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Money Supply Says No-Go to Inflation

June 1st, 2010 Michael McDonough Comments off

A precipitous decline in money supply could be choking the U.S.’s economic recovery, while supporting deflationary fears.  While the Fed no longer tracks M3, one of the broadest measures of the U.S. money supply, professional forecasters estimate the index has fallen 9.6% on an annualized basis from February through April; matching what was last seen during the Great Depression.  Looking at another broad measure of U.S. money supply, referred to as the St. Louis Fed’s MZM, which measures assets redeemable at par on demand, money supply has fallen 1.5% since the end of last year.  M2, a more popular measure of money supply, has remained positive, but diminished to a growth rate of 1.6% y/y from a peak of 10.1% in 2009. 

Professor Tim Congdon from International Monetary Research has called the trend in the M3 data ‘frightening’.  He also said, “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly.”  To put it simply, as long as banks remain hesitant or unable to lend inflation should remain tame in an environment of stunted economic growth.

Source: Fed

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Near-term Inflation Expectations Fall to Zero

May 24th, 2010 Michael McDonough Comments off

One year inflation expectations, as tracked by the breakeven rate for U.S. Treasury Inflated Protected Securities (TIPS), have fallen to almost 0%, while the more often quoted two year rate plummeted to 0.7% (see chart).  While longer-term inflation expectations have diminished, albeit at a much smaller magnitude, the spread between 2Y and 5Y rates has widened to 90bps from just 20bps a month ago.  Diminishing short-term inflation expectations are a product of traders’ flight to quality leading to among other things falling commodity prices.   While short-term breakeven rates will likely remain under pressure as long as developments in Europe control the market; a mounting economic recovery in the U.S. should make it very difficult for short-term breakevens to remain this low indefinitely. 

Source: Bloomberg

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Pricing Pressure Building within the Depths of the PPI

May 18th, 2010 Michael McDonough Comments off

Rising producer prices eventually translate into higher consumer prices as businesses are forced to pass on a portion if not all of the price increments to their customers.  So what you might be asking, this morning’s PPI indicated that producer prices fell -0.1% on a monthly basis. While this is true the PPI is broken out into three sub-components crude, intermediate, and finished goods—the headline PPI only tracks finished goods.  As higher producer prices eventually pass-through to consumer prices; higher crude material costs ultimately impact intermediate good prices, while rising intermediate good prices in time increase the headline PPI.  As of April crude material rose roughly 30% y/y, while intermediate good prices climbed 9%, the highest reading since 2008 (See chart).   Core raw material prices rose 49.7% y/y–its largest yearly gain on record. While this isn’t an immediate recipe for higher consumer prices; it is definitely indicative that pressure is building in the pipeline. 

 

Source: Bloomberg

In terms of monetary policy, short-term inflation expectations as measured by the US TIPS breakeven curve have diminished significantly on waning commodity prices and a stronger dollar stemming from the ongoing crisis in Europe and concerns over Chinese tightening.  This will likely keep the Fed on hold through-out the remainder of the year as unemployment remains high and growth below what would be anticipated following a major recession.  Looking further ahead, inflation pressure is gaining some momentum and should become more of a factor in monetary policy decisions as the year progresses. 

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Short-Term Inflation Expectations Drop Like a Rock

May 14th, 2010 Michael McDonough Comments off

Rampant risk aversion, receding energy prices, and a USD rally have led to significant steepening in the short-end of the U.S. breakeven curve, with the potential for more to come ahead of next week’s CPI release (see chart).  So long as risks in Europe continue to escalate and CPI growth comes in at or below consensus on 5/19 the market could see further steepening in the breakeven curve as near-term inflation expectations continue to moderate.  The bottom line here is that if this trend continues inflation hawks may once again take a back seat, while deflation rhetoric creeps its way back into the market. 

 Breakeven Curve:

Source: Bloomberg

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IP, CPI, & the NY Fed Survey

January 15th, 2010 Michael McDonough Comments off

December’s Industrial Production rose +0.6%, inline with a Bloomberg consensus forecast of +0.6%. November’s release was revised to +0.8% to +0.6%.  December’s reading was almost entirely due to a 5.9% jump in utilities stemming from extremely cold weather around the country. The index’s manufacturing component actually fell -0.1% during the month, while mining output rose modestly by 0.2%.

December’s Consumer Price Index gained +0.1%, after rising +0.4% in November. On a year over year basis, CPI is up +2.7%. Core CPI rose by +0.1% during the month following no change in November. On a year over year basis Core CPI is up +1.8%.  This data continues to indicate that inflation will not be a concern over the near-term,thereby reducing pressure on the fed to remove accommodative monetary policy.

The Empire State Manufacturing Survey jumped to 15.92 in January, compared to a revised 4.50 in December (originally reported at 2.55). It is important to note that this month’s data includes annual revisions. Looking the components: New orders rose to 20.48 in January from 2.77 in December; Prices paid climbed to 32.00 from 19.74; the 6-month outlook finished at 56.00 from 52.63; and finally the employment index moved into positive territory with a reading of 4.00 in January from -5.26 in December.  This result was well above expectations, and it will be interesting to see of the Philly Fed Survey demonstrates a similar surprise on January 21st.

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Housing Pains & Inflation Creep

November 18th, 2009 Michael McDonough Comments off

October’s Housing Starts disappointed the market finishing at an annual rate of 529,000 (-10.6%), while September’s release was revised up to 592K from 590K. Permit’s in October declined -4.0%, to 552K. Single-family starts fell -6.8%, while multi-family homes plummeted by -34.6%. The Bloomberg consensus forecast was for starts at 600K, with forecasts ranging from 570K to 630K.  This release was indicative of a housing market that is struggling rather than in the midst of a strong recovery.

Additionally, the level of mortgage applications continued to decline,–purchase applications hit a 12 year low–likely due what would have been the expiration of the first time home buyer tax credit.  Meaning, those looking to take advantage of the tax credit already have; it will take some time for a new group of buyers to enter the market on the back of the the tax credit’s extension.

October Consumer Price Index rose +0.3% after rising +0.2% in September. This compares to a Bloomberg consensus forecast of +0.2%. The core CPI increased by +0.2% during the month after rising +0.2% a month prior.  The main culprit behind the month’s larger than anticipated jump was a 1.7% increment in vehicle prices, which if factored out would have led to a flat core CPI number.  As expected, energy prices climbed 1.5%, adding momentum to the headline release.  Surprisingly, food prices were relatively stable during the month rising only +0.1%.  Despite adding some ammunition for inflation hawks, I do not believe this report indicates any significant inflation concerns over the near-term, but of course should be monitored as an eventual uptick inflation is inevitable.

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Housing Starts Disappoint & PPI Turns Negative

October 20th, 2009 Michael McDonough Comments off

September Housing Starts finished the month at an annual rate of 590K (+0.5%). At the same time, August Housing Starts were revised down to 587K versus its original release of 598K. Housing permits declined by -1.2%, to 573K. Unlike starts, August permits experienced a modest upward revision to 580K from 579K. Single-family starts rose +3.9%, while multi-family units dropped -15.2%.  September’s gains were essentially a wash when you factor in August’s revisions.  On a regional basis, in the South starts rose +7.1%-a record gain– while they fell -8.8% in the West, -5.5% in the Northeast, and -1.8% in the Midwest.

September Producer Price Index (PPI) fell -0.6%, after rising +1.7% in August. The Core PPI, which excludes food and energy, fell -0.1% in September following +0.2% increment in August.  The decline in the headline number was not unexpected given a pullback in energy prices for the month.  For the moment, the risk of deflation continues to outweigh the risk for immediate inflation.  However, the likely path is that core prices will remain stagnant until the economic recovery gains more traction and inflationary pressures once again take hold.

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Morning Recap–CPI Shows Modest Gains, Claims Down, & Empire State Manuf. Survey Reaches 5Y High

October 15th, 2009 Michael McDonough Comments off

September’s CPI rose +0.2%, compared to a +0.4% increment a month prior. Core CPI increased +0.2%.  This was generally in-line with the Bloomberg consensus forecast.  Food prices fell -0.1% during the month while energy prices rose +0.6%.  These modest gains continue to indicate that some deflationary risk remains on the table, and inflation should not be a big factor in the Fed’s decisions over the near-term as the unemployment rate likely moves north of 10.0%.

Initial jobless claims fell 10K to 514K.  Continued improvements in initial claims should lead to a slower rate of decline for the payrolls.  Nevertheless, claims are still depressed and things will continue getting worse before they get better in the labor market.

The Empire State Manufacturing Survey rose to 34.57 in October, compared to 18.88 a month prior.  In October, new orders increased to +30.82, versus +19.84 a month prior, while prices paid fell to +19.48 from +20.24. The 6-month outlook index finished at +55.69 from +52.29.  Surprisingly, this is the index’s highest reading in over five years.  This is an extremely positive report for manufacturing in the NY Fed’s district.  Additionally, a large jump in the new orders index should help support next month’s release.

The Philadelphia Fed’s general business activity index fell to 11.5 in September, compared to 14.1 a month prior.  This was slightly below the consensus forecast of 12.0  The prices paid index rose to 21.3 from 14.9, while the new orders index increased to 6.2 from 3.3. The employment index moved to -6.8 from -14.3.  Despite coming in slightly below expectations the number remains positive, and an increment in the new orders index should help maintain positive performance at least through next month.

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Personal Income up 0.2%, Consumption Rises 1.3%

October 1st, 2009 Michael McDonough Comments off

Personal income rose 0.2% in August, after rising 0.2% in July.  Personal consumption expenditures climbed 1.3%, versus a 0.3% increment in July.  Most of August’s strength was due to increased durable goods purchases (+5.3) stemming from the residual effect from the US government’s Cash for Clunkers program.  Nevertheless, the consumption of services reached an 11 month high, but with a modest gain of only 0.4%.  August’s PCE price index remained relatively constrained with the headline PCE rising 0.3%, and the core PCE showing a 0.1% gain, both when annualized still well within the Fed’s comfort zone.

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Case Shiller HPI an Improving Trend

September 29th, 2009 Michael McDonough Comments off

On a monthly basis both the 10 and 20 city Case Shiller HPI came in higher in July at +1.65% and 1.60%, respectively.  However, on a yearly basis the 10 city index is still down 12.8%, while the 20 city index is down 13.30%. On a monthly basis only three cities experienced declines (Detroit, Las Vegas, & Seattle).  The strongest performers were Minneapolis (+3.1%), San Francisco (+2.9%), and Chicago (+2.1). Overall, the data was slightly better than market expectations, but the impact should only be marginal.

YoY MoM
NV-Las Vegas -31.4% -1.9%
AZ-Phoenix -28.5% 1.2%
MI-Detroit -24.7% -0.4%
FL-Miami -21.2% 1.0%
FL-Tampa -18.5% 0.5%
CA-San Francisco -17.9% 2.9%
MN-Minneapolis -17.4% 3.1%
WA-Seattle -15.4% -0.3%
CA-Los Angeles -14.9% 1.2%
IL-Chicago -14.2% 2.1%
OR-Portland -13.9% 0.5%
Composite-20 -13.3% 1.2%
Composite-10 -12.8% 1.3%
CA-San Diego -12.3% 2.0%
GA-Atlanta -11.8% 1.6%
NY-New York -10.4% 0.9%
DC-Washington -9.8% 1.6%
NC-Charlotte -9.0% 0.1%
MA-Boston -5.0% 0.6%
CO-Denver -3.0% 0.6%
TX-Dallas -1.6% 0.6%
OH-Cleveland -1.4% 0.8%
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