Friday, December 26, 2014
Friday, December 19, 2014
Capital Markets Update
By Louis S. Barnes Friday, December 19, 2014
Mortgage interest rates increased slightly this past week as the Fed indicated at the conclusion of its FOMC meeting that it would be patient about when it decides to increase rates. Economic data was mixed. Economic data stronger than expected included November Industrial Production, November Capacity Utilization, and weekly jobless claims. Industrial Production increased the most since May of 2010. Economic data weaker than expected included the December New York Empire State Manufacturing Index, the December NAHB Housing Market Index, November Housing Starts, November Building Permits, and the December Philadelphia Fed Business Index. Inflation data continues to be tame. The November Consumer Price Index fell 0.3%, its largest decline since December 2008. Excluding the food and energy components, core CPI was up 0.1%, as expected. In Europe, November consumer prices increased at their slowest rate in five years, continuing to raise deflation concerns. In the United Kingdom, inflation fell to 1.00% in November, a 12 year low.
The Dow Jones Industrial Average is currently at 17,800, up over 500 points on the week. The crude oil spot price is currently $55.64 per barrel, down over $2 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Tuesday’s Durable Goods Orders, the final look at Q3 GDP, Personal Income and Outlays, the Consumer Sentiment Index, and New Home Sales, and Wednesday’s Jobless Claims as potential market moving events. All markets are closed Thursday for Christmas.
Mortgage interest rates increased slightly this past week as the Fed indicated at the conclusion of its FOMC meeting that it would be patient about when it decides to increase rates. Economic data was mixed. Economic data stronger than expected included November Industrial Production, November Capacity Utilization, and weekly jobless claims. Industrial Production increased the most since May of 2010. Economic data weaker than expected included the December New York Empire State Manufacturing Index, the December NAHB Housing Market Index, November Housing Starts, November Building Permits, and the December Philadelphia Fed Business Index. Inflation data continues to be tame. The November Consumer Price Index fell 0.3%, its largest decline since December 2008. Excluding the food and energy components, core CPI was up 0.1%, as expected. In Europe, November consumer prices increased at their slowest rate in five years, continuing to raise deflation concerns. In the United Kingdom, inflation fell to 1.00% in November, a 12 year low.
The Dow Jones Industrial Average is currently at 17,800, up over 500 points on the week. The crude oil spot price is currently $55.64 per barrel, down over $2 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Monday’s Existing Home Sales, Tuesday’s Durable Goods Orders, the final look at Q3 GDP, Personal Income and Outlays, the Consumer Sentiment Index, and New Home Sales, and Wednesday’s Jobless Claims as potential market moving events. All markets are closed Thursday for Christmas.
Friday, December 12, 2014
Capital Markets Update
By Louis S. Barnes Friday, December 12, 2014
Markets are moving in dramatic fashion, obscuring the improving US economy. Or vice-versa. Our 10-year T-note fell to 2.08% today, mortgages attempting to crack 4.00%; the German 10-year is a new all-time low 0.627% joined by Japan’s 0.398%. Stock markets are truly volatile, up-down-up-down. Oil has broken $60 and may go significantly lower as weaker producers are forced to pump more as prices fall.
Media commentary is badly confused trying to explain these events, the centerline holding that falling oil will cause inflation to fall, therefore buying bonds makes sense even at ridiculous yields. However, core inflation is not falling. Central banks use core (excluding energy and food) because energy is so volatile; the drop in nominal inflation today is just the flip side of the energy-driven jumps in 2008 and 2013. Proper central banking should not react to either.
Most commentary assumes the ECB will begin its first real QE in January, buying sovereign bonds, and say that markets are front-running. Don’t bet on that. Stark fear is the mover in global markets: fear that deflation is out of control in both Japan and Europe, fear that China’s slowdown will pull the stool from under commodity producers and emerging nations, and fear that the oil price drop is more hurtful than stimulative.
Fear there, but not here! From 2007 until this year the US economy was fragile and accident prone. No longer. We are still limping in spots — incomes and housing — but now we’re resilient, headwinds diminished and fewer open manholes.
The Fed is correct to plan liftoff from the “0%-.25%” of the last six years. Home mortgage credit rose in the last quarter for the first time in eight years. Total bank credit had a great year, rising 9% annualized until plopping in half in October, but in November ran a 14% pace. Retail sales are fine. The small-business survey by the NFIB in November jumped from its six-year trench. Lower oil prices are a help here, but not as much as in any prior drop. Natural gas prices have been down for five years. Electricity generated by burning oil has dropped 88% since 2013, replaced by gas and renewables. This is a gasoline-only deal: $2.50 will help, but miles driven have fallen ever since we rose above two bucks.
We have a precedent for this situation, US gaining strength, the rest of the world a mess. 1997-98 was the “Asian Contagion,” a global credit/currency meltdown concluding in default by Russia. The Fed was panicked that the US was the only growth engine, and if we faltered… no way out. So the Fed cut its overnight rate and with hindsight was dead wrong. The weakness overseas helped US strength, capped inflation here, and exactly as today pushed a flood of cash to US bonds, driving down mortgages and other borrowing costs. The Fed’s easing then did nothing but add air to the stock market bubble, and quick reversal of excessive stimulus led directly to recession.
Today, the Fed need not worry about inflation, but it absolutely should worry about the potential for hidden bubbles caused by the zero-percent regime. At zero it is at least 1.5% below inflation, highly stimulative, and zero is unnatural.
The Fed’s tightening this time may look like no other. Raising the overnight cost of money will push the dollar higher and overseas cash will continue to pour into our bonds and mortgages. Fed liftoff may have no effect at all on long-term rates, which might even continue to fall. The principal reason for the Fed not to tighten is the continuing weakness of housing, but we may be unscathed.
You can bet the most important thing the Fed will watch after liftoff will be long-term rates. If they rise, the Fed will slow or stop altogether; if no effect, the Fed may jack the Fed funds rate fairly rapidly. Imagine in 2016 a 2.00% Fed funds rate and a 2.00% 10-year, and such convergence or even inversion (short over long) not a sign of recession, just domestic strength and foreign desperation for yield!
Risks now are overseas. Markets show signs of destabilization, but thus far only reinforcing the flows of cash to us. Those flows will not stop until recovery over there, which is a hell of a lot closer to “if” than “when.”
Markets are moving in dramatic fashion, obscuring the improving US economy. Or vice-versa. Our 10-year T-note fell to 2.08% today, mortgages attempting to crack 4.00%; the German 10-year is a new all-time low 0.627% joined by Japan’s 0.398%. Stock markets are truly volatile, up-down-up-down. Oil has broken $60 and may go significantly lower as weaker producers are forced to pump more as prices fall.
Media commentary is badly confused trying to explain these events, the centerline holding that falling oil will cause inflation to fall, therefore buying bonds makes sense even at ridiculous yields. However, core inflation is not falling. Central banks use core (excluding energy and food) because energy is so volatile; the drop in nominal inflation today is just the flip side of the energy-driven jumps in 2008 and 2013. Proper central banking should not react to either.
Most commentary assumes the ECB will begin its first real QE in January, buying sovereign bonds, and say that markets are front-running. Don’t bet on that. Stark fear is the mover in global markets: fear that deflation is out of control in both Japan and Europe, fear that China’s slowdown will pull the stool from under commodity producers and emerging nations, and fear that the oil price drop is more hurtful than stimulative.
Fear there, but not here! From 2007 until this year the US economy was fragile and accident prone. No longer. We are still limping in spots — incomes and housing — but now we’re resilient, headwinds diminished and fewer open manholes.
The Fed is correct to plan liftoff from the “0%-.25%” of the last six years. Home mortgage credit rose in the last quarter for the first time in eight years. Total bank credit had a great year, rising 9% annualized until plopping in half in October, but in November ran a 14% pace. Retail sales are fine. The small-business survey by the NFIB in November jumped from its six-year trench. Lower oil prices are a help here, but not as much as in any prior drop. Natural gas prices have been down for five years. Electricity generated by burning oil has dropped 88% since 2013, replaced by gas and renewables. This is a gasoline-only deal: $2.50 will help, but miles driven have fallen ever since we rose above two bucks.
We have a precedent for this situation, US gaining strength, the rest of the world a mess. 1997-98 was the “Asian Contagion,” a global credit/currency meltdown concluding in default by Russia. The Fed was panicked that the US was the only growth engine, and if we faltered… no way out. So the Fed cut its overnight rate and with hindsight was dead wrong. The weakness overseas helped US strength, capped inflation here, and exactly as today pushed a flood of cash to US bonds, driving down mortgages and other borrowing costs. The Fed’s easing then did nothing but add air to the stock market bubble, and quick reversal of excessive stimulus led directly to recession.
Today, the Fed need not worry about inflation, but it absolutely should worry about the potential for hidden bubbles caused by the zero-percent regime. At zero it is at least 1.5% below inflation, highly stimulative, and zero is unnatural.
The Fed’s tightening this time may look like no other. Raising the overnight cost of money will push the dollar higher and overseas cash will continue to pour into our bonds and mortgages. Fed liftoff may have no effect at all on long-term rates, which might even continue to fall. The principal reason for the Fed not to tighten is the continuing weakness of housing, but we may be unscathed.
You can bet the most important thing the Fed will watch after liftoff will be long-term rates. If they rise, the Fed will slow or stop altogether; if no effect, the Fed may jack the Fed funds rate fairly rapidly. Imagine in 2016 a 2.00% Fed funds rate and a 2.00% 10-year, and such convergence or even inversion (short over long) not a sign of recession, just domestic strength and foreign desperation for yield!
Risks now are overseas. Markets show signs of destabilization, but thus far only reinforcing the flows of cash to us. Those flows will not stop until recovery over there, which is a hell of a lot closer to “if” than “when.”
Friday, December 5, 2014
Capital Markets Update
By Louis S. Barnes Friday, December 5, 2014
Mortgage interest rates increased this past week as today’s employment report for November was much stronger than anticipated. November Non-Farm Payrolls increased by 321k on expectations that they would increase by 230k. September and October Non-Farm Payrolls were revised upward as well. Private Payrolls increased by 314k on expectations that they would increase by 225k. Average hourly earnings increased 0.4% on expectations that they would increase by 0.2%. This the biggest jump in earnings since June 2013. The unemployment rate held steady at 5.8%. Other economic data stronger than expected included the November ISM Manufacturing Index, October Construction Spending, November Auto and Truck Sales, and the November ISM Services Sector Index. Economic data weaker than expected included the November ADP Private Jobs estimate, Q3 Productivity, Q3 Unit Labor Costs, the October U.S. Trade Deficit, and October Factory Orders. In Europe, the European Central Bank left their benchmark rate unchanged and will reassess additional stimulus next quarter. In China, manufacturing activity fell to its lowest level since March.
The Dow Jones Industrial Average is currently at 17,950, up over 100 points on the week. The crude oil spot price is currently $65.41 per barrel, down over $1 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Thursday’s Jobless Claims and Retail Sales and Friday’s Producer Price Index (PPI) and Consumer Sentiment index as potential market moving events.
Mortgage interest rates increased this past week as today’s employment report for November was much stronger than anticipated. November Non-Farm Payrolls increased by 321k on expectations that they would increase by 230k. September and October Non-Farm Payrolls were revised upward as well. Private Payrolls increased by 314k on expectations that they would increase by 225k. Average hourly earnings increased 0.4% on expectations that they would increase by 0.2%. This the biggest jump in earnings since June 2013. The unemployment rate held steady at 5.8%. Other economic data stronger than expected included the November ISM Manufacturing Index, October Construction Spending, November Auto and Truck Sales, and the November ISM Services Sector Index. Economic data weaker than expected included the November ADP Private Jobs estimate, Q3 Productivity, Q3 Unit Labor Costs, the October U.S. Trade Deficit, and October Factory Orders. In Europe, the European Central Bank left their benchmark rate unchanged and will reassess additional stimulus next quarter. In China, manufacturing activity fell to its lowest level since March.
The Dow Jones Industrial Average is currently at 17,950, up over 100 points on the week. The crude oil spot price is currently $65.41 per barrel, down over $1 per barrel on the week. The Dollar strengthened versus the Euro and Yen on the week.
Next week look toward Thursday’s Jobless Claims and Retail Sales and Friday’s Producer Price Index (PPI) and Consumer Sentiment index as potential market moving events.
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