The Dow Jones Industrial Average is currently at 15,241, down over 100 points on the week.  Crude oil spot prices are currently at $93.49 per barrel, down over $2 per barrel on the week.  The Dollar weakened versus the Euro and Yen on the week.

Next week look toward Thursday’s second look at Q1 GDP and weekly jobless claims and Friday’s Personal Income and Outlays as potential market moving events.  Bond and Equity Markets are closed Monday for Memorial Day.

So it was this week. The Fed inflicted no pain at all, just talked about the potential decision ahead, not yet made, considering at some point, maybe, depending, and if made, whenever, just a little pinch.

You’d have thought every bond trader on the planet had been hanged upside down by precious body parts. However, even their shrieking was hard to hear though the yammering by the alternate-universe mobs.

First reality, then the choirs of confusion.

Perfesser Bernanke, visibly exhausted, did very smart things this week. Talk of tapering QE exposes any parties excessively leveraged, deflating the bubble potential in QE. And some are: a group of REITs has a couple-hundred-billion bet on MBS levered with short borrowing, and junk bonds are too hot. Stocks… all you need to know about silliness: today marks the first three-day decline in stocks in all of 2013.

NYFed Prez Dudley laid out specifically how the Fed will exit the emergency. First: taper buys of Treasurys and MBS (and he said tapering is even-money with buying in bigger quantity). Second: stop reinvesting payments received on bonds. Third: begin to raise the overnight Fed funds rate. Fourth: maybe, if the economy really runs hot, sell some Treasurys, but in almost all events hold MBS until they mature.

Most professional observers chewed on the Fed all week long for sending a garbled message. Look back a ways. Mr. Greenspan was famous for obfuscation except when he really had something to say, and ran a one-man band, all others at the Fed forbidden to speculate on policy. And in his last three years of an over-long 17-year stay failed to listen to others about a credit bubble that damned near killed us. Perfesser Bernanke introduced faculty-club style, everyone allowed to argue opinions and to vent, and far too many Fed-watchers still chase around the outlying speakers the way dim hunting dogs can’t lay off rabbits.

The Fed did nothing more this week than to acknowledge new doubts lying in plain sight. Nobody knows the slope or durability of recovery. At best, the economy might be entering the outer edge of self-sustainability. In prior periods when the economy ran away from the Fed, the absolute precondition was a surge in credit, which today without QE is still contracting. Inflation appears to be falling for several reasons, but Bernanke was careful to say this week that long-term expectations are not declining.

Doubt creates volatility — true, up-down-up-down. The 10-year T-note, stabilized by QE in the second half of 2012 in the range 1.60%-1.85%, took three months this year to blow up to 2.05%, then 50 days to run all the way back down to 1.65%, then just 20 days to zip back to 2.05%. Expect more short-cycle wockety-tong. Still, mortgage rates have yet to cross 4.00%, even though MBS/10T spreads have widened. You can be certain the Fed does not like that widening, a sign of ongoing distress in markets still preferring ultimate safety, and will trade to keep that spread narrow.

Making all of this so difficult to process: the expensive-suited, highly-regarded, and well-connected, so seriously interviewed on the telly, but who may as well be standing behind your head slamming a ladle into a skillet. They’ve just about worn out the money-printing-inflation line, so now ooze to arguing the inevitable failure of central banks. Another group intones the failure of austerity and the need for stimulus, although the world is drowning in the deflationary excess production and debt born of runaway stimulus. One top twit after another imputes Japan’s situation to ours, or to Europe’s, or to China’s, or vice-versa, while all four are very different.

The US economy is uncertain enough without adding imaginary threats from overheating or Fed tightening. Or by offering fantasy prescriptions. More volatility, yes, but slow recovery and low rates probably for years ahead.

10-year T-note:

Everyone points to the rapidly weakening yen as a result of BOJ end-game QE:

However, a longer view provides context. The BOJ thus far has only part-way weakened the yen from wildly over-strong, caused by its status as safe haven during the Great Recession. If the yen blows through 120, then we may have something to worry about, but not now:

10-year Japanese Government Bonds (JGBs). This chart has an especially good time scale, but updates only quarterly and misses the run in the last month to .94% yield. The rapid reversal is concerning, but the cause is the same as the yen move and not a worry unless runs above 1.50%:

S&P500 (thx to Hussman Funds), vertically compressed. Got too hot, cooled off, looks like three times. Where it goes next or why, nobody knows, but exciting to watch:

The Dow Jones Industrial Average is currently at 15,292, up about 170 points on the week.  Crude oil spot prices are currently at $95.35 per barrel, down slightly on the week.  The Dollar strengthened versus the Yen and Euro on the week.

Next week look toward Wednesday’s Existing Home Sales and FOMC Minutes, Thursday’s jobless claims and New Home Sales, and Friday’s Durable Goods Orders as potential market moving events.

Bond markets everywhere always trade on central bank intentions to ease or tighten money in the future — nothing artificial about that — but the central banks themselves have for five years engaged in artificial, full-scale-emergency-experimental action to prevent a re-run of the 1930s, or worse.

Trading on central banks is once-removed from the real drivers: inflation and economic growth. Every interest-rate analyst is always caught in this loop: what does the Fed think of incoming data, and how will it react, right or wrong? Complicated today by this wrinkle: in normal times the Fed attempts pre-emptive action, knowing that its moves take six to eighteen months to have effect; but these times are unprecedented, and no one in or out of the Fed has decent predictive tools. This is a pure, seat-of-the-pants deal, and the Chairman in those pants will retire in seven months.

PIMCO has been the largest and most successful bond investment manager of the last generation. This week its CEO, Mohamed El-Erian intoned (condensed): “The global economy will give way to one of two stark alternatives: either sustainable growth, or shortfalls, instability, social tensions, political instability, and debt traps.” Wow. El-Erian usually talks like the Oracle of Delphi, murky thought free of specifics.

Buried in the thread: “…in the next three to five years.” Translation: the world’s central banks still can buy time and have room for more heroics. Spitball from the back: “three to five years” means you don’t have any damned idea. El-Erian was joined by PIMCO’s Bill Gross, modern god of bond trading, saying the Fed has “12-24 months” of QE still ahead. Fire another sloppy wad at that guy.

Meanwhile the financial press publishes in bold any investment manager with a theory, or political angler, or boondocks Fed official (KC’s Ms. George, Dallas’ Mr. Fisher, and Philly’s Mr. Plosser belong in SNL skits) — a stream of confetti blinding civilians and professionals actually trying to figure this thing out.

Avoid analysis, and review as much hard data as you can. In a seat-of-skirt deal, yours is as good as anybody’s.

The Fed would like very much to pull back from QE, if only to reduce its political exposure. But it must err on the side of slow exit for fear of an accidental economic abort, and not enough ammunition to reverse it. To pull back, the Fed must be content that the US economy has entered self-sustaining recovery.

The job market is obviously not in such recovery. Housing may be, but did not find ignition until the Fed drove mortgage rates to 3.50% only ten months ago. Technology is a strength, and some manufacturing, but the only other general sector doing well is actually a ruinous burden on households: health care. In a spectacular accident, void of leadership, we have achieved the largest fiscal repair of any advanced nation, the Federal deficit cut in half in just two years and falling (the “out-years” are not pretty, but we have time for that). The Fed is justified in easing against that fiscal drag.

Inflation is sliding by every available measure (CPI, PCE, chained-mean…), the “core” versions very close to the danger zone below 1%. Gold has dropped 25% since last fall, $1365 today, regaining its position as one of the worlds worst investments. Falling prices are grounds for Fed easing, not tightening.

Total bank credit outstanding has just now regained the level of 2008. The US GDP has grown 14% since then, credit support provided entirely by QE. Consumer credit is contracting 1% every 90 days, mostly in mortgage accounts (capping housing recovery), and shrinking despite the hideous explosion in loans to students.

There will come a time for QE pull-back and higher rates, but the data say this is not that time.

You can either over-regulate banks OR have enough credit.

Small business may be the best single indicator of a self-sustaining turn. Not yet.

10-year T-note. The vertical scale is greatly exaggerated, the whole top-bottom covering less than one percentage point, making narrow movement look wild.

Gold:

The Dow Jones Industrial Average is currently at 15,092, up over 100 points on the week.  Crude oil spot prices are currently at $93.79 per barrel, down almost $2 per barrel on the week.  The Dollar strengthened versus the Euro and Yen on the week.

Next week look toward Monday’s Retail Sales, Wednesday’s Producer Price Index (PPI) and Industrial Production, and Thursday’s Consumer Price Index (CPI), Housing Starts, Jobless Claims, and Philadelphia Fed Survey as potential market moving events.

Whenever the hard right and hard left agree, duck and cover.

One example: the right and left both want to intervene in Syria. The right confuses war with video games, and hasn’t learned a thing since Vietnam. The left is oblivious to contradiction: violence is good if for humanitarian cause, exit optional.

On another front, left and right are joined in shouting, one-up competition to see who can do the most damage. To banks, credit, and the economy.

The right despises modern banking because it’s a government scheme. The Fed is a conspiracy. Government won’t allow losses, the punishment that keeps people in line. Won’t break up big banks and go back to the good old days of small-town bankers saying “yes” to the right kind of people. And the right hates all those mister-fancy-pants and electronic money. Even the right wearing fancy pants hates the fancy-pants.

The left hates banks and bankers because they have money and won’t give it to people who don’t have any. The left has exactly the same fondness for the safe, small-bank world which didn’t supply enough credit, and wasn’t safe. Left and right agree that taxpayers should not bail out bankers. Bankers should pay. And the left hates fancy proprietary trading, securities underwriting, and derivatives, which neither left nor right knows from prostates, undertakers, or dirigibles.

No, we’ve got an agenda and we’re stickin’ to it.

Fannie and Freddie are now earning profits at a $50-billion annual pace. Shut them down. They will repay the Treasury within three years, and with FHA and VA provide 90% of new mortgages. Shut them down.

We don’t like big. Little banks we could let go. Two problems with that: in 1929 we had a lot of little banks, all caught the same disease, and 75% of them died before we thought to stop it. Taxpayers who might have saved everything just by promising a back-stop instead lost everything. You still want to bust up the big guys? Wells, Citi, Chase, BofA, and Goldman (not so big, but everybody hates Goldman)? Want to just dump the pieces on the market? Want another crash? Who is going to buy the pieces?

The French. Maybe the French will buy the pieces.

Okay, okay… than make them stop doing dangerous things. Like making money? You give deposits to a bank and expect a return, both interest and principal. To make money with your money your bank has to invest in something that you don’t know how to or are scared to or should be. “Make loans,” right and left say. To whom? Safe credits sell their own bonds. Safe stuff — Treasurys — doesn’t pay anything. Every other investment or loan entails risk that must be managed with sophisticated tools.

Forcing banks to raise more capital is wise, but in the hands of right and left any good idea gets overcooked. “Risk-based capital” is today such piling-on that banks are forced to shed useful businesses. Both wings are fond of “bail-in,” the European plan for assisted suicide: demand that banks simultaneously raise capital from investors and tell those investors that in the next systemic run they’ll get the Cyprus Haircut.

The joint assault on banks misses the one worthwhile target: CEOs, directors and chairmen. Could we import some new, ethical, and polite ones from Canada, where giant banks have worked very well? The new governor of the Bank of England is a Canadian recruit. Send the casino-ego boys packing.

Fed governor Tarullo published a paper on the Fed’s site that’s hard to read, but describes the extraordinary and real progress made in reforming banks since 2008, and the exceedingly careful pace. Careful not for benefit of bankers, but depositor-taxpayers and the society. Haste makes new bank runs. Net of huge losses and paying back TARP, US banks have raised $400 billion in new capital in just four years.

Never mind. From left and right, Rand Paul to Elizabeth Warren: break them up and shut them down. Business starved of credit hides under desks, eyes wide at the scene.

Red and amber bars, certain foreclosures, are still five times normal, and…

concentrated in states which have allowed judicial proceedings to freeze foreclosures and prolong the healing process. The non-judicial states are in recoveries, only benighted Nevada and Rhode Island still beyond any remedy:

The Dow Jones Industrial Average is currently at 15,006, up almost 300 points on the week.  Crude oil spot prices are currently at $95.37 per barrel, up over $2 per barrel on the week.  The Dollar strengthened versus the Yen and weakened versus the Euro on the week.

Next week look toward Thursday’s weekly jobless claims as a potential market moving event.  Also, the Treasury will auction $72 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds.

This morning’s news of a better job market has pushed 10-year Treasury yields from 1.63% to 1.73% overnight, and intercepted the mortgage move below 3.50%. Stocks of course to a new high, Dow above 15000.

Breathe again. The job market is not really better, just not as poor as could have been — markets were looking for worse and didn’t get it. We did add 165,000 jobs in April and revised up the two prior months, but the average workweek and overtime declined. Wages are rising at a 1.9% annual pace, below even diminished inflation, and another 278,000 people looking for full-time work could not find it and took part-time.

The twin ISM surveys both fell in April, manufacturing barely positive at 50.7, down from 51.3, and the service sector to 53.1 from 54.4. The Fed’s post-meeting minutes changed tense: in March it noted “a return to moderate economic growth:” this month “… has been expanding at a moderate pace.” Nobody wants to be a has-been.

The Fed also noted, along with everyone else: fiscal drag. One would hope so, given the Cliff tax increases and Sequester, although it’s astounding that we can meat-ax $85 billion out of Federal spending and not notice until the FAA tried to make airports uncomfortable on purpose.

Austerity is a calibration deal: we have to do enough of it, better not do too much, but the austerity dial has no level-indicator. Like living through winter with a thermostat arrow-pointer but no temperature marks, and a heating system responding to the thermostat in a random lag of two to 24 hours. That’s how life feels to the Fed.

That’s the run-down here in the US: slowing a bit, but okay, housing producing smiles. But the most powerful forces on the US economy, affecting everything from jobs to mortgage rates, lie overseas. All data show slowing in China. Japan’s inflation-inducing experiment is going to take months to evaluate, at the outset doing nothing but pushing down yields on non-Japan bonds. The emerging world churns its way forward by sucking jobs from the West, the means visible in Bangladesh.

Europe is back in the forefront of overseas trouble. The soap opera over there has overstayed its welcome, each new episode the same plot as the last, just shuffling the cast, and endlessly foreshadowing conclusions but no end to it. Thus we lose feel for the magnitude of the disaster and its progress. Unemployment across the south is now uniformly above 25%, in Germany 5.4%. Southern bond yields are down from 7% to 4%, but German ones today fell to a new all-time low 1.16%, and business credit in the south is all but unobtainable.

South is moving north. French unemployment is 10.8% and rising, and in Holland up to 8.1%, double two years ago. S&P this week reported on housing in Europe: French prices are off 5%, expected to fall another 5% this year and the decline “gaining momentum.” Spain’s prices are off an official 28% since 2008, but no one knows what will happen when it’s bad bank dumps foreclosed inventory. Dutch prices are off 18%, expected to fall another 5% this year and again next, 25% of Dutch mortgages underwater now. German home prices rose 3.5% last year, trend continuing.

Apparent German health conceals a fatal illness. Its banks and central bank assume that debt owed to Germany by the others will be paid. In euros. When it could not be more clear that the deutschemark-calibrated euro has crushed all the others.

Political stability is holding among the others for now, it seems because having German money in your wallet is worth any amount of damage to your children’s future. Anything but go back to the unreliability of the lira, peseta, or even franc. We have all looked to the weak as the most likely to leave the euro, but it could be someone like Holland, making its way in the world for hundreds of years with a reliable guilder.

Mercifully the US has made great progress, especially bank re-capitalization, so much so that we can make it through even a euro-breakup. Meantime, pain there keeps rates low here and assists our own recovery. Quite the world.

10-year T-note. Today’s job data just took us back where we’ve been, before markets overdid their worries about an economic slide. Also pushed lower by overseas lunacy noted above.

The ISM is the old Purchasing Managers’ Association, its manufacturing series one of the longest-running surveys available (early ’70s). We are moving forward, but may or may not be self-sustaining. Still need the Fed.

And Bill McBride’s all-time great visual. The world as we knew it 1945-1990 has passed into history, and we don’t know enough about the new one to describe any part of it as “normal,” new or otherwise.

The Dow Jones Industrial Average is currently at 14,716, up almost 170 points on the week.  Crude oil spot prices are currently at $93.10 per barrel, up over $5 per barrel on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Monday’s Personal Income and Outlays, Wednesday’s ISM Manufacturing Index and FOMC Announcement, Thursday’s International Trade and jobless claims, and Friday’s employment report for April as potential market moving events.  Markets will closely watch the FOMC Announcement for any indication of when the current quantitative easing may be lifted.

Long-term rates have fallen here and everywhere since late March, and have taken a new leg down today, US10s to 1.67% for the first time since December. Some of today’s move may be “event risk” bond-buying to protect against Syria. If they’ve really used Sarin, in a region vastly more dangerous than, say, North Korea….

More likely: wrestling under the sheets is economic action. Starting with today’s GDP report, Q1’13 at 2.5% versus expectations of 3.1%, and dreams of 4% and even 5% before March data turned down. March data have been so poor that odds favor a downward revision from the 2.5%. The Chicago Fed’s index whipped to minus .23 in March from plus .76 in February, and new orders for durable goods tanked 5.7% versus expectations for a decline half that size — even stripped of volatile orders for transportation, durables were down 1.4% versus hopes for plus 0.5%.

China’s purchasing-managers’ equivalent in April slid by surprise (why is anyone surprised?) to breakeven 50.5 from 51.5 in March. Global commodity prices continue to follow China’s track.

The Bank of Japan’s ultimate stimulus is thus far leaking yen out of Japan, aiding the global drop in long-term rates but not appearing to do anything for Japan itself.

Europe has found new cans to kick, but only after concluding a new deal with Mephistopheles. It is now painfully clear that non-German economies cannot recover under current policies (tied to the over-strong German-euro), nor can they continue current austerity. Spain bolted today, announcing 3% budget deficit target in 2016, which might as well be 2061. The deal with the Devil: just keep on borrowing past the point of no return, Italian and Spanish 10-year sovereign yields falling from the 7% tops in 2011-2012 now to 4% under the protection of the ECB. Which is expected to cut its overnight rate next week from 0.75%, a band-aid on a traumatic amputation.

Footnote on “point of no return.” Rogoff and Rinehart, the great researchers of past financial crises, were caught in an error two weeks ago which questioned their sovereign debt tipping point at 90% of GDP. Global Krugmanites leapt on the flaw: “Hah! See! We can borrow forever.” No, you can’t. You can get away with it for a long time if your central bank helps, and far beyond 90% of GDP, but if you pass the hazy horizon in which your economy will never be able to generate enough tax revenue to pay the interest due… one day, someday, you will default. The Devil smiles.

To move eyes from overseas to here is a great relief. Our own austerity is probably responsible for our spring slowdown, but interest rates are falling accordingly, the Fed has no inflation fear except too low, and can and should continue QE. Most amazing, budget deficits are falling at all levels of government, especially Federal, which may make it below 3% of GDP within a year. If the economy does not plotz, just mashes forward, we could stumble into a Clinton-accidental balanced budget.

Housing is central here and badly misunderstood. Everyone in healthy markets (land-scarce, inbound-migrating, global-plugged economies) sees auction conditions, and thinks the economy will surge immediately.

It’s a big country. March sales of existing homes actually slid slightly, and sales of new ones are consistently below forecast. The usually reliable FHFA has home prices up 7% year-over-year, and that overstatement is testimony to everyone’s struggle to measure prices during the transition from high levels of distressed sales to low.

MGIC, the mortgage insurer, just released its April run-down on 73 metro areas: 15 are “weak,” 26 are “soft,” and 32 “stable” (which in MGIC terms means “moderate” price appreciation, “balanced between buyers and sellers”), and still not one, single “strong” market. 26 of the 73 are rated as “improving” (in the process of moving to a better category), but given wildly overtight credit and little growth in incomes even among those with jobs, housing-led recovery is going to take time. But will come.

I hate to argue with inspired Bill McBride (www.calculatedriskblog.com) using his own charts, but his sooner-stronger housing-led recovery is not visible. Yet.