NEW$ & VIEW$ (18 DEC. 2014): Fed Up! CPI Down. Oil Up. Bears Down.

Fed Sets Stage for Rate Hikes The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis.

In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of “beginning to normalize the stance of monetary policy,” the most direct formal reference to raising rates it has made in years.

The new statement said the Fed would be “patient” before raising rates, adding that the overall outlook hadn’t much changed from earlier assurances that rates would stay low for a “considerable time.” (…)

“The committee considers it unlikely to begin the normalization process for at least the next couple of meetings,” she said. “This assessment, of course, is completely data-dependent,” she added, meaning it will depend on the path of the economy.

The central bank’s next scheduled policy meeting is Jan. 27-28. The following is March 17-18. (…)

In forecasts released with the statement, officials said they expected rates to end up anywhere between 0.375% and 4% by the end of 2016. Within that range, 17 officials project 13 different points where interest rates might end up.

Fifteen of 17 policy makers said they expected to raise short-term interest rates in 2015 and their median estimate—meaning half of estimates were above and half below—put short-term borrowing rates at 1.125% in 12 months. The median rate estimate for 2016 was 2.5% and for 2017 was 3.625%.

Those estimates are all modestly lower than the Fed projected in September, meaning that even though officials continue to expect to move rates up next year, they see a very gradual approach once they start. The estimates—though preliminary and subject to change—imply Fed officials have in mind four quarter-percentage point moves in 2015. (…) (Chart below from BloombergBriefs)

Fed officials are sticking to their view that the downward pressure on inflation will be sharp but short-lived. Officials projected 1.0% to 1.6% consumer price inflation in 2015, a large downward revision from earlier estimates. But they saw it returning to between 1.7% and 2.0% in 2016 and between 1.8% and 2.0% in 2017.

Ms. Yellen said the Fed would start raising rates as long as it was “reasonably confident” that inflation would move back to the 2% goal.


The above chart points where the Fed thinks short term rates will be in one year. At 1.1%, if Treasury rates stay at 2.2%, the 120 Yield Spread will drop to 110…But that’s only in 12 months…Still, it gives an ideas what “normal” rates should be.

Fed’s Janet Yellen Not Worried About Falling Oil Prices, Russian Turmoil

(…) In fact, she said Wednesday at her post-policy meeting press conference, falling oil prices are a net positive for the U.S. economy even if they weigh on inflation for a time. (…)

Ms. Yellen conceded that lower oil prices could lead to “reduced drilling activity” and less capital investment in domestic production efforts. But “on balance, I would see these developments as a positive for the standpoint of the U.S. economy,” she said.

Not so much for Russia, which Ms. Yellen said “has been hit very hard by the decline in oil prices, and the ruble has depreciated enormously in value.”

But developments in Russia likely won’t hurt the U.S. economy, she said.

Trade and financial links between the U.S. and Russia “are actually relatively small,” Ms. Yellen said, and “spillovers to the United States, both through trade and financial channels, would be small.”

Europe, though, is “somewhat more exposed to Russia,” she said.

Some reactions (WSJ):

  • “What was the point! The last FOMC meeting of 2014 was not just a disappointment, the outcome was plainly bizarre, if not outright confusing.  For a Fed that seeks to introduce more clarity and transparency of its views, they have in fact done the opposite. The tortuous, semantic-conscious language of the statement is really an exercise in obfuscation, one that harkens back to the days of Alan Greenspan. In stark contrast to this now stale Fed note is the fact the U.S. economy is unambiguously stronger and more dynamic than anytime we have seen in at least a decade. Frankly, I think the FOMC has done the institution some harm. By retaining the ‘considerable time’ phrase, we begin to worry whether the Fed is now falling behind the economic cycle. Slipping in the term ‘patient’ changes really nothing.” –Bernard Baumohl, The Economic Outlook Group
  • (…) the current verbiage ties the fed funds liftoff explicitly to economic criteria, namely inflation. Bottom line: If inflation does not trend toward 2% next year, then the Fed will not begin raising interest rates.” –Joseph LaVorgna, Deutsche Bank 
Pointing up ECB Offical Signals Stimulus

A European Central Bank executive board member, in an interview with The Wall Street Journal, sent one of the clearest signals to date that the ECB is poised to embark on large-scale asset purchases early next year, as the bank grapples with a weak economy and dangerously low inflation.

ECB board member Benoît Coeuré also provided details of the ECB’s plans to publish minutes of its policy meetings starting next year, saying the accounts should be released four weeks after meetings and will be “substantial” in providing the balance of views among officials.

“I see a broad consensus around the table in the governing council that we need to do more” to raise inflation and boost the economy, Mr. Coeuré said at his office in the ECB’s new skyscraper headquarters in Frankfurt. (…

Mr. Coeuré’s comments were noteworthy in that they suggest that the central bank’s threshold for action has now largely been met, and that officials have moved to the design phase of a quantitative-easing program focused on government bonds. (…)

From Bloomberg:

“The ECB has built up enough credibility on its own,” said Holger Schmieding, chief economist at Berenberg Bank in London. “That the Bundesbank may object to sovereign-bond purchases is largely taken for granted by markets. Tacit support from Berlin would neutralize Bundesbank objections in the German public debate.”

German Business More Bullish German business confidence improved for the second consecutive month, a key indicator showed, as the eurozone’s largest economy benefits from lower oil prices and a weaker euro.

The Munich-based Ifo Institute’s lead indicator rose to 105.5 in December, after the previous month’s 104.7. (…) Earlier this week a separate indicator of economicconfidence strongly outperformed analysts’ forecasts. The ZEW index rose to 34.9 in December versus 11.5 in the previous month.

U.S. Consumer Prices Post Largest Decline Since 2008; Core Prices Moderate

The consumer price index fell 0.3% during November (+1.3% y/y) following unrevised stability during October. It was the largest monthly decline since December 2008 and outpaced expectations for a 0.1% dip in the Action Economics Forecast Survey. A 3.8% energy price decline (-4.9% y/y) led the CPI lower. Prices excluding food & energy ticked up an expected 0.1% (1.7% y/y) after a 0.2% rise.

Energy prices were pulled lower by a 6.6% drop in gasoline prices (-10.5% y/y). Prices have fallen 14.3% during the last five months. Fuel oil prices declined 3.5% (-10.1% y/y) while natural gas prices eased 1.7% (+3.2% y/y), the sixth decline in the last seven months.

Prices for goods excluding food & energy declined 0.4%, pulled down by a 1.3% drop in appliance costs (-4.9% y/y) and a 1.1% decline in apparel prices (-0.4% y/y).

Pointing up Core CPI has been rising at 1.2% annualized rate in the past 6 and 4 months (table from Cleveland Fed).


U.S. Mortgage Loan Applications Decline

The Mortgage Bankers Association reported that their total Mortgage Market Volume Index fell 3.3% last week (-3.9% y/y). Applications to purchase a home fell 6.9% (-5.3% y/y) but application to refinance were little changed (-3.0% y/y).

Raymond James adds:

Recent housing data points have turned choppy again. December homebuilder sentiment fell slightly, the MBA builder application survey fell 13% in November, and single-family permits also fell 1% last month. Also, the NAR’s Realtor Confidence Index showed a drop in October for current sales expectations and the six-month outlook, roughly 10-15% below year-ago levels.

Oil’s Plunge Is Pushing Mortgage Rates Down Low oil prices may offer a hidden gift to consumers beyond the gas pump: They could also indirectly support lower mortgage rates.

Pointing up Saudi minister says oil drop is temporary Ali al-Naimi’s comments provide some support for crude price

(…) “I am optimistic about the future. What we are facing now and what the world is facing is a temporary situation and will pass,” Mr Naimi told the country’s press agency.

Mr Naimi blamed the sharp falls in price on an increase in non-Opec supply at time when demand was slowing down amid weaker economic growth. But he said the market “must not forget the negative role of speculators” in causing volatility.

Mr Naimi rejected any link between the kingdom’s oil policy and wider political motives, saying it was difficult for the Gulf nation and other members of Opec to reduce output and sacrifice market share. (…)

Striking an optimistic tone, Mr Naimi said he expected demand for crude to grow when the rebound in the global economy gathers pace. He also pointed out that the Kingdom has the ability to withstand a period of lower prices because of its large foreign exchange reserves.

Although the Kingdom would push ahead with its policy to let the market determine prices and balance supply and demand, Mr Naimi revealed that Opec had sought co-operation from other oil producers, but “those efforts were not successful”. (…)

Spending slashed as oil industry waits for new ‘price equalization point’

(…) Oil’s free fall has now washed through all quarters of the energy sector, hitting capital plans from oil sands and shale zones in Alberta to the Grand Banks offshore Newfoundland and Labrador, and the icy waters of the Beaufort Sea.

Husky lowered its 2015 budget by a third to $3.4-billion, from $5.1-billion this year, as spending winds down on its Liwan gas project in the South China Sea and its Sunrise joint venture in the oil sands. The Calgary-based company, controlled by Hong Kong mogul Li Ka-shing, said it would delay a multibillion-dollar expansion at its White Rose field offshore Canada’s East Coast for one year as it hunts for cost savings.

Oil sands player MEG chopped its 2015 spending plan to $305-million, down 75 per cent from $1.2-billion originally. Penn West Petroleum Ltd., pressured by high debt , slashed its budget next year by $215-million and cut its quarterly dividend by 78.5 per cent. Also Wednesday, U.S. oil major Chevron Corp. scrapped plans to drill in Arctic waters, citing “economic uncertainty.” (…)

China housing market trims losses

(…) House prices on new homes fell by an average of 3.6 per cent in November from a year earlier, according to Financial Times calculations based on the government’s survey of 70 large and medium-sized cities. That is the largest annual drop on record since the government stopped publishing nationwide price data at the beginning of 2011.

But on a monthly basis, November’s data showed signs of improvement. New house prices fell by 0.6 per cent in November from a month earlier, down from declines of 0.8 per cent in October and 1.0 per cent in September. (…)

“The pace of destocking in various cities is accelerating . . . There is hope that first-tier cities will halt their monthly declines and begin a rebound by the year-end.”

Indeed, data out last week showed property sales volume at an 11-month high in floor-area terms in November, although it was still down 13 per cent from a year earlier. (…)

Here’s to the Santa Claus Rally It’s beginning to look a lot like Christmas.

(…) The Dow Jones Industrial Average closed up 288 points, finishing with its best performance this year.

Thursday morning stocks in Europe are rallying, and the story was the same in Asia.

And all it took was a couple of words. By adding that it will be “patient” in its approach to increasing short-term interest rates and surprisingly maintaining wording that it will be a “considerable time” until borrowing costs rise, the Fed calmed market jitters about the start of tighter monetary policy against a backdrop of slow global growth and disinflation. (…)

Since 1969, the S&P 500 has averaged a 1.5% gain during the last five trading days of the year and first two sessions of the New Year, according to Stock Trader’s Almanac. The so-called “Santa Claus Rally” has held true for the past six years as stocks have risen. (…)

In every other pullback this year, excluding October, the buy-the-dippers came in when stocks were down 5%, noted Art Cashin, UBS director of floor operations at the NYSE. (…)

The Secular Extinction Of Stock Market Bears

Here’s a truly amazing chart:image


Pointing up Pointing up CHAOS IN RUSSIA

Sergei Guriev, a former rector of the New Economic School in Moscow, is professor of economics at Sciences Po in Paris. From the FT:

(…) What seems to have triggered the chaos was an unusual deal involving the bonds of Russia’s biggest oil company, Rosneft. Last year, in the era of three-digit oil prices, the state-owned group borrowed about $40bn from leading international and Russian banks to acquire its former competitor, Moscow-based joint venture TNK-BP. Given low oil prices and the impact of western sanctions in response to Russia’s actions in Ukraine, it is no longer clear how this debt will be repaid or refinanced.

This is why Rosneft has asked several times this year to borrow $40bn from Russia’s sovereign wealth fund. But, since the money was unavailable, at the end of last week Rosneft issued rouble-denominated bonds worth $11bn. The speculation is that these were bought by the largest state banks. The interest that investors are charging Rosneft on these bonds is substantially below even that of Russian sovereign debt of similar maturity — which is unprecedented for a company, especially one under international sanctions. Coincidentally, the buyers of these bonds were then permitted by the central bank to use them as collateral to borrow directly from the bank itself.

This deal has sent a strong message to the market. First, it showed Moscow’s priority is not fighting inflation or stabilising the rouble but supporting Rosneft. Second, it demonstrated that the central bank is ready to use highly questionable tools. The Rosneft deal has increased the risks in the banking system. The state lenders already have large exposure to the oil group — and any purchase of overpriced rouble bonds would erode their capital further.

Third, it became clear that the government and the central bank have neither strategy nor a clear understanding of how to deal with the present predicament, and certainly not in concert with a poor investment climate and resulting record capital flight.

The markets see a gathering storm but no captain. In recent weeks, Russia’s worst fears have become reality: the oil price has fallen; Asian markets have declined to bail out the nation’s banks and companies; hopes for lifting sanctions have become even more illusory.

Unless sanctions are lifted and the oil price rebounds, the Russian economy will grow much worse in 2015. (…)

What will happen next? A month ago, the central bank described an “un­likely” scenario with oil at $60 a barrel and a 4 per cent fall in GDP in 2015. Now, with the oil price actually at $60, a mild recession sounds like a pipe dream. The financial disruption and the interest rate rise in the middle of Tuesday night point to a full-blown economic disaster. (…)

There are only two remaining certainties. First, unless sanctions are lifted and the oil price rebounds, the Russian economy will grow much worse in 2015. Second, we can predict that Moscow’s response — in both economic and foreign policy — will be unpredictable.

More from the FT:

  • In a sign of the pressure policy makers are under, Sergey Shvetsov, deputy governor of the central bank, said the situation was “critical”: “I couldn’t imagine even a year ago that such a thing would happen — even in my worst nightmares,” he said at an event in Moscow.
  • “Russia is in full-blown currency crisis,” said Alexander Moseley, fund manager at Schroders. “It is difficult to see the underlying source of stress ending”.
  • “Investors are pricing in that Russia is going to experience quite a nasty recession, which will feed through to other countries,” said Andrew Milligan, head of global strategy at Standard Life Investments. “There are understandable worries in what are fast becoming very illiquid markets ahead of Christmas.”
  • While years of prudent fiscal policy and a war chest of $400bn in foreign exchange reserves have helped Russia fend off an outright financial crisis, the rouble rout has greatly increased the burden of more than $600bn in external debt held by banks and companies. Little of this debt can be refinanced because western sanctions have largely locked Russian borrowers out of US and European capital markets.

Call me Careful out there!

Home Building Faltered in November, but Broader Trends Point Up

Overall housing starts—including apartments and other multifamily dwellings—fell 1.6% in November to a seasonally adjusted annual rate of 1.028 million units, but have held above 1 million mark for three consecutive months, the Commerce Department said Tuesday.

Within that total, construction of new single-family homes fell in November to an annual rate of 677,000, after surging to a post-recession high in October.

November housing permits, a leading indicator of construction, fell 5.2% to 1.035 million.

I have yet to find the “broader trends pointing up” suggested by the headline. This Haver Analytics chart does not really point up just yet. Starts follow permits. Single family permits have been essentially flat for over a year.


And how about this chart from CalculatedRisk? Any “broader trends pointing up”?

Europe’s Deflation Struggle Intensifies Europe’s struggle to avoid a slide into deflation suffered a setback in November, as consumer prices across the European Union’s 28 members rose at the slowest annual pace in five years.

The bloc’s statistics agency on Wednesday confirmed that consumer prices in the 18 countries that share the euro were just 0.3% higher than in the same month of 2013, while they were 0.4% higher in the EU as a whole. In October, the annual rates of inflation were 0.4% and 0.5%, respectively. (…)

Total hourly labor costs were up 1.3% from the third quarter of 2013, a slight slowdown from the 1.4% rate of increase recorded in the second quarter. Wage rises were unchanged at 1.4%.

Not mentioned in the WSJ article (?): core inflation was unchanged in November and +0.6% YoY, roughly in line with the previous 5 months.

As China’s Economy Slows, So Too Does Growth in Workers’ Wages

Just 20 of the 32 Chinese provinces and regions tracked by China Labor Bulletin raised their statutory minimum wages so far in 2014, fewer than the 27 areas that lifted base pay levels last year, according to report published Tuesday by the Hong Kong-based group.

The latest data also marked a third-straight year of decelerating minimum-wage growth, according to China Labor Bulletin.

In 2014, the 20 regions that have boosted their minimum wages did so by an average of 13%, lower than the average 17% seen last year. This also compared to an average increase of 20% by 25 regions in 2012, and the average 22% increase by 24 regions in the preceding year.

(…) wage growth over the past decade has already all but eroded China’s competitive edge in labor costs over many of its regional rivals, according to the academy.

In particular, average wages in China’s manufacturing sector now exceed comparable levels in South and Southeast Asia by as much as six times, the think tank said.

China Warms To a More Flexible Yuan

After years of allowing nearly uninterrupted gains in the yuan, China is growing more willing to let it depreciate modestly while seeking to add flexibility to its trading, according to Chinese officials and experts familiar with the country’s policy-making.

The shift comes as the People’s Bank of China grapples with what some within the central bank call “unprecedented” downward pressure on the yuan, thanks to a strengthening U.S. dollar and a slowing Chinese economy. The yuan has fallen more than 2% against the dollar since the beginning of this year, putting it on track for its first annual decline in five years. On Wednesday, it was down 2.3% against the dollar for the year.

But the PBOC is unlikely to permit the yuan to slide more than 3% against the dollar, the officials and advisers to the central bank say. Big yuan depreciation could cause money to flow out of the country just when China needs funds to spur economic growth. (…)