Monthly Archives: July 2008

2008-07-16 US Economic Releases

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MBA Mortgage Applications (Jul 11)

Survey n/a
Actual 1.7%
Prior 7.5%
Revised n/a

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MBA Purchasing Index (Jul 11)

Survey n/a
Actual 359.7
Prior 365.8
Revised n/a

Minor down tic, still in a range that used to be indicative of 1.5 million housing starts per year, vs today’s approx 1 million.

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MBA Refinancing Index (Jul 11)

Survey n/a
Actual 1474.9
Prior 1379.3
Revised n/a

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Bloomberg Global Confidence (Jul)

Survey n/a
Actual 10.30
Prior 21.01
Revised n/a

Inflation and falling equity markets are getting everyone down.

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Consumer Price Index MoM (Jun)

Survey 0.7%
Actual 1.1%
Prior 0.6%
Revised n/a

Higher than expected.

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CPI Ex Food & Energy MoM (Jun)

Survey 0.2%
Actual 0.3%
Prior 0.2%
Revised n/a

Headline leaking into core.

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Consumer Price Index YoY (Jun)

Survey 4.5%
Actual 5.0%
Prior 4.2%
Revised n/a

Breakout!

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CPI Ex Food & Energy YoY (Jun)

Survey 2.3%
Actual 2.4%
Prior 2.3%
Revised n/a

If it was a relative value story, this would be a lot lower and going down.

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CPI ALLX (Jun)

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CPI TABLE (Jun)

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CPI Core Index SA (Jun)

Survey n/a
Actual 215.526
Prior 214.832
Revised n/a

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Consumer Price Index NSA (Jun)

Survey 217.903
Actual 218.815
Prior 216.632
Revised n/a

Karim writes:

  • Headline up 1.1% and 5.0% y/y

Above Fed’s comfort zones.

  • Core up 0.323% m/m and 2.4% y/y

In the 70’s I recall core passing 3% about the time headline passed 6%.

Click to see CPI Charts and CPI Table from the 1970s.

The difference there is no supply response for crude oil in sight this time.

  • Largest contributor to core was housing, where first 0.3% rise in oer this year was posted, and also a 1.8% rise in the fuel and utility component of housing.

Weak demand isn’t yet bringing CPI down as the Fed has been forecasting.

  • Lodging away from home (0.7%) had its second straight strong gain; this is usually +/- more than 1% each month, so likely to give back next month.

Weak occupancy hasn’t brought this measure down.

  • Tobacco up 1.5% due to tax hike in NY
  • Other items likely to reverse next month based on usual patterns are apparel (0.1%) and vehicle prices (0.1%)

Maybe, but lower car sales may not bring prices down over time due to cost issues.

  • Education (+0.5) also above trend

Costs rising here at well. And most employees probably get CPI increases.

  • Bernanke probably knew this number yesterday when he said inflation would be ‘temporarily higher’ in short-term.

Yes, and he and Vice Chair Kohn will have their hands full with the hawks at the August

  • Also, chain-weighted core CPI rose 0.1% and 2.1% y/y. This is a better proxy for core PCE (Fed’s preferred measure) as its not a fixed-weight time series and thus picks up substitution of one good versus another in consumer purchasing behavior.

Yes. Keeps this series lower than CPI until we’re down to eating bread and water, as deteriorating real terms of trade weigh on our standard of living.

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Net Long-term TIC Flows (May)

Survey $70.0B
Actual $67.0B
Prior $115.1B
Revised n/a

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Total Net TIC Flows (May)

Survey n/a
Actual -$2.5B
Prior $60.6B
Revised $61.6B

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Industrial Production MoM (Jun)

Survey 0.1%
Actual 0.5%
Prior -0.2%
Revised n/a

Better then expected.

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Industrial Production YoY (Jun)

Survey n/a
Actual 0.3%
Prior 0.1%
Revised 0.2%

Seems to be working its way lower over time. May be stabilizing with the weak USD.

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Capacity Utilization (Jun)

Survey 79.4%
Actual 79.9%
Prior 79.4%
Revised 79.6%

Higher than expected. The Fed is counting on slack to bring ‘inflation’ down.

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NAHB Housing Market Index (Jul)

Survey 18
Actual –
Prior 18
Revised –


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Bernanke testimony on inflation

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The last few Michigan surveys had one-year inflation expectations over 5%.

This is not lost on an FOMC that believes inflation expectations cause inflation.

Chairman Bernanke said this yesterday after outlining the inflation expectations/inflation process:

“A critical responsibility of monetary policy makers is to prevent that process from taking hold.”

‘Prevent’ implies action, not ‘monitoring’.

Might just be a poor choice of words.


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Exports, Inflation, and the USD

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This is what happens when non residents are scrambling to reduce their hoards of USD financial assets.

Exports rising like this along with the still falling dollar indicates the current $60 billion monthly trade gap is still too high – non-residents simply don’t want to accumulate USD financial assets at that rate.

This adjustment process continually aligns the ‘real’ (price adjusted) trade gap to levels that equal foreign $US ‘savings desires’.

For the US this currently means a weak USD and a combo of rising exports and rising traded goods prices.

GDP muddles through as government spending and exports support demand, with continuing weak domestic demand and declining real terms of trade crushing the US standard of living.

US Exports

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US Exports YoY


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Exports are a cost…

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Yet another economics professor gets it right!

September 02, 2007

Exports are Costs; Imports are Benefits

by Don Boudreaux

Today’s edition of the Chicago Tribune published this letter of mine:

You’re correct that free trade likely would create more opportunities for workers in Illinois to produce goods for export (“How free trade boosts Illinois,” Editorial, Aug. 25). Never forget, though, that the ultimate benefit of trade lies not in what people must sacrifice-not in the creation of opportunities to produce output for others-but in the greater quantity, quality and variety of goods and services that free trade makes possible for ordinary people to consume. Free trade’s bountiful harvest is not its exports; it is its imports.

Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, Va.


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Re: Sov CDS: ny open 15Jul08

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(an email exchange)

>    On Tue, Jul 15, 2008 at 11:03 AM, Mike wrote:
>
>    Should we be looking at selling protection on USTs for 20bps?
>

makes sense

And makes even more sense for the Fed to be selling it:

  1. free money (really sort of a tax for those who want to pay it, but whatever)
  2. assists market functioning

 
 
>
>
>    Sov CDS: ny open 15Jul08
>
>    Credit 5yr 10yrket Credit 5yr 10yr
>    Austria 12.5/15.5 17.0/18.5 Ireland 27.5/30.5 37.0/39.0
>    Belgium 19.0/22.0 26.5/29.0 Italy 41.0/43.0 51.5/53.5
>    Denmark 10.0/12.5 15.0/17.5 Nether 10.5/12.5 15.0/17.0
>    Finland 10.0/12.5 15.0/17.5 Portug 38.0/40.0 48.0/50.0
>    France 11.0/13.0 15.0/17.5 Spain 38.0/40.0 47.5/49.5
>    Germany 6.0/8.0 9.75/10.75 Sweden 10.5/12.5 15.0/17.0
>    Greece 51.0/53.0 61.5/63.5 UK 14.5/17.5 21.0/24.0
>    Iceland 250/290 240/300 US 14.5/18.5 19.0/25.0
>
>


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Deflation forecast

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This is the deflation argument.
(See below)

Never seen a split quite like this with calls for both accelerating inflation and outright deflation.

Which will it be?

My guess is inflation for the US as our friendly external monopolist continues to squeeze us with ever higher crude prices.

The political process is ensuring they will be passed through as sufficient government ‘check writing’ (net government spending) is sustained to support real growth.

(Bear Stearns, housing agencies, fiscal rebates, fiscal housing package, etc.)

And the dollar continues to adjust to the sudden, politically induced shift in foreign desires to accumulate USD financial and domestic assets.

Various private Q2 GDP estimates are now up to 2% – more than sufficient to support demand and pass through the higher headline prices.

Government is never revenue constrained regarding spending and/or lending.

The limit to government check writing is the political tolerance for inflation, which grows with economic weakness.

This inflation looks to me to be far worse than the 1970s.

Back then, we were able to muster a 15 million bpd positive supply response in crude that broke OPEC by deregulating natural gas.

We don’t have that card to play this time around.

From HFE:

July 14, 2008

WORLDWIDE:

  • Global Disinflation Is Going To Be The Next Big Move For The Bond Markets – Weinberg
  • Commodity And Oil Prices Cannot Rise Forever… There Is No Inflation – Weinberg
  • Bonds To Benefit – Weinberg

UNITED STATES:

  • STOP PRESS: Treasury, Fed To Make Credit Available To GSEs; Treasury To Seek Authority To Buy Their Stocks – Shepherdson
  • This Is A Lifeboat, Not a Bailout; Aim Is To Prevent Uncontained Failure – Shepherdson

CANADA:

  • We Cannot Rule Out A Rate Cut Tomorrow – Weinberg

EURO ZONE:

  • Core CPI Shows No Medium-Term Inflation Risks – Weinberg
  • Production Data Will Be Really Soft – Weinberg

GERMANY:

  • Core CPI Still Under 2% And Steady, ZEW At New Record Low – Weinberg
  • … Tighter Money Is Unhelpful Here – Weinberg

UNITED KINGDOM:

  • Starting Point For August QIR Forecasts To Emerge In This Week’s
  • Reports: Most Inputs To The Forecasts Will Be Stronger – Weinberg

FRANCE:

  • Not-Too-Scary Inflation Report Exported: Core Prices Are Steady – Weinberg

JAPAN:

  • Three Soft Report This Week Will Keep Investors Moving Out Of Stocks, Into Bonds – Weinberg

AUSTRALIA:

  • CPI Report For Q2, Due Next Week, May Rekindle Inflation Worries – Weinberg

CHINA:

  • Exploding Foreign Borrowing Diminishes Foreign Currency Reserve Adequacy; Trends Suggest Further Decay – Weinberg
  • GDP Will Be Below Recent Trend In This Week’s Report – Weinberg


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2008-07-15 US Economic Releases

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ICSC-UBS Store Sales YoY (Jun)

Survey n/a
Actual 2.2%
Prior 2.3%
Revised n/a

Fiscal spending seems to have stemmed the decline.

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ICSC-UBS Store Sales TABLE (Jun)

Same.

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Producer Price Index MoM (Jun)

Survey 1.4%
Actual 1.8%
Prior 1.4%
Revised n/a

Looks like a banana republic with a weak currency.

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PPI Ex Food & Energy MoM (Jun)

Survey 0.3%
Actual 0.2%
Prior 0.2%
Revised n/a

Also looks to be working its way higher.

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Producer Price Index YoY (Jun)

Survey 8.7%
Actual 9.2%
Prior 7.2%
Revised n/a

Inflation pouring in through the front door – import prices.

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PPI Ex Food & Energy YoY (Jun)

Survey 3.2%
Actual 3.0%
Prior 3.0%
Revised n/a

Looking like its on the way up, as it’s recovered and surpassed the level of Aug 06 when Goldman changed their commodity index and triggered massive selling of gasoline.

The Fed is watching for headline to leak into core, which they’ve said is already happening.

When only food/crude/import prices go up, it’s a relative value story, as funds to buy that stuff mean less to buy other things, and they lag in price.

But in this case core measures are not going down to offset headline numbers.

True, they haven’t gone up that much yet, but they have gone up rather than down.

That means that yes, demand is ‘weak’ and unemployment creeping up,

But demand is still strong enough to support both higher headline CPI and rising core measures as well,

Supported by government spending which is not revenue constrained nor liquidity constrained,

And supported by booming exports as non residents trip over each other trying to spend their now unwanted multi $trillion hoard of US financial assets.

Current levels of demand are more than sufficient to support much higher levels of housing starts (though still low levels), relatively flat employment, and rising core inflation measures.

And US real terms of trade continue to deteriorate along with the standard of living as a foreign oil monopolist exacts ever higher relative prices.

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Advance Retail Sales MoM (Jun)

Survey 0.4%
Actual 0.1%
Prior 1.0%
Revised 0.8%

Lower than expected, due to weaker than expected auto sales, due to the wrong vehicles on the showroom floors, which will take a while to correct.

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Retail Sales Less Autos MoM (Jun)

Survey 1.0%
Actual 0.8%
Prior 1.2%
Revised n/a

A little weaker than expected but pretty good from a strong previous month.

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Advance Retail Sales YoY (Jun)

Survey n/a
Actual 3.0%
Prior 2.1%
Revised n/a

Once again fiscal policy, not monetary policy, stops the slide.

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Empire Manufacturing (Jul)

Survey -8.0%
Actual -4.9%
Prior -8.7%
Revised n/a

May be on the mend from the lows.

Karim writes:

  • Retail sales a bit softer than expected..up 0.1% headline, up 0.8% ex-autos, and -0.5% ex-gas
  • Control (ex-autos, gas and building materials) up 0.3% and minor downward revisions to prior two months
  • PPI up 1.8% headline and 0.2% core; y/y 9.2% and 3.0% respectively
  • Pipeline pressures remain intense with intermediate up 2.1% m/m and crude 3.7%
  • Medical goods and services component decline (large component of PCE deflator; so June core PCE may come in 0.0% or 0.1%).
  • Empire survey shows modest improvement but stays in negative territory: -8.68 to -4.92

    • Right, Redbook sales show same moderate growth in non-auto sales. The wrong vehicles are on the showroom floors right now and it will take a while for the right ones to take their place.

    I have no idea what’s driving lower medical costs and whether further declines are to be expected, but seems highly unlikely.

    The dollar’s down again today.

    ‘Inflation’ is flowing in through that channel like water through a screen door on a submarine.

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    Redbook Store Sales (Jul 8)

    Survey n/a
    Actual 2.7%
    Prior 2.6%
    Revised n/a

    Moving up as fiscal policy kicks in.

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    Redbook Store Sales TABLE (Jul 8)

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    IBD/TIPP Economics Optimism (Jul)

    Survey 36.8
    Actual 37.4
    Prior 37.4
    Revised n/a

    A little better than expected.

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    Business Inventories (May)

    Survey 0.5%
    Actual 0.3%
    Prior 0.5%
    Revised n/a

    Possible that sales may be exceeding estimates and lowering inventories.

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    ABC Consumer Confidence (Jul 13)

    Survey -41
    Actual -41
    Prior -41
    Revised n/a

    Seems to have bottomed, but remains at low levels, probably due to inflation.


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The $30 billion of Bear Stearns secs were sold to the Fed

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Doesn’t look like a funding operation.

Looks like JPM sold the Bear Stearns securities to the Fed and retained a first loss piece:

Text in JP Morgan’s 10Q:

“Concurrent with the closing of the merger, the Federal Reserve Bank of New York (the “FRBNY”) will take control, through a limited liability company (“LLC”) formed for this purpose, of a portfolio of $30 billion in assets of Bear Stearns, based on the value of the portfolio as of March 14, 2008. The assets of the LLC will be funded by a $29 billion, 10-year term loan from the FRBNY, and a $1 billion, 10-year note from JPMorgan Chase. The JPMorgan Chase note will be subordinated to the FRBNY loan and will bear the first $1 billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, the JPMorgan Chase note and the expense of the LLC, will be for the account of the FRBNY.”


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