Daily Archives: December 11, 2007 @ 8:52 pm (Tuesday)

Re: credit recap

Posted on by

(an interoffice email)

>
>
>
> Mkt did not like the Fed move today- IG9 went from 70 out to 78.75 after the
> news. CMBS cash (which had a roaring spread tightening in the morning of
> about 15bp) gave all but 6bp of it back. There was a rumor this AM that
> JPM is taking a look at Wamu, but nothing official materialized yet.

Thanks, watching to see if the tightening resumes after this afternoon’s ‘reduction of risk’ reaction to the fed report.

>
>
> General Credit News
>
> The US Federal Reserve cut the Fed Funds Rate by ¼ point and the discount
> rate by ¼ point. The market sold off due to discount rate cut being less
> than expected (people expecting a ¾ point cut). Also, the fact the Fed
> maintained concerns about inflation worried people.

Yes, the media had convinced everyone they didn’t and shouldn’t care about inflation.

>
>
>
> The CEO of the Dubai owned investment firm Istithmar PJSC said that US
> financial and real estate companies are at “attractive valuations” after
> their shares fell on the subprime mortgage crisis. The CEO said, “We feel
> there’s been an overreaction and the market has not yet separated the wheat
> from the chaff.”

Agreed!

>
>
> German investor confidence dropped more than economist forecast in December,
> reaching their lowest level in almost 15 years as rising credit costs dimmed
> the outlook for economic growth.

They must be watching CNBC, too!

>
>
>
> Homebuilder shares fell the most ever on speculation that the Fed’s interest
> rate cut may not be enough to increase demand for new homes or prevent a
> recession. S&P’s measure of 15 homebuilders dropped 9.7% today after the
> Fed cut rates by ¼ point.

Overreaction is my best guess.

>
>
>
> Citigroup Inc. (C): Board appointed Vikram Pandit CEO.
>
>
>
> Fannie Mae (FNM): CEO said the US mortgage and housing markets are unlikely
> to recover until at least 2010.

May not go through old highs until then, but should be bottoming somewhere around current levels of activity.

♥

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UST ASW update

Posted on by

(an interoffice email)

>
>
> 16bp day for 2yr spreads today:
>
>
>
> The market went into the fed announcement expecting perfection
>
> 25-50bp cut and 50bps on the discount window.
>
>
>
> Spreads were 6 lower on the day in the 2yr sprds and 3 lower in tens before
> the Fed.
>
> Needless to say the market was disappointed…
>
> Spreads moved back to the wides in the front end
>
> and now are repricing an expectation of extended financial market /
> financing turmoil

Hi,

Looked to me like the post fed moves were unwinds of all sorts, and didn’t fit any other theme, so I’ll be watching for reversals after things settle down tomorrow am.

Interesting that the markets were shocked that the Fed cared about inflation. I read the speeches as saying they do care a lot, but the media glossed over those parts and didn’t even report those references.

And also interesting that interest rates went lower in response to the Fed caring about inflation.

Also, the strong yen vs the pound and euro, for example, was the reaction to ‘stress’ type of move we saw beginning in August.

While the FOMC didn’t do much to alleviate stress per se, they didn’t actually *do* anything to make it worse, either, and there were signs it was running its course, with the year end issue the remaining
hurdle. I’ll be looking for signs the NY Fed is working on that tomorrow and watching to see if 3 mo libor comes back down over the next few days.

The CPI and PPI are expected to be off the charts Thursday and Friday, and the media could start harping on inflation, blame the Fed for high oil prices, questioning whether a half point in the funds rate over the last few months was worth a $20 increase in the price of crude, and continue pushing that theme if crude goes up as I expect it will, as Saudis continue to (irregularly to hide what they are doing) hike posted prices and let the quantity they pump vary. (and Russia
probably doing same as well.) At 120 crude, retail gasoline should be pushing $4 and food up as well via the biofuel connection, and the media attack on the Fed for letting the inflation cat get out of the bag can elevate expectations rapidly, with tips breakevens and Michigan expectations numbers elevating rapidly.

So far, higher crude means lower yields, as it is anticipated the economy will weaken and the Fed doesn’t care about inflation. If/when that changes- as evidenced by higher crude causing higher interest rates even with risk to gdp- tensions and stresses move up several notches, as anyone working through the 70’s and 80’s should recall.

Given the coming inflation numbers, a segment of the mainstream will start to point out that the ‘correct’ fed funds rate is about 7% with inflation at about 4. To them a neutral real rate would put the ff rate at 6, so it will take 7 to be restrictive. They will argue headline cpi is the rate to use, as food and energy are trending and sustaining the higher levels, along with import and export prices rising at more than 5% rates, and therefore this group will give greater weight to core moving up to headline as happened in the 70’s when crude trended upwards for an extended period of time. And should crude continue to move up, this initially small group of mainstream economists will grow, and CNBC will help promote this ‘scare story’ as it attracts more and more viewers.

Hoping things don’t go that way but concerned they will. Looking forward to reactions to the data later this week and what commodity prices do from here.

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Financing desk comments

Posted on by

I’m lost for an explanation as to whey the Fed ignored the year end liquidity issue entirely, after alluding to it in various speeches and allowing the impression that they were going to address it at the meeting persist.

Keep me posted as to how LIBOR is over the turn (as well as fed funds over the turn) late morning after the dust settles, thanks. The NY Fed may have something in mind to bring rates more in line with the Fed’s target rate.

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FOMC

Posted on by

(interoffice email)

> Dovish statement not matched by actions (no lowering of FF-Discount Rate
> spread). As Tom Brady recently commented, “Well done is better than well
> said”.

Yes, seems they ignored the FF/LIBOR an year end issues in general. After two cuts in the FF and the discount rates that did not address ‘market functioning’, markets wer discounting some positive action, such as a larger discount rate cut or removal of the stigma. This is very disconcerting and give the appearance that the fed ‘doesn’t get it’.

> KEY POINTS
> Slower economy is no longer a forecast, it’s a reality (“Economic gwth is
> slowing”), which means they could drop the word ‘forestall’.

Yes. Perhaps they mean the lower GDP forecasts when they say ‘slowing’, as not much else that has been released is signaling a slowdown.

>
> i.e., future easing is now to counter a weak economy not one likely to
> weaken
> They dropped the neutral bias, now saying only that ‘some inflation risks
> remain’
> Financial market deterioration mentioned twice: ‘Strains in financial
> markets have increased’, and ‘the deterioration in
> financial market conditions’.

Yes, but did nothing to address that issue.

> Former Fed Governor Philips on CNBC saying she was surprised additional
> action wasn’t taken on discount rate.
>
> The Federal Open Market Committee decided today to
>
> lower its target for the federal funds rate 25 basis points
>
> to 4 1/4 percent.
>
>
>
> Incoming information suggests that economic growth is
>
> slowing, reflecting intensification of the housing
>
> correction and some softening in business and consumer
>
> spending. Moreover, strains in financial markets have
>
> increased in recent weeks. Today’s action, combined with the
>
> policy actions taken earlier, should help promote moderate
>
> growth over time.
>
> Readings on core inflation have improved modestly this
>
> year, but elevated energy and commodity prices, among other
>
> factors, may put upward pressure on inflation. In this
>
> context, the Committee judges that some inflation risks
>
> remain, and it will continue to monitor inflation developments carefully.
>
>
>
> Recent developments, including the deterioration in
>
> financial market conditions, have increased the uncertainty
>
> surrounding the outlook for economic growth and inflation.

Uncertainty increased for both.

>
> The Committee will continue to assess the effects of
>
> financial and other developments on economic prospects and
>
> will act as needed to foster price stability and sustainable
>
> economic growth.
>
Again, nothing about market functioning or liquidity.

OCT Statement

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

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Dec 11 balance of risks update

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Labor markets remain stronger than expected, right up through this morning’s Manpower survey for next quarter. Inflation risks remain elevated, with estimates of 1.5% PPI and 0.6% CPI the consensus for Thursday and Friday, and CPI core moving higher as well. While several funding spreads have widened vs. fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down- what the Fed calls an ‘easing of financial conditions’ for this component. And removing the stigma from using the discount window will ease year end issues.

A 0.25% fed funds cut and 0.50% discount rate cut are priced in for today’s meeting, and more cuts are priced in for future meetings. At the same time the balance of risk as highlighted below, with those cuts priced in, seems tilted towards inflation.

Conclusion:

Those closest to the Fed expect a 0.25% cut in the fed funds rate and a 0.50% cut in the discount rate. They see the Fed’s motivation as fear of the balance of risks swinging sharply back towards ‘market functioning risk’ if the Fed doesn’t deliver the cuts already priced in. It’s a case of ‘let’s put to bed the market functioning issues first, and then move on to other issues.’

Data Highlights:

  • ECONOMY – SHOW ME THE WEAKNESS!
  • EMPLOYMENT – better than expectations right up through today:
    • ADP employment strong.
    • Payrolls up 94,000- above expectations.
    • Unemployment rate 4.7% – down slightly.
    • Weekly claims very slightly higher.
  • HOUSING – exceeds expectations:
    • Mortgage applicationsstrong and trending up.
    • New home sales 728k vs. 750k expected, and 716k previous month.
    • Existing home sales 4.97million vs. 5million.
    • Permits 1.178m vs. 1.200million expected, previous month revised to 1.261million from 1.226million.
    • Pending home sales up 0.6% vs. down 1% expected. Previous month revised to up 1.4% from up 0.2%.
    • Housing starts 1.229 vs. 1.117 expected.
    • NAHB housing index 19 vs. 17 expected.
  • AND THE REST is still showing no sign of weakness:
    • CEO survey positive.
    • Q3 GDP revised up to 4.9%.
    • Personal income and spending up .2%, (.1% less than private forecasts), real spending flat.
    • Total vehicles sales over 16 million and unchanged.
    • Factory orders up 0.5% and 0.3%, above expectations.
    • October construction spending down 0.8%, vs. up 0.2% for September, year over year down 0.6%, somewhat below expectations.
    • Durable goods – 0.7% vs. up 0.3% expected but previous month revised from 0.3% to up 1.1&.
    • Capacity Utilization 81.7 vs. 82 expected.
    • Industrial production was down 0.5% vs. up 0.1% expected.
    • Retail sales ex autos up 0.2% in line with expectations, core up 0.1%.
    • Sep trade balance -56.5 vs. -58.5 expected.
    • Consumer confidence down- too many people watching CNBC.
  • INFLATION RISKS HIGHER:
    • CPI consensus (Dec 14): 4.1% YoY from 3.5%, core 2.3% YoY from 2.2%.
    • December Michigan inflation expectations up- one year 3.5% from 3.4%, five year 3.1% from 2.9%.
    • October PCE deflator up 2.9% YoY, vs. 1.8% pre Oct 31 meeting .
    • October Core PCE up 0.2%, up 1.9% YoY, vs. 1.8% pre Oct 31 meeting.
    • OFHEO home price index down 0.4%, first decline since 1994, but still up YoY.
    • Import prices up 1.8% vs. 1.2% expected, YoY up 9.6% vs. 9% expected.
    • Prices received up in all the reported surveys (ISM, Purchasing Managers, region feds, etc.).
    • Prices paid all up except Phil Fed survey prices paid down slightly.
    • Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted, “There was no significant progress on the inflation front.”
    • 10 year TIPS floater at 1.85% shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.
    • 5×5 TIPS CPI break even rate is down to 2.42% vs. 2.49% October 31.
    • Crude oil is at $89, down from $94 at the last meeting, and vs. about $55 last year.
    • Saudi oil production up, indicating higher demand at the higher prices.
  • MARKET FUNCTIONING/FINANCIAL CONDITIONS – little movement but markets muddling through the ‘Great Repricing of Risk’:
    • Bank loans up, commercial paper down.
    • Assorted losses and recapitalizations but no business interruptions.
    • S&P index down about 1% since October 31, but remains up about 8% for 2007, and substantially up from the inter meeting lows.
    • 3 month FF/LIBOR spread is 73 bp, wider since October 31.
    • Mortgage rates down, jumbo mortgage spreads are wider but off the widest levels.
    • Mortgage delinquencies up, probably within Fed forecasts.

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Bear Stearns U.S. Economics: Small business optimism down

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The NFIB small business optimism index fell to 94.4 in November from 96.2 in October. Although the net percentage of firms planning to expand was little changed at 13% in November versus 14% in October, the net percentage of firms expecting the economy to improve fell sharply to -10.0 from -2.0.

Watching too much CNBC.

In November, 7% of firms reported that credit was harder to get, up from 6% in October. The NFIB noted “Credit conditions continue to look normal … There is no credit crunch on Main Street, all the angst appears to be confined to Wall Street and its observers” (November’s percentage of firms reporting that credit was hard to get compares to an average of 5% for the 21-year history of the monthly survey).

Agreed, and this goes unreported in the financial press.

The percentage of small firms planning to increase employment was unchanged at 11% in November, although 19% of firms reported jobs as being “hard to fill,” down from 22% in October.

Employment holding up confirming other data.

Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted “There was no significant progress on the inflation front.”

Right – supports risks tilting toward inflation.

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Manpower survey better than expected

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Bernanke stated he was watching the labor markets closely, right up to the meeting, and the latest survey further confirms its holding up at least as well as expected, if not quite a bit better.

The headline and lead in, however, continue to indicate a reporting bias toward a slowdown:

U.S. Employers Trim First-Quarter Hiring Plans, Manpower Says

By Bob Willis

Dec. 11 (Bloomberg) — Employers in the U.S. trimmed hiring plans for the first quarter of 2008 as the economy cools, according to a private survey released today.

Manpower Inc., the world’s second-largest provider of temporary workers, said its employment index for January through March fell to 17, the lowest since the first three months of 2004, after holding at 18 for the three prior quarters.

The decline wasn’t large enough to signal employment would slump, suggesting the labor market is holding up enough to sustain consumer spending. Federal Reserve policy makers, who are forecast to lower interest rates later today, are counting on rising wages to help Americans weather the housing recession.

“We’ve kind of pointed down a little, but we didn’t fall off a cliff like we did in other downturns,” Jeffrey Joerres, chief executive officer of Milwaukee-based Manpower, said in an interview. “Companies may not be euphoric about hiring, but they are still hiring.”

Right, so why wasn’t the headline ‘survey doesn’t signal a slump’? The reporting bias has been as strong as I’ve ever seen it.

The survey was in line with the Labor Department’s monthly jobs report issued last week. Employers added a greater-than- forecast 94,000 workers to payrolls in November and the unemployment rate held at 4.7 percent. The economy has created an average 118,000 jobs a month so far this year, compared with 189,000 a month in 2006.

These are not rate cut numbers.

Manpower’s index slumped 8 points in the second quarter of 2001, at the start of the last recession.

Before adjusting for seasonal variations, 22 percent of the roughly 14,000 companies surveyed said they will boost payrolls in the first quarter, down from 27 percent in the previous three months.

Little Change

Twelve percent said they’d trim hiring in the coming quarter, and 60 percent anticipated no change, the survey showed.

The overall index subtracts the percentage of employers planning to cut jobs from those who plan to add workers and adjusts the results for seasonal variations.

The world’s largest economy will expand at a 1 percent annual pace this quarter, bringing 2007’s growth rate to 2.2 percent, according to the median estimate of economists surveyed this month by Bloomberg
News. It grew at a 4.9 percent annual pace in the third quarter and 2.9 percent for all of 2006.

That’s a two quarter average of 3%, as actual employment and output grew modestly and inventory in Q3 borrowed some GDP from Q4. And the fed knows that if recent history is any guide, there is a good chance net exports were higher than expected in Q4 and it could be revised up.

The Fed will probably lower its target lending rate by a quarter point to 4.25 percent later today, its third consecutive reduction, according to a separate Bloomberg survey.

That’s the consensus, and the fed may do it out of fear that if they do not accomodate what markets have priced in, the sky will fall.

Half Limit Hiring

Employers in five of 10 industries polled by Manpower planned to limit hiring next quarter compared with the previous three months. Manpower’s measure of hiring intentions was weakest for construction companies. The index for government agency hiring showed the biggest drop.

And the risks are to the upside, as construction is already near zero. There is no where to go but unchanged or up.

Hiring plans at all but one of the industries were lower than year-ago levels, the report showed. Manufacturers of long- lasting goods, such as computers and appliances, projected little change from the first quarter of 2007.

The hiring outlook is strongest at mining companies, followed by service industries and wholesalers.

Regionally, employers in the Northeast, South and West predict no change in hiring, while employers in the Midwest anticipate a slowdown in activity.

Globally, hiring plans in Peru, Singapore, India, Argentina, South Africa, Australia and Japan were among the strongest, while employers in Ireland reported the weakest hiring plans.

The Manpower survey is conducted quarterly and has a margin of error of plus or minus 0.8 percentage point in the U.S. and no more than plus or minus 3.9 percentage points for national, regional and global
data.

To contact the reporter on this story:Bob Willis in Washington
bwillis@bloomberg.net .

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China’s export prices

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Checked with our China economist, it appears that China’s export price has been rising since early 06. Compared to the price by end of 06, export prices are already 7.4% higher (See charts attached)-an interoffice email

2007-12-11 China Export Input Prices2007-12-11 China Export Prices vs Term of Trade

While headlines focus on China’s internal inflation issues, more relevant to the fed are China’s export prices, which become our import prices.

And it is not wrong to view import prices as functionally equivalent to unit labor costs, due to outsourcing of labor investment inputs.

And a weaker $ vs Yuan will add to our ‘import inflation’.

Fed hawks know this and probably sense a ripping inflation in the pipeline.

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