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Posts Tagged ‘FOMC’

Economists Warn Fed Could Hike Discount Rate Before Next Meeting

March 18th, 2010 Michael McDonough Comments off

Economists and investors alike are speculating that the Fed could announce a second hike to the discount rate, after increasing its spread over the fed funds target rate to 50bps–compared to its historical level of 100bps.    Some investors, despite Fed comments to the contrary, perceived the move as prelude to more significant tightening, be it through a reversal of quantitative easing and/or eventual rate hikes.  Further adjustments could have a similar psychological effect on investors, especially given expectations that the Fed could remove or alter the phrase ‘extended period’ from its statement as early as April’s meeting–a clear sign tightening is quickly approaching.

Fed Funds Target (white) Vs. Discount Rate (orange):

According to the latest Federal Funds Implied Probability data, calculated by Bloomberg, the vast majority of investors anticipate no changes to the Fed’s target in April, but looking further out that number diminishes to  66.5% in June.  In an environment of high unemployment, subdued inflation, and what could be tepid growth, I expect August would be the earliest we could expect a Fed rate hike.  Nevertheless, news of another discount rate hike will almost certainly reverberate through the markets, spooking some skittish investors.

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No Surprise, Fed Raises Discount Rate

February 18th, 2010 Michael McDonough Comments off

Chairman Bernanke recently indicated that the Fed was considering an increase in the discount rate, which tends to mean it is going to happen and soon.  It happened, the Fed this evening announced an increase in the discount rate to 0.75% from 0.50%, moving it closer to its pre-crisis spread to the Fed Funds Rate of 100bps.  Undoubtedly, this is a prelude to additional less accommodative monetary policies, which will likely begin with the end of quantitative easing at the end of this quarter, followed the by eventual sale of assets from the Fed balance sheet, and eventual rate hikes for both the target rate and interest on excess reserves.  I do not anticipate we will see a hike in the benchmark rate until at least November of this year, given what I anticipate will be tepid growth and high unemployment.

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Bullard Comments on Monetary Policy, Indicating a Fed Rate Hike Not Likely Over the Short-Run

February 8th, 2010 Michael McDonough Comments off

According to CNBC, James Bullard,President Federal Reserve Bank of St. Louis, indicated in an interview today that *he does not believe the Fed will begin hiking interest rates, until after they start selling off some assets. He anticipates that the Fed could begin selling assets during the second half of this year. Bullard had this to say on asset sales, “Maybe you get in the second half of 2010 or something like that, if things are going pretty well, maybe then you’d sell a little bit at that point and you’d try to see how the market reacts.”

In investors’ minds Bullard’s comments will likely reduce the probability of a near-term rate hike, and also help define the parameters for future hikes.  I presently do not anticipate that we will see a Fed rate hike until November 2010 at the absolute earliest.

*I heard this reported on CNBC, but have not yet found the quote to support this statement.

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Hoenig Dissent Only Surprise in FOMC’s Statement

January 27th, 2010 Michael McDonough Comments off

As anticipated the FOMC reaffirmed that it “will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions…are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  But, a hawkish sign came in the form of a dissenting vote from Kansas City Fed President Thomas Hoenig–a known inflation hawk.  This could be an indicator that the Fed is testing the waters for eventual tightening, which are likely still a ways off.  I do not anticipate we will see any changes to the Fed’s benchmark rate until the labor market realizes significant improvements, which I can’t imagine will be prior to November 2010 due to below trend growth rates.

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An Economic Wrestling Match For Our Future

December 14th, 2009 Michael McDonough Comments off

As the invisible hand of the market continues wrestling the imprudent hand of governments; consequences will be felt across the globe as one hand hits the table…

Government stimulus and monetary policy has undoubtedly led us out of one of the worst recessions since the Great Depression, but what impact will these policies have on the future?  Many economists agree that the current growth period has been significantly bolstered by fiscal stimulus, which has failed to substantially address a lack in final demand and create what many would consider to be a sustained recovery.  Let’s take a look at this chart published by Goldman Sach’s chief economist Jan Hatzius depicting his firm’s view on the medium term impact of the fiscal stimulus package on GDP:

GS Fiscal Stimulus on GDPSource: Goldman Sachs

Not pretty, especially considering there are no indications that final demand is prepared to take the lead as this recoveries growth engine.  Given the nature of politics and the election cycle it makes sense for some politicians to be more concerned over short-term outcomes versus long-term consequences, at least if they want to retain their jobs.  And who wants to be unemployed right now?

Funds for the government’s stimulus package do not just appear; they were borrowed.  Not only were they borrowed, but they were borrowed at teaser rates subprime Vegas home buyers would have been happy with several years ago.  It is my belief over the long-term the government’s soaring debt load combined with an eventual increment in rates will lead to substantially higher taxes in the US and lower growth prospects for the country.  What we have done is borrow from future growth for the gains we are realizing today.

Turning to the central bank, copious amounts of liquidity have been poured into the financial system to help stave off deflation and support asset prices.  These funds have not yet triggered significant inflationary concerns, because they have simply made up for a slowdown in the velocity of money.  What I mean is the fed’s injections counteracted an essential halt in lending markets; making up for borrowed money that would have existed to prop prices.  But, this also means that as banks turn back on the lending spicket excess liquidity in the system can quickly turn into fuel for inflation.  This will force the Fed to react by withdrawing liquidity from the system, and hiking the target rate.  The big question will if the fed can remove excess  liquidity faster than inflation can take root, and if so will unemployment still be at uncomfortably high levels?  Probably.

All of these questions will be answered in time, but I have no doubt we will be paying for today’s growth well into the future.  Will it be worth the price? We can only hope.

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US Economics Week Ahead: No Change by the Fed

December 12th, 2009 Michael McDonough Comments off

There is no doubt that this week’s FOMC meeting will steal the economic headlines, however, the result is likely to be rather anticlimactic.  I do not anticipate any major changes to the FOMC’s statement, and certainly no shift in the target rate—despite last month’s better than expected employment data.  The Fed will not view a single data point as the start of a trend, and regardless of being on their minds the employment data will not have a significant impact at this meeting.  After Wednesday we will inevitably be one meeting closer to an eventual rate hike, however, ahead of any hike the Fed would remove the phrase  ‘extended period’ from the statement, and I do not yet believe that is in the cards.

Other important indicators this week include the producer price index, consumer price index, and industrial production.  On the inflation front both headline producer and consumer prices will face some upward pressure due to higher energy and food prices, while the core releases should remain tame.  Industrial production will face some headwinds from a relatively mild month reducing utility output, which should be more than offset by manufacturing output.  An increase in aggregate manufacturing hours worked during the month help to support this belief.

During the week we will also hear earnings from FedEx (FDX), Best Buy (BBY), Nike (NKE), Oracle (ORCL), and Research in Motion (RIMM) to name a few.  In other news, the Senate Banking Committee is expected to vote Thursday on the reconfirmation of Federal Reserve Chairman Bernanke.  Boeing is also expected to conduct its first test flight of their new 787 Dreamliner, after numerous delays. Finally, President Obama will attend the UN Climate summit in Copenhagen to push for several environmental initiatives.

Here is the rest of this week’s US calendar:

Monday, Dec. 14

Nothing

Tuesday, Dec. 15

First day of the FOMC meeting

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number fell -1.3% compared to a drop of -0.1% a week prior.

8:30 a.m. EST: November’s Producer Price Index (Risk: Neutral, Market Reaction: Moderate): Rising food and energy prices during the month will likely place some upward momentum on the November’s PPI.  However, increments in the core number should be only modestly positive after falling -0.6% in October.  The current Bloomberg consensus forecast is for a monthly increment in headline PPI of 1.0%, compared to 0.2% for the core release.

8:30 a.m. EST: December’s Empire State Manufacturing Survey (Risk: Negative, Market Reaction: Moderate): Recent weakness in the manufacturing sector, combined with a declining new orders index could place additional downward pressure on the NY fed’s manufacturing survey for December after falling 11 points to 23.51 in November.  Nevertheless, the current Bloomberg consensus forecast is anticipating a rise in the month to 25.0.  As always it will be important to monitor the new orders-a forward looking component—, prices paid, and employment aspects of the survey.

8:55 a.m. EST: Redbook (Risk: Neutral, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales rose 1.2% last week on a yearly basis.

9:00 a.m. EST: October’s Treasury International Capital (TIC) Data (Risk: Neutral, Market Reaction: Moderate): This report highlights the flow of financial instruments to and from the U.S. It indicates foreign demand for U.S. financial instruments and thus tends to have a stronger impact on the dollar and the bond markets than it does on equities.  But, given the recent record levels for treasury auctions, it will be interesting to monitor foreign demand for US debt.

9:15 a.m. EST: Industrial Production (Risk: Neutral, Market Reaction: Significant): A significant increment in manufacturing hours worked during the month—a positive for industrial production—will be partially offset by an anticipated decline in utility output, stemming from relatively mild weather across the country.  With this in mind the current Bloomberg consensus forecast is for a monthly increment in industrial production of 0.6%, versus 0.1% in October, with capacity utilization rising to 71.2% from 70.7%

1:00 p.m. EST: December’s Housing Market Index (Risk: Neutral, Market Reaction: Moderate): The NAHB Housing Survey, which measures home builder confidence, should continue to benefit from the extension/expansion of the first time home buyer tax credit.  However, numerous headwinds still exist for the sector so any improvements in December are likely to be modest.  The index was unchanged at 17 in November.

Wednesday, Dec. 16

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Applications rose 8.5% last week after rising 2.1% a week prior.  Refinance applications climbed 11.1%, while purchase applications rose 4.0% on the back of attractive interest rates.  A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, and have recently reduced the demand for mortgages.    However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months.

8:30 a.m. EST: November’s Consumer Price Index (Risk: Neutral, Market Reaction: Significant): As with the PPI, higher energy and food prices during the month will likely add some pressure on headline CPI, while core CPI should only show a modest rise. The current Bloomberg consensus forecast is for an increment of 0.4% for the headline number, and 0.1% for core.  It may be important to note that headline CPI will likely experience its first year over year gain since February 2009.

8:30 a.m. EST: November’s Housing Starts (Risk: Neutral, Market Reaction: Moderate): Housing starts look to be up in November on the back of good weather, after falling more than anticipated in October. Additionally, construction jobs declined by only -27K during the month compared to -56K in October. The Bloomberg consensus forecast anticipates starts to rise to 575K, versus 529K in October; I anticipate that new building permits should also rise during the month after declining by -4.0% a month prior—permits tend to be a forward looking indicator toward starts.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed a decline of -3.8 million barrels versus a jump of 2.1 million barrels a week prior.

2:15 p.m. EST: December’s FOMC Announcement (Risk: Neutral, Market Reaction: Very Significant): Despite being the week’s most eagerly anticipated piece of economic news, the outcome is likely to be somewhat anticlimactic.  I do not anticipate any major changes compared to November’s FOMC statement, and certainly no shift in the target rate.  The Fed will not view one month of better than anticipated employment data as a trend, and thus it is very unlikely to have a significant impact at this meeting, however, it will be on their minds.  Nevertheless, we will be one meeting closer to an eventual rate hike, but I do not yet anticipate the removal of the key phrase ‘extended period’ from the FOMC’s statement.  The Fed will likely reiterate that employment is still lagging and that “with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time”.

Thursday, Dec. 17

8:30 a.m. EST: Third Quarter’s Current Account (Risk: Neutral, Market Reaction: Marginal): The third quarter current account deficit likely widened on the back of a wider trade deficit stemming from more expensive energy imports.  The current account deficit totaled $99 billion in the second quarter.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims rose 17K last week to 474K, after falling 5K a week prior. Despite the decline in last week’s claim number the 4 week moving average improved to 473,750 from 481,500.  Improving initial claims are indicative of fewer job losses in the monthly employment report; however, the job situation will get worse before it gets better.  The current Bloomberg consensus forecast is expecting claims to come in at 465K, a decrease of -9K from last week.

10:00 a.m. EST: November’s Leading Indicators (Risk: Neutral, Market Reaction: Moderate): November’s leading indicator index will likely show its 8th consecutive month of positive readings.  The current Bloomberg consensus forecast is expecting a +0.7% rise for the month, compared to a +0.3% increment in October.  The biggest positive contributions for the index will likely come from the yield curve, initial jobless claims, and the average workweek, while the University of Michigan’s consumer expectations index should be the largest negative factor.

10:00 a.m. EST: December’s Philadelphia Fed Survey (Risk: Negative, Market Reaction: Moderate): As with the NY fed survey, recent weakness in the manufacturing sector will likely place some downward pressure on the Philly fed survey.  The survey’s six month expectations index peaked at 60.1 in June and has since fallen to 36.8 in November—this tends to be an ominous sign for the spot reading.  Nevertheless, the current Bloomberg consensus forecast is anticipating only a modest decline to 16.5 from 16.7 in November.  However, the forecast range goes from a high of only 18.0 to a low of 6.9.

10:30 a.m. EST: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet shrank last week to US$2.169trn from US$2.186trn, primarily due to a reduction in long-term loans to banks.    The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Friday, Dec. 18

Quadruple Witching

Enjoy the weekend!

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US Economics Week Ahead: Jobs & the Fed

October 31st, 2009 Michael McDonough Comments off

With the first week of November comes a wave of important economic data—plus a few key earnings announcements—important macro releases include October’s employment report, an FOMC announcement, and several other indicators that will help gauge the health of the consumer and overall economy.  Also important to note is that the ECB, Bank of England, and Bank of Australia are all scheduled to make their own policy announcements next week, which could have some carry over into US markets.  On the earnings front, the market will be hearing from companies that include Cisco, Kraft Foods, Viacom, and Prudential.

Nevertheless, this week’s spotlight will be on Friday’s employment report, which is expected to show the unemployment rate moving from 9.8% to 9.9% with a decline in payrolls of -175K.  During the week it will be important for investors to watch the employment components of both the manufacturing and non-manufacturing ISM along with the ADP employment report for any clues towards Friday’s payroll numbers.  Any major swings in these indicators could shift expectations for Friday’s number and thus have a big impact on the day’s trading.

This Wednesday’s FOMC statement will undoubtedly receive immense scrutiny from investors looking for hints toward the timing of an eventual tightening cycle, however, as economic conditions have remained fairly static since the last meeting major changes are unlikely.  Other notable indicators include Monday’s motor vehicle sales and manufacturing ISM, Wednesday’s non-manufacturing ISM and Treasury refunding announcement, Thursday’s chain store sales and productivity, and Friday’s consumer credit report.

Here is the rest of this week’s US calendar:

Monday, Nov. 2

October’s Motor Vehicle Sales (Risk: Neutral, Market Reaction: Moderate): Car companies once again introduced strong incentives for the month to bring buyers back into the market after the expiration of the government’s ‘Cash for Clunkers’ program, but sales should remain relatively subdued.  The current Bloomberg consensus forecast is for domestic vehicle sales at an annualized pace of 7.3 million units compared to 6.7 million units in September.  August sales reached an annualized pace of 10 million units thanks to the ‘Cash for Clunkers’ program.

10:00 a.m. EST:  ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): October’s ISM index should remain above 50 for the third consecutive month, despite likely remaining relatively unchanged from September’s release of 52.6.  The current Bloomberg consensus forecast is for a release of 53.0.  Investors will not only be paying close attention to the new orders index—previously 60.8—, but also the employment index—previously 46.2— for clues toward Friday’s employment report.  An ISM above 50 bodes well for the overall economy, and should place some upward momentum on industrial production.

10:00 a.m. EST:  September Construction Spending (Risk: Neutral, Market Reaction: Marginal): According to the Bloomberg consensus survey construction spending is expected to fall -0.2% in September versus an increment of 0.8%in August.  Strong housing start data will likely place some momentum on residential construction while high commercial vacancy rates and lower government spending should more than offset these gains through government and public construction spending.

10:00 a.m. EST:  September’s Pending Home Sales (Risk: Neutral, Market Reaction: Moderate): Pending home sales rose 6.4% in August.  However, pending home sales could start facing some pressure over the coming months as the first time home buyer tax credit is presently set to expire on November 30th.

10:30 a.m. EST:  Daniel Tarullo, Federal Reserve Governor, is participating on a panel to discuss executive compensation at a University of Maryland event.

10:00 p.m. EST:  US Treasury 4Q09 Borrowing Requirements (Risk: Neutral, Market Reaction: Marginal): The Treasury will release its borrowing estimates for the next two quarters.  Further details will be released in Wednesday’s refunding announcement.

Tuesday, Nov. 3

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated a weekly increment of 0.1% in store sales compared to a gain of 0.2% a week prior.

8:55 a.m. EST: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales were rose 0.7% last week on a year over year basis.

10:00 a.m. EST:  Factory Orders (Risk: Neutral, Market Reaction: Marginal): After falling -0.8% in August—on the back of weak durable goods—factory orders are expected to show at least a modest gain.  The current Bloomberg consensus forecast is for an increment in September of 1.0%.  The advanced durable goods orders report indicated a 1.0% increment in September, which should place some upward momentum on September’s factory orders.

Wednesday, Nov. 4

7:00 a.m. EST: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Last week’s data declined 12.3% after falling 13.7% a week prior possibly due to the upcoming expiration of the first time home buyer tax credit.  The refinance index fell 16.2%, while the purchase index fell 5.2%.

7:30 a.m. EST:  Challenger Job-Cut Report (Risk: Neutral, Market Reaction: Marginal): This index measures the number of announced corporate mass layoffs, but does not take into account the timing of the actual layoffs.  Meaning layoffs announced in October may not actually take place until September, or even take place slowly over an extended period of time.

8:15 a.m. EST:  ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP Employment report is considered a good window into Friday’s critical payroll number.  Any significant swings in this release combined with unexpected shifts in the manufacturing and non-manufacturing ISM employment indices could shift the consensus forecast for Friday’s employment release.

9:00 a.m. EST:  Treasury Refunding Announcement (Risk: Neutral, Market Reaction: Moderate): According to the Securities Industry and Financial Markets Association the Treasury will likely announce that it will issue $444.5 billion of marketable debt during the fourth quarter.  This would equate to a 13% jump from last quarter, but remain below the levels of fourth quarter 2008 as they were beginning to fund several new programs.  Treasury yields have the potential to creep higher over the coming months as additional supply hits the market.

10:00 a.m. EST:  October’s ISM Non-Manufacturing Index (Risk: Neutral, Market Reaction: Significant): Like the manufacturing ISM, non-manufacturing ISM, should remain above 50, but be relatively unchanged on a month over month basis.  The current Bloomberg consensus forecast is for a reading of 51.9, versus 50.9 in September.  Again, investors will be paying close attention to the employment index for clues towards Friday’s employment report.  Also, it is important to look for any continued improvements in the new orders index that would confirm a continued upward trend for the index.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed a rise of 0.8 million barrels versus an increment of 1.3 million barrels a week prior.

2:15 p.m. EST:  FOMC Announcement (Risk: Neutral, Market Reaction: Significant): Investors will be analyzing the FOMC statement very closely for any indication of when they intend to begin tightening monetary policy or how they intend to withdraw quantitative easing.  Nevertheless, it is unlikely that November’s statement will express any significant changes versus the prior month, as economic conditions have remained somewhat static.  However, you can be sure the statement will be analyzed under a microscope for even the slightest hint of a shift in policy.

Thursday, Nov. 5

October Chain Store Sales (Risk: Neutral, Market Reaction: Moderate): US chain store sales were up 0.1% on a yearly basis in September, and could experience some modest gains in October.  Relatively strong performance in the ICSC-Goldman Sachs weekly chain store sales index should bode well for retailers, but numerous headwinds still exist, including a weak labor market and wavering consumer confidence reducing spending.  

October’s Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): This survey conducted by Monster Worldwide Inc. measures online job demand.  According to last month’s national survey, “Despite recent improvements in economic sentiment, U.S. employers continue to exhibit caution when it comes to hiring,” said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide.“On the upside, demand for workers is firming in the blue-collar segment, with welcome signs of revived activity in construction and manufacturing.”

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 1K to 530K, after falling 11K a week prior. Despite second derivative improvements these numbers still indicate further deterioration to upcoming payroll numbers, and the unemployment rate, which is very likely to exceed 10% in the coming months. The current Bloomberg consensus forecast is expecting a pullback in this week’s initial claims data to 523K from 530K—these numbers are still very high.

8:30 a.m. EST: Third Quarter 2009 Productivity and Costs (Risk: Neutral, Market Reaction: Significant): Productivity gains continue to surprise to the upside as employers are able to gain more output from fewer employees.  Never before in history has productivity experienced such strong gains during a protracted economic downturn.  With that said the current Bloomberg consensus forecast is for third quarter productivity growth of 6.3%, compared to 6.6% during the second quarter.  A 6.3% rise in 3Q09 nonfarm business gross value add coupled with a what is a forecasted decline in nonfarm private sector hours worked helps support the case for strong productivity growth during the quarter.  Strong gains in productivity will likely cause employers to delay employers from hiring as they are now receiving more from less.

9:00 a.m. EST: RBC CASH index (Risk: Neutral, Market Reaction: Significant): The Royal Bank of Canada’s Consumer Attitudes and Spending by Household (CASH) Index is a monthly measure of consumer attitudes toward investing, the economic outlook, and personal finances.  This index does hold some importance in so much that it tends to demonstrate a pretty significant correlation with the consumer sentiment index being released next week.

10:30 a.m. EST: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet again declined last week to US$2.144trn from US$2.183trn a week prior.    The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Friday, Nov. 6

8:30 a.m. EST: Employment Situation Report (Risk: Neutral, Market Reaction: Very Significant): The current Bloomberg consensus forecast is for a decline in payrolls of -175, versus a decline of -263K in September, and an unemployment rate of 9.9% compared to 9.8% a month earlier.  October’s anticipated second derivative improvement in payrolls is partially due to expected improvements in September’s education components after strong losses last month. The unemployment rate will likely continue to rise—the consensus forecast range for October’s unemployment rate is 9.9% to 10.1%—and eventually peak above 10% next year.

10:00 a.m. EST: Wholesale Trade (Risk: Neutral, Market Reaction: Marginal): This indicator measure the level of inventories and sales by US wholesalers.  It is generally considered a good forward looking indicator toward trends in consumer behavior as stores typically ramp up inventories prior to any anticipated increment in sales.  It is important to note that this data is on a two month lag.

3:00 p.m. EST: September’s Consumer Credit Outstanding (Risk: Neutral, Market Reaction: Moderate): After falling $12.0 billion in August consumer credit outstanding likely declined again during September with declines in both revolving and non-revolving credit.  The current Bloomberg consensus forecast is for a decline of US$10.0 billion.  This would be the eighth consecutive month of declines for consumer credit outstanding.  It is important to note that the monthly changes in this index have been quite volatile recently making it harder to calculate accurate forecast. 

3:00 p.m. EST:  Elizabeth Duke, Federal Reserve Governor, delivers the keynote address at the Chicago Fed’s annual Community Bankers Symposium.

Enjoy the weekend!

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FOMC Announces No Change… Fed’s Purchase of Long-Term Treasuries Will End As Planned In Oct…

September 23rd, 2009 Michael McDonough Comments off

Overall, the statement seems more upbeat in terms of economic activity, but seems to place a potentially higher risk of deflation, “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

The Fed reiterated they will end the long-term treasury purchase program as originally  planned by the end of October.  However, “Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.”

Finally, “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Press Release

Federal Reserve Press Release

Release Date: September 23, 2009

For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

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US Economic Week Ahead: Big Ben & His Men (& Women)…

September 18th, 2009 Michael McDonough Comments off

Undoubtedly the most important item on this week’s calendar will be Wednesday’s FOMC announcement, which is highly unlikely to show any changes to the current policy stance.  But, as always, the market will be paying close attention the wording of the FOMC’s statement, which turned slightly more constructive last month indicating that financial markets have improved and that economic activity had begun to ‘level out’.  But, there is a possibility that the FOMC could provide some additional information regarding the fate of its Treasury purchase program.  The program is currently set to slowly expire by the end of October.  This week’s other notable indicators include new and existing home sales, which are both expected to rise for the fifth consecutive month.  In addition home builders Lennar Corp. (LEN) and KB Home (KBH) are scheduled to release earnings on Monday and Friday, respectively.  The market will also be being paying attention to Friday’s durable goods release, which should show continued strength in August due to support from the US government’s Cash for Clunkers program.  Finally, G20 nations will be meeting on Thursday and Friday in Pittsburgh, PA to discuss a variety of topics that could drive some headlines.

Here is the rest of this week’s US calendar:

Monday September 21st:

10:00AM: Leading Indicators (Risk: Neutral, Market Reaction: Moderate): August’s leading economic indicator will likely experience its fifth consecutive month of positive readings, helping to confirm Ben Bernanke’s recent comments that the recession has ended.  The current Bloomberg consensus forecast is for a gain of +0.7%, compared to an increment of +0.6% in July.  Stock prices, the yield curve, and vendor performance should have the largest positive impact on the index for the month, while money supply and jobless claims will add some negative pressure.  The LEI is a good forward looking indicator toward future industrial production and ISM performance.

Tuesday September 22nd:

7:45AM: ICSC-Goldman Store Sales (Risk: Negative, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated no change in store sales compared to an increase of +0.6% a week prior.

8:55AM: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales were down -1.9% last week on a year over year basis.

10:00AM: FHFA House Price Index (Risk: Neutral, Market Reaction: Marginal): The Federal Housing Finance Agency (FHFA) monthly house price index is compiled by using loan data provided by Fannie Mae and Freddie Mac, which means all the data within the index consists of conventional mortgages within the limitations of the GSE’s.  The FHFA’s monthly purchase only index gained of 0.5% in June with May’s number being revised up to +0.6%.  The monthly index tends to be relatively volatile, but should continue to trend up in-line with the Case-Shiller home price index.

10:00AM: Richmond Fed Survey of Manufacturing Activity (Risk: Neutral, Market Reaction: Marginal): The Richmond Fed manufacturing activity index has been in positive territory since May, and should remain there this month based on what has been a strong new orders component.   The overall current conditions index was unchanged in August from July at 14.

Wednesday September 23rd:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Last week’s data showed a decline of 8.6% due to the effects of the shortened week.  The refinance index fell 7.4%, while the purchase index dropped 10.3%. These declines were likely due to the shortened Labor Day week, and slightly higher, albeit relatively low, mortgage rates.

10:30AM: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed a decline of -4.7mn barrels versus a decline of -5.9mn barrels a week prior.

2:15AM: FOMC Meeting Announcement: The market is unlikely to witness any drastic deviations in Fed policy this month with the target range remaining between 0.0% and 0.25%.  But, the market will be looking for any changes to wording in the Fed’s policy statement that could indicate a more constructive outlook for US economic activity or financial markets.  The Fed may also make an announcement regarding the fate of its Treasury purchased program, which is set to expire at the end of October.  The FOMC had this to say about the program in its last statement, “To promote the a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchases by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”

Thursday September 24th:

G-20 Conference Begins in Pittsburgh PA

8:30AM: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 5K to 545K. Initial claims should continue to demonstrate marginal improvements over the coming months as weakness in the labor market slowly abates. But, make no mistake about it these levels are still uncomfortably high, and will continue to adversely impact the US payroll data for some time.  In fact using a simple regression analysis claims at their current levels would indicate a decline in payrolls of roughly 480K, however, recently this model has been exaggerating the actual effect on payrolls, but nevertheless is a cause for concern going forward.  The current Bloomberg consensus for this week’s initial claims release is 550K. The marginal forecasted increment is still due to the potential seasonal effects of the later than usual Labor Day Holiday.

10:00AM: Existing Home Sales (Risk: Neutral, Market Reaction: Significant): A strong pending home sales number in July should help continue the upward momentum for August’s existing home sales.  The current Bloomberg consensus forecast is for an increase to 5.35mn from 5.24mn in July.  Existing home sales have risen for four month consecutive months, reaching a two-year high in July, which will likely be usurped by August’s data.

10:30AM: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

1:00PM: Christina Romer, Chair of the White House Council of Economic Advisers is giving the keynote address to the Chicago Federal Reserve Bank’s International Banking Conference

4:30PM: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet rose again last week to US$2.125trn from US$2.072trn a week prior.  The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Friday September 25th:

8:30AM: Durable Goods (Risk: Neutral, Market Reaction: Significant): The US government’s Cash for Clunkers program should continue to help bolster August’s durable goods orders, which according to the Bloomberg consensus forecast is anticipated to rise by 1.0%, compared to July’s increment of 4.9% stemming from strong civilian aircraft activity.

9:55AM: Consumer Sentiment (Risk: Negative, Market Reaction: Significant): The current Bloomberg consensus forecast is anticipating no change in September’s Reuter’s/University of Michigan’s Consumer sentiment index compared to the month’s preliminary reading of 70.2.  However, a paradoxical comment by the index’s publisher earlier this month highlighted consumers’ concerns over their individual situation, which I believe could adversely impact the index.  The comment said, “Confidence rebounded in early September as consumers increasingly expected the economy to improve despite their reluctant conclusion that their own financial situation would remain quite problematic for some time.”

10:00AM: New Home Sales (Risk: Neutral, Market Reaction: Significant): As with existing home sales, new home sales should rise in August, with the current Bloomberg consensus forecast anticipating a rise to 445K from 433K in July.  Last month was the index’s fourth consecutive increment.  It will also be important to pay close attention to the inventory of new houses, which fell in July to 7.5 months from 8.5 in June; this was the lowest reading since April 2007.  Going forward it will be important to monitor whether or not the US first time home buyer program is extended.  It is presently scheduled to expire on November 30th, and has likely had a positive contribution on the housing market.  Some reports have indicated that 25% of total home sales may be attributable to the program.

1:15PM:  Kevin Warsh, Federal Reserve Board Governor is set to speak at the Chicago Federal Reserve Bank’s International Banking Conference

Enjoy the weekend!

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When Will the FOMC Turn From Dove to Hawk? Don’t Hold Your Breath…

September 3rd, 2009 Michael McDonough Comments off

Recently, concerns have been mounting over whether or not the Fed may need to consider a more hawkish stance over potential inflationary pressure.  Increments over the past several days in the price indices for both the Manufacturing ISM and Non-Manufacturing ISM have only exacerbated these worries.  To help quantify this situation I dusted off the old Taylor Rule, and constructed several scenarios, that could lead to an increment in the FOMC’s target rate.

For those of you unfamiliar with the Taylor rule, it is a tool used to estimate where the FOMC’s target rate should stand based on inflation and economic growth.  However, in my model instead of using actual GDP against potential GDP, I used the actual unemployment rate versus the non-accelerating inflation rate of unemployment or NAIRU; for this analysis I estimated NAIRU  at 4.5%. For the inflation component I used Core-PCE against the lower end of the Fed’s inflation threshold of 2.0%.   As you can see from the chart below, the model has quite accurately estimated the Fed Funds rate since 1990.

Source: St. Louis Fed

Source: St. Louis Fed

Source: My Calculations & St. Louis Fed

Source: My Calculations & St. Louis Fed

Presently, my model indicates the FOMC’s target rate should stand at -2.1%, which is more or less in-line with the Fed’s present range of 0% to 0.25% in addition to steps toward ‘quantitative easing’.  But, what type of scenarios could  place pressure on the Fed’s dovish stance?  First, lets start off with a highly unlikely scenario, leaving the Core-PCE constant, the unemployment rate would need to fall below 7.0% before my modified Taylor rule would indicate a Fed Funds Rate above 0.0%.  Alternatively, leaving unemployment constant at 9.4%, the model indicates Core-PCE would need to exceed 2.6% just to move the estimated target rate above 0%.  A more likely scenario would be an increase in the unemployment rate to 10%, which would place negative pressure on rates, coupled with a marginal increase in the PCE to 1.8%.  Using these inputs, my model signals a target rate of -2.2%.

What does this mean?  Given the current US macro-economic outlook it is very unlikely we will see any pressure on the Fed Fund target rate.  But, if there is a sharp unanticipated increments in core-PCE, there is a possibility the Fed could react regardless of the rule. The Fed is well aware of the damages prolonged excessive inflation–or deflation–could have on the US economy, and will react pro-actively to stem that risk .  Nevertheless, it is important to keep in mind that the Fed has a dual mandate to assure price stability and full employment.  Therefore, it is hard to believe the Fed would consider any deviations to its current policy while the country is experiencing rising unemployment, except in the most dire of circumstances.

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