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Archive for December 6th, 2007

2007-12-06 US Economic Releases

Posted by WARREN MOSLER on 6th December 2007

2007-12-06 Initial Jobless Claims

Initial Jobless Claims (Dec 1)

Survey 335K
Actual 338K
Prior 352K
Revised 353K

Down from the week before, chart still looks like a modest up move has taken place. Still comfortably below the 375-400K level that would signal a slowdown.

2007-12-06 Continuing Claims

Continuing Claims (Nov 24)

Survey 2620K
Actual 2599K
Prior 2665K
Revised 2658K

Also backing off from last week’s mini spike and not a problem for the fed at current levels.

2007-12-06 Mortgage Deliquencies

Mortgage Delinquencies (3Q)

Survey n/a
Actual 5.59%
Prior 5.12%
Revised n/a


Delinquencies up some, but probably not far from fed expectations.

2007-12-06 ICSC Chain Store Sales YoY

ICSC Chain Store Sales YoY

Survey 2.4%
Actual 3.5%
Prior 5.12%
Revised n/a


These look fine – up a touch and no sign of collapse.


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Update: balance of risks since October 31st

Posted by WARREN MOSLER on 6th December 2007


♥ Jury still out pending tomorrow’s employment number and pre meeting developments.

♥ Labor markets stronger than expected, inflation about as expected. While several funding spreads have widened vs fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down.

♥ The largest risk the Fed is probably worried about is that if they don’t match the 35 bp cut priced into the fed funds futures, the subsequent market reactions might result in extreme technical dysfunction. This was given as a non trivial factor for the 25 ‘insurance’ cut on October 31, and subsequent statements seemed determined to not have this be a factor at the next meeting. But it is.


♥ CPI consensus (Dec 14): 4.1yoy from 3.5, core 2.3yoy from 2.2

♥ Oil down last from 94 at the meeting, vs 55 last year. Futures structure flattened.

♥ Prices received up in all the reported surveys (ism, purchasing mgrs, region feds, etc.), Phil Fed survey prices paid down slightly, others up.

♥ 10 year TIPS floater at 1.70 shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.

♥ 10 year TIPS CPI break even rate down to 2.68 after month end when Nov fell out, from 2.77 at meeting. (interim high of 2.89)

♥ Michigan inflation expectations up – one year 3.4 from 3.1, 5 year 2.9 from 2.8.

♥ Q3 deflator up very slightly from .8 to .9.

♥ PCE deflator up 2.9 yoy, vs 1.8 pre Oct 31 meeting.

♥ Core PCE up .2, up 1.9 yoy. (unchanged)

♥ Q3 unit labor costs and productivity somewhat higher than expectations.

♥ OFHEO home price index down .4%, first decline since 1994, still up yoy, in line with forecasts.

♥ PPI up .1 vs up .3 expected, core flat vs up .2 expected, PPI 6.1% yoy, core 2.5%.

♥ Import prices up 1.8% vs 1.2 expected, yoy up 9.6% vs 9% expected.

♥ Saudi oil production up indicating higher demand at the higher prices.

Market Functioning/Financial Conditions

♥ Stocks down since the last meeting, but up for the year and substantially off the recent lows.

♥ Ff/libor wider but year end issue only.

♥ Mtg rates down, but jumbo mtg spreads vs fed funds and swaps widened.

♥ Bank loans up, commercial paper down.

♥ Assorted losses and recapitalizations but no business interruption.

♥ Mtg delinquencies up, probably within Fed forecasts.

Economic Outlook

♥ Mtg. apps strong and trending up.

♥ ADP employment strong.

♥ Weekly claims very slightly higher.

♥ GDP revised up to 4.9%.

♥ Personal income and spending up .2, (.1 less than private forecasts), real spending flat.

♥ Total vehicles sales unchanged.

♥ Factory orders up .5 and .3, above expectations.

♥ Consumer confidence down.

♥ Construction spending down .8, up .2, somewhat below expectations.

♥ Congressional response to adjustable rate mtgs.

♥ New home sales 728k vs 750k expected, then 716.

♥ Existing home sales 4.97m vs 5million.

♥ Permits 1.178m vs 1.200m expected prev revised to 1.261 from 1.226.

♥ Housing starts 1.229 vs 1.117 expected.

♥ NAHB housing index 19 vs 17 expected.

♥ Durable goods -.7 vs up .3 expected but previous month revised from .3 to up 1.1.

♥ Cap U 81.7 vs 82 expected.

♥ Industrial prod down .5 vs up .1 expected.

♥ Retail sales ex autos up .2 in line with expectations, core up .1%.

♥ Pending home sales up .2% vs down 2% expected.

♥ Sep trade balance -56.5 vs 58.5 expected.

Posted in Interest Rates | 2 Comments »

Re: more in ism

Posted by WARREN MOSLER on 6th December 2007

(an interoffice email)

> ADP came in higher than expected and caused most dealers to raise their
> payroll forecasts.
> Productivity revised UP to 6.3% vs 4.9%preliminary. Unit Labor Costs revised
> to DOWN 2% vs. -0.2% preliminary.
> ISM Non-Manuf, Nov — slips to 54.1 vs. 55.8 prior, weaker-than-forecast.

still expanding

> Prices rose to 76.5 vs. 63.5,

inflation risks increasing

> Employment falls to 50.8 vs. 51.8,

still expanding

> New Orders
> slipped sharply to 51.1 vs. 55.7.

still expanding

> Bank of Canada cut rates this morning citing a soft outlook for US housing.

worried about their currency being too strong and losing demand to the US

> Fannie Mae cut it’s Quarterly dividend and announced it will be issuing
> preferred securities.

no business interruption

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Re: credit recap

Posted by WARREN MOSLER on 6th December 2007

Blood flowing around the clot. Markets functioning to keep the ‘real economy’ moving along. This will take some of the bid for bank LIBOR funding away as well.

Credit Recap

Source: Bear Stearns Credit Research.

The wave of new supply has continued to come at even wider concessions than August and September. New issues have been coming at 25 bps to over 40 bps, in excess of the 5-10-bp discounts we saw pre-credit crunch.

The disconnect between LIBOR and the 5-year Treasury yield has invited more high grade new issuance. Typically, commercial paper of high grade issuers comes at LIBOR +10 bps. In the current market environment, LIBOR is artificially higher than many argue it should be, because banks (particularly in Europe) have been shepherding cash. Banks have had little excess cash to lend to one another as they face their own year-end reserve needs and prepare for the potential funding needs of SIV maturities, which they cannot readily refinance and must take onto their own balance sheets. Thus, the price of short-term inter-bank borrowing remains well above the typical 12 bps over Fed Funds. In fact, 3-month U.S. LIBOR at 5.15% is 90 bps over an expected 4.25% Fed Funds, and 115 bps over a more aggressive 4% FF estimate. By comparison, new high grade 5-year issues have been coming at T+135 to 170, or 4.65% to 5%-well below LIBOR of 5.15%.

We expect this window of cheaper-than-LIBOR capital markets financing could continue for some time, perhaps months-at least until the credit markets are comfortable that the SIV problems have been resolved and banks have restored whatever Tier 1 capital they feel they need. Bank-owned SIVs holding portfolios of bank-issued notes, mortgage ABS and CDO liabilities have not been able to refinance the commercial paper funding these SIVs, and they have been forced to either liquidate the portfolios at a loss or take the SIVs on balance sheet and fund the maturities that come due, absorbing more of a bank’s capital.

5-Year Treasury-Based Financing Cheaper to Issue Than Commercial Paper

Source: Bear Stearns Credit Research.

More subordinated bank and financial issues are on the horizon, and even infrequent non-financial issuers are getting ahead of this expected supply. Notice in the table below of recent new high grade issuance, there are plenty of issuers who haven’t tapped the capital markets for several years (for example Kellogg, McCormick, Nordstrom, Rockwell). We think they are tapping the markets now for several reasons: first, as we said, 5-year Treasury based financing is cheaper to issue than commercial paper; second, issuers like to have fresh financing benchmarks along the curve; third, 10s/30s curves continue to flatten as spreads widen (even though yields are not changing that much), encouraging longer-dated new issuance; and fourth, syndicate desks (including reverse inquiry from investors) are encouraging issuing before the expected wave of financial issues comes to market throughout the first quarter of 2008.

Banks, brokers and financial companies are in need of capital, to repair balance sheets from write-downs and replace capital that is tied up in unsold positions like SIVs and unsold LBO funding commitments. We have seen recent bond issues by Bank of America and Wells Fargo, although banks need to watch their credit ratings and need to issue non-debt capital. Most common equity of most financials has been beaten down, so the likely product will be preferred, hybrids and subordinated securities which generally come to market at significantly wider spreads than where the already-wider bonds are trading. Wachovia recently announced its plan to sell $500 million of 30-year subordinated debt. From our discussions, many banks want to sell long-dated hybrid and preferred issues, yet there is thin institutional demand. Since these deals will likely need to be distributed through retail channels, the market can only slowly absorb just a few deals at a time, and we understand a long line is forming to sell paper. Barclays, for example, just issued a $1-billion 7.750% perpetual preferred, and last week Citigroup sold a $7.5-billion private 11.000% preferred.


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Re: BBC E-mail: UK interest rates trimmed to 5.5%

Posted by WARREN MOSLER on 6th December 2007



Yes, thanks. Might be to ‘give room’ to the Fed or maybe the modern version of ‘trade wars’ being played out?

The UK is saying to the US there’s a limit to using the $ as a ‘weapon’ to ‘steal’ agg demand. They see it as a game of chicken- the cb that’s willing to risk the inflation the most cuts and get the agg demand? An interesting twist on the ‘beggar they neighbor’ wars under fixed fx.


On Dec 6, 2007 8:22 AM, Philip Arestis wrote:
> Philip Arestis saw this story on the BBC News website and thought you
> should see it.
> ** Message **
> Dear Warren,
> This has just come through. Not unexpected.
> Best wishes, Philip
> ** UK interest rates trimmed to 5.5% **
> The Bank of England cuts UK interest rates from 5.75% to 5.5% amid signs that the economy is slowing down.
> < >

Posted in Fed, Interest Rates | No Comments »

Re: change of govt = change of practice

Posted by WARREN MOSLER on 6th December 2007


On Dec 5, 2007 11:50 PM, Wray, Randall wrote:
> Bill: thanks. Yes I think the data are overwhelming for very serious problems, for deep recession, and for rate cuts.
the problems to the real economy aren’t showing up yet

  1. exports have been more than filling the housing gap- as long as foreigners continue the move to ‘spend their hoard’ of $US we can probably muddle through for quite a while.
  2. housing feels like it’s bottomed and won’t be subtracting from gdp. mtg rates are lower than in august and banks are pushing hard to loan directly without the securitization process and are keeping the (wider) spreads for themselves.
  3. none of the losses so far have been anything more than rearranging financial assets and have not resulted in business interruption in the real economy.
  4. unlike the 30′s, we are not on the gold standard. If we had been on it, instead of the run up in gold prices of recent years the same relative value changes would have instead been evidenced by a massive deflation (gold held constant), outflows of gold from the govt, and maybe higher rates to keep that from happening, eventual devaluation (1934), and more powerful motivation for trade wars- all like the 1930′s and other standard gold standard collapses. So comps with the 1930′s can be highly misleading. With today’s non convertible currency the ‘adjustments’ are very different and the financial stresses tend to be more removed from main street. Note the s and l crisis, the crash of 87, the 98 credit crisis had relatively minor effects on gdp. Loans create deposits unconstrained by the gold supply, and capital is likewise both endogenous and not constrained by gold. Instead, all is constrained by income, and govts are pretty good at sustaining that at least at modest levels during slowdown with countercyclical tax structures leading the way, and lots of ‘off balance sheet deficit spending’ leaking out all over the world. This includes massive state bank lending from China, to even the eurozone (though that may be catching up with them under current arrangements), and budget deficits around the world sufficient for the moment to keep things muddling through.

> there is a very large body of evidence to indicate this is the worst situation seen in the US since the 1930s. It is a good time for >pragmatism and for throwing out silly rules. Central bankers are doing what they can. Unfortunately, as we all know only too well, the importance of fiscal policy is not understood.

Right, while I would cut rates to 0, I would also offset the resulting fiscal drag but cutting social security taxes. Irony is current rate cuts in isolation tighten the fiscal balance.

Also, I’m thinking a world wide cap on the $ price of imported crude and domestic gasoline prices might be a short term path to price stability and a long term path to using less of it as costs of production rise and it can’t be sold profitable.

Just in the beginning stage of this concept!

Meanwhile, I don’t think any slowdown will cut net demand for crude sufficiently to take away Saudi and Russian pricing power for at least the next 6 months. and if they simply spend their income here the higher prices won’t slow gdp, just hurt our real terms of trade and keep upward pressure on cpi which is starting to spill over to core, and which the Fed won’t ignore as it climbs past 4, 5 and 6%.


>There isn’t too much reason to be optimistic. As they say, we live in
interesting times, that are making us long for boring. See you in
> L. Randall Wray
> Research Director
> Center for Full Employment and Price Stability
> 211 Haag Hall, Department of Economics
> 5120 Rockhill Road
> Kansas City, MO 64110-2499
> and
> Senior Scholar
> Levy Economics Institute
> Blithewood
> Bard College
> Annandale-on-Hudson, NY 12504
> ________________________________
> From: Warren Mosler []
> Sent: Wed 12/5/2007 8:13 PM
> To: Bill Mitchell
> Subject: Re: change of govt = change of practice
> Hi Bill, good info, thanks very much!
> warren
> On Dec 5, 2007 3:48 PM, Bill Mitchell wrote:
> > dear warren
> >
> > history was made yesterday – the RBA published the minutes of their
> > meeting
> > on Tuesday where they spell out their reasoning on rates (no change).
> > This
> > is the first time they have done that and it follows the election
> > campaign where
> > Rudd made a big point of returning honesty and transparency to his govt
> > after
> > the bad howard years of lying and covering up anything that moved.
> >
> > So you can see the minutes tell you that a further rate rise is now not
> > inevitable
> > despite inflation being above the magic upper bound of 3 and despite
> > them expecting
> > it to remain that way for at least 6 months more.
> >
> > They are now saying that world trends are for lower interest rates to
> > cope with the
> > worsening credit crisis.
> >
> > So: (a) their strict Inflation Targetting is being violated by “other
> > concerns”
> > (b) they think the US is heading for recession.
> >
> > local commentators last night said the Fed will lower by 0.5 next week
> > after BOC went
> > down this week and BOE is heading that way too.
> >
> > anyway, today the CofFEE conference starts – 2 days.
> >
> > see you
> > bill

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