Bank deposits drop

Seems they forgot the loans create deposits thing…

Billions exit bank accounts after years of inflows

By Jeff Cox

August 30 (CNBC) — American bank accounts have gotten noticeably smaller this year as mom-and-pop investors have begun to embrace risk.

Deposit balances in insured banks have fallen by $51 billion—a small amount relatively speaking, to be sure, but notable in that it reverses a six-year pattern, according to Market Rates Insight.

The drop in deposit balances poses a vexing problem to banks, which are under regulatory pressure to cut leverage and increase their percentage of cash on hand.

“The overall decline in deposits balances in the second quarter of 2013 is an indication that interest rates on deposits are likely to start climbing up in the near future” Dan Geller, executive vice president at Market Rates Insight, said in a statement.

Comments on research report

From DB,
Comments below:

Commentary for friday: the second print on Q2 GDP growth showed a significant upward revision to +2.5% from +1.7% as previously reported. Recall that growth was only +1.1% in Q1.

After the 3rd downward revision

Given that the deflator was revised a tenth higher (0.8% vs. 0.7% as previously reported), the magnitude of the overall revision is even more impressive. Personal consumption was unrevised at +1.8% in Q2,

Down from 2.3% in Q1 if I recall correctly

While business fixed investment was only modestly softer (+4.4% vs. +4.6%). Residential investment was also reduced slightly (+12.9% vs. +13.4%). The big changes to Q2 growth were in inventories and international trade. Inventory accumulation was lifted to $62.6b from $56.7b as first reported, thereby adding 0.6 ppt to growth compared to 0.4 ppt previously.

The question is voluntary to restock from a Q1 dip or sales growth forecast, or involuntary due to lower than expected sales.

In terms of trade, firmer exports and softer imports drove net exports to improve; as a result, the original -0.8 ppt drag from trade was revised up to zero.

Question is whether exports can be sustained through Q3 as the dollar spike vs Japan and then the EM’s hurts ‘competitiveness’

The government drag on Q2 was revised to become slightly larger (-0.2 ppt vs. -0.1 ppt as first reported). Nonetheless, the federal government drag on economic activity has diminished significantly compared to the impact in Q1 (-0.7 ppt) and Q4 2012 (-1.2 ppt). A diminished drag from the public sector should enable overall GDP growth, which was +1.6% year-on-year in Q2, to close the gap with private sector growth, which was +2.5% over the same period.

I see it this way- the govt deficit spending is a net add of spending/income. So with the deficit dropping from 7% of GDP last year to maybe 3% currently, with maybe 2% of the drop from proactive fiscal initiatives, some other agent has to be spending more than his income to sustain sales/incomes etc. If not, output goes unsold/rising inventories and then unproduced. The needed spending to ‘fill the spending gap’ left by govt cutbacks can come from either domestic credit expansion or increased net exports (no resident credit expansion/savings reductions. I don’t detect the domestic credit expansion and net export growth/trade deficit reduction seems likely given the dollar spike and oil price spike?

If we achieve +3.0% growth in the current quarter and +3.5% in Q4, this will push the year-on-year rate to +1.7% in Q3 and +2.5% by yearend. (this is in line with the Fed’s central tendency forecasts, which are due to be updated at the september FOMC meeting.)

In order for our growth forecast to come to fruition, we will need to see a pickup in consumer spending,

Hard to fathom, as personal consumption has been slipping from 2.3 in Q1 to 1.8 in Q2, and walmart and the like sure aren’t seeing any material uptick in sales? Car sales are ok, but further gains from the June high rate seems doubtful as July has already posted a slower annual rate.

homebuilding and business investment relative to first half performance. The first two series are likely to be boosted by sturdier employment gains, and hence faster household income growth.

Seems early Q3 reports show falling mtg purchase applications, home sales falling month to month, and lots of anecdotals showing the spike in mtg rates has slowed things down. So growth from Q2 seems unlikely at this point?

We are confident that the pace of hiring will pick up in the relatively near term, because jobless claims continue to hold near cyclical lows.

New jobs dropped to 160,000 in july, and claims measure people losing their jobs, not new hires. Also, top line growth, the ultimate driver of employment, remains low, so assuming actual productivity hasn’t gone negative a spike in jobs is unlikely?

Given the usefulness of jobless claims as a payroll forecasting tool, it should come as little surprise that they are also significantly correlated with wage and salary growth. In fact, over the past 25 years, the current level of jobless claims has typically coincided with private wage and salary growth above 6% compared to 3.8% in Q2.

As above, claims may have correlated with all that in the past, but the causation isn’t there. Looks to me like claims are more associated with ‘time from the bottom’ as with time after the economy bottoms firings tend to slow, regardless of hiring?

Meanwhile, the third growth driver noted above—business investment—will largely depend on the corporate profit trend. Yesterday’s second print on GDP provided the first look at economy-wide corporate profits, which rose +3.9% in Q2 vs. -1.3% in Q1. Many analysts fretted the decline in profits in Q1, because they tend to drive business investment and hiring plans. We dismissed the Q1 weakness as a temporary development which occurred in lagged response to the growth slowdown in Q4 2012 and Q1 2013. The fact that profits are reaccelerating (+5.0% year-on-year versus +2.1% in Q1) is an encouraging development in this regard.

Profits also are a function of sales, which are a function of ‘deficit spending’ from either govt or other sectors, as previously discussed. And, again, i see no signs of ‘leaping ahead’ in any of those sectors.

Faster GDP growth through yearend should result in even stronger corporate profit growth.

Agreed! But didn’t he just say that the GDP growth would come from business investment that’s a function of profits (and in turn a function of sales/GDP)?

To be sure, the additional growth momentum now evident in the Q2 GDP results makes our 3% target for current quarter growth more easily attainable. –CR

I don’t see how inventory growth is ‘momentum’ and seems there are severe headwinds to Q3 net exports as drivers of growth?

And govt is there with a deficit of only 3% of GDP to help offset the relentless ‘unspent income’/demand leakages inherent in the global institutional structure.

income and spending disappoint

Standing by for positive spin on this…

Consumers gripped wallets tight in July, even with prices tame

August 30 (Reuters) — U.S. consumer spending barely rose and inflation was tame in July, offering a cautionary note on the economy as the Federal Reserve weighs cutting back its massive bond buying program.

The Commerce Department said on Friday consumer spending ticked up 0.1 percent as outlays on services were flat and purchases of durable goods such as automobiles fell. Spending was also held back by weak incomes.

Brazil hikes rates to fight inflation

Fundamentally this increases govt deficit spending/interest income for the private sector, a negative for the currency and inflation, especially as it adds to costs.

However it also adds to spending/output/employment which causes policy makers to think they got it right by hiking as the stronger economy ‘needs’ the higher rates, etc.

Brazil in fourth consecutive rate rise

(FT) Brazil’s central bank has moved to restore investors’ confidence in Latin America’s biggest economy by resorting to its fourth consecutive interest rate increase to tame stubbornly high inflation. The central bank’s monetary policy committee, Copom, raised Brazil’s benchmark Selic rate by 50 basis points to 9 per cent late on Wednesday, the latest increase in a 175 basis point tightening cycle since April. “The committee evaluates that this decision will contribute to set inflation into decline and ensure that this trend persists in the upcoming year,” it said, repeating the brief statement issued at its last meeting in July. On Thursday last week Alexandre Tombini, Brazil’s central bank president, launched an unprecedented $60bn intervention programme to halt the plunge of the real.

comments on GDP

Q2 revised up to 2.5 with higher exports and higher inventories.

Higher inventories can be either voluntary or involuntary, but in any case either unlikely to repeat and can reverse subsequently. And sustaining higher net exports is also problematic with the dollar spiking vs yen and now most other emerging market currencies. And at the same time spiking oil prices increase US import expenditures.

And consumption growth at only 1.8 looks to be decelerating as well.

So with the narrative of govt reductions of net spending needing to be offset by either some other agent spending more than his income, or output goes unsold, we have the foreign sector reducing net exports and unsold inventories in reaction to reduced govt.

And so far it looks to me like Q3, again in line with the narrative, is facing some serious downside risk.

purch apps and related comments


Full size image

This shows what’s happened to the number of home mortgage purchase applications since rates went up (they’ve gone down!).

While higher rates help savers as much as they hurt borrowers, the borrowing at the higher rates has to take place for the savers to get helped.

Yes, Tsy auction rates are higher, but the Fed is buying pretty much the same amount of securities that the Tsy is selling, so no help there.

It’s when the economy is ‘strong enough’ such that borrowing continues even at the higher rates that those rates ‘feed back into the economy’ through savers.

However, it is now the case that ‘investors’ hiked mtg rates due to various Fed fears, etc. with the open question being whether or not prospective home buyers will in fact borrow at those rates. If they don’t, no savers get helped and housing adds less to GDP.

Meanwhile, the Fed wants to exit QE on it’s ‘risk/reward’ analysis and has stated that improvement in the ‘labor market’ is what warrants the exit. And if ‘market forces’ have moved rates higher due to the economic outlook that’s ok too, so the current level of rates and weaker housing is unlikely to alter tapering plans, leaving the coming August jobs report as the critical data point. At the same time, the Fed wants to remain highly ‘accommodative’ and so will likely take communicative measures to attempt to keep longer rates lower, as they seem to have run out of operational alternatives.

So in my search for the agents who will increase their ‘borrowing to spend’ sufficiently to offset this year’s decrease in the govt’s deficit spending, seems I can scratch off ‘housing’.

And if any of you notice any signs of ‘borrowing to spend’ I’m missing please let me know- it’s lonely (and depressing!) being the only one to see the kind of downside risk to GDP growth I’m seeing…

EU Said to Draft Gazprom Complaint as Putin Prepares G-20 Talks

And if you recall from a write up a few years back Russia promised not to take advantage like this. Who would’ve thought?

In any case it’s bad real terms of trade for euro zone gas buyers, but helps exports of whatever Russia buys with the inflated euro revenues, with export prices held down by austerity, etc.

EU Said to Draft Gazprom Complaint as Putin Prepares G-20 Talks

By Gaspard Sebag

August 26 (Bloomberg) — European Union regulators are drafting a formal antitrust complaint against OAO Gazprom, which supplies a quarter of the EUs natural gas, threatening to escalate a probe thats been attacked by Russian President Vladimir Putin.

Officials are working on a statement of objections against Russias state-owned gas export monopoly, according to three people familiar with the probe, who asked not to be named because the status of the inquiry is confidential.

A complaint over allegations that the company abused its dominant position in the gas market may be sent by the end of the year if Gazprom and the EU fail to open settlement talks, said one of the people.

A showdown with Gazprom risks inflaming relations with Russia just as Putin prepares to host a meeting of leaders from the Group of 20 nations next month in St. Petersburg. Russian Foreign Minister Sergei Lavrov warned this month that if the European Union imposes antitrust sanctions against Gazprom, it will be difficult for the company to operate in markets where it faces open discrimination.

The case has the potential to seriously disturb EU-Russia relations, said Thijs Van de Graaf, a researcher at the Ghent Institute for International Studies in Belgium. Gazprom is not a normal company in Russia. It does not only give account to its shareholders but also serves political goals.

Mobilization and Money

The way I say it is the funds to pay taxes and buy tsy secs come from govt spending/lending.
That is, govt is best thought of as spending first, then ‘collecting’ taxes and ‘borrowing.’

And, as a minor correction, govt doesn’t ‘issue money, then spending it’ but in general just instructs the Fed to credit a member bank account.

Mobilization and Money

By J.D. Alt