Pending Home Sales Total SA

Down a touch but not through the lows, could still be forming a bottom.

IBD/TIPP Economic Optimism (Jan) TABLE

Speaks for itself…

Consumer Credit Total Net Change

Explains November spending strength and probably borrowed from December due to how the holidays fell.

ABC Consumer Confidence

This is the most hawkish Fed pres:

GLADWYNE, PENNSYLVANIA (Thomson Financial) – The head of the Philly Fed, Charles Plosser, today raised the possibility of a stagflation threat to the US economy.

“Although I am expecting slow economic growth for several quarters, we should not rely on slow growth to reduce inflation,” the Philadelphia Federal Reserve Bank president warned in a speech here. “Indeed, the 1970s should be a sufficient reminder that slow growth and falling inflation do not necessarily go hand in hand.” Plosser, who has a vote on the rate-setting Federal Open Market Committee this year, warned that he is getting increasingly worried about inflation. “Recent data suggest that inflation is becoming more broad-based,” he said, “And recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures.” Plosser also used today’s speech to draw a clear line between what the Fed should do to stabilize the economy and what it should do to stabilize financial markets.

He believes the Fed’s three rate cuts will take time to work through the economy and that in the meantime growth will slow.

“Since monetary policy’s effects on the economy occur with a lag, there is little monetary policy can do today to change economic activity in the first half of 2008.” In the meantime, “we will get some bad economic numbers from various sectors of the economy in the coming months,” he added.

But beyond the immediate short term, Plosser was more optimistic. He reckons the economy will “improve appreciably by the third and fourth quarters of 2008, and that is when any monetary policy action today will begin to have noticeable effects.” On the credit market front, the Fed’s new Term Auction Facility (TAF) program should help stabilize financial markets and provide liquidity when the interbank lending markets “are under stress and not functioning smoothly,” he added.

Plosser said early evidence suggests the first two 20 bln usd auctions were successful. Two more have been scheduled later this month.

The key point, he said, is that “the TAF did not change the stance of monetary policy. The Fed actually withdrew funds through open market operations as it injected term liquidity through the TAF.” Plosser was already known as one of the inflation “hawks” among the regional Fed bank presidents. His analysis confirms a preference for avoiding further rate cuts and the risk of further inflation as long as financial markets problems do not pose a danger to the rest of the economy.

Food, fuel, and $/import prices present a triple negative supply shock.

Now gold pushing $900 as LIBOR falls, commercial paper issuance increases, and ‘market function risk’ subsides.

Downside risks to GDP are still not trivial.

Consumer income and desire to spend it may be problematic, and banks and other lenders may further tighten borrowing requirements.

And weaker overseas demand may cool US exports.

Yes, the Fed knows and fears demand MAY weaken, and forecasts lower inflation as a consequence.

But inflation is the clear and present danger, vs an economy that may weaken further

And mainstream economic theory says the cost of bringing down inflation once the inflation cat is out of the bag is far higher than
any near term loss of output incurred in keeping inflation low in the first place.

And the Fed addresses its dual mandate of low inflation and low unemployment with mainstream theory that concludes low inflation is a necessary condition for optimal employment and growth over the long term.

Saudi production increased marginally for January, and all indications are net demand is holding up at the higher prices.

While this bodes for continued price hikes, markets may have likely sold off on the news, believing the higher production is a sign of a proactive supply increase that will drive prices down.

It’s the difference between getting your offer lifted vs your bid hit. Saudi (and Russian) offers are clearly getting lifted.

“The Fed needs to stop printing money to buy US government securities.”
-Ron Paul

Ron Paul on the monetary system, as he calls for a return to the gold standard.

This is one of his numerous nonsensical, inapplicable rhetorical outbursts on the monetary system on national television.

The lack of media criticism, by a media that will criticize anything any candidate says, is telling.

Particularly the financial press. To that point, I just saw a CNBC report that ended with a concern regarding what will happen this week when the ECB ‘removes the liquidity they added before year end.’

This ‘financial knowledge crisis’ dwarfs the ‘liquidity crisis’.

Meanwhile, 3 month LIBOR continues to fall and now yields about 50 bp less than it did before the Dec 18 meeting. The Fed sees this as an ‘easing of financial conditions’ and as taking away that much of the need to lower the fed funds rate. This is the opposite of what happened a few months ago when 3 month LIBOR did not go down when they cut the Fed Funds rate, which gave the Fed cause to further lower Fed Funds.

With various mtg products pegged to spreads vs 3 and 6 month LIBOR this also brings those rates down.