by Calculated Risk on 12/14/2015 09:21:00 AM

A few excerpts from an article by Tim Duy: Makes You Wonder What The Fed Is Thinking

The Fed is poised to raise the target range on the federal funds rate this week. More on that decision tomorrow. My interest tonight is a pair of Wall Street Journal articles that together call into question the wisdom of the Fed's expected decision. The first is on inflation, or lack thereof, by Josh Zumbrun:

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

A key reason for the Federal Reserve to raise interest rates is to be ahead of the curve on inflation. But given their poor inflation forecasting record, not to mention that of other central banks ... why are they so sure that they must act now to head off inflationary pressures? One would expect waning confidence in their inflation forecasts to pull the center more toward the views of Chicago Federal Reserve President Charles Evans and Board Governors Lael Brainard and Daniel Tarullo and thus defer tighter policy until next year.

Now combine the inflation forecast uncertainty with the growing consensus among economists that the Fed faces the zero bound again in less than five years. This one's from Jon Hilsenrath:

Among 65 economists surveyed by The Wall Street Journal this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done—meaning financial institutions have to pay to park their money with the central banks...

Not a surprising conclusion given that Fed officials expect the terminal fed funds rate in the 3.3-3.8 percent range (central tendency) while the 2001-03 easing was 5.5 percentage points and the 1990-92 easing was 5.0 percentage points. You see of course how the math works.
...
Bottom Line: Given that the Fed likely only gets one chance to lift-off from the zero bound on a sustained basis, it is reasonable to think they would wait until they were absolutely sure inflation was coming. Even more so given the poor performance of their inflation forecasts. But the Fed thinks there is now more danger in waiting than moving. And so into the darkness we go.

by Calculated Risk on 12/13/2015 07:47:00 PM

From Jon Hilsenrath at the WSJ: Fed Officials Worry Interest Rates Will Go Up, Only to Come Back Down

Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years.

But that’s if all goes as planned. Their big worry is they’ll end up right back at zero.

Weekend:
• Schedule for Week of December 13th

• FOMC Preview and Review of Projections

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

Oil prices were down over the last week with WTI futures at $35.62 per barrel and Brent at $37.93 per barrel.  A year ago, WTI was at $58, and Brent was at $61 - so prices are down almost 40% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.01 per gallon (down about $0.55 per gallon from a year ago).  Prices should fall under $2.00 per gallon soon.

by Calculated Risk on 12/13/2015 12:08:00 PM

Almost all analysts are expecting the FOMC to raise the Fed Funds rate this week. Most analysts think the federal funds rate will be increased from a target range of "0 to 1/4 percent" to a range of "1/4 to 1/2 percent".

The current effective rate is 0.14 percent, close to the middle of the current range.

For review, here are the key paragraph in the October FOMC statement:

"In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. 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. "
emphasis added

Since that statement, the economy added 298 thousand jobs in October and 211 thousand jobs in November.  The unemployment rate declined further from 5.1% in September to 5.0% in November.  This is the "some further improvement" in the labor market that the FOMC mentioned in the October statement.

Also, based on recent comments, it seems several key members of the FOMC are reasonably confident inflation will move back towards the 2% target.   Of course headline inflation will take another dip due to the recent decline in oil prices.

Here are the September FOMC projections.  Since the release of those projections, Q2 GDP was revised up from 3.7% annualized to +3.9% annualized. And Q2 GDP was reported at 2.1%.  It appears GDP will be up around 2.2% for this year - in the September forecast range.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2015	2016	2017
Sept 2015	2.0 to 2.3	2.2 to 2.6	2.0 to 2.4
Jun 2015	1.8 to 2.0	2.4 to 2.7	2.1 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 5.0% in October and November, so the unemployment rate projection for Q4 2015 will probably be changed to 5.0% (at the lower end of Sept projection).

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2015	2016	2017
Sept 2015	5.0 to 5.1	4.7 to 4.9	4.7 to 4.9
Jun 2015	5.2 to 5.3	4.9 to 5.1	4.9 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 October, PCE inflation was up only 0.2% from October 2014.  Since oil prices have declined further since September, headline PCE inflation could move down some more in November and December.  Overall PCE inflation projections will probably be revised down 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
Sept 2015	0.3 to 0.5	1.5 to 1.8	1.8 to 2.0
Jun 2015	0.6 to 0.8	1.6 to 1.9	1.9 to 2.0

PCE core inflation was up only 1.3% in October year-over-year.  It appears PCE inflation will be in the September forecast range, and will be mostly unrevised.

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

Overall, it appears the labor market has improved, and the economy is growing about as expected - although inflation is still low.

by Calculated Risk on 12/12/2015 05:41:00 PM

A few excepts from a research piece by Goldman Sachs economists Zach Pandl and Jan Hatzius: December FOMC Preview

Next week we expect the FOMC to raise its target range for the federal funds rate to 0.25-0.50%, bringing an end to the seven-year period of near-zero interest rates. With this action essentially priced in, focus will be on the committee’s policy guidance for 2016 and beyond.

If the FOMC raises rates next week the post-meeting statement will require a thorough rewrite. We expect three main changes. First, we expect the committee to upgrade its description of the labor market in light of firmer payroll growth. Second, we expect the statement to remove some of its relatively cautious language on inflation, while continuing to emphasize that inflation will remain a key determinant of the policy outlook. Third, we look for the statement to show a clear baseline for additional rate hikes—it will not signal “one and done”.

Although Fed officials regularly describe the likely pace of rate hikes as “gradual” we do not expect this term to appear in the statement itself. Recent comments suggest some hesitation about adopting “gradual” as official guidance, despite the frequent mentions. That being said, from the press conference guidance and the Summary of Economic Projections (SEP), the gradual message should be all but explicit.

by Calculated Risk on 12/12/2015 08:31:00 AM

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

The key economic report this week is November housing starts on Wednesday.

For manufacturing, November Industrial Production will be released on Wednesday, and the December NY, Philly and Kansas City Fed manufacturing surveys will be released this week.

For prices, CPI will be released on Tuesday.

----- Monday, December 14th -----
No economic releases scheduled.

----- Tuesday, December 15th -----
8:30 AM: The Consumer Price Index for November from the BLS. The consensus is for no changed in CPI, and a 0.2% increase in core CPI.

8:30 AM: NY Fed Empire State Manufacturing Survey for December. The consensus is for a reading of -7.0, up from -10.7.

10:00 AM: The December NAHB homebuilder survey. The consensus is for a reading of 63, up from 62 in November.  Any number above 50 indicates that more builders view sales conditions as good than poor.

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

8:30 AM: Housing Starts for November.

Total housing starts decreased to 1.060 million (SAAR) in October. Single family starts decreased to 722 thousand SAAR in October.

The consensus for 1.140 million, up from October.

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

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 77.4%.

During the day: The AIA's Architecture Billings Index for November (a leading indicator for commercial real estate).

2:00 PM: FOMC Meeting Announcement.  The FOMC is expected to 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.

----- Thursday, December 17th -----
8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 270 thousand initial claims, down from 282 thousand the previous week.

10:00 AM: the Philly Fed manufacturing survey for December. The consensus is for a reading of 1.2, down from 1.9.

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

11:00 AM: the Kansas City Fed manufacturing survey for December.

by Calculated Risk on 12/11/2015 08:11:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Lower as Markets Grow Anxious Ahead of Fed

Mortgage rates recovered yesterday's losses in many cases, and moved even lower in many other cases. The mortgage sector was one of the tamer performances of the day when it comes to financial markets. Even if we focus solely on the mortgage-backed-securities (MBS) that most directly affect mortgage rates, we see a lot more movement in the marketplace than we see on lender rate sheets.

This dichotomy between market movement and rate sheets is fairly common when volatility increases or on the approach to a significant economic event. That's especially true of Friday afternoons. With a big increase in volatility on this Friday before next week's big Fed announcement, today meets all the conditions.

Still, rates did drop--just not as much as we might like. The most prevalently-quoted conventional 30yr fixed rate moved back down to 3.875% for some of the more aggressive lenders, though most remain at 4.0%. Among the lenders quoting the same rates as yesterday, upfront costs would be slightly lower (or lender credit slightly higher).
emphasis added

Here is a table from Mortgage News Daily:

Home Loan Rates

View More Refinance Rates

by Calculated Risk on 12/11/2015 04:20:00 PM

Another short preview, this one from economists at Nomura:

We believe that the FOMC will raise short-term interest rates at its December meeting as comments from Fed officials in recent months have suggested that the bar for liftoff is low. With liftoff quite likely, the attention is on what happens after liftoff. We think that the FOMC will want to send the signal that we should not expect liftoff to be followed by a series of subsequent rate hikes in rapid succession. We think the Committee will continue to stress that the subsequent rate adjustment will be “gradual” and “data dependent.” 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. We will play close attention to the FOMC’s projections for the economic and inflation outlook and how it ties this into its expectation of the path of policy.

CR: I'll post an additional preview of the FOMC meeting this weekend.

by Calculated Risk on 12/11/2015 12:16:00 PM

A few excerpts from a research piece by Merrill Lynch economist Michael Hanson: The not-so-dovish hike

With the market pricing in a better than 90% chance the Fed will hike at its December meeting, liftoff expectations are very different than in September. However, it is déjà vu all over again for talk of a “dovish hike” thereafter. We do not expect the Fed will be find the right mix of language, projections, dots and press conference remarks that ratifies current market expectations of a little more than two hikes next year — particularly when the Fed views four as “gradual.” The overall message from the December meeting is likely to be dovish, but probably less than the market hopes. ...

The challenge for Yellen will be to find the right balance between “gradual” and “data dependent.” ... the Fed does not want to suggest that it will pre-commit to any particular policy path. Several Fed officials have noted that “gradual” is a forecast, not a promise. As long as the data behave largely in line with the FOMC’s projections, a gradual pace of rate hikes is likely. But Yellen’s ability to explain this nuance to a market that would like a clear sign that the Fed is going to go even more slowly in 2016 may well be tested.

From CR: It seems that the Fed will raise rates next week. For 2016, several key analysts are forecasting 4 rate hikes (every other meeting), however the market is only pricing in about 2 rate hikes in 2016.

by Calculated Risk on 12/11/2015 10:00:00 AM

The preliminary University of Michigan consumer sentiment index for December was at 91.8, up from 91.3 in November.

"While the preliminary December reading was largely unchanged from last month, consumers evaluated current economic conditions more favorably and expected future prospects less favorably. In a repeat of last month's findings, all of the early December gain was recorded among households with incomes in the bottom two-thirds (+2.7%), while the Sentiment Index among consumers with incomes in the top third declined (-4.4%). Importantly, the survey recorded persistent strength in personal finances and buying plans, while the largest loss was in how consumers judged prospects for the national economy during the year ahead. Overall, the Sentiment Index has averaged 92.9 during 2015, the highest since 2004, with only 10 higher yearly averages in the past half century. The data continue to indicate that real consumer expenditures will grow by 2.8% in 2016 over 2015. "
emphasis added

This was slightly below the consensus forecast of 92.0.


Click on graph for larger image.

by Calculated Risk on 12/11/2015 08:39:00 AM

On a monthly basis, retail sales were up 0.2% from October to November (seasonally adjusted), and sales were up 1.4% from November 2014.

From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $448.1 billion, an increase of 0.2 percent from the previous month, and 1.4 percent above November 2014. ... The September 2015 to October 2015 percent change was unrevised from +0.1 percent.

Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline increased 0.3%.

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales ex-gasoline increased by 3.7% on a YoY basis (1.4% for all retail sales including gasoline).

The increase in November was below expectations of a 0.3% increase.   This was a a somewhat weak headline report, however sales ex-gasoline are still up a decent 3.7% YoY.