Category Archives: Interest Rates

Re: new fed lending facility

Posted on by

(an interoffice email)

> – any chance they would take discount window rate down intra-meeting (or before year end)

seems they don’t have to with this new ‘facility.’

> – have u evaluated the “loan auction” story?

Seems a lot like ‘standard’ repo apart from accepting pretty much anything as collateral from member banks in good standing. This should allow any member bank to fund itself a the ‘stop’ of the auctions, and I’m guessing that stop will be maybe 25 over funds, just to have some semblence of a ‘penalty rate’ though with no ‘stigma.’

Non member banks will still need to borrow from member banks, most likely, and so to the extent they are in the libor basket the libor settings could stay higher than otherwise. Not sure how all that will settle out.

But member banks using the Fed as ‘broker of last resort’ means borrowing and lending with the Fed will keep the names of other banks off their books over year end, and may make room for member bank/non member bank lending. Hard to say, but prospects look pretty good for this to clear up the year end log jam. Also, the ECB could do same with a $ facility which would also help.

Keep me posted if you hear anything, thanks.

♥

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More detail on the liquidity facility

Posted on by

looks a lot like the recommendations Karim emailed to them:

An article in the Financial Times:

Fed officials have dusted down this proposal and adapted it to address the current credit market crisis.

Vincent Reinhart, a fellow at the American Enterprise Institute and former chief monetary economist at the Fed, says this kind of auction facility would allow the Fed to provide funds directly to a much larger group of banks than the limited number of primary dealers who participate in open market operations, against a wide range of collateral, without the stigma of the discount window.

“I think it would be very positive,” he says. Banks in need of liquidity could acquire funds relatively anonymously, while the large number of participants with direct access to Fed money would encourage arbitrage to exploit the gap between cheap Fed money and high interbank rates.

Moreover, the Fed could auction funds at whatever term it wanted to in order to target liquidity at particular term markets – for instance, the market for one-month loans. It would have the option of either auctioning a fixed amount of funds, or offering to supply whatever funds were needed at a target rate.

The intended interest rate spread over the Fed funds rate is not known. If the Fed decided to auction loans at or only slightly above the Federal funds rate, it would risk subsidising weaker banks, which normally pay a premium to borrow in the interbank market.

However, Mr Reinhart says this could be dealt with by varying the amount of collateral required in return for loans based on the creditworthiness of the bank seeking funds.

♥

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Wray discussion

Posted on by

(an email with Randall Wray) 

On Dec 11, 2007 10:49 PM, Wray, Randall <WrayR@umkc.edu> wrote:
> Warren: very respectfully, I suggest you might reconsider both your model of the fed’s reaction function as well as the likely course of the “real” economy.
>
> Whatever the fed might have said about “fighting inflation” back last summer is not relevant to near- and medium-term policy. The fed is scared nearly out of its mind about financial mkts and spill-over to the “real economy”. Further, it realizes all inflation pressures are in sectors over which it has no control, and that are just “relative value” stories. Yes, there can be some feed thru effects to nominal values, but the Fed can’t do anything about it. Inflation will not enter the Fed’s decision making in the near and medium term. Yes, they will continue to pay lip-service to it, since their whole strategy of inflation management relies on expectations. But they are far more concerned with asset prices, financial markets, and, less importantly, economic performance.

Already agreed.  As Karim says it, they want to put the liquidity issue to be first, then worry about inflation.
I’m guessing that the ‘new’ liquidity facility they just announced that will be used to set rates over year end for member banks with a greatly expanded list of acceptable collateral may do the trick.

If so, much of the ‘fear’ is gone, and it’s back to the more traditional and ‘comfortable’ inflation vs the economy, which is a
whole different ball game.

>
> The “markets” are also scared out of their minds. Maybe they are all completely wrong, and you are the lone voice of reason. Maybe nothing is going to spill-over into the real sector. But it is worth considering that MAYBE they are correct.

I do give that some weight.  Maybe 25%?  And with govt, pensioners, and indirect govt sectors not going to slow down, the rest has to slow down quite a bit just to get to 0 real growth.  In fact, I see the biggest chance of negative growth coming with ok nominal growth but a high deflator due to statistical variation.  Nominal shows no signs of slowing, and it is a monetary economy.

 My continuing point, however, is that it’s not happening yet, nor is anything I’m seeing that is yet showing actual weakness, apart from so far anecdotal statements about retail sales, and the .2 nominal personal spending number last reported. I have also seen nothing but low gdp forecasts getting revised up continuously.  Maybe that changes.  However, if demand does weaken, I’m not sure it would be due to the financial losses as I still see no ‘channel’ from that to the real economy, apart from  CNBC scaring people into not spending, and that is not a trivial effect!  But so far there doesn’t seem to anything reducing personal income, and borrowing power seems reasonable if the desire is there for (now cheaper) homes, cars, computers, etc. with a non trivial amount coming from export earnings, which seem to be going parabolic.
> In any case, it will probably help you to predict what mkts are doing if you consider that they REALLY believe we are headed for a hard crash, and that this is not just media manipulation. They could be completely wrong. But at least we can predict their behavior.

I hear you, and in fact that has been my explanation of why they 50 in Sept, and then 25 in Oct- blind fear of the unknown/crash landing. But how does that explain yesterdays outcome?  It was at the very low end of expectations.  They even were stingy on the discount rate spread, which costs them nothing in terms of inflation.  All you can say is they were trying to avoid moral hazard risk, which indicates a lot less fear of hard landing than previously, along with reasonably
harsh language on inflation to ‘explain’ to the markets the stinginess of their actions?

>
> I do agree with you that there will be a reversal tomorrow, and after every disappointment at the Fed’s actions. But that is froth. Mkts have to take profits where they can find them–and after 300 points down, the mkt looks cheap. Yes, mortgages are being made. Yes, investment banks will buy-out insurers (to minimize losses–even if the insurers eventually go bankrupt), and so on. You get profits where you can, or you lose all of your business.

Right, a basic driver of capitalism.  The old ‘fear vs greed’ pendulum.

>But massive losses and write-downs will continue. Maybe they are
wrong to do it; maybe it is just paper shuffling; but it is worth
considering that after a few trillion dollars of losses, there could
be a real effect on the economy.

Sure, but you know as well as anyone the real economy is a function of agg demand.  And there’s been no credible channel discussed of how agg demand gets reduced that’s showing up anywhere in the data.  To the contrary, the non resident sector has suddenly become a source of demand for US output that’s already more than made up for the outsized
and sudden drop from the housing sector, as the bid for housing from sub prime borrowers vanished.  That’s an example of a major demand channel vanishing that could have taken the economy down, but was coincidentally rescued by the foreign sector.  The present value gains from the new export demands are roughly offsetting the pv losses from the sub prime bid vanishing.  Hence, equity markets are up about 10% for the year.

The siv’s, the spv’s the junior tranches, and the super senior tranches all have massive negative present values. Yes, if we can ride it out, in 10 years they could all come back. As keynes said, life is too short.

We don’t have to ride out anything if our purchasing power is unchanged at the macro level, and we can sustain demand for our output.

>
> Even if all we are interested in is to predict what the fed and mkts are going to do, it is worth considering that the Fed BELIEVES it is fighting a Fisher-type 1930s debt deflation that will bring down the whole economy, and that most in the mkts also believe that is a plausible outcome.

Agreed!

>They might all be crazy. But they can be self-fulfilling.

yes, as above.

>So far as I know, EVERY former fed official who is now free to speak
is projecting more rate cuts and recession and maybe worse. That
includes mister inflation hawk Larry Meyer (for whom I TA-ed). The
notion that inflation is a problem just is not going to get traction.
maybe not.  but they all blow with the wind- especially the media- and after this weeks inflation numbers we’ll have a better idea.

>
> I could be wrong, but I’m not paid to be right! I view it all as a bemused spectator. However, millions of Americans WILL lose their homes. Maybe they shouldn’t have them. I do not know, but I do lean toward the view that they should and that policy ought to aim for protecting home ownership. In any case, I find it very hard to believe that will have no effect on the economy.

We’ve already had the effect, as above, and it’s been offset by export earnings, at least so far.  Maybe ‘millions’ will lose ownership, but they won’t be unemployed and homeless.  They will rent, or get owner financing, or get bailouts from relatives, etc.  Mtg rates are down from last summer, affordability is up, and employment is relatively high as well.

The only thing to fear is CNBC itself.

Thanks!!!

Warren

> L. Randall Wray
> Research Director
> Center for Full Employment and Price Stability
> 211 Haag Hall, Department of Economics
> 5120 Rockhill Road
> Kansas City, MO 64110-2499
> and
> Senior Scholar
> Levy Economics Institute
> Blithewood
> Bard College
> Annandale-on-Hudson, NY 12504

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Ip: intermeeting ease/action

Posted on by

(an interoffice email) 

Thanks, and good call!
>
>
>
> Many I spoke to post-fomc talked about an intermeeting ease on the discount
> rate.
>
> Also, that the Fed would use their mouthpieces (Ip,e.g.) to get a message
> out tomorrow if today’s reaction went poorly.
>
> So here we have it, Ip story tonight on potential discount rate cut within
> ‘days’
>
>

Fed Cuts Rates, Seeks New Ways To Thaw Credit
By GREG IP

December 12, 2007

WASHINGTON — With a deepening credit crunch threatening to drag the stalled U.S. economy into recession, the Federal Reserve cut interest rates for the third time since August, and left the door open to further cuts.

But yesterday’s cut, at the low end of Wall Street’s hopes, disappointed investors, who hoped the Fed would do more to thaw frozen credit markets. The Dow Jones Industrial Average fell sharply, undoing about a third of the run-up in stocks triggered in late November when top Fed officials first publicly signaled that another rate cut was likely. The blue-chip average ended the day at 13432.77, down 294.26 points, or 2.1%.

The Fed lowered its target for the federal-funds rate, charged on overnight loans between banks, by a quarter percentage point to 4.25%. It also cut the discount rate, at which it lends directly to banks, by the same amount, to 4.75%.

Fed officials, however, continue to consider ways of using various tools – including the discount rate — to combat banks’ unwillingness to lend even to each other, which they view as a threat to economic growth. The central bank could take action within days.

A variety of steps, widely discussed in the markets, are likely to be on the table, including another cut in the discount rate, longer-term loans to money-market dealers, easier collateral rules for loans from the Fed, and other complex steps last taken in 1999 to alleviate funding pressures ahead of the year 2000, when many feared a “Y2K” computer bug would disrupt markets and create economic havoc.

Changes in the discount rate can be made by the Fed board in Washington without the approval of the entire 17-member policy-making Federal Open Market Committee, which sets the federal-funds rate target.

Some on Wall Street yesterday criticized the Fed’s actions so far as inadequate. “From talking to clients and traders, there is in their view no question the Fed has fallen way behind the curve,” said David Greenlaw, economist at Morgan Stanley. “There’s a growing sense the Fed doesn’t get it,”

Markets expect a weakening economy will force the Fed to cut rates more, Mr. Greenlaw said. Futures markets expect another cut in January and a federal-funds rate of 3.25% by next fall.

In its statement yesterday, the Fed said that its quarter-point rate cut, which pushed the federal-funds rate a full percentage point below where it stood in early August, “should help promote moderate growth over time.”

The central bank didn’t, as it did in October, say the risks of weaker growth and of higher inflation were roughly balanced. That message was a signal that the Fed didn’t expect to cut rates again.

Instead, the Fed said yesterday it will to “continue to assess the effects of financial and other developments on economic prospects and will act as needed.” By avoiding any explicit indication of its next move on rates, the Fed left its options open for its next meeting in late January.

The FOMC’s 10 voting members approved the rate cut 9-1. Federal Reserve Bank of Boston President Eric Rosengren dissented in favor of a sharper, half-point cut. One FOMC member also dissented in October, but in favor of no rate cut. The shift in the dissents, from wanting less rate cutting to wanting more, symbolizes the swing toward pessimism at the Fed.

“Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” the Fed said yesterday. “Moreover, strains in financial markets have increased in recent weeks.”

Unlike the previous two rate cuts, yesterday’s wasn’t portrayed as “insurance” against improbable but damaging economic scenarios. That suggests Fed officials view the economy as weaker than they expected as recently as late October.

Corporate executives are also signaling a more downbeat outlook. “I’m not going to put a happy face on this. Consumers are going to be a challenge in 2008,” General Electric Co. Chief Executive Jeffrey Immelt told investors yesterday. But global growth is “as strong as ever,” he added.

When Fed policy makers met in late October, financial markets were in better shape than they had been in August, and the economy had just posted a strong third-quarter performance. They chose to cut rates by a quarter point and concluded that would likely be enough.

But in subsequent weeks, markets reversed course as big losses tied to soured mortgage-related investments cut into the capital of major banks and other financial institutions, limiting their ability to lend. Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn signaled their increased concern in speeches in late November, foreshadowing yesterday’s rate cut.

Even so, investors, who have persistently had a gloomier outlook than the Fed, were disappointed the Fed didn’t cut rates more or signal greater willingness to do so. Bond prices shot up and yields, which move in the opposite direction, fell sharply. The 10-year Treasury note’s yield dropped to 3.97% from 4.1% just before the announcement, while the two-year note’s yield, which is especially sensitive to expectations of Fed action, fell to 2.92% from 3.13%. Yields on corporate bonds rose relative to Treasurys.

Major banks, meanwhile, lowered their prime lending rates, the benchmark for many consumer and business loan rates, to 7.25% from 7.5%.

The Fed has found it especially difficult to discern the economy’s path and thus the right level for rates because the main threat facing the economy is the reluctance of banks and investors to lend to homebuyers, businesses and consumers. That’s harder to measure than the things like profits, inventories, employment and the Fed’s own interest-rate actions that usually drive the business cycle.

“Well, the boys blew it again. You wonder which economy they are looking at and what it is they are thinking about,” said Alfred Kugel, Chicago-based chief investment strategist for investment-management firm Atlantic Trust of Atlanta.

Brian Sack, an economist at Macroeconomic Advisers LLC, said that in 2001 the major shock to the economy was the stock market. “We have a better shot at trying to calibrate those wealth effects, whereas the credit turmoil has many dimensions to it. Frankly it’s hard to assess how much economic restraint you get from those various dimensions.”

In the past month, data on the so-called real economy has been soft but not dramatically so. Macroeconomic Advisers said yesterday it now expects the economy to shrink marginally during the current quarter, then grow at a 1.8% annual rate in the first quarter of 2008.

On the other hand, credit markets have tightened sharply. Since Oct. 31, the yields on securities backed by auto loans has jumped to 6.3% from 5.4%, while yields on securities backed by home-equity loans have jumped to 7.7% from 6.6%, according to J.P. Morgan Chase & Co. Rates on “jumbo” mortgages — those larger than $417,000 — are around 6.9%, up from 6.6%. The London interbank offered rate, the rate banks charge each other for three-month loans in the offshore market — is a whopping full percentage point above the expected federal- funds rate; it is typically less than a tenth of a point higher.

There isn’t yet evidence these higher rates have significantly bit into consumer spending, outside of housing, and the rates could drop after year-end funding pressures ease. But investors generally don’t expect that to happen.

A survey by Macroeconomic Advisers of its clients, mostly hedge funds and other sophisticated investors, found most expect little retracement of the wide spreads between yields on risky debt and Treasury yields by next year and most expect banks to curtail lending. “The possibility of a widespread pullback in credit availability is a significant risk to the outlook,” the firm said.

♥

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Re: credit recap

Posted on by

(an interoffice email)

>
>
>
> Mkt did not like the Fed move today- IG9 went from 70 out to 78.75 after the
> news. CMBS cash (which had a roaring spread tightening in the morning of
> about 15bp) gave all but 6bp of it back. There was a rumor this AM that
> JPM is taking a look at Wamu, but nothing official materialized yet.

Thanks, watching to see if the tightening resumes after this afternoon’s ‘reduction of risk’ reaction to the fed report.

>
>
> General Credit News
>
> The US Federal Reserve cut the Fed Funds Rate by ¼ point and the discount
> rate by ¼ point. The market sold off due to discount rate cut being less
> than expected (people expecting a ¾ point cut). Also, the fact the Fed
> maintained concerns about inflation worried people.

Yes, the media had convinced everyone they didn’t and shouldn’t care about inflation.

>
>
>
> The CEO of the Dubai owned investment firm Istithmar PJSC said that US
> financial and real estate companies are at “attractive valuations” after
> their shares fell on the subprime mortgage crisis. The CEO said, “We feel
> there’s been an overreaction and the market has not yet separated the wheat
> from the chaff.”

Agreed!

>
>
> German investor confidence dropped more than economist forecast in December,
> reaching their lowest level in almost 15 years as rising credit costs dimmed
> the outlook for economic growth.

They must be watching CNBC, too!

>
>
>
> Homebuilder shares fell the most ever on speculation that the Fed’s interest
> rate cut may not be enough to increase demand for new homes or prevent a
> recession. S&P’s measure of 15 homebuilders dropped 9.7% today after the
> Fed cut rates by ¼ point.

Overreaction is my best guess.

>
>
>
> Citigroup Inc. (C): Board appointed Vikram Pandit CEO.
>
>
>
> Fannie Mae (FNM): CEO said the US mortgage and housing markets are unlikely
> to recover until at least 2010.

May not go through old highs until then, but should be bottoming somewhere around current levels of activity.

♥

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UST ASW update

Posted on by

(an interoffice email)

>
>
> 16bp day for 2yr spreads today:
>
>
>
> The market went into the fed announcement expecting perfection
>
> 25-50bp cut and 50bps on the discount window.
>
>
>
> Spreads were 6 lower on the day in the 2yr sprds and 3 lower in tens before
> the Fed.
>
> Needless to say the market was disappointed…
>
> Spreads moved back to the wides in the front end
>
> and now are repricing an expectation of extended financial market /
> financing turmoil

Hi,

Looked to me like the post fed moves were unwinds of all sorts, and didn’t fit any other theme, so I’ll be watching for reversals after things settle down tomorrow am.

Interesting that the markets were shocked that the Fed cared about inflation. I read the speeches as saying they do care a lot, but the media glossed over those parts and didn’t even report those references.

And also interesting that interest rates went lower in response to the Fed caring about inflation.

Also, the strong yen vs the pound and euro, for example, was the reaction to ‘stress’ type of move we saw beginning in August.

While the FOMC didn’t do much to alleviate stress per se, they didn’t actually *do* anything to make it worse, either, and there were signs it was running its course, with the year end issue the remaining
hurdle. I’ll be looking for signs the NY Fed is working on that tomorrow and watching to see if 3 mo libor comes back down over the next few days.

The CPI and PPI are expected to be off the charts Thursday and Friday, and the media could start harping on inflation, blame the Fed for high oil prices, questioning whether a half point in the funds rate over the last few months was worth a $20 increase in the price of crude, and continue pushing that theme if crude goes up as I expect it will, as Saudis continue to (irregularly to hide what they are doing) hike posted prices and let the quantity they pump vary. (and Russia
probably doing same as well.) At 120 crude, retail gasoline should be pushing $4 and food up as well via the biofuel connection, and the media attack on the Fed for letting the inflation cat get out of the bag can elevate expectations rapidly, with tips breakevens and Michigan expectations numbers elevating rapidly.

So far, higher crude means lower yields, as it is anticipated the economy will weaken and the Fed doesn’t care about inflation. If/when that changes- as evidenced by higher crude causing higher interest rates even with risk to gdp- tensions and stresses move up several notches, as anyone working through the 70’s and 80’s should recall.

Given the coming inflation numbers, a segment of the mainstream will start to point out that the ‘correct’ fed funds rate is about 7% with inflation at about 4. To them a neutral real rate would put the ff rate at 6, so it will take 7 to be restrictive. They will argue headline cpi is the rate to use, as food and energy are trending and sustaining the higher levels, along with import and export prices rising at more than 5% rates, and therefore this group will give greater weight to core moving up to headline as happened in the 70’s when crude trended upwards for an extended period of time. And should crude continue to move up, this initially small group of mainstream economists will grow, and CNBC will help promote this ‘scare story’ as it attracts more and more viewers.

Hoping things don’t go that way but concerned they will. Looking forward to reactions to the data later this week and what commodity prices do from here.

♥

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Financing desk comments

Posted on by

I’m lost for an explanation as to whey the Fed ignored the year end liquidity issue entirely, after alluding to it in various speeches and allowing the impression that they were going to address it at the meeting persist.

Keep me posted as to how LIBOR is over the turn (as well as fed funds over the turn) late morning after the dust settles, thanks. The NY Fed may have something in mind to bring rates more in line with the Fed’s target rate.

♥

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FOMC

Posted on by

(interoffice email)

> Dovish statement not matched by actions (no lowering of FF-Discount Rate
> spread). As Tom Brady recently commented, “Well done is better than well
> said”.

Yes, seems they ignored the FF/LIBOR an year end issues in general. After two cuts in the FF and the discount rates that did not address ‘market functioning’, markets wer discounting some positive action, such as a larger discount rate cut or removal of the stigma. This is very disconcerting and give the appearance that the fed ‘doesn’t get it’.

> KEY POINTS
> Slower economy is no longer a forecast, it’s a reality (“Economic gwth is
> slowing”), which means they could drop the word ‘forestall’.

Yes. Perhaps they mean the lower GDP forecasts when they say ‘slowing’, as not much else that has been released is signaling a slowdown.

>
> i.e., future easing is now to counter a weak economy not one likely to
> weaken
> They dropped the neutral bias, now saying only that ‘some inflation risks
> remain’
> Financial market deterioration mentioned twice: ‘Strains in financial
> markets have increased’, and ‘the deterioration in
> financial market conditions’.

Yes, but did nothing to address that issue.

> Former Fed Governor Philips on CNBC saying she was surprised additional
> action wasn’t taken on discount rate.
>
> The Federal Open Market Committee decided today to
>
> lower its target for the federal funds rate 25 basis points
>
> to 4 1/4 percent.
>
>
>
> Incoming information suggests that economic growth is
>
> slowing, reflecting intensification of the housing
>
> correction and some softening in business and consumer
>
> spending. Moreover, strains in financial markets have
>
> increased in recent weeks. Today’s action, combined with the
>
> policy actions taken earlier, should help promote moderate
>
> growth over time.
>
> Readings on core inflation have improved modestly this
>
> year, but elevated energy and commodity prices, among other
>
> factors, may put upward pressure on inflation. In this
>
> context, the Committee judges that some inflation risks
>
> remain, and it will continue to monitor inflation developments carefully.
>
>
>
> Recent developments, including the deterioration in
>
> financial market conditions, have increased the uncertainty
>
> surrounding the outlook for economic growth and inflation.

Uncertainty increased for both.

>
> The Committee will continue to assess the effects of
>
> financial and other developments on economic prospects and
>
> will act as needed to foster price stability and sustainable
>
> economic growth.
>
Again, nothing about market functioning or liquidity.

OCT Statement

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

♥

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Dec 11 balance of risks update

Posted on by

Labor markets remain stronger than expected, right up through this morning’s Manpower survey for next quarter. Inflation risks remain elevated, with estimates of 1.5% PPI and 0.6% CPI the consensus for Thursday and Friday, and CPI core moving higher as well. While several funding spreads have widened vs. fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down- what the Fed calls an ‘easing of financial conditions’ for this component. And removing the stigma from using the discount window will ease year end issues.

A 0.25% fed funds cut and 0.50% discount rate cut are priced in for today’s meeting, and more cuts are priced in for future meetings. At the same time the balance of risk as highlighted below, with those cuts priced in, seems tilted towards inflation.

Conclusion:

Those closest to the Fed expect a 0.25% cut in the fed funds rate and a 0.50% cut in the discount rate. They see the Fed’s motivation as fear of the balance of risks swinging sharply back towards ‘market functioning risk’ if the Fed doesn’t deliver the cuts already priced in. It’s a case of ‘let’s put to bed the market functioning issues first, and then move on to other issues.’

Data Highlights:

  • ECONOMY – SHOW ME THE WEAKNESS!
  • EMPLOYMENT – better than expectations right up through today:
    • ADP employment strong.
    • Payrolls up 94,000- above expectations.
    • Unemployment rate 4.7% – down slightly.
    • Weekly claims very slightly higher.
  • HOUSING – exceeds expectations:
    • Mortgage applicationsstrong and trending up.
    • New home sales 728k vs. 750k expected, and 716k previous month.
    • Existing home sales 4.97million vs. 5million.
    • Permits 1.178m vs. 1.200million expected, previous month revised to 1.261million from 1.226million.
    • Pending home sales up 0.6% vs. down 1% expected. Previous month revised to up 1.4% from up 0.2%.
    • Housing starts 1.229 vs. 1.117 expected.
    • NAHB housing index 19 vs. 17 expected.
  • AND THE REST is still showing no sign of weakness:
    • CEO survey positive.
    • Q3 GDP revised up to 4.9%.
    • Personal income and spending up .2%, (.1% less than private forecasts), real spending flat.
    • Total vehicles sales over 16 million and unchanged.
    • Factory orders up 0.5% and 0.3%, above expectations.
    • October construction spending down 0.8%, vs. up 0.2% for September, year over year down 0.6%, somewhat below expectations.
    • Durable goods – 0.7% vs. up 0.3% expected but previous month revised from 0.3% to up 1.1&.
    • Capacity Utilization 81.7 vs. 82 expected.
    • Industrial production was down 0.5% vs. up 0.1% expected.
    • Retail sales ex autos up 0.2% in line with expectations, core up 0.1%.
    • Sep trade balance -56.5 vs. -58.5 expected.
    • Consumer confidence down- too many people watching CNBC.
  • INFLATION RISKS HIGHER:
    • CPI consensus (Dec 14): 4.1% YoY from 3.5%, core 2.3% YoY from 2.2%.
    • December Michigan inflation expectations up- one year 3.5% from 3.4%, five year 3.1% from 2.9%.
    • October PCE deflator up 2.9% YoY, vs. 1.8% pre Oct 31 meeting .
    • October Core PCE up 0.2%, up 1.9% YoY, vs. 1.8% pre Oct 31 meeting.
    • OFHEO home price index down 0.4%, first decline since 1994, but still up YoY.
    • Import prices up 1.8% vs. 1.2% expected, YoY up 9.6% vs. 9% expected.
    • Prices received up in all the reported surveys (ISM, Purchasing Managers, region feds, etc.).
    • Prices paid all up except Phil Fed survey prices paid down slightly.
    • Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted, “There was no significant progress on the inflation front.”
    • 10 year TIPS floater at 1.85% shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.
    • 5×5 TIPS CPI break even rate is down to 2.42% vs. 2.49% October 31.
    • Crude oil is at $89, down from $94 at the last meeting, and vs. about $55 last year.
    • Saudi oil production up, indicating higher demand at the higher prices.
  • MARKET FUNCTIONING/FINANCIAL CONDITIONS – little movement but markets muddling through the ‘Great Repricing of Risk’:
    • Bank loans up, commercial paper down.
    • Assorted losses and recapitalizations but no business interruptions.
    • S&P index down about 1% since October 31, but remains up about 8% for 2007, and substantially up from the inter meeting lows.
    • 3 month FF/LIBOR spread is 73 bp, wider since October 31.
    • Mortgage rates down, jumbo mortgage spreads are wider but off the widest levels.
    • Mortgage delinquencies up, probably within Fed forecasts.

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Bear Stearns U.S. Economics: Small business optimism down

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The NFIB small business optimism index fell to 94.4 in November from 96.2 in October. Although the net percentage of firms planning to expand was little changed at 13% in November versus 14% in October, the net percentage of firms expecting the economy to improve fell sharply to -10.0 from -2.0.

Watching too much CNBC.

In November, 7% of firms reported that credit was harder to get, up from 6% in October. The NFIB noted “Credit conditions continue to look normal … There is no credit crunch on Main Street, all the angst appears to be confined to Wall Street and its observers” (November’s percentage of firms reporting that credit was hard to get compares to an average of 5% for the 21-year history of the monthly survey).

Agreed, and this goes unreported in the financial press.

The percentage of small firms planning to increase employment was unchanged at 11% in November, although 19% of firms reported jobs as being “hard to fill,” down from 22% in October.

Employment holding up confirming other data.

Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted “There was no significant progress on the inflation front.”

Right – supports risks tilting toward inflation.

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