Conclusion

♥ Jury still out pending tomorrow’s employment number and pre meeting developments.

♥ Labor markets stronger than expected, inflation about as expected. While several funding spreads have widened vs fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down.

♥ The largest risk the Fed is probably worried about is that if they don’t match the 35 bp cut priced into the fed funds futures, the subsequent market reactions might result in extreme technical dysfunction. This was given as a non trivial factor for the 25 ‘insurance’ cut on October 31, and subsequent statements seemed determined to not have this be a factor at the next meeting. But it is.

Inflation

♥ CPI consensus (Dec 14): 4.1yoy from 3.5, core 2.3yoy from 2.2

♥ Oil down last from 94 at the meeting, vs 55 last year. Futures structure flattened.

♥ Prices received up in all the reported surveys (ism, purchasing mgrs, region feds, etc.), Phil Fed survey prices paid down slightly, others up.

♥ 10 year TIPS floater at 1.70 shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.

♥ 10 year TIPS CPI break even rate down to 2.68 after month end when Nov fell out, from 2.77 at meeting. (interim high of 2.89)

♥ Michigan inflation expectations up – one year 3.4 from 3.1, 5 year 2.9 from 2.8.

♥ Q3 deflator up very slightly from .8 to .9.

♥ PCE deflator up 2.9 yoy, vs 1.8 pre Oct 31 meeting.

♥ Core PCE up .2, up 1.9 yoy. (unchanged)

♥ Q3 unit labor costs and productivity somewhat higher than expectations.

♥ OFHEO home price index down .4%, first decline since 1994, still up yoy, in line with forecasts.

♥ PPI up .1 vs up .3 expected, core flat vs up .2 expected, PPI 6.1% yoy, core 2.5%.

♥ Import prices up 1.8% vs 1.2 expected, yoy up 9.6% vs 9% expected.

♥ Saudi oil production up indicating higher demand at the higher prices.

Market Functioning/Financial Conditions

♥ Stocks down since the last meeting, but up for the year and substantially off the recent lows.

♥ Ff/libor wider but year end issue only.

♥ Mtg rates down, but jumbo mtg spreads vs fed funds and swaps widened.

♥ Bank loans up, commercial paper down.

♥ Assorted losses and recapitalizations but no business interruption.

♥ Mtg delinquencies up, probably within Fed forecasts.

Economic Outlook

♥ Mtg. apps strong and trending up.

♥ ADP employment strong.

♥ Weekly claims very slightly higher.

♥ GDP revised up to 4.9%.

♥ Personal income and spending up .2, (.1 less than private forecasts), real spending flat.

♥ Total vehicles sales unchanged.

♥ Factory orders up .5 and .3, above expectations.

♥ Consumer confidence down.

♥ Construction spending down .8, up .2, somewhat below expectations.

♥ Congressional response to adjustable rate mtgs.

♥ New home sales 728k vs 750k expected, then 716.

♥ Existing home sales 4.97m vs 5million.

♥ Permits 1.178m vs 1.200m expected prev revised to 1.261 from 1.226.

♥ Housing starts 1.229 vs 1.117 expected.

♥ NAHB housing index 19 vs 17 expected.

♥ Durable goods -.7 vs up .3 expected but previous month revised from .3 to up 1.1.

♥ Cap U 81.7 vs 82 expected.

♥ Industrial prod down .5 vs up .1 expected.

♥ Retail sales ex autos up .2 in line with expectations, core up .1%.

♥ Pending home sales up .2% vs down 2% expected.

♥ Sep trade balance -56.5 vs 58.5 expected.