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Posted by warren mosler (65.113.90.26) on 16:49:09 10/26/07
Subject: Fed countdown
Comments welcome!
Looking ahead to the meeting next week:
$92 oil, grains, gold, and metals up, and dollar down-
Fed sees all that as a the 'price' it paid for 'insurance.'
CPI year over year jumped to 2.8% and next month's print is looking
like 3.5% or more, and 07 looking north of 4% vs 06 at 2.8% and 05 at
2.5%.
They cut 50 instead of 25 as they did it for 'liquidity' rather than
'the economy', with the lesson of 1998 being not to cut in 25's when
you think it will take 50- do it all at once rather then drag it out
and need to go 75. And don't wait too long to take it back, as they
believe they did back then and supported the subsequent asset bubble.
So now fed funds vs libor are coming in nicely, jumbo mtgs are
starting to move, repriced risk is higher in yield as it 'should be'
and for the most part trading at the higher levels. Banks are
absorbing assets from the commercial paper markets at a healthy clip
as they now find the higher yields attractive based on regulated
capital requirements and returns on equity.
Earnings are firm enough to support equities which are up roughly
10% for 07 with barely a correction.
Exports pulled up q3 gdp estimates to 3.1%, again fully replacing what
housing might have added in prior years, and q4 estimates are in the
1.5 -1.8 range, far higher and also more certain than Sep 18
forecasts. And world growth remains strong, as does demand for food
and energy.
Jobless claims remain low, and employment data was revised with the
-4000 jobs before the meeting restated at +89,000, and unemployment
remains low and stable.
So as a point of logic I'd expect the Fed to leave the fed funds rate
unchanged, and maybe cut the discount rate to the fed funds rate to
help keep markets orderly.
On Sept 18, however, the same logic led me to the same conclusion,
which turned out to be wrong. I underestimated the Fed's fear of a
systemic meltdown due to 'liquidity issues,' While there are still
substantial 'liquidity' issues being worked through, a systemic
meltdown is no longer as immediate a fear.
My favorite quote remains- 'if the Fed doesn't care about inflation
why should I?' And that is also exactly how securities are being
priced- a 25 cut next week is totally priced in, and over .50 more by
next October.
Recapping the highlights:
ECONOMY:
Housing generally weak- starts and permits way down
Existing home prices down year over year, new home up a tad
month over month but still looking very weak
mtg purchase apps stable at just over 400, up 8.8% year over
year.
Exports strong, trade gap down
q3 gdp est 3.1%, up from about 2% at the Sep 18 meeting
ism manuf at 52
Initial unemployment claims remain low.
Jobs up 110,000 for sep, with -4,000 aug print before the Sep 18
meeting revised to up 89,000 as well.
unemployment up slightly to a still low 4.696 for sep from 4.642
for aug
personal income up .3, spending up .6
Earnings decelerating, but ok.
retail sales flat in Aug before meeting, up .3 for sept
Bank losses about 1 months earnings max, no capital impairment
Merrill took some hits.
Stocks still up about 10% for 06 depending on index, though off
highs.
Cap Ut high at 82%
INFLATION:
cpi now up 2.8 year over year vs 2.4 at sep 18 meeting, and
looking like it will be about 3.5 next month.
core up .22 for month and 2.1 year over year, owner equiv rent
back up to up .3
pce up 1.8 year over year, .087 month over month
import prices up 1% month over month, 5.2 year over year
export prices up .3 month over month, 4.5 year over year
spot crude over 90, gasoline and grains, gold, up
ppi up 1.1 month over month, 4.4 year over year. core .1 and 2%
year over year
dollar weak
'LIQUIDITY'
fed funds vs libor narrowing continuously since sep 18 meeting
credit spreads stable and liquidity increasing marginally
housing credit continues to deteriorate
cp getting rolled, cost lower for credit worthy borrowers
Bank lending increasing as cp declines- lending finding its way
back into the banking system
Bank lending standards annecdotally tighter
Jumbo mtgs improving and tightening to agencies- the fed has
mentioned this several times as an important indicator
With all humility!
Warren
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