3 mo libor is now for all practical purposes is ‘under control’ and down about 50 bp since the last Fed meeting.
Market function risk seems to be behind us, and the talk has now shifted to weakness due to softer demand.
The question is what level of demand is consistent with ‘price stability’.
In other words, to not exceed potential non inflationary GDP (the Fed’s speed limit) demand has to be low enough to not continuously drive up food/fuel/import prices.
♥
Another sign of a possible October/November bottom:
Countrywide fundings inch higher
CALABASAS, Calif. (AP) – Countrywide Financial Corp., the nation’s largest mortgage lender, said Wednesday its December loan fundings rose 1 percent from November and were ahead of internal forecasts.
The stock, which lost nearly a third of its value on Tuesday amid rumors –which the company strongly denied — of bankruptcy, rose 13 percent in premarket trading.
Countrywide said it funded $24 billion in loans in December, giving it a total of $69 billion for the fourth quarter. Average daily mortgage applications in the month slipped from November, but Countrywide attributed that to a typical seasonal decline.
The company’s banking operations had assets of $113 billion at the end of December, up from $83 billion at the end of November.
Countrywide also said it saw a slower rate of people paying off loans early, which made its servicing business more valuable. Servicers collect payments and manage loans for their owners.
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| Survey | n/a |
| Actual | 32.2% |
| Prior | -11.6% |
| Revised | n/a |
As expected, purchase applications sprung back after the annual fall of in late Dec.
Markets were concerned this wouldn’t happen this year.
Refi index up indicates market functioning returning here as well.
30 year mtg rate down to 5.73% – way lower than August.
♥
Fed will take heat for conducting a weak $, beggar thy neighbor, inflate your way out of debt policy, as it will be seen US exports are robbing demand from eurozone, while price pressures rise, spreading stagflation around the world.
| Highlights: |
| ♦ Europe’s Economic Expansion Exceeds Earlier Estimate |
| ♦ German Output, Exports, Retail Sales Unexpectedly Fall on Oil |
| ♦ German Nov industrial output down 0.9 pct from Oct, cons up 0.4 pct |
| ♦ Germany May Cut Forecast for 2008 GDP Growth, Steinbrueck Says |
| ♦ European Trade Union Says Wage Growth Is No Threat to Inflation |
| ♦ French November Trade Deficit Widens to EU4.8 Billion |
| ♦ December inflation surprising, rates may grow further |
[source: Bloomberg]
♥
| Survey | -0.7% |
| Actual | -2.6% |
| Prior | 0.6% |
| Revised | n/a |
Down a touch but not through the lows, could still be forming a bottom.
| Economic Outlook |
Personal Financial Outlook |
Federal Economic Policies |
Overall | ||
| Jan. | 2008 | 31.4 | 55.7 | 42.7 | 43.2 |
| Dec. | 2007 | 32.1 | 58.3 | 42.7 | 44.4 |
| Nov. | 2007 | 30.8 | 53.5 | 47.1 | 43.8 |
| Oct. | 2007 | 38.5 | 58.2 | 45.1 | 47.3 |
| Sept. | 2007 | 37.9 | 59.3 | 47.3 | 48.2 |
| Aug. | 2007 | 40.3 | 59.8 | 48.5 | 49.5 |
| July | 2007 | 39.5 | 58.3 | 46.8 | 48.2 |
| June | 2007 | 41.3 | 58.9 | 47.1 | 49.1 |
| May | 2007 | 39.1 | 57.6 | 47.3 | 48 |
| April | 2007 | 34.9 | 56.2 | 45.3 | 45.5 |
| March | 2007 | 41.5 | 61.1 | 49.8 | 50.8 |
| Feb. | 2007 | 46.4 | 60.8 | 51 | 52.7 |
| Survey | 43.0 |
| Actual | 43.2 |
| Prior | 44.4 |
| Revised | n/a |
Speaks for itself…
| Survey | $8.0B |
| Actual | $15.4B |
| Prior | $4.7B |
| Revised | $2.0B |
Explains November spending strength and probably borrowed from December due to how the holidays fell.
| Survey | -20 |
| Actual | -20 |
| Prior | -20 |
| Revised | n/a |
♥
This is the most hawkish Fed pres:
GLADWYNE, PENNSYLVANIA (Thomson Financial) – The head of the Philly Fed, Charles Plosser, today raised the possibility of a stagflation threat to the US economy.
“Although I am expecting slow economic growth for several quarters, we should not rely on slow growth to reduce inflation,” the Philadelphia Federal Reserve Bank president warned in a speech here. “Indeed, the 1970s should be a sufficient reminder that slow growth and falling inflation do not necessarily go hand in hand.” Plosser, who has a vote on the rate-setting Federal Open Market Committee this year, warned that he is getting increasingly worried about inflation. “Recent data suggest that inflation is becoming more broad-based,” he said, “And recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures.” Plosser also used today’s speech to draw a clear line between what the Fed should do to stabilize the economy and what it should do to stabilize financial markets.
He believes the Fed’s three rate cuts will take time to work through the economy and that in the meantime growth will slow.
“Since monetary policy’s effects on the economy occur with a lag, there is little monetary policy can do today to change economic activity in the first half of 2008.” In the meantime, “we will get some bad economic numbers from various sectors of the economy in the coming months,” he added.
But beyond the immediate short term, Plosser was more optimistic. He reckons the economy will “improve appreciably by the third and fourth quarters of 2008, and that is when any monetary policy action today will begin to have noticeable effects.” On the credit market front, the Fed’s new Term Auction Facility (TAF) program should help stabilize financial markets and provide liquidity when the interbank lending markets “are under stress and not functioning smoothly,” he added.
Plosser said early evidence suggests the first two 20 bln usd auctions were successful. Two more have been scheduled later this month.
The key point, he said, is that “the TAF did not change the stance of monetary policy. The Fed actually withdrew funds through open market operations as it injected term liquidity through the TAF.” Plosser was already known as one of the inflation “hawks” among the regional Fed bank presidents. His analysis confirms a preference for avoiding further rate cuts and the risk of further inflation as long as financial markets problems do not pose a danger to the rest of the economy.
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Food, fuel, and $/import prices present a triple negative supply shock.
Now gold pushing $900 as LIBOR falls, commercial paper issuance increases, and ‘market function risk’ subsides.
Downside risks to GDP are still not trivial.
Consumer income and desire to spend it may be problematic, and banks and other lenders may further tighten borrowing requirements.
And weaker overseas demand may cool US exports.
Yes, the Fed knows and fears demand MAY weaken, and forecasts lower inflation as a consequence.
But inflation is the clear and present danger, vs an economy that may weaken further
And mainstream economic theory says the cost of bringing down inflation once the inflation cat is out of the bag is far higher than
any near term loss of output incurred in keeping inflation low in the first place.
And the Fed addresses its dual mandate of low inflation and low unemployment with mainstream theory that concludes low inflation is a necessary condition for optimal employment and growth over the long term.
♥
Saudi production increased marginally for January, and all indications are net demand is holding up at the higher prices.
While this bodes for continued price hikes, markets may have likely sold off on the news, believing the higher production is a sign of a proactive supply increase that will drive prices down.
It’s the difference between getting your offer lifted vs your bid hit. Saudi (and Russian) offers are clearly getting lifted.
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“The Fed needs to stop printing money to buy US government securities.”
-Ron Paul
Ron Paul on the monetary system, as he calls for a return to the gold standard.
This is one of his numerous nonsensical, inapplicable rhetorical outbursts on the monetary system on national television.
The lack of media criticism, by a media that will criticize anything any candidate says, is telling.
Particularly the financial press. To that point, I just saw a CNBC report that ended with a concern regarding what will happen this week when the ECB ‘removes the liquidity they added before year end.’
This ‘financial knowledge crisis’ dwarfs the ‘liquidity crisis’.
Meanwhile, 3 month LIBOR continues to fall and now yields about 50 bp less than it did before the Dec 18 meeting. The Fed sees this as an ‘easing of financial conditions’ and as taking away that much of the need to lower the fed funds rate. This is the opposite of what happened a few months ago when 3 month LIBOR did not go down when they cut the Fed Funds rate, which gave the Fed cause to further lower Fed Funds.
With various mtg products pegged to spreads vs 3 and 6 month LIBOR this also brings those rates down.
♥
He is currently leaning towards cuts, but watching carefully for signs of improvements in market functioning and output, and aware of the risks of his inflation forecast being wrong.
Fed’s Lockhart: Economic Outlook
From Atlanta Fed President Dennis P. Lockhart: The Economy in 2008
Looking to 2008, I believe the pivotal questionâ€â€Âthe central uncertaintyâ€â€Âis the extent of current and future spillover from housing and financial markets to the general economy. The dynamics I’m watchingâ€â€Âstated simplisticallyâ€â€Âare the following. First, there’s the effect of dropping house prices on the consumer and in turn on retail sales and other personal expenditures. And second, I’m watching the effect of financial market distress on credit availability and, in turn, on business investment, general business activity, and employment.
Yes, we are all watching that carefully. So far so good, but consumer spending is always subject to change.
I’m watching credit availability, but seems the supply side of credit is never the issue. The price changes some, but quantity is always there at ‘market’ prices that provide desired returns on equity.
Business investment seems to hold up nicely as well, probably due to most investment being for cost cutting rather than expanding output. This makes investment a type of profit center.
Employment is still increasing, more in some fields than others.
And, of course, overall, from the mainstream’s view, demand is more than enough to be driving reasonably high inflation prints.
My base case outlook sees a weak first half of 2008â€â€Âbut one of modest growthâ€â€Âwith gradual improvement beginning in the year’s second half and continuing into 2009. This outcome assumes the housing situation doesn’t deteriorate more than expected
Meaning it’s expected to deteriorate some. I’m inclined to think it’s bottomed.
and financial markets stabilize.
They are assuming this and it already seems to have happened. FF/LIBOR is ‘under control.’
A sober assessment of risks must take account of the possibility of protracted financial market instability together with weakening housing prices, volatile and high energy prices, continued dollar depreciation, and elevated inflation measures following from the recent upticks we have seen.
That statement includes both deflationary and inflationary influences – not sure what to make of it.
But he will vote for 50 bp cut in January.
Maybe if the meeting were today, but much can change between now and then.
I’m troubled by the elevated level of inflation. Currently I expect that inflation will moderate in 2008 as projected declines in energy costs have their effect. But the recent upward rebound of oil pricesâ€â€Âand the reality that they are set in an unpredictable geopolitical contextâ€â€Âmay mean my outlook is too optimistic. Nonetheless, I’m basing my working forecast on the view that inflation pressures will abate.
Doesn’t say what the Fed might do, if anything, if inflation doesn’t abate.
To a large extent, my outlook for this year’s economic performance hinges on how financial markets deal with their problems.
He believes the performance of the real economy is a function of the health of financial markets.
I’m not sure that is turning out to be the case.
The coming weeks could be telling. (What does he know). Modern financial markets are an intricate global network of informed trust. Stabilization will proceed from clearing up the information deficit and restoring well-informed trust in counterparties and confidence in the system overall.
To restore market confidence, leading financial firms, I believe, must recognize and disclose losses based on unimpeachable valuation calculations,
Maybe they already have. The penalties for not being ‘honest’ are severe, and it’s hard to see how any public company would try to cover anything like that up.
restore capital and liquidity ratios, and urgently execute the strenuous task of updating risk assessments of scores of counterparties. The good news is that markets can return to orderly functioning and financial institutions can be rehabilitated quickly. With healthy disclosure, facing up to losses, recapitalization, and the resulting clarity, I believe there is hope for this outcome.
May already be happening.
So far only about $50 billion of announced bank losses. Q4 reports will add some to that, when the majority of the remaining losses will be disclosed.
In Aug 1998 $100 billion was lost all at once with no recovery prospects, back when that was a lot of money.
So far this crisis has been mild by historical standards.
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