Friday, November 21, 2014
Capital Markets Update
By Louis S. Barnes Friday, November 21, 2014
Mortgage rates have been stable near 4.00%, held there by the 10-year T-note moving hardly at all in the last month, 2.31%-2.38% since Halloween. Such stability is most unusual, best understood as a market gathering tension for a significant snap.
The dominant news is central banks trying to cope with extreme deflationary pressures, and this week the Fed released the minutes of its October 28/29 meeting.
Reading Fed minutes is a black art. This set is “only” 15 pages, but unspeakably dense, jargon-ridden, in the unique code of Fed politics, most of it irrelevant to the big questions or intentionally masking answers, if any: RATES UP, OR DOWN, WHEN?
For the brave and foolhardy willing to give it a try, here follows a guide, and re-interpretation of this set (in plain sight at www.federalreserve.gov). I say “re-interpret” because I couldn’t get to the real thing until yesterday, after reading earlier reviews by media Fedologists. As I read I flashed back to the media analysis, wondering if they had read the same minutes. I don’t recall a wider gap between the analysts and what’s in the actual words. The consensus was ho-hum, Fed stands pat. Not so.
These minutes begin with an incomprehensible discussion of the mechanics of rate hikes. Ignore all of that. When they need to hike, they will.
At the bottom of page three, a big hint: “Staff Review of the Economic Situation.” The bulk of all meeting minutes is anonymous commentary by Fed governors and regional Fed presidents, at each point adding “one member said”, or a few, or several, or many, or most, as the Secretary tries to describe weight of opinion. When the Fed first began to publish minutes only three weeks after the fact (ten years ago, Bernanke invention), these modifiers were so confusing that it published a guide.
In general, all the time, ignore the governors and regional presidents (in the minutes described as “members”) until you learn which have good sense and which don’t. Since the minutes’ commentary is anonymous, we can’t tell if an apparent consensus is among the bright lights (Dudley, Fischer, Rosengren, Williams, Lacker, Evans, and Lockhart), or the dim and argumentative (Fisher, George, Bullard, Plosser, Mester, Kocherlakota — all regional presidents). One serious study by economists outside the Fed (Romer, et al) backwalked the opinions of the regional Fed presidents for predictive accuracy and concluded: “They need not offer forecasts.”
Page three: Staff said that market indications of inflation had declined, but inflation surveys were stable. Since the meeting surveys have fallen, too. That’s a big deal: in three weeks the Fed’s primary assumption about inflation has been cast in doubt.
Page four, Staff: “Foreign economies appeared to have continued to expand at a moderate rate in the third quarter… In Japan, consumption staged a mild rebound…. euro area pointed only to continued sluggish growth.” Events have proved this commentary absurdly optimistic. Strangely, profoundly out of touch.
Page 5, in puzzled tone, Staff observed that market pricing had pushed back the date for a Fed rate hike. My margin note is “duh.” Markets see US wages and global deflation. Later on that page: “Credit flows to nonfinancial business picked up in September.” The Fed’s own H.8 shows a deep slowdown in total bank credit.
Page 6: “Staff revised down its projection for real GDP growth….” What?! You see that in any media analysis? Staff: “The risks to the forecast for real GDP growth and inflation were seen as tilted to the downside.”
The labor market has improved faster than the Fed thought possible only a year ago, and has positioned to intercept the inflation pressure from wages inevitably rising as the labor market tightens. Yet wages are not rising, and may not even if unemployment falls another percent or more. Staff seems aware that things are not going according to plan. The Fed historically underweights events overseas because the US is the least export-dependent of any major economy, but these minutes are at the edge of oblivious to foreign pressures which will undercut US wages and prices.
Stick out my turkey neck: when rates snap, it will be down.
Mortgage rates have been stable near 4.00%, held there by the 10-year T-note moving hardly at all in the last month, 2.31%-2.38% since Halloween. Such stability is most unusual, best understood as a market gathering tension for a significant snap.
The dominant news is central banks trying to cope with extreme deflationary pressures, and this week the Fed released the minutes of its October 28/29 meeting.
Reading Fed minutes is a black art. This set is “only” 15 pages, but unspeakably dense, jargon-ridden, in the unique code of Fed politics, most of it irrelevant to the big questions or intentionally masking answers, if any: RATES UP, OR DOWN, WHEN?
For the brave and foolhardy willing to give it a try, here follows a guide, and re-interpretation of this set (in plain sight at www.federalreserve.gov). I say “re-interpret” because I couldn’t get to the real thing until yesterday, after reading earlier reviews by media Fedologists. As I read I flashed back to the media analysis, wondering if they had read the same minutes. I don’t recall a wider gap between the analysts and what’s in the actual words. The consensus was ho-hum, Fed stands pat. Not so.
These minutes begin with an incomprehensible discussion of the mechanics of rate hikes. Ignore all of that. When they need to hike, they will.
At the bottom of page three, a big hint: “Staff Review of the Economic Situation.” The bulk of all meeting minutes is anonymous commentary by Fed governors and regional Fed presidents, at each point adding “one member said”, or a few, or several, or many, or most, as the Secretary tries to describe weight of opinion. When the Fed first began to publish minutes only three weeks after the fact (ten years ago, Bernanke invention), these modifiers were so confusing that it published a guide.
In general, all the time, ignore the governors and regional presidents (in the minutes described as “members”) until you learn which have good sense and which don’t. Since the minutes’ commentary is anonymous, we can’t tell if an apparent consensus is among the bright lights (Dudley, Fischer, Rosengren, Williams, Lacker, Evans, and Lockhart), or the dim and argumentative (Fisher, George, Bullard, Plosser, Mester, Kocherlakota — all regional presidents). One serious study by economists outside the Fed (Romer, et al) backwalked the opinions of the regional Fed presidents for predictive accuracy and concluded: “They need not offer forecasts.”
Page three: Staff said that market indications of inflation had declined, but inflation surveys were stable. Since the meeting surveys have fallen, too. That’s a big deal: in three weeks the Fed’s primary assumption about inflation has been cast in doubt.
Page four, Staff: “Foreign economies appeared to have continued to expand at a moderate rate in the third quarter… In Japan, consumption staged a mild rebound…. euro area pointed only to continued sluggish growth.” Events have proved this commentary absurdly optimistic. Strangely, profoundly out of touch.
Page 5, in puzzled tone, Staff observed that market pricing had pushed back the date for a Fed rate hike. My margin note is “duh.” Markets see US wages and global deflation. Later on that page: “Credit flows to nonfinancial business picked up in September.” The Fed’s own H.8 shows a deep slowdown in total bank credit.
Page 6: “Staff revised down its projection for real GDP growth….” What?! You see that in any media analysis? Staff: “The risks to the forecast for real GDP growth and inflation were seen as tilted to the downside.”
The labor market has improved faster than the Fed thought possible only a year ago, and has positioned to intercept the inflation pressure from wages inevitably rising as the labor market tightens. Yet wages are not rising, and may not even if unemployment falls another percent or more. Staff seems aware that things are not going according to plan. The Fed historically underweights events overseas because the US is the least export-dependent of any major economy, but these minutes are at the edge of oblivious to foreign pressures which will undercut US wages and prices.
Stick out my turkey neck: when rates snap, it will be down.
Friday, November 14, 2014
Capital Markets Update
By Louis S. Barnes Friday, November 14, 2014
Brazilians, Russians, euro-Europeans, non-euro Europeans (Swedes, Danes, Dutch, Czechs…), Brits, Koreans… all have good reason to sell domestic money and buy dollars. The linkage: deflation is spreading outward from the worst-managed, a dead heat between Japan, Europe, and China.
Quiet on the surface, anything but quiet underneath. And “over there”… oh my.
The most important single datum: the Treasury this week sold at auction $70 billion in new long-term bonds for the first time in six years without the Fed as a QE buyer. The auction was effortless, the yield on the 10-year 2.30% Monday, 2.35% Wednesday, and today just under 2.33%. Mortgages have held slightly above 4.00%.
The world is hungry for US paper, bonds or stocks, trying to get out of whatever currency it holds (except Swiss Francs, the ultra-safety play) into dollars. And it is very nearly the whole world. Only China is maintaining its dollar peg, but everyone assumes it will have to devalue as well.
The linkage in all currencies at the moment begins with the US economy, easily in the best shape of all, no matter how poor it feels to 70% of our citizens. The NFIB small-business survey has been stuck in a Great Recession trench, but this year it’s out for real — not healthy, but out. US retail sales managed a modest 0.3% increase in October after September’s contraction.
US GDP is growing on a baseline of 2.5%, stripped of distortions from inventories and trade. The Eurozone overnight announced 3rd quarter results: up 0.2% after the 0.1% 2nd quarter. The London Telegraph on China (the Brits for old reasons are still well-connected in Asia): producer prices have fallen in 32-straight months, its CPI 1.6% and falling versus 3.5% target, and its actual GDP growth probably less than 5%.
Brazilians, Russians, euro-Europeans, non-euro Europeans (Swedes, Danes, Dutch, Czechs…), Brits, Koreans… all have good reason to sell domestic money and buy dollars. The linkage: deflation is spreading outward from the worst-managed, a dead heat between Japan, Europe, and China.
Deflation and even sub-normal inflation are fatal in a debt-soaked world. Debtors must pay interest and principal in money more valuable than they borrowed, and can’t borrow new funds. The remedy understood long before the dawn of central banks (circa 1875): chop official interest rates and print money until inflation is restored, aided by your weakening currency. The alternate or companion remedy is fiscal: borrow and spend. But the Krugman mirage is foreclosed today by ruinous sovereign debt.
A currency weakened by printing should make your exports more attractive to others, and make imports more expensive, which should… should… push domestic inflation up and out of the danger zone.
Today that ancient strategy is failing. If the fundamental global problem is excess production and excess labor, those who devalue get this disastrous reward: higher import prices raise domestic costs, but not incomes. Exactly the same effect as an oil “price shock,” self-inflicted, underway in Japan right now.
Another small problem: if everyone devalues at once, their relative positions do not change. Except versus the US and the buck. We have precedent for this situation: the 1997-’98 “Asian Contagion.” At its feverish peak, Russia defaulted on its bonds, and hyper-leverage by some math wonks at nobody-ever-heard-of Long Term Capital Management nearly collapsed the financial system.
In 1997 the Fed misunderstood. It was terrified of an unstoppable global recession, and cut the Fed funds rate from 5.50% to 4.75%. Greenspan, Summers, and Rubin made the cover of Time as the “Committee to Save the World.” Few people understood that the flood of global cash to the dollar was an enormous stimulant here, and the Fed’s rate cut just blimped more gas into the stock bubble.
Today I’m not so sure the cash flood will be as beneficial. We, too, suffer from incipient wage deflation. But, short of starting a trade war with tariffs, we have no way to keep the world from swamping our lifeboat — if that’s the correct analogy.
The Fed today is struggling. It sees conditions precedent to an overheated labor market, but a tsunami of deflation as well. Its threats to raise rates just make the currency contagion worse. Better to cork it for a bit, as the Bank of England has done.
Friday, November 7, 2014
Capital Markets Update
By Louis S. Barnes Friday, November 7, 2014
Mortgage interest rates were mostly flat on the week as economic data continues to be mixed. Economic data stronger than expected included the October ISM Manufacturing Index, weekly jobless claims, Q3 Productivity, and October unemployment. The four week moving average of jobless claims fell to its lowest level in 14 years. Unemployment fell to 5.8% but the labor participation rate is still low at 62.8%. Economic data weaker than expected included September Construction Spending, the September Trade Deficit, September Factory Orders, the October ISM Services Sector Index, October non-farm and private payrolls, and October Average Hourly Earnings. In Europe, the European Central Bank left interest rates unchanged and did not announce additional stimulus. The European Commission cut its growth forecast for the EU to 0.8% this year and to 1.1% in 2015. In China, the Purchasing Managers Index was weaker at 50.8 versus 51.2 expected. Economic weakness in Europe, China, and much of Latin America along with a strong Dollar will likely be a drag on U.S. economic growth as exports slow.
The Dow Jones Industrial Average is currently at 17,552, up over 160 points on the week. The crude oil spot price is currently at $78.78 per barrel, down almost $2 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Thursday’s Jobless Claims and Friday’s Retail Sales and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Tuesday for Veterans Day.
Mortgage interest rates were mostly flat on the week as economic data continues to be mixed. Economic data stronger than expected included the October ISM Manufacturing Index, weekly jobless claims, Q3 Productivity, and October unemployment. The four week moving average of jobless claims fell to its lowest level in 14 years. Unemployment fell to 5.8% but the labor participation rate is still low at 62.8%. Economic data weaker than expected included September Construction Spending, the September Trade Deficit, September Factory Orders, the October ISM Services Sector Index, October non-farm and private payrolls, and October Average Hourly Earnings. In Europe, the European Central Bank left interest rates unchanged and did not announce additional stimulus. The European Commission cut its growth forecast for the EU to 0.8% this year and to 1.1% in 2015. In China, the Purchasing Managers Index was weaker at 50.8 versus 51.2 expected. Economic weakness in Europe, China, and much of Latin America along with a strong Dollar will likely be a drag on U.S. economic growth as exports slow.
The Dow Jones Industrial Average is currently at 17,552, up over 160 points on the week. The crude oil spot price is currently at $78.78 per barrel, down almost $2 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Thursday’s Jobless Claims and Friday’s Retail Sales and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Tuesday for Veterans Day.
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