantitative Easing, but they would really like to see Washington get their act together. In their statement, they said that despite signs of recovery “fiscal policy is restraining economic growth”.

The statement is the FOMC's boldest assertion to date that Washington policy is hampering the US's fragile economic recovery. It stands in marked contrast to last month's more cautious statement, which said "fiscal policy has become somewhat more restrictive".

The FOMC released its statement after two key reports suggested that recovery in the jobs market is slowing, as end of year tax hikes and budget cuts – known as sequestration – seem to take their toll.

They increasingly view fiscal policy as an impediment to what they've been trying to accomplish and today's statement is an outright affirmation of that view. Fiscal policy 'is' restraining growth, from the Fed's point of view. And as long as fiscal policy remains constrictive, then the Fed are likely to do more rather than less.

Here is what the Fed statement said: “economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”

For now, the Fed is sticking to Quantitative Easing, stating: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”

At first, that probably frightened some traders, but the reality is that the Fed probably won't be reducing purchases any time soon, largely because the politicians in Washington aren't likely to stop the stupid fiscal policy any time soon. Expectations for tapering off of the Fed's outcome-based purchases have been pushed back due to recent softening in the economic data. Economic growth rebounded in the first quarter after a dismal end to 2012, but the 2.5 percent annual rate of expansion fell short of economists' estimates, and forecasters are already penciling in a weaker second quarter.

The housing market continues to show signs of strength, with home prices posting their biggest yearly gain since 2006. However, the industrial sector is not quite robust, with a report today showing national factory activity barely grew in April.

And the job market, the focus of much of the Fed's efforts, is just hanging on. Employers added only 88,000 workers to their payrolls in March and today payroll processing firm ADP announced that private firms added an estimated 119,000 jobs in April, the lowest ADP estimate since October 2012. Of course, Friday we get the government's monthly jobs report.

Continuing from the Fed statement: “Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.”

That is a strange definition for the Fed’s favorite measure of inflation, the PCE index, that now is running at a 1% annual pace.

The Fed action was supported on an 11-1 vote. Esther George, president of the Kansas City regional Federal Reserve bank, dissented for a third straight meeting. The statement said George remained concern that the Fed's aggressive stimulus could heighten the risk of inflation and financial instability.

The yield on the bellwether 10-year Treasury note dipped to a 2013 low of 1.62% today as traders seemed more concerned about falling prices than inflationary pressures. Fixed-income traders will accept lower yields in periods of falling prices. And weak economic news of late is raising that specter. Falling government bond yields could be consider as a contributing factor to push key commodity prices lower. The price of crude oil dipped to just over $90 a barrel before finishing the day just under $91 a barrel. Two days, the price of crude oil was topping $94.50 a barrel. Gold prices are sometimes considered an inflation barometer, were down again today at $1459; just a few weeks ago the prices were above $1700.

In response to a deep financial crisis and recession, the Fed cut overnight interest rates to effectively zero in late 2008. It has also bought over $2.5 trillion in assets, more than tripling its balance sheet, to keep long-term rates low.

If the economy's fortunes do not improve, the central bank may well look for fresh ways to boost its support to the economy, and increasing the amount of assets it is buying is just one option.

The Fed could announce an intent to hold the bonds it has bought until maturity instead of selling them when the time comes to tighten monetary policy. Fed Chairman Ben Bernanke has already raised this as a possibility.

Policymakers could also set a lower unemployment threshold to signal when the time might be ripe to finally raise rates. Currently, the threshold stands at 6.5 percent, provided inflation does not threaten to breach 2.5 percent.

So, today's report seems strange; the Fed doesn't seem to acknowledge a disinflationary environment; there was almost no mention of the weak labor market; they might increase or reduce the pace of its purchases to maintain appropriate policy accommodation.

Here is the bottom line: rates aren't changing any time soon; the Fed will continue buying an incredible amount of bonds and mortgage backed securities; the housing market has been nationalized by the Fed; Bernanke and the gang will watch this Friday's jobs report and quietly curse Congress.

Someday, we'll get back to a 40-hour workweek; just not this week.