Category Archives: Inflation

Mtg Purchase Apps, Chicago PMI, ADP, Euro Comment

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This is still going nowhere, and, most recently, trending lower, and obviously not responding positively to the ultra low rates of the last several years:

MBA Mortgage Applications
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Highlights
After surging in the prior week following the FOMC’s decision against a rate hike, mortgage activity fell back in the September 25 week. The purchase index fell 6 percent in the week but still remains up strongly year-on-year, at plus 20 percent. The refinance index fell 8.0 percent in the week. Rates continued to move lower in the week with the average 30-year mortgage for conforming loans ($417,000 or less) down 1 basis point to an average 4.08 percent.

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Yet another negative shock.

And note that it all went bad after the collapse in oil prices:

Chicago PMI
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This is their forecast for Friday’s number, and the downward trend since November continues for both ADP and the BLS payroll series:

ADP Employment Report
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Highlights
ADP’s call for Friday’s September employment report is on the high side but only slightly, at 200,000 for private payroll growth vs Econoday expectations for 190,000. ADP’s call for August, an initial 190,000 now revised to 186,000, proved much stronger than the initial government total of 140,000. Today’s result won’t likely shake up the outlook for Friday’s employment report where another month of moderate improvement is expected.
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From ADP:

Goods-producing employment rose by 12,000 jobs in September, off from 15,000 the previous month. The construction industry added 35,000 jobs in September, almost double the 18,000 gained in August. Meanwhile, manufacturing dropped into negative territory losing 15,000 jobs in September, the worst showing since December 2010.

Revealing CNBC headline, as ultimately ‘purchasing power parity’ does hold. That is, high inflation means the value of the currency is falling, and longer term currencies that experience high inflation depreciate vs currencies with low inflation. That is, high inflation policy is not the stuff of strong currencies, regardless of interest rates.

So what the headline is implying, at best, is that the ECB policy response will be to lower rates/do more QE to promote inflation, and thereby weaken the currency. It is also probably implying that a lower rate and QE per se make
the euro weaker.

My narrative is a bit different. I see the deflation as further supporting the euro area’s record high and growing trade surplus, a force which fundamentally drives the euro higher, as non residents continuously sell their currencies to buy euro to pay for imports from the euro area. This ultimately drives the euro higher, as happened with the yen for the 2 decades it ran large and persistent trade surpluses, along with a zero rate policy, and far more QE than the ECB or the Fed has done.
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Cartoon, US International Trade, India, Redbook Retail Sales, China Comments, Consumer Confidence

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As previously discussed, trade deficit increasing:

United States : International trade in goods

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Definition
The Census Bureau is now publishing an advance report on U.S. international trade in goods. The BEA will incorporate these data into its estimates of exports and imports for the advance GDP estimates. This is expected to reduce the size of revisions to GDP growth in the second estimates.

Just maybe the higher rates have been supporting the higher inflation? And supporting growth?

India cuts policy rate by bigger-than-expected 50 bps

Sept 29 (Reuters) — The Reserve Bank of India cut its policy interest rate to a 4-1/2 year low of 6.75 percent on Tuesday, in a bigger-than-expected move that, with inflation running at record lows, could help an economy in danger of slowing down.

A Reuters poll last week showed only one out of 51 economists had expected a 50 basis points cut in the repo rate , while 45 had expected a 25 bps cut.

The RBI had previously cut interest rates three times this year, lowering it by 25 basis points each time.

The RBI justified the bigger reduction, saying consumer inflation was likely be running at 5.8 percent, below the 6 percent target for January, thanks partly to the government’s efforts to contain food prices.

Redbook retail sales dismal and dragging along the lows:
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Barclays analysts visited China and came back saying it was one of the most bearish trips they’ve ever taken

Good number here but not confirmed by sales reports, at least not yet:

Consumer Confidence
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Personal Income, Pending Home Sales, Dallas Fed, China

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Been almost a year, and still looks to me like the oil price collapse was an unambiguous negative for the US and global economies. And for the same reasons. For every buyer of oil who benefited, a seller of oil lost exactly that much. That leaves the drop in capex, as well as the continued decrease in net government spending, which has yet to be ‘replaced’ by alternative spending. Apart from inventory building…

Personal Income and Outlays
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Highlights
The consumer is making money and spending money at the same time that inflation is very quiet. Personal income rose 0.3 percent in August which is on the low side of expectations but July is now revised 1 tenth higher to a very solid 0.5 percent. And the wages & salaries component is also very solid, at plus 0.5 and 0.6 percent the last two months. Turning to spending, the gain is 0.4 percent which is 1 tenth above consensus with July revised 1 tenth higher to 0.4 percent also.

Inflation readings came in as expected, at no change for the PCE price index and up only 0.1 percent for the core. Year-on-year, overall prices are up only 0.3 percent, which is unchanged from July, with the core ticking 1 tenth higher to 1.3 percent which is still well below the Fed’s 2 percent target.

The savings rate is solid at 4.6 percent and has been edging lower from 4.9 percent in April. This may be a sign of confidence among consumers who are now willing to spend while saving less. Other details include a rise for rents but a dip for proprietor income.

This report is very healthy but how it plays for the FOMC is uncertain. Income and spending would justify a rate hike but not the inflation readings.

Note the ‘peaks’ back around November when oil prices collapsed:
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This is before inflation adjustment:
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And this is per capita:
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And on the consumption side:
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Slipping back as previously suggested:

Pending Home Sales Index
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Highlights
The existing home sales market looks to remain flat in the coming months based on the pending home sales index which fell a disappointing 1.4 percent in August. Three of four regions posted declines led by the Northeast at 5.6 percent with the South, which is by far the biggest housing region, down 2.2 percent. Only the West posted a gain, at 1.8 percent.

Existing home sales are being limited by lack of homes on the market which itself, however, reflects softness in home prices and general demand. But there is strength in housing and that’s in new home sales and construction. Watch for Case-Shiller home price data on tomorrow’s calendar.
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Less worse, but remains negative:

Dallas Fed Mfg Survey
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Highlights
The Dallas Fed rounds out a full run of negative indications on the September factory sector with the general activity index remaining in deeply negative ground at minus 9.5. New orders are at minus 4.6 which, however, is an 8 point improvement from August. Production is actually in positive ground at 0.9.

Other readings include a decline in the workweek and the fifth straight contraction for employment. Price readings show little change for inputs but, like other reports, contraction for finished prices.

The Texas economy has been depressed all year by the energy sector while the nation’s factory sector continues getting hurt by weak foreign demand and strength in the dollar.

Looks a lot like a recession, no?
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China’s industrial restructuring cuts power use, freight volume

Sept 26 (Xinhua) — Zhang Xiaoqiang, executive deputy director of China Center for International Economic Exchanges. Zhang admitted that there were some doubts about China’s economic growth rate in the first half (H1), as two key indicators of economic growth, namely power consumption and freight volume, dropped remarkably. The discrepancy between economic growth and the two key indicators’s growth in the first six months did not fit with previous patterns, but industrial restructuring is a new factor, and should be taken into account when analyzing the new situation, he said.

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Redbook Retail Sales, Richmond Fed, Architectural Index, Mtg Purchase Index, Chemical Activity Barometer, China, Unemployment Duration Chart

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No sign of improvement:
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Bad:

Richmond Fed Manufacturing Index
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Highlights
Early indications on the September factory sector are negative and now include a minus 5 headline from the Richmond Fed. New orders, unfortunately, are even more deeply in the negative column at minus 12 which points to even weaker activity in the months ahead. Shipments are already in the negative column for a second straight month at minus 3. And manufacturers in the region have already worked down their backlogs to keep up production with backlogs in deep contraction at minus 24 and minus 15 the last two months. Employment is in the plus column but just barely at 3 and it won’t stay there for long if orders and production continue to weaken. Price readings are moderating further to round out an unpleasant picture of unexpected slowing. Last week’s Philly Fed report and especially the Empire State report also pointed to weakness this month. Watch for the manufacturing PMI on tomorrow’s calendar which will give a national look at the September factory sector.

Down as well:
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Moved up some for the week but as per the chart still drifting a bit lower:
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Looks like it’s maybe heading south:

September 2015 Chemical Activity Barometer Says Economy Will Continue to Slow

from the American Chemistry Council

The Chemical Activity Barometer (CAB), dropped 0.4 percent in September, following a revised 0.2 percent decline in August. The pattern shows a marked deceleration, even reversal, over second quarter activity. It is unlikely that growth will pick up through early 2016.
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‘Markit’ reports like this PMI are always suspect but narrative is interesting:

PMI Manufacturing Index Flash
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Highlights
Growth in Markit’s manufacturing sample remains as slow as it’s been since October 2013, stuck at 53.0 for the September flash. The reading is the same as the final August result and little changed from August’s flash of 52.9. It’s also below the recovery’s 54.3 average.

Growth in new orders is the slowest since January with businesses citing caution among customers and subdued business conditions. Export orders, hurt by weak foreign demand and strength in the dollar, have been very weak this year but did improve slightly in the latest report. Slow orders are leading the sample to slow hiring and trim inventories. The latest gain for employment is only marginal and the weakest since July last year.

Prices are especially weak in the report, showing the first drop in four months for input costs and the first drop in finished goods since August 2012. Fed policy makers, concerned by low inflation, are likely to take special notice.

The 53.0 headline points to more strength than many of the details of the report. Together with the September run so far of regional surveys, the manufacturing sector does not look like it’s having much of a month. Watch for durable goods orders tomorrow for definitive data on August followed by the Kansas City manufacturing update for September.

Fiscal does work if they ‘do what it takes’. Maybe the policies of the western educated kids has been over ruled by their elders?

Production declines further as total new orders fall at faster pace

Sept 23 (Markit) — Flash China General Manufacturing PMI at 47.0 in September (47.3 in August). Manufacturing Output Index at 45.7 in September (46.4 in August). The decline indicates the nation’s manufacturing industry has reached a crucial stage in the structural transformation process. Overall, the fundamentals are good. The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices. Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front.

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The Fed’s Sort of Right Move for the Wrong Reasons

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The Fed did not raise rates because the FOMC concluded this was not the time to remove accommodation.

I agree this is not the time to remove accommodation. But I do not agree lower rates and QE are accommodative.

Changing rates shifts income between borrowers and savers, and with the federal debt just over 100% of GDP, the state is a large net payer of interest to the economy. So lowering rates reduces interest income paid by the state to the economy. Therefore that aspect of lowering rates imparts a contractionary bias and, yes, raising rates would impart an expansionary bias. In other words, the Fed has the ‘easing’ and ‘tightening’ thing backwards, and if it wants to impart an expansionary and inflationary bias a rate increase would be in order.

Paying more interest, however, does have distributional consequences, as the additional income paid to the economy goes to those holding government securities. Alternatively, a fiscal adjustment (tax cut and spending increase) directs additional spending power to other constituencies. So the remedies for a weak, deflationary outlook come down to some combination of rate hikes, tax cuts, or spending increases.

And given those choices, I think most of us would vote to leave rates at 0 and either cut taxes or increase public spending.

Additionally, the rate selected by the Fed translates into the term structure of prices presented to the economy, as forward pricing is necessarily a function of Fed rate policy. So in that sense, the term structure of rates put in place by Fed policy *is* the rate of inflation presented to the economy at any point in time.

Let me also add that setting a range for fed funds rather than a single interest rate gives the appearance of ignorance. A combination of paying interest on reserves and a few (reverse) repurchase agreements to pay interest on any residual funds not subject to interest on reserves would both do the trick and improve the optics.

And as for QE, the Fed buying secs is functionally identical to the tsy never having issued them, and instead letting tsy payments remain as reserve balances. That is, QE shifts duration but not quantity, and there is little to no evidence that shifting duration has a material effect on aggregate demand, inflation, or employment.

So while QE is just a placebo, like any placebo, it does impact the decisions of portfolio managers, corporations, central bankers, etc. who believe otherwise.

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Mtg Purchase Apps, CPI, Home Builder’s Index, Euro Area Balance of Trade, CEO Outlook

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Looking like it’s turned south:

MBA Mortgage Applications
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Fed continues to fail to sustain enough aggregate demand to meet it’s 2% inflation target:

Consumer Price Index
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Highlights
Consumer prices came in soft in August and will not be turning up the heat on the doves at the FOMC. Pressured by gasoline, the CPI fell 0.1 percent in August with the year-on-year rate up only 0.2 percent. The core, which excludes energy and food, rose only 0.1 percent with the year-on-year rate steady at plus 1.8 percent and still under the Fed’s 2 percent goal.

And details are soft. Energy prices fell 2.0 percent in the month including a 4.1 percent decline for gasoline. Airfares were down sharply for a second month, 3.1 percent lower. Owners equivalent rent, which had been hot, rose only 0.2 percent in the month.

Showing some pressure is apparel, up 0.3 percent for a second straight month in what hints at back-to-school price traction. Otherwise, components are flat to steady such as food at plus 0.2 percent or medical care at no change.

The 1.8 percent year-on-year core rate does catch the eye but with commodity prices soft and foreign economies weak, the outlook for price acceleration remains elusive.
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Up a bit! The new home builders are still optimistic:
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New record high- very euro friendly…
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CEOs’ Outlook for U.S. Economy Dims Ahead of Fed Rate Decision

(Bloomberg) — The Business Roundtable CEO Economic Outlook Index fell to 74.1 in a quarterly survey, down from 81.3. The survey was completed between Aug. 5-26. The CEOs projected U.S. economic growth of 2.4 percent this year, down 0.1 percentage point from the previous forecast. The share of CEOs expecting a decrease in their companies’ U.S. capital spending in the next six months rose to 20 percent in the latest survey from 13 percent in the previous one. Thirty-two percent said their firms’ U.S. employment will decline, compared with 26 percent in the prior survey.

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Producer Price Index, Consumer sentiment, Italy IP

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United States : PPI-FD
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Down again, and not wrong to say it peaked shortly after oil prices collapsed. See chart below:

United States : Consumer Sentiment
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Highlights
Just when you think you’ve gotten through the week, consumer sentiment dives and, perhaps, tips the balance against a rate hike. The mid-month September flash for the consumer sentiment index is down more than 6 points to 85.7 which is below Econoday’s low-end forecast. The index is now at its lowest point since September last year.

Weakness is centered in the expectations component which is down more than 7 points to 76.4, also the lowest reading since last September. Weakness in this component points to a downgrade for the outlook on jobs and income. The current conditions component also fell, down nearly 5 points to 100.3 for its weakest reading since October. Weakness here points to weakness for September consumer spending. Inflation readings are quiet but did tick 1 tenth higher for both the 1-year outlook, at 2.9 percent, and the 5-year, at 2.8 percent.

New York Fed President William Dudley himself has said he is focused on this report as an early indication of how U.S. consumers are responding to Chinese-based market turbulence. These results offer a rallying cry for the doves at next week’s FOMC meeting.
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Low euro helping Italy:

Italy : Industrial Production
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Highlights
The goods producing sector comfortably exceeded expectations in July. A 1.1 percent monthly increase in output ex-construction followed a minimally smaller revised 1.0 percent drop in June for annual workday adjusted growth of 2.7 percent, up from minus 0.3 percent at the end of the second quarter. The monthly profile remains volatile but the trend at least appears to be mildly positive.

July’s monthly bounce, the sharpest since June 2014, was reassuringly broad-based. The erratic energy subsector (7.1 percent) led the way but there were tidy gains too in consumer goods (1.0 percent), capital goods (0.3 percent) and intermediates (0.6 percent).

July’s data put overall industrial production (ex-construction) 0.7 percent above its average level in the second quarter when it climbed 0.5 percent versus the January-March period. Moreover, while August’s manufacturing PMI (53.8) saw its lowest level since April, it still indicated further healthy increases in both output and, importantly, new orders. Accordingly it looks as if goods production should provide useful support to third quarter GDP growth. That said, the sector still has a long way to go to get anywhere near its pre-Great Recession peak in April 2008. Compared with then, output is still down some 24 percent.

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JOLTS, Redbook retail sales, Mexican inflation

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More openings, same quits, fewer hires.
Whatever all that means…

United States : JOLTS
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Highlights
Job openings were up sharply in July, to 5.753 million from an upwardly revised 5.323 million in June. The job openings rate rose to 3.9 percent in July following three prior months at 3.6 percent. Professional & business services, which is considered to be a leading component for total employment, led the gains with a 122,000 increase followed by accommodation & food services at 82,000 and retail at 77,000. Despite the rise in openings, the number of hires edged lower to 4.983 million from June’s 5.182 million. The quits rate, which is watched as an indication of worker confidence, was unchanged for a fourth month at 1.9 percent. The rise in openings could definitely be cited by the hawks at next week’s FOMC as a further indication of tightness in the labor market.
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So maybe it wasn’t the central bank that created all that inflation way back when?
;)
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Fed comments and charts, Employment from outside the labor force, Public sector employment, Small Business Index, Labor market conditions index

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The reason the Fed is talking hike is because they believe the continued modest growth is reducing the excess capacity in the economy, and they are concerned about hitting the wall of full employment with their 0 rate policy and multi $ trillion portfolio, both of which they believe to be highly accommodative.

That is, they believe the car is creeping along in the fog towards what they believe is a wall with their foot on what they believe is the accelerator, and they want to lighten the pressure on the presumed accelerator before they hit the presumed wall.

However, they also know the growth in employment is only very slightly staying ahead of population growth, and, likewise, most all of the drop in the rate of unemployment is due a drop in the labor force participation rate, and not to employment growth. And they also know most of the newly employed were not considered in the labor force when they were hired, raising questions about what the labor force participation rate is actually measuring. And further evidence of a continued high level of slack are the continuing low levels of wage increases, as well as low reported inflation readings in general, which remain well below Fed targets 6 years into their 0 rate and QE initiatives.

And then there is the counterfactual, with their models telling them the economy would have been a whole lot worse without their accommodative policies. Believing that suggests that any backing off from current policy risks a substantial setback.

My conclusion- no telling what they might do. These are human beings navigating in a fog with an inapplicable map, and they think the brake pedal (lowering rates) is the gas pedal.

San Francisco Fed’s Williams Sees Rate Increase ‘This Year,’ If Risks Dissipate

By Jon Hilsenrath and Michael S. Derby

July 1 (WSJ) — “All of the data that we have had up until now has been, I think, encouraging. It …has been about as good, or better, than I was expecting, in terms of the U.S. economy,” San Fran Fed president John Williams said. “But there are some pretty significant—and I would say have now grown larger—headwinds that have developed.” The change in financial conditions since the July Fed meeting, in the form of falling stock prices and a rising dollar, “have been pretty big,” he said. “It’s not the case that nothing has changed since our last [policy] meeting.”

Sure looks to me like most everything peaked when oil prices collapsed:
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So, interesting how the jobs are coming from ‘outside the labor force’ when it’s been the presumed and unique ‘shrinking labor force’ that’s resulted in most of the decline in the unemployment rates:
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Employment growth has been nearly matched by population growth, so, again, it’s only via the ‘shrinking labor force’ argument that there’s been ‘improvement’:
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President Obama remains the all time Tea Party hero when it comes to reducing the size of govt:
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From RHB- you can see which one leads:
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NFIB Small Business Optimism Index
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Highlights
A solid gain in job openings and a solid bounce back for earnings trends helped lift the small business optimism 4 tenths to 95.9 vs Econoday expectations for 96.0. The index shows no immediate effect from troubles in China and global volatility. Hiring, capital spending and inventory investment plans firmed slightly, collectively adding 2 points. But the two outlook components collectively declined 4 points in readings that do not point to a big second-half finish for the economy.
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Labor Market Conditions Index
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Highlights
The August employment report proved mixed but not the labor market conditions index which rose 3 tenths to 2.1. This is a soft level compared to the mid-single digit trend of 2013 and 2014 but is still the highest reading of the year, since December. Adding to the strength is a 7-tenths upward revision to July. Payroll growth in August was weak but not the unemployment rate which fell 2 tenths to a recovery best of 5.1 percent. This index is based on a broad set of 19 components and could be cited by the hawks as evidence of labor market improvement at next week’s FOMC.

This hasn’t updated yet but you can see today’s print of 2.1 doesn’t impress:
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Credit check, Jobs comment, ECRI update, Saudi statement

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Commercial paper nudges down a bit, bank loans up a bit, so not much happening on balance:

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BLS Jobs Situation Disappointing in August 2015. Growth Rate of Employment Continues to Slow.

By Steven Hansen

The BLS jobs report headlines from the establishment survey was disappointing. The unadjusted data shows growth is at the lowest levels since the Great Recession. Hey, if the kids were not going back to school (teachers being hired) – this report would have been a disaster.

Rail Week Ending 29 August 2015: Shows a Decline for the Month of August

Week 34 of 2015 shows same week total rail traffic (from same week one year ago) declined according to the Association of American Railroads (AAR) traffic data. Intermodal traffic expanded year-over-year, which accounts for approximately half of movements. but weekly railcar counts continued in contraction. Total rail traffic for the month of August declined 0.8 %.

28 August 2015: ECRI’s WLI Growth Index Slides Deeper Into Contraction

ECRI’s WLI Growth Index which forecasts economic growth six months forward – slid further into negative territory. This index had spent 28 weeks in negative territory then 15 weeks in positive territory – and now is in its third week in negative territory. ECRI also released their inflation index this week.

Saudi confirms price cutting strategy:

U.S. Oil-Production Decline to Accelerate: Saudi Aramco Chairman

By Brian Wingfield

(Bloomberg) — U.S. crude production will decline before global oil markets recover, Saudi Aramco Chairman Khalid Al-Falih said.

“We expect the decline from the U.S. to accelerate as we go forward” because many rigs have already been demobilized, Al-Falih, who is also his nation’s health minister, said today at the U.S.-Saudi Investment Forum in Washington. “A re-balancing is taking place as we speak.”

Officials from Saudi Arabia, the world’s largest oil exporter, are visiting the U.S. as King Salman meets with President Barack Obama at the White House to discuss issues ranging from regional security to energy. Global oil prices have declined by more than 50 percent within the last year as world supply has exceeded demand, triggering thousands of job losses in the energy sector.

The Organization of the Petroleum Exporting Countries, of which Saudi Arabia is the largest producer, said in a report Aug. 31 it’s willing to talk to other nations about achieving a “fair” price in global markets.

The U.S. Energy Information Administration, the Energy Department’s statistical arm, projects domestic production to decline to 8.8 million barrels a day by next August before recovering later in 2016. U.S. production in June was about 9.3 million barrels a day, according to the EIA.

Al-Falih said he’s concerned that low prices may undercut investment in the oil industry, leading to future shortages. It’s “inevitable that oil markets will recover,” he said. “We’ve already started seeing pickup in demand globally,” Al-Falih said.

Saudi Arabia is better positioned to deal with the downturn in prices because it has created budgetary buffers and accumulated international reserves to shield it from an oil-price decline, Finance Minister Ibrahim Al-Assaf said at the investment forum.

“Our strategy has proven to be the right one,” he said.

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