The fix is in – strong growth for 2008?

We have gone from the jobless recovery to the full employment recession.

Recap of prospects for strong GDP in 2008 – details/support covered in previous posts:

  • Government spending has been moved forward and is now kicking in.
  • Exports accelerating, sustainable, and keeping personal income growing.
  • Business inventories are very low.
  • Fiscal package to be high multiple.
  • Short term interest rates will be kept low enough to keep mortgage resets from being disruptive in Q1.
  • Asian stocks overnight rebound and US stocks rebounding as well – PEs looking unsustainable low.
  • Housing too low for further declines to subtract from growth – can only add if it rebounds as I expect it will.

2008-01-17 US Economic Releases

2008-01-17 Housing Starts

Housing Starts (Dec)

Survey 1145K
Actual 1006K
Prior 1187K
Revised 1173K

2008-01-17 Building Permits

Building Permits (Dec)

Survey 1135K
Actual 1068K
Prior 1152K
Revised 1162K

Both still in free fall – may be weather distorted some, but they don’t look good.


2008-01-17 Initial Jobless Claims

Initial Jobless Claims (Jan 12)

Survey 331K
Actual 301K
Prior 322K
Revised n/a

All the way back down. Seems out of line with housing and Philly Fed.

Could be the government spending kicking in that will subsequently support housing and other spending. (See previous posts on government spending.)

Spending resuming its growth after sagging for a couple of quarters as spending got moved forward.


2008-01-17 Continuing Claims

Continuing Claims (Jan 5)

2008-01-17 Continuing Claims from 1980

Continuing Claims since 1980

Survey 2750K
Actual 2751K
Prior 2702K
Revised 2685K

Back up, but this is a tiny blip on the longer term chart.


2008-01-17 Philadelphia Fed.

Philadelphia Fed. (Jan)

Survey -1.0
Actual -20.9
Prior -5.7
Revised n/a

Falling off a cliff.


2008-01-17 Philadelphia Fed. TABLE

Philadelphia Fed. TABLE

Weakness in every category – except prices paid and received, which skyrocketed.

Adds to the fed’s dilemma.


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Bernanke

Fed/Bernanke probably concerned about core CPI going so high and making ‘popular’ headlines and is worried about cutting 50 into the triple negative supply shock of food/fuel/import-export prices.

And with today’s claims number showing, there may not be as much slack in the labor markets as the last unemployment number indicated. The fed has been counting on slack in the labor markets to keep wage demands in check and not transmitting headline inflation to core inflation via higher wages.

And now that core has in fact started to move, he’s pushing for a fiscal package (which goes against the mainstream grain/fiscal responsibility, etc.) as an alternative to future rate cuts which carry, in mainstream theory, an inflation price.

He would very much like the planned January 30 cut to be the last one needed. He doesn’t want to be the next Miller or the next Volcker.


December beige book – modest increase

No recession, yet..

Stocks rise after Fed releases report

by Tim Paradis

(CNBC) Stocks were mostly higher Wednesday after a Federal Reserve report showing economic growth at the end of 2007 appeared to quiet some worries of a precipitous slowdown in the economy.

The modest rebound from a sharp pullback Tuesday came after Wall Street spent most of the session fluctuating while investors combed through corporate profit reports and news that supported varying views about the economy’s well-being.

Stocks gained after the Fed report — its Beige Book survey of regional economies — suggested economic activity increased modestly from mid-November through December, though at a slower pace than in a previous survey.


2008-01-16 US Economic Releases

2008-01-16 Mortgage Applications

Average Mortgage Purchasing Index (Jan 11)

Survey n/a
Actual 461.20
Prior 414.00
Revised n/a

2008-01-16 Mortgage Applications

Mortgage Refi’s (Jan 11)

Survey n/a
Actual 3575.50
Prior 2494.20
Revised n/a

Purchase index back on uptrend, refi way up. Lower rates and return of market functioning coming together nicely.

Still looks like housing could have bottomed October/November, but jury is still out pending data and revisions.

JP Morgan mtg revenue spiked up as JPM gains market share in mtg markets.

Houses are cheaper, lenders aggressive with real buyers, and income has continued higher.

See Mortgage applications soar.



2008-01-16 Consumer Price Index MoM

Consumer Price Index MoM (Dec)

Survey 0.2%
Actual 0.3%
Prior 0.8%
Revised n/a

2008-01-16 CPI Ex Food & Energy MoM

CPI Ex Food & Energy MoM (Dec)

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

2008-01-16 Consumer Price Index YoY

Consumer Price Index YoY (Dec)

Survey 4.1%
Actual 4.1%
Prior 4.3%
Revised n/a

2008-01-16 CPI Ex Food & Energy YoY

CPI Ex Food & Energy YoY (Dec)

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

See Food/fuel/$ bakes in core.


2008-01-16 Industrial Production

Industrial Production (Dec)

Survey -0.2%
Actual 0.0%
Prior 0.3%
Revised n/a

Graph looks OK – holding its own!


2008-01-16 Capacity Utilization

Capacity Utilization (Dec)

Survey 81.2%
Actual 81.4%
Prior 81.5%
Revised 81.6%

Drifting off some, but still at a relatively high level.


2008-01-16 NAHB Housing Market Index

NAHB Housing Market Index (Jan)

Survey 19
Actual 19
Prior 19
Revised 18

Rounding bottom?


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Food/fuel/$ bakes in core

Near triple digit gains for 2007 in food and fuel and rising export/import prices from the weak $ policy will keep core inflation on the high side for a long time.

And with the great pricing of risk ‘crisis’ no longer a forward looking phenomena, the beginnings of a housing recovery, financial downside surprises behind us, and exports continuing to boom, the Fed’s concern switches to the ‘monetary easing’ they believe kicks in with it’s macro effects later in the year.

Most at the Fed say you can’t wait for core to start going up – it’s too late when that happens. Some say you can wait for it to move a tiny bit. Either way both concerns are now elevated.

A 50bp ‘insurance’ cut is still likely if the meeting were today. The next key numbers are claims tomorrow and next Thursday, as well as housing data due out, but seems that data at best could mean this is the last cut rather than take the cut away.

Equities may may do better as well, as financial write-off uncertainty is largely behind us, and the companies doing well in this environment lead the way forward, and PEs are very low.


Mortgage applications soar

Home loan demand surges to near four-year high

By Julie Haviv

(Reuters) U.S. mortgage applications surged last week, with demand hitting its highest in nearly four years as interest rates plunged, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended January 11 surged 28.4 percent to 906.4, its highest since the week ended April 2, 2004.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.62 percent, down 0.11 percentage point from the previous week, and its lowest since the week ended July 1, 2005, when they stood at 5.58 percent.

Interest rates were below year-ago levels at 6.19 percent.

Douglas Duncan, chief economist at the MBA, said the robust data offers a glimmer of hope for housing.

“When consumers see an opportunity, no matter how pessimistic they might be, they take it,” he said. “It will improve the underlying state of the industry and the longer rates stay down, the more people will take advantage of the opportunity, so that is a good thing.”

Mortgage rates have fallen along with U.S. Treasury yields. The benchmark 10-year U.S. Treasury note yield fell below 3.68 percent on Tuesday, its lowest since July 2003 as stocks plunged and expectations of aggressive interest rate cuts from the Federal Reserve rose. Yields move inversely to price.

Overall mortgage applications last week were 35.9 percent above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 10.1 percent to 687.5.

Fixed 15-year mortgage rates averaged 5.07 percent, down from 5.21 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) decreased to 5.77 percent from 6.04 percent.

Demand Surges

The MBA’s seasonally adjusted purchase index, widely considered a timely gauge of new home sales, jumped 11.4 percent to 461.2, its highest since the week ended December 7, 2007. The index came in above its year-earlier level of 439.7, a rise of 4.9 percent.

Demand for home loan refinancing surged last week as the group’s seasonally adjusted index of refinancing applications skyrocketed 43.4 percent to 3,575.5, its highest since the week ended April 2, 2004. The index was up 74.8 percent from its year-ago level of 2,045.8.

The refinance share of applications increased to 62.7 percent from 57.7 percent the previous week. The ARM share of activity edged down to 9.2 percent from 9.3 percent.

“This time of the year you always have to be careful about weather patterns and other factors,” Duncan said. “I really think this is, at least in some instances, evidence that with mortgage rates dropping and house prices having leveled off or fallen in some places, there is an improvement in affordability underway.”

This week ushers in other key data gauging the state of the hard-hit U.S. housing market.

The National Association of Home Builders will release its January NAHB/Wells Fargo Housing Market Index on Wednesday and the Commerce Department will release data on December housing starts on Thursday.


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2008-01-16 EU Highlights

Overall, inflation and weakness continues:

European Inflation Holds Above 3% as Food Prices Soar
German 2007 Inflation Fastest Since Records Began
France: Inflation up to 2.3% in Q4 sunk real wages, spending
ECB’s Weber Says Shouldn’t `Over-Dramatize’ Inflation Jump
Europe’s Economies Face `Stagflation’ Risk This Year
Weber Says ECB Won’t Tolerate Excessive Pay Increases
European Car Sales Rose in 2007 on New Fiat, BMW Models
German First-Quarter Growth to Slow to 0.3 Percent
Bank of Italy Cuts 2008 Growth Forecast Due to Euro, Inflation
Bank of France Cuts Fourth-Quarter Growth Forecast to 0.4%
French Populace Grows to 63.8 Million, Second-Highest in Europe
Iceland delays banks’ plans to adopt the euro

Good choice.


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Why I expect US exports to continue to be very strong..

The desire to accumulate $US financial assets has been diminished for at least the following reasons:

  1. Treasury policy – Paulson is actively pushing both a strong yuan and threatening any other CB that buys $US with the label of ‘currency manipulator.’ CB’s had been perhaps the largest source of $US financial assets accumulation and are now limited to compounding of interest.
  2. US foreign policy is probably driving CB’s in less than friendly nations to diversify their reserves away from $US financial assets.
  3. Fed policy has the appearance of a ‘beggar thy neighbor’/’inflate your way out of debt’ policy, as the Fed aggressively cuts rates in the face of inflation not seen in 25 years.

This all sets in motion a downward pricing of the $US as non residents sell them to each other at lower and lower prices in this effort to lower their rate of accumulation of $US financial assets. But these financial assets can only ‘go away’ when they get spent or invested in the US, when US prices are low enough to cause this to happen. The rapid rise in exports and accelerated non resident buying of US real estate and other assets is anecdotal evidence this is taking place as theory predicts.

This is a very large cyclical force that should continue to drive rapidly rising exports for perhaps a year or more. Weak foreign economies should have little effect on this process, as that weakness doesn’t reduce the desire of portfolio managers to shift out of $US financial assets.

This is also highly inflationary for the US. This buying by non residents both drives down the $US and drives up the prices of US exports, now rising at a 7% clip last I checked.

The desired shift is probably well over $1 trillion which means exports will increase by a good part of that to facilitate this transfer.

This can sustain US GDP in the face of falling domestic demand, which will stay relatively low until housing picks up. Employment will remain reasonably good, but standards of living fall as we produce as much, but export more and consume less. We get paid to work but can buy less due to high prices, with our remaining production exported to those wishing to reduce their accumulated $US financial assets.

We’ve been talking about this possibility about a long time, but seems our trade negotiators have finally got their wish.

Meanwhile, Saudis continue to act the swing producer. In fact, they told Bush today they have 2 million bpd capacity in reserve, and that markets are well supplied. At their price, of course.

Probably have been some year end allocations out of crude by pension funds as with the price hikes they would need to sell some to keep the same ‘weight’ in their portfolios. That should be ending soon.

And I agree with Karim, the Fed is not likely to act on inflation until core starts to rise or their measures of inflation expectations start to rise, despite the fact that mainstream theory clearly says if any of that happens it’s too late. Seems to me the senior FOMC members are putting their jobs on the line by taking that kind of systemic risk, which their own theory tells them is far higher than the risk of any lost output from a .


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TAF Results

(from Patrick Doyle)

Below is a table of the results of the last 3 TAF auctions

Of note is the spread to OIS (FF’s) which is inside the historic LIBOR / OIS spread. There were less participants in this round as well

This all bodes well and is showing the easing of pressure in the funding markets.

Jan. 15
2008
Dec. 21
2007
Dec. 19
2007
Stop-out rate: 3.95% 4.67% 4.65%
Total propositions submitted: $55.526 Bil. $57.664 Bil. $61.553 Bil.
Total propositions accepted: $30.000 Bil. $20.000 Bil. $20.000 Bil.
Bid/cover ratio: 1.85 2.88 3.08
Number of bidders: 56 73 93
Term 28-day loan 35-day loan 28-day loan
Settlement Date Jan. 17, 2008 Dec. 27, 2007 Dec. 20, 2007
Maturity Date Feb. 14, 2008 Jan. 31, 2008 Jan. 17, 2008

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