by Calculated Risk on 9/14/2015 06:17:00 PM

From Reuters: Credibility, 'gradual' approach at stake as Fed weighs rate rise

A broad group of economists polled by Reuters last week bet on a September move by a slim margin; economists at banks that deal directly with the Fed, known as primary dealers, picked December as more likely; and traders of short term interest rate futures were giving a rate rise this week only a one-in-four chance.
...
As recently as July, Yellen, who took over the Fed's reins in early 2014, appeared to make the case for a September move, telling a congressional hearing that waiting longer could mean the need to hike more rapidly later. "An advantage to beginning a little bit earlier is that we might have a more gradual path," she said.
emphasis added

This will be an interesting announcement!

Tuesday:
• At 8:30 AM ET, Retail sales for August will be released. The consensus is for retail sales to increase 0.3% in August, and to increase 0.2% ex-autos.

• Also at 8:30 AM, NY Fed Empire State Manufacturing Survey for September. The consensus is for a reading of -0.5, up from -14.9.

• At 9:15 AM, the Fed will release Industrial Production and Capacity Utilization for August. The consensus is for a 0.2% decrease in Industrial Production, and for Capacity Utilization to decrease to 77.8%.

• At 10:00 AM, Manufacturing and Trade: Inventories and Sales (business inventories) report for July. The consensus is for a 0.1% increase in inventories

by Calculated Risk on 9/14/2015 04:31:00 PM

Some random thoughts ... Based on the data, I noted that a rate hike this week is possible, even likely.  However the consensus of economists is no rate hike at the FOMC meeting this week.

Economists at Goldman Sachs, Deutsche Bank, J.P. Morgan, Nomura, and many others see December as more likely than September (some see the Fed waiting until 2016). Economics professor Tim Duy also thinks a September rate hike is unlikely.   Duy and Goldman Sachs chief economist Jan Hatzius have probably been as accurate as anyone in forecasting Fed actions - and neither expects a rate hike this week.

The arguments against a rate hike are low inflation, low inflation expectations, market based financial tightening (stronger dollar, wider credit spreads), global economic weaknesses, recent stock market volatility, slack in the labor market, and asymmetrical risks (hiking too soon poses much larger risks than waiting too long).

Those arguing the FOMC will probably raise rates this week point to "some further improvement" in the labor market since June, and that the forces holding down inflation are dissipating.  The revisions to the FOMC projections will be mostly supportive of a rate hike - and it wasn't long ago that FOMC members were hinting they'd hike rates in September if the economy evolved as expected.

In a WSJ article yesterday, Harriet Torry and Jon Hilsenrath pointed out that every central bank that has raised rates over the last seven years had had to reverse course. See: Lesson for Fed: Higher Interest Rates Haven’t Been Sticking. Of course that will be true for the FOMC meetings in October and December too!

A rate hike this week still seems possible to me (just focusing on the data), but it seems every research piece I read says "no".

by Calculated Risk on 9/14/2015 02:18:00 PM

Another update ... during the recession, I wrote about the troubles in Las Vegas and included a chart of visitor and convention attendance: Lost Vegas.

Since then Las Vegas visitor traffic recovered to a new record high in 2014.

We only have data through July 2015, but visitor traffic is 2% above the record 2014 pace so far.

However convention attendance is only returning slowly. Here is the data from the Las Vegas Convention and Visitors Authority.  

Click on graph for larger image.

The blue bars are annual visitor traffic (left scale), and the red line is convention attendance (right scale). 

Through July, visitor traffic in 2015 is running 2.0% above 2014.

Convention traffic is up 0.6% from last year, and is still way below the pre-recession peak.  In general, the gamblers are back - and the conventions are slowly returning.

It seemed like there were many housing related conventions during the housing bubble, so it may be some time before convention attendance hits a new high.

by Calculated Risk on 9/14/2015 10:14:00 AM

Note: There were some large swings in LA area port traffic earlier this year due to labor issues that were settled on February 21st. Port traffic surged in March as the waiting ships were unloaded (the trade deficit increased in March too), and port traffic declined in April.

Container traffic gives us an idea about the volume of goods being exported and imported - and usually some hints about the trade report since LA area ports handle about 40% of the nation's container port traffic.

The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.

Click on graph for larger image.

On a rolling 12 month basis, inbound traffic was up 1.1% compared to the rolling 12 months ending in July.   Outbound traffic was down 0.4% compared to 12 months ending in July.

The recent downturn in exports might be due to the strong dollar and weakness in China.

The 2nd graph is the monthly data (with a strong seasonal pattern for imports).

Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year).

Imports were up 12% year-over-year in August; exports were down 4% year-over-year.

On a monthly basis, imports were at an all time high.

This data suggests a larger trade deficit with Asia in August, and that U.S. retailers are optimistic about the holiday shopping season.

by Calculated Risk on 9/13/2015 08:33:00 PM

From Harriet Torry and Jon Hilsenrath at the WSJ: Lesson for Fed: Higher Interest Rates Haven’t Been Sticking

In the seven years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been forced to retreat.
...
Central banks in the eurozone, Sweden, Israel, Canada, South Korea, Australia, Chile and beyond have tried to raise rates in recent years, only to reduce them again as their economies stumbled.

My guess is Fed Chair Yellen would say she is aware of the actions of the other central banks, and this one of the reasons the Fed has been so patient in waiting to raise rates.

Weekend:
• Schedule for Week of September 13, 2015

Monday:
• No economic releases scheduled.

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are up 10 and DOW futures are up 180 (fair value).

Oil prices were down slightly over the last week with WTI futures at $44.84 per barrel and Brent at $48.22 per barrel.  A year ago, WTI was at $93, and Brent was at $99 - so prices are down over 50% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.33 per gallon (down over $1.00 per gallon from a year ago).

by Calculated Risk on 9/13/2015 12:14:00 PM

Analysts are split on whether the FOMC will raise the Fed Funds rate this week.   It could go either way.

Those arguing the FOMC will probably wait until December (or until 2016) point to inflation below target, market based financial tightening (stronger dollar, wider credit spreads), global economic weaknesses, and recent stock market volatility.

Those arguing the FOMC will probably raise rates this week point to "some further improvement" in the labor market, and that the forces holding down inflation are dissipating.

Note: It is a different question if the Fed "should" raise rates in September, as opposed to "will" the Fed raise rates.  Clearly the risks are asymmetrical (hiking too soon poses much larger risks than waiting too long), and that argues for waiting a little longer.

For review, here is the key sentence in the July FOMC statement:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

Since that statement, the economy added 245 thousand jobs in July and 173 thousand jobs in August (and frequently August is revised up).  The unemployment rate declined from 5.3% in June to 5.1% in August.  This is probably the "some further improvement" in the labor market that the FOMC mentioned in the July statement.

So the focus at the FOMC meeting will probably be on inflation.  Is the FOMC "reasonably confident that inflation will move back to its 2 percent objective over the medium term" (emphasis added).

Fed Vice Chairman Stanley Fischer said two weeks ago:

As I have discussed, given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further. While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade. The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level. And slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well.
emphasis added

Although inflation may be low over the next few months (lower oil prices), it sounds like Fischer is "reasonably confident" that inflation will move higher in the "medium term".

What about the revisions to the FOMC projections?  (See below)  Projections for 2015 GDP will probably be revised up, the unemployment rate revised lower, and core inflation revised up slightly.  

My view: Based on the FOMC's previous statement, and the likely revisions to the FOMC projections, and Fischer's views on inflation, it seems likely the FOMC will raise rates this week.

Here are the June projections.  Since the release of those projections, Q1 GDP was revised up from -0.7% annualized to +0.6% annualized. And Q2 GDP was reported at 3.7% (and will probably be revised up a little more).

So it seems likely projections for 2015 GDP will be revised up.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2015	2016	2017
Jun 2015	1.8 to 2.0	2.4 to 2.7	2.1 to 2.5
Mar 2015	2.3 to 2.7	2.3 to 2.7	2.0 to 2.5

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 5.1% in August, so the unemployment rate projection for Q4 2015 will be revised lower. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2015	2016	2017
Jun 2015	5.2 to 5.3	4.9 to 5.1	4.9 to 5.1
Mar 2015	5.0 to 5.2	4.9 to 5.1	4.8 to 5.1

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July, PCE inflation was up only 0.3% from July 2014.   However, PCE inflation has been running at a 2.2% annualized rate over the last 6 months.  At that rate, PCE inflation will be up to 0.9% year-over-year in Q4.

On the other hand, oil prices have declined a little since July, and, as a result, PCE inflation could move down some more in August.  Overall PCE inflation projections will probably be mostly unrevised for 2015, and will be well below the FOMC's 2% target.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2015	2016	2017
Jun 2015	0.6 to 0.8	1.6 to 1.9	1.9 to 2.0
Mar 2015	0.6 to 0.8	1.7 to 1.9	1.9 to 2.0

PCE core inflation was up only 1.2% in July year-over-year.  However core PCE inflation has been running at a 1.7% annualized rate over the last 6 months.  Based on the last 6 months, it appears 2015 projections for core PCE will be revised up slightly.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2015	2016	2017
Jun 2015	1.3 to 1.4	1.6 to 1.9	1.9 to 2.0
Mar 2015	1.3 to 1.4	1.5 to 1.9	1.8 to 2.0

by Calculated Risk on 9/12/2015 02:41:00 PM

A few excerpts from a research note by Goldman Sachs chief economist Jan Hatzius and economist Zach Pandl: FOMC Preview: September and Beyond

We adopted a December liftoff forecast following the June FOMC meeting, largely because this seemed to be Chair Yellen’s own baseline. Recent events have further strengthened our conviction that next week is too early for a rate hike.

Even if we focus only on the economic data, it is hard to argue that developments have beaten expectations on net. Although the growth data have been quite good and the labor market has improved further, both wage and price inflation have fallen short of expectations.

Once we broaden the perspective to include financial conditions, developments have been worse than almost anyone expected. ... This has led us to shave our growth forecasts over the next three quarters by ¼ point, with risks that still tilt to the downside.

Fed officials have made it clear that “data dependent” policy refers not only to data releases but also to factors that could impinge on the outlook, including changes in financial conditions. ...

We expect the message from the committee as a whole—including the “dot plot” and the post-meeting statement—to signal a December liftoff. ...

However, we will listen closely for any hints in Chair Yellen’s press conference that she is now leaning toward a 2016 liftoff. Although most standard Taylor rules suggest that rates should rise soon, we find the arguments for a further delay—the asymmetric risk of moving too early vs. too late and the recent tightening of financial conditions—quite compelling and think they may resonate with her as well.
emphasis added

CR note: I will post an FOMC preview tomorrow.

by Calculated Risk on 9/12/2015 08:11:00 AM

The focus this week will be on the FOMC announcement and press conference on Thursday.

The key economic reports this week are August housing starts on Wednesday, and August retail sales on Tuesday.

For manufacturing, August Industrial Production will be released on Tuesday, and the September NY and Philly Fed manufacturing surveys will be released this week.

For prices, CPI will be released on Wednesday.

Also the preliminary annual benchmark revision for the employment report will be released on Wednesday, and the Fed's Q2 Flow of Funds report on Friday.

----- Monday, September 14th -----
No economic released scheduled.

----- Tuesday, September 15th -----
8:30 AM ET: Retail sales for August will be released.

This graph shows retail sales since 1992 through July 2015. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). On a monthly basis, retail sales were up 0.6% from June to July (seasonally adjusted), and sales were up 2.4% from July 2014.

The consensus is for retail sales to increase 0.3% in August, and to increase 0.2% ex-autos.

8:30 AM: NY Fed Empire State Manufacturing Survey for September. The consensus is for a reading of -0.5, up from -14.9.

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for August.

This graph shows industrial production since 1967.

The consensus is for a 0.2% decrease in Industrial Production, and for Capacity Utilization to decrease to 77.8%.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for July.  The consensus is for a 0.1% increase in inventories.

----- Wednesday, September 16th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: The Consumer Price Index for August from the BLS. The consensus is for a 0.1% decrease in CPI, and a 0.2% increase in core CPI.

10:00 AM: The September NAHB homebuilder survey. The consensus is for a reading of 61, unchanged from August.  Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Thursday, September 17th -----
8:30 AM: Housing Starts for August.

Total housing starts increased to 1.206 million (SAAR) in July. Single family starts increased to 782 thousand SAAR in July.

The consensus for 1.168, down from July.

8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 275 thousand initial claims, unchanged from 275 thousand the previous week.

10:00 AM: the Philly Fed manufacturing survey for September. The consensus is for a reading of 6.3, down from 8.3.

10:00 AM: 2015 Current Employment Statistics (CES) Preliminary Benchmark Revision. From the BLS:

"Each year, the Current Employment Statistics (CES) survey estimates are benchmarked to comprehensive counts of employment from the Quarterly Census of Employment and Wages (QCEW) for the month of March. These counts are derived from state unemployment insurance (UI) tax records that nearly all employers are required to file. ... The final benchmark revision will be issued with the publication of the January 2016 Employment Situation news release in February."

2:00 PM: FOMC Meeting Announcement.  The FOMC might raise the Fed Funds rate at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chair Janet Yellen holds a press briefing following the FOMC announcement.

----- Friday, September 18th -----
10:00 AM ET: Regional and State Employment and Unemployment for August.

12:00 PM: Q2 Flow of Funds Accounts of the United States from the Federal Reserve.

by Calculated Risk on 9/11/2015 06:38:00 PM

During the recession, I started following the Sacramento market to look for changes in the mix of houses sold (equity, REOs, and short sales). For a few years, not much changed. But in 2012 and 2013, we saw some significant changes with a dramatic shift from distressed sales to more normal equity sales.

This data suggests healing in the Sacramento market and other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In August, total sales were up 16.2% from August 2014, and conventional equity sales were up 21.3% compared to the same month last year.

In August, 7.8% of all resales were distressed sales. This was down from 9.1% last month, and down from 11.7% in August 2014.  This is the lowest percentage of distressed sales since they started breaking out distressed sales).

The percentage of REOs was at 3.5% in August, and the percentage of short sales was 4.3%.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales.

There has been a sharp increase in conventional (equity) sales that started in 2012 (blue) as the percentage of distressed sales declined sharply.

Active Listing Inventory for single family homes decreased 14.9% year-over-year (YoY) in August.  This was the fourth consecutive monthly YoY decrease in inventory in Sacramento (a big recent change).

Cash buyers accounted for 15.8% of all sales (frequently investors).

Summary: This data suggests a more normal market with fewer distressed sales, more equity sales, and less investor buying.

by Calculated Risk on 9/11/2015 03:01:00 PM

From Nomura:

"We believe that the FOMC will wait until December to increase short-term interest rates. This judgment is primarily due to the uncertainty surrounding the inflation outlook and the evolution of financial conditions going forward. The possible impact of recent financial market movements on the economy is not yet clear, but should become clearer by the December FOMC meeting. That said, a September liftoff is still on the table as economic data have been more solid and some FOMC participants still seem confident that inflation will evolve in line with their outlook. In addition to the FOMC statement, we will also receive the Committee’s summary of economic projections and Chair Yellen will hold a press conference. How Chair Yellen addresses the recent global and financial market developments and her view of their impact on the economic and inflation outlook will be important for our expectation of the path of policy."

CR note: I will post an FOMC preview this weekend.