Schedule for Week of March 9th
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World View & Market Commentary.
Forest first; Trees second.
Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.
In the Columbus Day shortened week of October 14, application activity for home mortgages fell a very steep 14.9 percent. The headline's two components show a 16.6 percent drop for refinancing applications and an 8.8 percent drop for purchase applications. The federal holiday is one likely factor behind the decline as is a rise in interest rates with the average 30-year loan up eight basis points to 4.25 percent.
Headline inflation for the consumer remained on the warm side while core inflation softened. The consumer price index in September increase 0.3 percent, following a 0.4 percent jump the month before. The latest number matched the consensus forecast. Excluding food and energy, the CPI posted a mild 0.1 percent boost after rising 0.2 percent in August. The market expectation was for a 0.2 percent gain.
Turning to major components, energy increased a strong 2.0 percent after rising 1.2 percent in August. Gasoline spurted 2.9 percent higher after increasing 1.9 percent in August. Food price inflation continued hot, rising 0.4 percent in September after accelerating to a 0.5 percent pace the month before.
Within the core, apparel declined 1.1 percent after a series of strong gains. Recreation dipped 0.1 percent. Used vehicles fell 0.6 percent while new vehicles were flat. Also, shelter cost inflation slowed to a 0.1 percent rise after two moderately strong gains.
Year-on-year, overall CPI inflation rose to 3.9 percent from 3.8 percent (seasonally adjusted) in August. The core rate held steady at 2.0 percent on a year-ago basis. On an unadjusted year-ago basis, the headline number was up 3.9 percent in September and the core was up 2.0 percent.
Today's report was more encouraging than yesterday's PPI report. However, energy and food components are remaining stubbornly strong despite softening in the core. The September CPI report will not encourage the inflation hawks within the Fed to back down.
September housing data appears in part to be coming off hurricane effects in August as starts jumped and permits eased back. But strength also appears to be more broad based than this effect. Housing starts in September rebounded a sharp 15.0 percent after declining 7.0 percent the month before. The September annualized pace of 0.658 million units topped the consensus forecast for 0.590 million units and is up 10.2 percent on a year-ago basis. The comeback in September was led by a monthly 51.3 percent surge in the multifamily component, following a 16.8 percent drop in August. The single-family component edged up 1.7 percent after a 2.8 percent decrease the month before.
By region, the jump in starts was led by an 18.1 percent increase in the West. Other regions also gained with Northeast up 12.7 percent; the Midwest up 9.3 percent; and the South up 15.7 percent. Only the increases in the Northeast and South were partially related to rebounding from hurricane effects in August.
Housing permits edged slipped 5.0 percent after rebounding 4.0 percent in August. The September rate of 0.594 million units annualized came in lower than analysts' projection for 0.620 million. Permits in September are up 5.7 percent on a year-ago basis.
The September starts report shows new housing activity to be stronger than expected. The big question is whether the demand exists to absorb added supply. Yesterday's modest improvement in the NAHB housing market index suggests that there could be some lift coming in new home sales. But home builders are not getting too optimistic as indicated by pullback in housing permits. At this point, caution is still a good idea.
Bank of America Said to Split Regulators Over Shifting Merrill Derivatives
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”
Headline inflation in September surged at the producer level while the core rate nudged up. Producer prices jumped 0.8 percent in September, following no change in August. The September number was much higher than analysts' projection forecast for a 0.3 percent boost. Turning to major components, energy rebounded 2.3 percent after falling 1.0 percent in August. Gasoline gained 4.2 percent, following a 1.0 percent decrease the prior month. Food costs slowed to a still warm 0.6 percent rise after surging 1.1 percent in August.
At the core level, PPI inflation posted a 0.2 percent rise, compared to a 0.1 percent increase in August. The median market forecast called for an increase of 0.1 percent. In September, one-third of the advance can be traced to prices for light motor trucks, which rose 0.6 percent.
For the overall PPI, the year-ago pace in September came in at 7.0 percent, compared to 6.5 percent in August (seasonally adjusted). The core rate in September held steady at 2.5 percent. On a not seasonally adjusted basis for September, the year-ago headline PPI was up 6.9 percent while the core was up 2.5 percent.
On the news, equity futures edged down. Treasury yields were little changed with traders still focusing on less robust GDP growth in China. The latest PPI data indicate that underlying inflation is not yet easing as soon as the Fed had hoped despite recent softness in commodities prices. This likely will heighten the internal Fed debate over the costs and benefits of additional easing.
- Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.
- Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.
- Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.
- New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.
Business conditions in the New York manufacturing region are contracting for the fifth month in a row according to the Empire State index for October which shows little change at minus 8.48 vs September's minus 8.82. Positives include new orders which at plus 0.16 show a fractional monthly gain to end two months of contraction. Shipments, at plus 5.33, show a moderate monthly gain. Also positive is employment, at plus 3.37, to indicate a mild monthly rise in the sample's workforce.
Now the negatives. Unfilled orders, at minus 4.49, are contracting for the fourth month in a row. Manufacturers in the region have been keeping shipments and employment up by working down backlogs which however are becoming increasingly thin. Inventories, at minus 8.99, are contracting for the fourth month in a row suggesting that the region's manufacturers, hit by weakness in new orders, see their inventories as too high. Delivery times, at minus 1.12, have been getting a bit shorter hinting at over capacity in the shipping sector as truck and rail firms chase fewer and fewer orders.
Pressures on both input and output prices are easing in what is also consistent with slowing conditions. Another negative is the six-month outlook which at 6.74 is down from 13.04 in the prior month and is at a new low for the recovery. This echoes other readings on sentiment, including those on consumer sentiment, that spirits are unusually depressed. The next look at this month's conditions in the manufacturing sector will be Thursday with the Philly Fed's report.
Manufacturing-especially autos-continues to lead industrial production. In September, industrial production advanced 0.2 percent, following no change the month before (originally up 0.2 percent) and a 1.1 percent jump in July (previously up 0.9 percent). Analysts had projected a 0.2 percent rise for September.
By major industry, manufacturing improved to a 0.4 percent rise after a 0.3 percent boost in August (previously estimated at up 0.5 percent). The auto component increased another 0.7 percent after a gain of 1.5 percent in August. Outside of autos, manufacturing is still healthy. Strength was in durables as nondurables declined marginally. Excluding motor vehicles, manufacturing rose 0.3 percent, equaling the pace for the prior month.
In other major sectors, utilities output fell 1.8 percent after declining 2.9 percent in August. Mining output expanded 0.8 percent, matching the growth rate for August.
On a seasonally adjusted year-on-year basis, overall industrial production was up 3.2 percent in September, compared to 3.3 percent in August.
Overall capacity utilization in August improved to 77.4 percent from 77.3 percent in August (originally 77.4). The September rate was slightly lower than analysts' estimate for 77.5 percent.
The manufacturing sector continues to post better numbers at the national level than in many regional surveys. Gains continue to be moderately healthy and somewhat broad based though more in durables than in nondurables.
On the news release, equity futures were mixed and little changed compared to prior to the release. The earlier released Empire State manufacturing survey was a little disappointing and weighed on equity futures.
The traditional non-NAICS numbers for industrial production may differ marginally from the NAICS basis figures.