by Calculated Risk on 12/11/2016 07:58:00 PM

From Bloomberg: Oil Surges as Saudis Eye Deeper Cuts While Non-OPEC Joins Deal

Oil jumped to the highest since July 2015 after Saudi Arabia signaled it’s ready to cut output more than earlier agreed while non-OPEC countries including Russia pledged to pump less next year, strengthening the coordinated commitment by the world’s largest producers to tighten supply.

Futures rose as much as 5.8 percent in New York and 6.6 percent in London.

Weekend:
• Schedule for Week of Dec 11, 2016

Monday:
• No economic releases scheduled.

From CNBC: Pre-Market Data and Bloomberg futures: S&P futures are up 6, and DOW futures are up 75 (fair value).

Oil prices were up over the last week with WTI futures at $53.73 per barrel and Brent at $56.59 per barrel.  A year ago, WTI was at $36, and Brent was at $37 - so oil prices are up about 50% year-over-year!

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.21 per gallon - a year ago prices were at $2.01 per gallon - so gasoline prices are up about 20 cents per gallon year-over-year.

by Calculated Risk on 12/11/2016 08:11:00 AM

The consensus is that the Fed will raise the Fed Funds Rate 25 bps following the FOMC meeting this coming week.

Since the rate hike is expected (and assuming it happens), the focus this month will be on hints about the next move from the wording of the statement, the projections, and Fed Chair Janet Yellen's press conference.  My guess is, as far as the impact of fiscal stimulus, the Fed will wait and see what the actual proposals will be.

Here are the September FOMC projections.  Since the release of those projections, Q3 GDP was reported at a 3.2% annual rate.

Currently GDP is tracking around 2.6% annualized in Q4. That would put real GDP up 2.0% in Q4 2016 over Q4 2015.  2016 GDP will probably be revised up slightly, but it will be interesting to see if projections for 2017 and 2018 are revised up due to possible fiscal stimulus.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2016	2017	2018	2019
Sept 2016	1.7 to 1.9	1.9 to 2.2	1.9 to 2.2	1.7 to 2.0
Jun 2016	1.9 to 2.0	1.9 to 2.2	1.8 to 2.1	n.a.

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 4.6% in November and 4.9% in October, so the unemployment rate projection for Q4 2016 will probably be revised down slightly.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2016	2017	2018	2019
Sept 2016	4.7 to 4.9	4.5 to 4.7	4.4 to 4.7	4.4 to 4.8
Jun 2016	4.6 to 4.8	4.5 to 4.7	4.4 to 4.8	n.a.

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 1.4% from October 2015.  With oil prices up year-over-year, PCE inflation has been moving up.  It appears inflation will be revised up for 2016, but the key will be if inflation is revised up for 2017 and 2018.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2016	2017	2018	2019
Sept 2016	1.2 to 1.4	1.7 to 1.9	1.8 to 2.0	1.9 to 2.0
Jun 2016	1.3 to 1.7	1.7 to 2.0	1.9 to 2.0	n.a.

PCE core inflation was up 1.7% in October year-over-year.  This is still in the September projection range, and will probably only be changed slightly.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2016	2017	2018	2019
Sept 2016	1.6 to 1.8	1.7 to 1.9	1.8 to 2.0	1.9 to 2.0
Jun 2016	1.6 to 1.8	1.7 to 2.0	1.9 to 2.0	n.a.

In general, it appears GDP and inflation will be revised up slightly, and the unemployment rate revised lower.   If this continues, look for the Fed to raise rates again in the first half of 2017.

by Calculated Risk on 12/10/2016 08:09:00 AM

The key economic reports this week are October Retail Sales, Housing Starts, and the Consumer Price Index (CPI).

For manufacturing, October industrial production, and the November New York, and Philly Fed manufacturing surveys, will be released this week.

The FOMC meets on Tuesday and Wednesday, and the FOMC is expected to raise rates at this meeting.

----- Monday, Dec 12th -----
No economic releases are scheduled.

----- Tuesday, Dec 13th-----
6:00 AM ET: NFIB Small Business Optimism Index for November.

----- Wednesday, Dec 14th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM ET: Retail sales for November will be released.  The consensus is for 0.4% increase in retail sales in November.

This graph shows retail sales since 1992 through October 2016.

8:30 AM: The Producer Price Index for November from the BLS. The consensus is for a 0..2% increase in prices, and a 0.2% increase in core PPI.

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 75.0%.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for October.  The consensus is for no change in inventories.

2:00 PM: FOMC Meeting Announcement. The FOMC is expected to increase the Fed Funds rate 25 bps 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, Dec 15th -----
8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 255 thousand initial claims, down from 258 thousand the previous week.

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

8:30 AM ET: The New York Fed Empire State manufacturing survey for December. The consensus is for a reading of 3.0, up from 1.5.

8:30 AM: the Philly Fed manufacturing survey for December. The consensus is for a reading of 10.0, up from 7.6.

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

----- Friday, Dec 16th -----
8:30 AM: Housing Starts for November.

Total housing starts increased to 1.323 million (SAAR) in October. Single family starts increased to 869 thousand SAAR in October.

The consensus is for 1.230 million, down from the October rate.

10:00 AM: Regional and State Employment and Unemployment (Monthly) for November 2016

by Calculated Risk on 12/09/2016 08:59:00 PM

A few excerpts from another FOMC preview, this once from Merrill Lynch:

It is the day we have all been waiting for – the FOMC is very likely to hike 25bp to a range of 50 – 75bp at the December 14th meeting. This is the second hike in the cycle, following the move last December. Since the rate hike is considered a foregone conclusion and is unlikely to move the markets, the focus will be on the statement, SEP (specifically the dots) and the press conference. While we are expecting the decision to be unanimous, it is possible that there is a dovish dissent with Fed Governor Brainard as the most likely candidate.
...
Medium-term forecasts: We think the median unemployment forecast will fall to 4.7% from 4.8% given the recent drop in the unemployment rate. We also expect GDP growth to be revised higher this year to either 1.9% or 2.0% on the back of stronger 2H GDP tracking. Looking ahead to the next three years, we think the risk is for upward revisions to inflation.

Long-term forecasts: We do not expect a change to long-term growth or unemployment rate. The median expectation for long-run GDP growth fell to 1.8% from 2.0% in the September SEP and we do not think conditions have changed since then to warrant a revision. While fiscal policy could alter trend growth, Fed officials do not yet have details.

by Calculated Risk on 12/09/2016 05:59:00 PM

A few excerpts from a research piece by Goldman Sachs economists Zach Pandl and Jan Hatzius:

Markets have reacted strongly to the presidential election, and fiscal easing may eventually warrant a quicker pace of rate hikes by the FOMC. However, Fed officials will have few policy details at this stage, and will undoubtedly want to see the first rate increase in a year go off smoothly. Therefore, we look for the committee to offer a mostly steady message next week, and to delay incorporating fiscal policy changes into the outlook until next year.

Fortunately, there is already enough data in hand to make a strong case for a rate increase at the meeting: (1) growth momentum has picked up from earlier this year, (2) spare capacity has diminished further, and (3) inflation news has been mostly encouraging. ...

We therefore expect a unanimous vote for an increase in the funds rate range to 0.50-0.75%. The statement will likely upgrade its description of the risks to the outlook to “balanced” from “roughly balanced”. The committee may adjust its assessment of the policy stance to “moderately accommodative” from “accommodative”, as many officials have already done in their public comments.

In the Summary of Economic Projections, we expect (1) upward revisions to GDP growth, (2) downward revisions to the unemployment rate, including the median estimate of the structural rate, (3) slight upward revisions to headline and core PCE inflation, and (4) unchanged median projections for the funds rate.

In the press conference, look for Chair Yellen to highlight the incoming data and to repeat the committee’s existing outlook that the pace of rate hikes will be gradual. We see little incentive for Yellen to dwell on the uncertain outlook for fiscal policy at this stage.

I'll have more previews this weekend.

by Calculated Risk on 12/09/2016 02:51:00 PM

Note: The FOMC meets next week, and almost every expects a rate hike at the December meeting.

A few excerpts from a research note from Nomura:

In line with market expectations, we expect the FOMC will raise the federal funds rate target to 0.50-0.75% at the conclusion of the 13-14 December meeting. We think that the incoming data since the last meeting has been sufficiently positive for the Committee to conclude that the case for rate hike has been finally met.

On the policy statement, we expect the paragraph on current economic conditions to point to continued growth. Additionally, we expect the Committee to highlight two notable developments – a sharp drop in the unemployment rate and a pickup in market-based measures of inflation compensation – in the statement. On the economic outlook, we expect no substantive changes, although the Committee may acknowledge a shift in the balance of risks to the positive side given the potential fiscal stimulus that will likely be realized under a Republican-led Congress and a Trump White House.

In addition, we will receive a new set of forecasts from the FOMC participants. ...

Our base scenario is that FOMC participants will not change their outlook for 2017 and beyond as we do not think the Committee will incorporate the possibility of fiscal expansion. It's unclear when and how FOMC participants will take into account potential changes in fiscal policy. In that sense, there is some risk that some participants could raise real GDP projections for 2017 and 2018 in anticipation of fiscal expansion. And, given the recent decline in the unemployment rate, the unemployment rate forecast for 2017 could be also revised lower.
...
Last, Chair Yellen will hold a press conference after the conclusion of the two-day policy meeting. ... We will also listen for any clues on how the FOMC may change its outlook in response to the major fiscal stimulus that will likely be enacted next year.

I'll post more previews, but a rate hike next week seems almost certain.

by Calculated Risk on 12/09/2016 12:18:00 PM

The Federal Reserve released the Q3 2016 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth increased in Q3 compared to Q2:

The net worth of households and nonprofits rose to $90.2 trillion during the third quarter of 2016. The value of directly and indirectly held corporate equities increased $494 billion and the value of real estate increased $554 billion.

Household net worth was at $90.2 trillion in Q3 2016, up from $88.0 trillion in Q2 2016.

The Fed estimated that the value of household real estate increased to $22.7 trillion in Q3. The value of household real estate is now above the bubble peak in early 2006 - but not adjusted for inflation, and also including new construction.

Click on graph for larger image.

The first graph shows Households and Nonprofit net worth as a percent of GDP.  Household net worth, as a percent of GDP, is higher than the peak in 2006 (housing bubble), and above the stock bubble peak.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q3 2016, household percent equity (of household real estate) was at 57.3% - up from Q2, and the highest since Q2 2006. This was because of an increase in house prices in Q3 (the Fed uses CoreLogic).

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 50+ million households with mortgages have far less than 57.3% equity - and about 3 million homeowners still have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt increased by $86 billion in Q3.

Mortgage debt has declined by $1.21 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up in Q3, and  is above the average of the last 30 years (excluding bubble).

by Calculated Risk on 12/09/2016 10:14:00 AM

The preliminary University of Michigan consumer sentiment index for December was at 98.0, up from 93.8 in November.

Consumer confidence surged in early December to just one-tenth of an Index point below the 2015 peak—which was the highest level since the start of 2004. The surge was largely due to consumers’ initial reactions to Trump’s surprise victory. When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys. To be sure, an equal number volunteered negative judgments about prospective economic policies, but the frequency of those negative references was less than half its prior peak levels whereas positive references were about twice its prior peak. There were a few exceptions to the early December surge in optimism, mainly among those with a college degree and among residents of the Northeast, although no group has adopted a pessimistic outlook for the economy. The most important implication of the increase in optimism is that it has raised expectations for the performance of the economy. President-elect Trump must provide early evidence of positive economic growth as well as act to keep positive consumer expectations aligned with performance. Either too slow growth or too high expectations represent barriers to maintaining high levels of consumer confidence. Until specific policies are proposed, there is no reason to alter the 2017 forecast of 2.5% for real consumption.
emphasis added

Click on graph for larger image.

by Calculated Risk on 12/08/2016 09:39:00 PM

Friday:
• At 8:30 AM ET, University of Michigan's Consumer sentiment index (preliminary for December). The consensus is for a reading of 94.1, up from 93.8 in November.

• Also at 10:00 AM, Monthly Wholesale Trade: Sales and Inventories for October. The consensus is for a 0.4% decrease in inventories.

• At 12:00 PM, Q3 Flow of Funds Accounts of the United States from the Federal Reserve.

by Calculated Risk on 12/08/2016 04:01:00 PM

A few excerpts from a research piece by Goldman Sachs economist Alec Phillips: Fiscal Boost: Mainly a 2018 Story

We expect fiscal policy to become more expansionary next year, but the timing is uncertain. Our preliminary expectation is that the growth effects from looser fiscal policy would be concentrated in Q4 2017 and the first half of 2018. The timing depends mainly on how long it takes tax legislation to become law, and whether Congress legislates a prolonged phase-in or implements the full tax cut in the first year. ...

Infrastructure and federal spending are also potential factors. On the former, the lags are often quite long ... On the latter, a boost to defense spending looks likely sometime between Q2 and Q4 2017, but this may be partly offset with cuts to non-defense spending in the same timeframe.

The effect of Obamacare “repeal and replace” is less clear, but seems likely to provide a modest net stimulus in the near term—potentially as soon as Q2 2017—as a result of the likely repeal of the taxes used to pay for some of the program. Other changes are likely but seem unlikely to be implemented until 2019.