2008-06-16 Weekly Credit Graph Packet


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IG On-the-run Spreads

IG6 Spreads

IG7 Spreads

IG8 Spreads

IG9 Spreads

The wiggles down give the Fed comfort that markets are functioning to price risk.


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2008-06-16 US Economic Releases


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Empire Manufacturing (Jun)

Survey -2.0
Actual -8.7
Prior -3.2
Revised n/a

Empire Manufacturing TABLE (Jun)

Looks like the worst is over, but the economy remains on the weak side.

Prices paid still way high.

Looks like number of employees up as well.

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Net Long-term TIC Flows (Apr)

Survey $63.3B
Actual $115.1B
Prior $80.4B
Revised $79.6B

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Total Net TIC Flows (Apr)

Survey $42.5B
Actual $60.6B
Prior -$48.2B
Revised $79.6B

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TIC TABLE (Apr)

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NAHB Housing Market Index (Jun)

Survey 19
Actual 18
Prior 19
Revised n/a

A bit worse than expected. Confidence is down all over due to food/crude/import prices. Might be the case here.

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NAHB Housing Market Index (Jun)


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2008-06-13 US Economic Releases


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Consumer Price Index MoM (May)

Survey 0.5%
Actual 0.6%
Prior 0.2%
Revised n/a

From Karim:

More divergence between headline and core.

  • Headline up .6498% m/m and 4.2% y/y; 3mth annualized rate of 4.9%
  • Core up .202% and 2.3% y/y; 3mth annualized rate of 1.8%

Trends diverging

  • Gas (up 5.7%) and lodging away from home (+1.3%, but just reversing prior mth’s 1.9% drop) only major outliers
  • Medical (0.2%), oer (0.1%) and education (0.4%) all in line with trend

Kohn defended his inflation forecasting approach on Wednesday (based on ’50yrs’ of analysis). Basically using an ‘expectations augmented’ Philips Curve; meaning slack (which he stated is opening up) is largest determinant of inflation, as long as expectations are stable. He said if ‘over time’ expectations did not recede, it would be ‘troublesome’ for inflation; in the meantime, the Fed would ‘temporarily’ allow a rise in both inflation and joblessness. Some Regional Bank Presidents may feel differently.

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CPI Ex Food & Energy MoM (May)

Survey 0.2%
Actual 0.2%
Prior 0.1%
Revised n/a

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Consumer Price Index YoY (May)

Survey 3.9%
Actual 4.2%
Prior 3.9%
Revised n/a

The dip in the second half of 2006 was entirely due to the Goldman induced commodity sell off when the gasoline weighting in their index was changed.

Prices have now fully recovered and resumed their uptrend.

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CPI Ex Food & Energy YoY (May)

Survey 2.3%
Actual 2.3%
Prior 2.3%
Revised n/a

Food and energy prices are just beginning to be passed through to core CPI. Everything is composed of food and energy, so it’s just a matter of time before all prices catch up, particularly with GDP now moving up some with the latest fiscal package kicking in.

Because headline CPI is a smaller percentage of GDP than it was in the 70’s, the passthrough will take a bit longer.

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CPI Core Index SA (May)

Survey n/a
Actual 214.832
Prior 214.398
Revised n/a

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Consumer Price Index NSA (May)

Survey 216.205
Actual 216.632
Prior 214.823
Revised n/a

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U of Michigan Confidence (Jun P)

Survey 59.0
Actual 56.7
Prior 59.8
Revised n/a

Below expectations, but seems inflation is cutting into confidence, so this doesn’t give the Fed a reason not to hike at the next meeting.

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Inflation Expectations 1yr Forward (May)

Survey n/a
Actual 5.1%
Prior 5.2%
Revised n/a

This is persisting at far too high a level for Fed comfort.

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Re: Roach-Stagflation


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(an email exchange)

A few of things:

First, the rising wages in the 70’s led to bracket creep that put the budget in surplus in 1979 and resulted in a severe recession soon after.

This time around it is unlikely the inflation takes much of a dent out of the deficit so it’s more likely demand will be sustained to support prices. And, at least so far, Congress has acted to sustain demand and support prices with the latest fiscal package and more seemingly on the way.

Second, last time around the oil producers for the most part didn’t spend all that much of their new found revenues and thereby drained demand from the US economy. This time around they seem to be spending on infrastructure at a rate sufficient to drive our exports and keep gdp muddling through.

Third, I recall it was maybe the deregulation of nat gas that freed up a cheap substitute for electric utilities and unleashed a massive supply response as nat gas was substituted for crude at the elect power producers. After 1980 opec cut production by something like 15 million bpd to hold prices above 30 until they could cut no more without capping all their wells and the price tumbled to about 10 where it stood for a long time. This time around that kind of excess supply is nowhere in sight.

>
>   On Thu, Jun 12, 2008 at 11:59 PM, Russell wrote:
>
>   Stephan Roach is chairman of Morgan Stanley Asia, and pens
>   this missive for the FT, in which he contextualizes why the
>   Fed’s options are limited:
>
>   ”Fears of 1970s-style stagflation are back in the air. Global
>   bond markets are growing ever more nervous over this possibility,
>   and US and European central bankers are talking increasingly
>   tough about the perils of mounting inflation.
>
>   Yet today’s stagflation risks are very different from those that
>   wreaked such havoc 35 years ago. Unlike in that earlier period,
>   wages in the developed economies have been delinked from prices.
>   That all but eliminates the automatic indexation features of the
>   once dreaded wage-price spiral – perhaps the most insidious
>   feature of the “great inflation” of the 1970s. Moreover, as the
>   stunning surge of the US unemployment rate in May suggests,
>   slowing economic growth in the industrial economies is likely to
>   open up further slack in labour markets, thereby putting downward
>   cyclical pressure on wages over the next couple of years.
>
>   But there is a new threat to global inflation that was not present
>   in the 1970s. It is arising from the developing world, especially in
>   Asia, where price pressures are lurching out of control. For
>   developing Asia as a whole, consumer price index inflation hit 7.5
>   per cent in April 2008, close to a 9½-year high and more than double
>   the 3.6 per cent pace of a year ago. Sure, a good portion of the recent
>   acceleration in pricing is a result of food and energy – critically
>   important components of household budgets in poorer countries and
>   yet items that many analysts mistakenly remove to get a cleaner read
>   on underlying inflation. But even the residual, or “core”, inflation rate
>   in developing Asia surged to 3.8 per cent in April, more than double
>   the 1.8 per cent pace of a year ago…”
>
>

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BOJ and inflation


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Bank of Japan keeps distance from Fed, ECB hawks

by Leika Kihara

(Reuters) Bank of Japan Governor Masaaki Shirakawa distanced himself on Friday from the hawkish tone of U.S. and European central bankers, and signalled slowing economic growth was still a key factor in deciding interest rates.

After keeping rates steady at 0.5 percent as expected, Shirakawa acknowledged that the rising global risk of inflation had prompted the U.S. Federal Reserve and the European Central Bank to deliver unusually candid warnings to markets this month.

But he said it was equally important to monitor the risk of slowing economic growth in Japan, with financial markets still bruised by a credit crisis weighing on the global economy.

My take is that over the years voters repeatedly show a larger dislike of inflation vs unemployment. They would rather have a slow down and rising unemployment than high inflation. That’s why the politicians charge the CB with controlling inflation. Inflation will get them kicked out of office even faster than unemployment will.

If the BOJ members ‘allow’ inflation and doesn’t hike rates to fight it (that’s what they all think fights inflation), I would expect the politicians will replace them members who will hike.


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Re: The Fed’s dual mandate


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(an email exchange)

On Thu, Jun 12, 2008 at 7:21 PM, Russell wrote:

> The mainstream economists now saying inflation is here to stay. Wow.

Yes, and note this:

Get used to high prices

by Chris Isidore

(CNNMoney.com)But most economists don’t expect the Fed to raise interest rates — its traditional way of combating inflation — until the end of the year at the earliest.

Generally, higher rates cool U.S. economic activity and cut demand for goods and services, which in turn leads to lower prices.

However, the Fed also has a mandate to foster sustainable economic growth. And with the unemployment rate registering its biggest spike in 22 years in May, the Fed is not likely to push rates higher soon, economists said.

They are missing the Fed’s core belief that enables them to meet their dual mandate, that Fisher and others have been repeating:

Low inflation is a necessary condition for optimal growth and employment.

Without that fundamental belief, there is no way to meet both conditions of the dual mandate.

With it, they know, or should know, exactly what to do.


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Watch for full employment to be redefined


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It’s about that time of the cycle for ‘learned’ academic papers to start popping up claiming the NAIRU, the ‘non accelerating inflation rate of unemployment’ (or something like that) is in actual fact more like 7% rather than the currently believed 5%.

And expect these findings to show that it’s always been closer to 7%, but that a temporary glut in global supply, due to the removal of prior international trade constraints, temporarily permitted lower unemployment rates to not trigger accelerating inflation.

Now, however, this ‘slack’ has been used up.

That will suggest that inflation will continue to accelerate until the unemployment rate is over 7%, much like it is in the eurozone.


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2008-06-12 US Economic Releases



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2008-06-12 Import Price Index MoM

Import Price Index MoM (May)

Survey 2.5%
Actual 2.3%
Prior 1.8%
Revised 2.4%

The Fed sees this as imported inflation pouring through the $ channel.

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Import Price Index X Petro (May)

Survey n/a
Actual 113.8
Prior 113.2
Revised n/a

Just in case you thought it was all oil.

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Import Price Index YoY (May)

Survey 17.2%
Actual 17.8%
Prior 15.4%
Revised 16.3%

The Fed sees this as a relentless assault on inflation expectations.

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Import Price Index X Petro YoY (May)

Survey n/a
Actual 6.6%
Prior 6.6%
Revised n/a

[comments]

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Import Prices TABLE (May)

[comments]

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Advance Retail Sales (May)

Survey 0.5%
Actual 1.0%
Prior -0.2%
Revised 0.4%

Another better than expected report, and the previous month revised up as well.
If anything, the Fed sees the downside risks to growth are diminishing.
Rebate checks may be doing more than the Fed anticipated.

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Advance Retail Sales ALLX (May)

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Retail Sales Less Autos (May)

Survey 0.7%
Actual 1.2%
Prior 0.5%
Revised 1.0%

Seems to be broad based spending, though still moderate.

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Retail Sales X Auto, Building Materials, & Gas Stations (May)

Survey n/a
Actual 247.7
Prior 245.7
Revised n/a

[comments]

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Initial Jobless Claims (June 7)

Survey 370K
Actual 384K
Prior 357K
Revised 359K

Back up to the higher end of the ‘new’ range, as the 4 week average remains very steady.

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Continuing Jobless Claims (May 31)

Survey 3118K
Actual 3139K
Prior 3093K
Revised 3081K

The highest report of this cycle, but still far below recession levels. Also, with GDP prospects looking up, the Fed is getting concerned that unemployment isn’t high enough to keep inflation in check.

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Business Inventories (April)

Survey 0.3%
Actual 0.5%
Prior 0.1%
Revised 0.2%

Higher than expected and prior month revised up as well. At the point in the cycle this probably indicates inventory is being built to meet higher sales expectations, rather than inventory accumulating due to sales falling short. Inventories have been on the low side, and rebuilding them adds to GDP.

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And today it’s Vice Chairman Kohn


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Fed’s Kohn says risks of inflation psychology higher

by Pedro Nicolaci da Costa

(Reuters) A steady rise in energy prices has fueled an inflationary psychology in the United States and could be a problem if it does not reverse, Federal Reserve Vice Chairman Donald Kohn said on Wednesday.

Seems this means the Fed has to act to get it to reverse- a rate hike at the June meeting will be on the table.

“Repeated increases in energy prices and their effect on overall inflation have contributed to a rise in the year- ahead inflation expectation of households,” Kohn said in remarks prepared for delivery to a conference organized by the Boston Federal Reserve Bank in Chatham, Mass.

Kohn said evidence that longer-term inflation expectations have edged up is a particular worry.

“Any tendency for these longer-term inflation expectations to drift higher or even fail to reverse over time would have troublesome implications for the outlook for inflation,” he said.


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2008-06-11 EU Highlights


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Highlights

French Inflation Accelerates to 12-Year High of 3.7%
Spain’s Core Inflation Accelerated in May as Food Costs Surged
Germany’s Weise Says Unemployment May Fall More Than Expected
Stark Says ECB Not Talking About Series of Increases

Doesn’t mean they won’t do it.

ECB’s Liikanen Sees Inflation Expectations Rising

If inflation expectations remain elevated.

Spain, Portugal, Italy Worry About Rate Increases, WSJ Says


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