Highlights:
| February Inflation Accelerates to 8.7%, Fastest Pace in 11 Years |
Inflation continues to rip, and my guess is it remains underreported.
Fundamentally, this is not good for the value of the yuan, by definition, but timing is everything…
Author Archives: WARREN MOSLER
Fed policy changes
The Fed continues to show a deficiency in understanding monetary operations with the latest moves. While steps in the right direction, a better understanding of monetary operations would have meant funding ANY member bank asset at the FF rate and establishing an unlimited term lending facility for Treasury securities.
Meanwhile they seem to be trying to minimize further rate cuts and instead trying to target areas of illiquidity as per Friday and today’s announcements. They may have reached their inflation tolerance with crude at $109, the dollar continuously falling, and inflation expectations elevating.
Somewhat more troubling is the eurozone seemingly wanting dollar lines from the Fed. Not sure why, but borrowing external currency isn’t ordinarily a good sign.
Re: Italy BOT auction has to be cut back to clear
>
>    On Tue, Mar 11, 2008 at 7:52 AM, Dave Vealey wrote:
>
>    1 yr bill auction in Italy looks to have failed to get enough bids for
>    paper. Avg yield was 3.80% and high yield was 4.50%….
>
>    DV
>
Not good! This is where the real systemic risk lies, as previously discussed.
2008-03-10 US Economic Releases
Wholesale Inventories (Jan)
| Survey | 0.5% |
| Actual | 0.8% |
| Prior | 1.1% |
| Revised | n.a |
Looking to see if there’s any inventory building in Q1 after the big fall off in Q4 after the run up in Q3 etc…
CNBC: home buyers have an incentive to delay
You can save about 100 bps by waiting for the extended limits for jumbos to kick in:
Hurdles for Jumbo Borrowers
by Jennifer Woods
For starters, if you’re looking in certain high-cost metropolitan areas such as New York, Los Angeles, Boston or San Francisco, you may want to sit tight for a few weeks.
That’s because a measure in the fiscal stimulus package recently signed into law by President Bush that will temporarily change the guidelines on what constitutes a jumbo mortgage.
As it stands, mortgages above $417,000 on single-family homes are considered “jumbo” , or non-conforming, in that they are not backed by federal mortgage entities, and carry higher rates than conforming mortgages which are below $417,000.
The new bill, however, allows that amount to be bumped up — in some areas to as much as about $729,750. The actual guidelines were set March 6 by the Department of Housing and Urban Development.
“It makes huge sense to wait [for the guidelines to be determined] said Fenton Soliz, president and chief executive of Mortgage Experts. “You might qualify for substantially more money at a lower rate,” he said.
The current average for a 30-year fixed mortgage is 5.90 percent, compared to 6.88 percent for a 30-year fixed jumbo mortgage.
MSNBC: dollar exit supports GDP
This is all part of the effort of non-residents to no longer accumulate $70 billion per month of US financial assets.
The USD goes down as they try to sell USD to each other at lower and lower prices and doesn’t stop until levels are reached where it makes sense to spend the USD here. That’s the only way the net accumulation can be reduced.
Here is BMW is buying US labor content in parts and finished products.
The US has become a substantial and growing auto exporter.
Exports continue to pick up much of the slack from the housing market, as GDP muddles through.
And the Fed thinks this is a good thing. Bernanke stated in from of Congress that he’d like to see exports and investment (in export businesses) drive US GDP rather than consumption.
If the trade gap goes to zero, trade could be adding about another 2% to US demand/GDP.
BMW plans to increase US production while cutting workers in Germany
by Page Ivey
On one side of the Atlantic Ocean, BMW says it will cut 7.5 percent of its work force over two years. On this side of the water, the company says it plans to increase production by more than 50 percent by 2012.
“This is completely driven by the plunge in the dollar,” said Greg Gardner with Oliver Wyman, publisher of the Harbour Report on automotive manufacturing activity. “It is untenable to produce at a much higher cost in Germany.”
The euro climbed to record heights Friday, reaching $1.5463 before falling back to $1.5335 in late trading after the Federal Reserve announced it would provide more cash to banks that need it. That means European goods cost more for Americans to buy.
By building the cars in the U.S., BMW can save money on the lower dollar and on wages since its South Carolina workers make less than German workers, Gardner said.
The declining dollar also means BMW and other foreign automakers likely will start buying locally for more of the parts used by their U.S. plants, he said.
Saudi Oil Production firm at current prices
Saudi Oil Production
Even with crude prices now well over $100 there’s no sign of demand for Saudi crude falling off. I expect they will continue to act as swing producer, setting price and letting quantity adjust, until a large enough supply response forces their production down below 7 million bpd.
2008-03-07 US Economic Releases
Change in Nonfarm Payrolls (Feb)
Change in Nonfarm Payrolls since 1980
| Survey | 23K |
| Actual | -63K |
| Prior | -17K |
| Revised | -22K |
Unemployment Rate (Feb)
| Survey | 5.0% |
| Actual | 4.8% |
| Prior | 4.9% |
| Revised | n/a |
The longer term chart is definitely looking lower/weaker, but not yet at recession levels, and is not ‘population adjusted.’
This give the Fed no comfort regarding inflation concerns.
The output gap is may already too low to bring inflation down, and their forecasts are for a (modest) pickup in growth when the fiscal package kicks in beginning early May.
In their models, it’s the forecast of rising unemployment that is responsible for the slack that brings inflation back into comfort zones.
Today’s 4.8% unemployment number is a step in the wrong direction for that to happen.
Change in Manufacturing Payrolls (Feb)
| Survey | -25K |
| Actual | -52K |
| Prior | -28K |
| Revised | -31K |
Manufacturing employment falls indefinitely in a modern economy.
Average Hourly Earnings MoM (Feb)
| Survey | 0.3% |
| Actual | 0.3% |
| Prior | 0.2% |
| Revised | 0.3% |
The Fed wants these to remain reasonably well-contained.
Average Hourly Earnings YoY (Feb)
| Survey | 3.6% |
| Actual | 3.7% |
| Prior | 3.7% |
| Revised | n/a |
As above.
Average Weekly Hours (Feb)
| Survey | 33.7 |
| Actual | 33.7 |
| Prior | 33.7 |
| Revised | n/a |
Down a tad.
Coming soon!
Consumer Credit (Jan)
| Survey | $7.0B |
| Actual | — |
| Prior | $4.5B |
| Revised | — |
[comments]
Reuters: payrolls and the output gap
U.S. Feb payrolls drop for second straight month
by Glenn Somerville
U.S. employers cut payrolls for a second straight month during February, slashing 63,000 jobs for the biggest monthly job decline in nearly five years as the labor market weakened steadily, a government report on Friday showed.
The Labor Department said last month’s cut in jobs followed an upwardly revised loss of 22,000 jobs in January instead of 17,000 reported a month ago. In addition, it said that only 41,000 jobs were created in December, half the 82,000 originally reported.
December was first reported as a ‘very weak’ 17,000 increase, revised to up 82,000 a month later (not ‘as originally reported’ as above) and now further revised to up 41,000.
These are substantial swings with current market sensitivities, and January and February will likely be further revised next month.
At the same time, the unemployment rate fell to 4.8%. The previous increases corresponded to an unexpected jump in the labor force participation rate, which has now fallen back some in line with Fed expectations.
The Fed has long been anticipating that demographic forces would reduce the labor force participation rate and thereby tighten the labor markets.
That is, we are running out of people to hire; so, new hires fall while the unemployment rate stays the same or goes down.
The last several months are consistent with this outlook, and it means the output gap isn’t all that large, as 4.75% unemployment is deemed by the Fed to be full employment with anything less further driving up inflation.
All this makes things more difficult for the Fed:
- Stagnant GDP
- Declining labor force
- Very small output gap
- Dangerously rising inflation
Without a major net supply response (a 5+ million bdp jump in crude or crude substitutes or drop in demand), crude prices will likely continue to rise. The drop in net demand for OPEC crude that cuased the price to break was about 15 million bdp in the 1980s, for example.
Reuters: Yellen the Dove turing more hawkish
Yellen: Fed faces unpleasant mix on prices, growth
by Ros Krasny
CHICAGO (Reuters) – San Francisco Federal Reserve Bank President Janet Yellen said on Friday that the U.S. central bank faces an “unpleasant combination” of risks to inflation and growth in setting interest rate policy.
“The U.S. economy is particularly exposed to downside risks from the unwinding of the housing bubble and disruptions in financial markets,” Yellen said in remarks prepared for Banque de France’s symposium on globalization and monetary policy in Paris.
“There is some slack now in the U.S. labor market and, if these downside economic risks materialize, quite a bit more slack could emerge,” she said, which would tend to dampen inflation.
The dove position: OK to cut now because inflation coming down later anyway.
Still, Yellen said inflation risks were “roughly balanced” and that the Fed “cannot afford to take for granted that inflation expectations will remain well-anchored.”
The hawk position: if you let inflation expectations elevate (and there are signs this is happening), it’s too late, and a much larger output gap is needed to bring it back down.