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Archive for January 29th, 2008

FOMC preview

Posted by Sada Mosler on 29th January 2008

My guess is the GDP forecast the Fed is now getting from it’s staff is not a downgrade from previous forecasts, and may even be an upgrade due to:

  • The blowout durable goods numbers
  • The drops in claims following the high unemployment number
  • The private forecasts on average show 65,000 new jobs and unemployment falling to 4.9 on Friday
  • Anecdotal reports from big cap old line corps show no recession in sight
  • But still data dependent with ADP, GDP, and deflator tomorrow am

Yes, it has been about domestic demand, but they now realize exports have taken up the slack and are holding up employment and real gdp, as well as contributing to inflation.

Staff inflation report will show deterioration of both headline CPI and core measures, along with tips fwd breakevens moving higher and survey info showing elevating prices paid and received. And food/fuel/import and export prices all trending higher, risking core converging to headline CPI.

Higher crude prices are now attributed to higher US demand by the markets and the Fed.

Many ‘financial conditions’ have eased:

  • LIBOR has come down over 150 bp since the Dec 18 meeting even as FF are down only 75. mtg rates way down as well, and at very low levels.
  • Commercial mortgage rates somewhat higher, but from very low levels previously
  • Equities have firmed up since the soc gen liquidations (and look very cheap to me)

The last bit of system risk is from a downgrade of the monolines and that risk seems to be diminishing.

The ratings agencies have been reviewing them intensely for 6 months, and both the capital of the monolines and the credit quality of the insured bonds must still be adequate for the AAA rating. And in any case the risk is to go to AA, not to junk, meaning that credit per se isn’t the issue at all. The issue is forced selling by those who can’t legally hold insured bonds if the rating drops. That’s a very different issue.

Wouldn’t surprise me that if tomorrows numbers are as expected, and the fed cuts 50, markets start to look at that as possibly the last move, and reprice accordingly, with FF futures trading closer to a 3% trough than a 2% trough.

An unchanged decision may also result in a near 3% FF futures trough, with a couple of 25 cuts priced in.


Posted in Fed, Interest Rates | 2 Comments »

Crude just traded over $92/barrel

Posted by Sada Mosler on 29th January 2008

The markets and the Fed now look at higher crude as evidence of higher demand.

Posted in Oil | No Comments »

ISM revised upward

Posted by Sada Mosler on 29th January 2008

Seems most of Q4 was revised up, and Q3 as well.

TABLE-U.S. ISM non-manufacturing index revised to 54.4 in Dec

(Reuters) The Institute for Supply Management on Tuesday released annual seasonal adjustments to some of its monthly non-manufacturing indexes.

Dec Nov Oct Sept Aug July June May Apr Mar Feb Jan
Bus Activity 54.4 54.6 55.5 55.7 56.3 55.9 59.7 58.4 56 53 54.9 57.9
New Orders 53.9 52 55.4 53.9 55.8 53.1 56.7 56.7 54.7 54.2 55.2 55.6
Employment 51.8 51.4 52.4 52.5 48.6 51.9 53.5 53.5 51.9 51.3 52.1 52.9
Prices Index 71.5 73.7 66.1 65 60.1 63.1 65.6 64.3 63.2 62.9 53.9 56.1
Dec Nov Oct Sept Aug July June May Apr Mar Feb Jan
Bus Activity 53.9 54.1 55.8 54.8 55.8 55.8 60.7 59.7 56 52.4 54.3 59
New Orders 53.5 51.1 55.7 53.4 57 52.8 56.9 57.4 55.5 53.8 54.8 55.4
Employment 52.1 50.8 51.8 52.7 47.9 51.7 55 54.9 51.9 50.8 52.2 51.7
Prices Index 72.7 76.5 63.5 66.1 58.6 61.3 65.5 66.4 63.5 63.3 53.8 55.2


Posted in USA | No Comments »

Inflation expectations update

Posted by Sada Mosler on 29th January 2008

As of 1pm today – this is what the Fed is looking at for today’s meeting.

Most say if you let expectations elevate it’s too late. Others think they can be allowed to elevate a little bit and then brought down.

2008-01-29 5Y Tips Implied Inflation Rate 5Y Forward


Posted in Fed, Interest Rates | No Comments »

2008-01-29 US Economic Releases

Posted by Sada Mosler on 29th January 2008

2008-01-29 Durable Goods Orders Total

Durable Goods Orders Total (Dec)

Survey n/a
Actual 226,601
Prior 215,433
Revised n/a

2008-01-29 Durables Ex Transporation Total

Durables Ex Transportation Total (Dec)

Survey n/a
Actual 155,206
Prior 151,303
Revised n/a

2008-01-29 Durable Goods YoY % Change

Durable Goods YoY % Change

Survey n/a
Actual 5.0%
Prior -0.6%
Revised n/a

Doesn’t look much like recession to me. November revised up to where last month’s number might have changed impressions as well.

This also increases the chances that the December employment number gets revised up this Friday, along with a lower unemployment number for January.

From Karim:

The 5.2% rise in DGO is a bit of a mixed bag
–81% rise in aircraft orders (likely to help exports)
–ex-aircraft and defense still up 4.4%;

Yes, that’s what an export economy looks like.

but looks like making up for lost ground as 3mth trend (annualized) falls from -1.2% to -2.8%
–more troubling is shown in chart attached; inventory/shipments ratio threatening multi-year highs (inverted on chart); suggests more downside for industrial production in period ahead

Or it could mean larger shipments being readied.

Unfilled orders up 2.5% month over month; up 18.5% year over year,

Johnson-Redbook and ICSC chain store sales reflect weak January; sales about flat to December.

Yes, that’s what an export economy looks like. Decent employment but weaker domestic real consumption, as more of the output gets shipped abroad rather than getting consumed domestically.

Case-Shiller Index falls from -6.07% y/y to -7.74% y/y. 10 largest metro-areas fall from -6.67% to -8.42% y/y.

Yes, a November number. Real estate in largest areas was still falling back then.

2008-01-29 S&P/CS Composite-20 YoY

S&P/CS Composite-20 YoY (Nov)

Survey -7.1%
Actual -7.7%
Prior -6.1%
Revised n/a

2008-01-29 S&P/CS Home Price Index

S&P/CS Home Price Index (Nov)

Survey n/a
Actual 188.8
Prior 192.9
Revised 192.9

2008-01-29 Consumer Confidence

Consumer Confidence (Jan)

Survey 87.0
Actual 87.9
Prior 88.6
Revised 90.6

2008-01-29 ABC Consumer Confidence

ABC Consumer Confidence (Jan)

Survey -24
Actual -27
Prior -23
Revised n/a

Still looking weak. But with CNBC turning more positive on the economy, this might turn up soon.

Posted in Daily | No Comments »

Responses to comments on the ‘Comments on Brian Wesbury article’ post

Posted by Sada Mosler on 29th January 2008

Post: Comments on Brian Wesbury article

Comment by ‘Hoover Printing Press‘:

Warren congrats on your new website.


I keep reading that the bond insurers have let banks keep lots of “accounting issues” off the books – thus affecting tier 1 capital requirements – currently to the banks advantage. Without the bond insurers and their AAA rating by moody and sp (fitch has already lowered ratings down from AAA) the banks will have to scramble for lots of capital without the insurance, barclays recent estimate upwards of 150 billion. I remember Buffet referring to Financial WMD’s.

Yes, but that’s a matter of institutional structure. The government has several options.

For example:

  • The government could change bank ‘haircuts’ to capital by allowing AA insured bonds to have the same or only marginally higher capital charges as AAA bonds. The capital requirements are somewhat arbitrary to being with and meant to serve public purpose.
  • The government could offer some for of supplemental insurance at a fee to investors holding the AAA insured bonds in question. Again, for example, the fee could perhaps be 1%, and the government could guarantee a price of 97 to any investor who paid the fee. The government will probably make a profit on this type of program, as the monolines’ capital will still be in first lost position, and even if they are downgraded to AA, the implication is they will have more than sufficient capital to cover all losses. That is what AA means.

I read articles that NY is in a mad scramble to get buffet and others to bring some assurances to the bond insurance industry because the muni debt market is going to seize up without bond insurance and what the AAA ratings of that insurance lends to capital requirements and “accounting issues.”

Yes. There are some institutional ‘land mines’ in place that the government can either prevent from being tripped or defuse directly (for a fee), as above.

In hoover’s time I remember reading from Rothbard’s great depression I believe that he printed but the banks used the money to shore up their reserves, they did not want to lend and spur the economy at the cost of their own survival.

Under that gold standard regime, the government was limited in what it could do. Deficit spending carried the risk of loss of gold reserves, for example. And, in fact, the US was forced off the gold standard in 1934 domestically and devalued for foreign holders of $. This was the only actual default in US history.

So why is Bush and congress giving joe six pack 150B when he could have used that to back the bond insurers and the banks?

No comment.. You must be new here??? :)

Possibly getting the ratings agency to save some face and for fitch to bring AAA ratings back to the bond insurers?

Or the supplemental plan, above, that doesn’t bail out the insurers.

On another point, you claim a large difference between hoover’s problems and our problems today is the gold standard and floating exchange rates. Unfortunately I must press you as to how that is so when the folks at the top of this chart (china) have fixed exchange rates relating to the folks at the bottome of it (USA). Soros is claiming the USA will soon lose reserve currency status.

A fixed exchange rate ‘forces’ you to run a trade surplus to sustain sufficient reserves of gold or the reserve currency of choice. It also limits the ability to conduct countercyclical deficit spending as that leads to loss of reserves and default/devaluation/etc.

China has a ‘dirty float’, which means the currency is not convertible, but instead they intervene at various prices.

Not at all the same thing.

I am not so sure the Euro will be able to weather a global financial meltdown and perhaps in economic warfare, keeping reserve currency status is worth fighting over.

What is it, and why do you care?

With bush selling lots of scatter bombs to the house of Saud, at least we are trying to keep friends who have control over oil.

Still with the USA’s current account balance the worst of any country on the planet,

Imports are real benefits, exports real costs. In general, the larger your trade deficit, the higher your standard of living.

40K nukular bombs and a war machine that eats up large domestic resources, and a consumer base whose only skill is to shop till princess drops,

Consumption is the only point of economics.

I am not so sure what you are trying to save to get USA to deficit spend even MORE?

Right now, more deficit spending of the type proposed will mainly increase inflation.

Would it be so bad if that guy “dfense” from the mike douglas movie “FALLING DOWN” gets put out of a missle building job and starts fishing on the dock of the bay wasting time?

Comment by Scott Fullwiler:

Wesbury’s basically a monetarist (everything that goes wrong is the Fed’s fault for creating either too much or too little “liquidity”) operating with a gold standard model.

Yes, that’s where we don’t agree on causation and risks. But interesting that even in that paradigm, he doesn’t see the risks the Fed does, as they are in the same gold standard paradigm.

That said, he’s been bullish on the economy since 2002, and he’s been mostly right in that, except that he’s also been saying inflation is right around the corner since then, too, given weak dollar, strong gold.

And I’ve seen inflation underway due to Saudis acting as the swing producer and hiking price continuously.

And I see the weak $ as a change in preferences of non-resident holdings of financial assets.

Until a year and a half ago he was also claiming that the large spread b/n st and lt Treasuries was another a sign of inflation,

And I say it’s a sign of what investors think the Fed will be doing next. So to that extent, the curve reflects investor expectations. But there is also a lot of institutional structure that steers maturity preferences; so, the result is a mix of the two.

though he decided bond markets were being irrational once the yield curve inverted (again, if inflation is right around the corner).

Again, that reflects investor expectations.

I’ve used him in my classes for several years as a “balance” to the Levy view of “debt deflation’s around the corner.” Interesting to see that you and he are on the same page now at least regarding state of the economy, since you’ve been pessimistic (at least in long run, given small govt deficit) while he’s been a non-stop bull.

Yes, I’ve been expecting lower domestic demand since the financial obligations ratio go to where it go in Q2 2006, due to the shrinking budget deficit. What I missed was how strong exports would be, mainly on our three pronged weak dollar policy that has been scaring foreigners away from holding $US financial assets.

This includes calling CB’s currency manipulators if they buy $US, aggressive Middle Eastern policy, and the Fed’s apparent lack of concern for the value of the currency (inflation). Fundamentally, the falling budget deficit is good for the $US, but technically government policy has triggered an ‘inventory liquidation’ over seas that is causing exports to boom.

And now we are learning the hard way (or should be) what an export driven economy looks like – weak domestic demand due to high prices and full employment as we build goods and services for others.


Posted in USA | 4 Comments »