by Calculated Risk on 10/13/2014 11:24:00 AM

From Evan Soltas: Disinflation, Here We Come

Spot prices for oil have dropped 20 percent in the last three months, from $110 to $90 a barrel. If they remain at these levels, inflation in the United States will slow quite a bit, and quickly at that. My estimate is that headline PCE inflation will fall to just under 1 percent within the next three months of data.
...
Recall that PCE inflation is 1.5 percent year-over-year. So, one surprise from energy markets, and we could be below one percent. At a time when we are supposed to be a couple months away from a rate hike, this could complicate the exit plan.

This is why it is important to look at core measures of inflation (core CPI and PCE that remove energy), and other measures of underlying inflation such as the Cleveland Fed's median CPI and trimmed-mean CPI.

And from Tim Duy: The Methodical Fed

Just a few months ago the specter of inflation dominated Wall Street. Now the tables have turned and low inflation is again the worry du jour as a deflationary wave propagates from the rest of the world - think Europe, China, oil prices. How quickly sentiment changes.

And given how quickly sentiment changes, I am loath to make any predictions on the implications for Fed policy. ...

Bottom Line: Fed policy might sound dovish this week, but take note the the underlying tone has been methodically hawkish for a long, long time. And markets have responded accordingly, including anticipating a return to the zero bound when the next recession hits. Nor should this be unexpected. Monetary policymakers have yet to set clear objectives that includes a high probability that the zero bound is left behind for good.

One thing is clear, Fed Chair Janet was correct in June when she said

"I think recent readings on CPI index have been a bit on the high side but I think the data we're seeing is noisy. Broadly speaking inflation is evolving in line with the committee's expectations."

by Calculated Risk on 10/13/2014 08:46:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Oct 10, 2014.

Changes and comments from surferdude808:

Minimal changes to the Unofficial Problem Bank List with only one removal. After the deduction, the list count moves down to 429 institutions with assets of $136 billion.

A year ago, the list held 683 institutions with assets of $238.3 billion. The Bank of Palatine, Palatine, IL ($49 million) found a merger partner to depart the list. The other change this week was the Federal Reserve issuing a Prompt Corrective Action order against Fayette County Bank, St. Elmo, IL ($53 million), which just recently joined the list last month. Next week we expect the OCC will provide on update on its enforcement action activity.

CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now down to 429.

The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.)

As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

When the list was increasing, the official and "unofficial" counts were about the same. Now with the number of problem banks declining, the unofficial list is lagging the official list. This probably means regulators are changing the CAMELS rating on some banks before terminating the formal enforcement actions.

by Calculated Risk on 10/12/2014 07:36:00 PM

Note: Monday is a federal/bank holiday. The Bond market will be closed in observance of the Columbus Day holiday. The stock market will be open for trading.

From Professor Hamilton: Lower oil prices

For the last 3 years, European Brent has mostly traded in a range of $100-$120 with West Texas intermediate selling at a $5 to $20 discount. But in September Brent started moving below $100 and now stands at $90 a barrel, and the spread over U.S. domestic crude has narrowed. Here I take a look at some of the factors behind these developments.
...[see Hamilton's post]

As I’ve noted before there’s a basic limit on how much U.S. production is capable of lowering the world price. The methods that are responsible for the U.S. production boom are quite expensive. Just how low the price can go before some of the frackers start to drop out is subject to some debate.

More production in Libya and in the U.S., combined with a weak global economy and the stronger dollar ... and the price of oil has declined significantly.

Weekend:
• Schedule for Week of October 12th

From CNBC: Pre-Market Data and Bloomberg futures: currently the S&P futures are down 17 and DOW futures are down over 100 (fair value).

Oil prices were down over the last week with WTI futures at $84.33 per barrel and Brent at $88.60 per barrel.  A year ago, WTI was at $102, and Brent was at $111 - so prices are down close to 20%  year-over-year.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are around $3.22 per gallon (down about 10 cents from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 10/12/2014 11:32:00 AM

A couple of months ago I wrote: Flashback to August 2011 and 2013 (And a hint for 2015). I discussed the policy insanity in 2011 and 2013, and worried about 2015 (this happens in odd years because politicians hope voters will forget).

From Goldman Sachs economist Alec Phillips:

In many policy areas, a shift in Senate control would simply result in a new flavor of the gridlock that has prevailed since the 2010 election. The split between Congress and the White House would still exist and, while Republicans would set the agenda in both chambers if they held a majority, a degree of bipartisan support would still be necessary in the Senate light of the 60-vote threshold necessary to pass most legislation.

The exception would be the annual budget resolution and legislation related to it. The budget resolution sets out annual targets for federal spending, revenue, and debt. More importantly, it can be used to clear a procedural path for legislation that includes policies to reconcile the level of spending, revenue, or debt under current law with the levels in the budget resolution. Such “reconciliation” legislation is not subject to filibuster and can therefore pass both chambers with only a simple majority (i.e., 51 votes in the Senate).

Issues like the debt limit could be handled in one of two ways. In theory, reconciliation would allow Republicans to couple a debt limit hike with other measures and send it to the President with only Republican votes. However, in practice this would be difficult: with a narrow majority and differences between centrists and conservatives in the party, Republican leaders could struggle to get 51 votes for a debt limit hike.

The alternative would be for Republican Senate leaders to try to attract Democratic support to pass a debt limit hike with 60 votes. However, if Republicans win the Senate majority, we would expect them to push for greater concessions from the White House around this sort of fiscal deadline than they have managed to get recently.

The result is likely to be less predictability regarding the process surrounding major fiscal deadlines. Since the confrontation between House Republicans and the White House over the debt limit in 2011, markets have gradually become inured to fiscal brinksmanship, as these debates have started to follow a predictable pattern. If Republicans win majorities in both chambers as polls currently suggest they might, that pattern seems likely to change, which could lead to renewed uncertainty ahead of future fiscal deadlines.
emphasis added

Here was go again in 2015.

by Calculated Risk on 10/11/2014 06:09:00 PM

For your Saturday reading pleasure, from Fed Vice Chairman Stanley Fischer: The Federal Reserve and the Global Economy. Here is the conclusion:

To summarize and conclude, the Fed's statutory objectives are defined by its dual mandate to pursue maximum sustainable employment and price stability in the U.S. economy. But the U.S. economy and the economies of the rest of the world have important feedback effects on each other. To make coherent policy choices, we have to take these feedback effects into account. The most important contribution that U.S. policymakers can make to the health of the world economy is to keep our own house in order--and the same goes for all countries. Because the dollar is the primary international currency, we have, in the past, had to take action--particularly in times of global economic crisis--to maintain order in international capital markets, such as the central bank liquidity swap lines extended during the global financial crisis. In that case, we were acting in accordance with our dual mandate, in the interest of the U.S. economy, by taking actions that also benefit the world economy. Going forward, we will continue to be guided by those same principles.