by Calculated Risk on 2/04/2015 08:46:00 PM

The West Coast port slowdown is ongoing and will have an impact on the December trade report. From Reuters: Contract negotiators for U.S. West Coast ports hit snag

Shipping companies and terminal operators for 29 U.S. West Coast ports appeared to have hit a snag on Wednesday in protracted labor negotiations with the dockworkers' union, calling a news conference to publicly address the status of the talks.

The negotiations, joined in recent weeks by a federal mediator, have coincided with chronic cargo backups hampering freight traffic through waterfronts handling nearly half of U.S. maritime trade and more than 70 percent of imports from Asia.
...
The congestion has been most pronounced at Los Angeles and Long Beach, the nation's two busiest shipping hubs. During the past two days, port authorities there reported more than 20 freighters left idled at anchor, waiting for berths to open.

Also falling oil prices will have an impact on the trade deficit. Oil imports averaged $82.95 per barrel in November, and will probably be close to $70 in December (and fall further in January).

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 290 thousand from 265 thousand.

• Also at 8:30 AM, the Trade Balance report for December from the Census Bureau. The consensus is for the U.S. trade deficit to be at $38.0 billion in December from $39.0 billion in November.

by Calculated Risk on 2/04/2015 04:48:00 PM

From the ECB: Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The waiver allowed these instruments to be used in Eurosystem monetary policy operations despite the fact that they did not fulfil minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review and is in line with existing Eurosystem rules.

Joseph Cotterill at FT AlphaVille explains: Greece and the ECB: the first cut

Greek sovereign bonds, T-bills and government-guaranteed debt will no longer be welcome at the ECB Tower as of 11 February.

The waiver — which let in Greek debt despite its junk-rated status for as long as Greece was in a programme — has been something of a merry-go-round before, in previous points of crisis between Greece and its official creditors. Bank bonds guaranteed by the government were also due to be kicked out at the end of this month because of a two year-old decision.

This is the first cut. As Karl Whelan has explained, Greece’s use of ELA will be closely watched by the ECB’s Governing Council from this point and the screws could be turned here too in time. ELA is costlier for Greek banks to use — and is genuine lending of last resort — so it’s a lot more important for Greece’s position for this bit of plumbing to stay on.

by Calculated Risk on 2/04/2015 01:35:00 PM

Month after month I've taken the "over"  for the employment report ("over" the consensus), and that has been correct most months. However, for January, I'll take the "under" ... however I think there is a good chance that employment will be up 3 million year-over-year (it would take 192 thousand jobs added including revisions).

Friday at 8:30 AM ET, the BLS will release the employment report for January. The consensus, according to Bloomberg, is for an increase of 230,000 non-farm payroll jobs in January (with a range of estimates between 215,000 and 268,000), and for the unemployment rate to be unchanged at 5.6%.

The BLS reported 252,000 jobs added in December.

Here is a summary of recent data:

• The ADP employment report showed an increase of 213,000 private sector payroll jobs in January. This was below expectations of 220,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth slightly below expectations.

• The ISM manufacturing employment index decreased in January to 54.1%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs were unchanged in January. The ADP report indicated a 14,000 increase for manufacturing jobs in January.

The ISM non-manufacturing employment index decreased in January to 51.6%. A historical correlation between the ISM non-manufacturing employment index and the BLS employment report for non-manufacturing, suggests that private sector BLS non-manufacturing payroll jobs increased about 115,000 in January.

Combined, the ISM indexes suggests employment gains of 115,000.  This suggests growth below expectations.

• Initial weekly unemployment claims averaged close to 298,000 in January, up from 291,000 in December. For the BLS reference week (includes the 12th of the month), initial claims were at 308,000; this was up from 289,000 during the reference week in December.

Generally this suggests a few more layoffs, seasonally adjusted, in January compared to the previous four months (employment gains averaged 284,000 per month for the previous four months).

• The final January University of Michigan consumer sentiment index increased to 98.1 from the December reading of 93.6. This was the highest level in over ten years. Sentiment is frequently coincident with changes in the labor market, but this increase is probably mostly due to sharply lower gasoline prices.

• On small business hiring: The small business index from Intuit showed a 20,000 increase in small business employment in January, down from 30,000 added in November and December.

• Trim Tabs reported that the U.S. economy added between 190,000 and 220,000 jobs in January. This was down from their 210,000 to 240,000 range last month (that was low but close). "TrimTabs’ employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from the paychecks of the 141 million U.S. workers subject to withholding"  December and January are challenging for TrimTabs due to year end bonuses - so they provided a range again this month.

• Conclusion: There is always some randomness to the employment report, but most indicators suggest fewer jobs added in January compared to the previous several months.  The consensus forecast reflects some slowdown in employment growth, but I'll take the under this month (below 230,000).

Special Note: In addition to the normal revisions, the annual benchmark revision will be released with the January report. The preliminary estimate was an additional 7,000 jobs as of March 2014 (not a large revision).

Also, the new population controls will be used in the Current Population Survey (CPS) estimation process. The BLS notes that the "household survey data for January 2015 will not be directly comparable with data for December 2014 or earlier periods".

by Calculated Risk on 2/04/2015 10:09:00 AM

The January ISM Non-manufacturing index was at 56.7%, up from 56.5% in December. The employment index decreased in January to 51.6%, down from 55.7% in December. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: January 2015 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in January for the 60th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 56.7 percent in January, 0.2 percentage point higher than the December reading of 56.5 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased to 61.5 percent, which is 2.9 percentage points higher than the December reading of 58.6 percent, reflecting growth for the 66th consecutive month at a faster rate. The New Orders Index registered 59.5 percent, 0.3 percentage point higher than the reading of 59.2 percent registered in December. The Employment Index decreased 4.1 percentage points to 51.6 percent from the December reading of 55.7 percent and indicates growth for the eleventh consecutive month. The Prices Index decreased 4.3 percentage points from the December reading of 49.8 percent to 45.5 percent, indicating prices contracted in January when compared to December. According to the NMI®, eight non-manufacturing industries reported growth in January. Comments from respondents vary by industry and company; however, they are mostly positive and/or reflect stability about business conditions."
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was close to the consensus forecast of 56.5% and suggests slightly faster expansion in January than in December.  The sharp decline in the employment index is a little concerning.

by Calculated Risk on 2/04/2015 08:20:00 AM

From ADP:

Private sector employment increased by 213,000 jobs from December to January according to the January ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Goods-producing employment rose by 31,000 jobs in January, down from 47,000 jobs gained in December. The construction industry added 18,000 jobs, down from last month’s gain of 26,000. Meanwhile, manufacturing added 14,000 jobs in January, below December’s 23,000.

Service-providing employment rose by 183,000 jobs in January, down from 207,000 in December. ...

Mark Zandi, chief economist of Moody’s Analytics, said, “Employment posted another solid gain in January, although the pace of growth is slower than in recent months. Businesses in the energy and supplying industries are already scaling back payrolls in reaction to the collapse in oil prices, while industries benefiting from the lower prices have been slower to increase their hiring. All indications are that the job market will continue to improve in 2015.”

This was below the consensus forecast for 220,000 private sector jobs added in the ADP report. 

The BLS report for January will be released on Friday and the consensus is for 230,000 non-farm payroll jobs added in December.

by Calculated Risk on 2/04/2015 07:01:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 30, 2015. ...

The Refinance Index increased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 2 percent from one week earlier.
...
“Following several weeks of already elevated refinance activity due to falling interest rates, FHA refinance applications increased 76.5 percent in response to a reduction in annual mortgage insurance premiums which took effect January 26,” said Lynn Fisher, MBA’s Vice President of Research and Economics. “Conventional refinance volume was up only 0.5 percent for the week while VA refinance volume was down 24.3 percent. FHA purchase applications were also up 12.4 percent over the week prior, despite a decrease in purchase applications in the rest of the market.” ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.79 percent, the lowest level since May 2013, from 3.83 percent, with points increasing to 0.29 from 0.26 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

2014 was the lowest year for refinance activity since year 2000.

It looks like 2015 will see more refinance activity than in 2014, especially from FHA loans!

The second graph shows the MBA mortgage purchase index.  

According to the MBA, the purchase index is up 3% from a year ago.

by Calculated Risk on 2/03/2015 09:00:00 PM

From the WSJ: Oil Prices Surge 7% to One-Month High

U.S. oil futures notched a fourth consecutive gain, their longest winning streak since August. Prices have risen 19% in that time. The benchmark crude-oil contract on the New York Mercantile Exchange settled up $3.48, or 7%, at $53.05 a barrel, the highest settlement price since Dec. 31, 2014.

Still down almost 50% from a year ago.  A wild ride!

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, the ADP Employment Report for January. This report is for private payrolls only (no government). The consensus is for 220,000 payroll jobs added in January, down from 241,000 in December.

• At 10:00 AM, the ISM non-Manufacturing Index for January. The consensus is for a reading of 56.5, up from 56.2 in December. Note: Above 50 indicates expansion.

by Calculated Risk on 2/03/2015 05:51:00 PM

Here is some interesting data (just for background) from housing economist Tom Lawler:

Note: Manufactured housing placements prior to 1974 and for 2014 based on shipments. Census stopped releasing estimates for MH placements this summer.

Note that while the total number of new housing units completed/put in place from 2003 to 2007 was almost identical to that for 1983 to 1987, single-family production was 41% higher.

Since the end of 2007, the number of single-family (attached and detached) homes occupied by renters has probably increased by over 4 million.

Housing Put in Place by Type (Annual Average, Thousands of Units)
	Single Family	Multi- family	Manufactured Housing	Total
1968-72	928	641	435	2,004
1973-77	1,061	575	324	1,960
1978-82	1,016	487	251	1,754
1983-87	1,053	581	269	1,903
1988-92	976	326	202	1,504
1993-07	1,102	231	305	1,638
1998-02	1,251	324	273	1,848
2003-07	1,485	301	119	1,905
2008-12	553	207	57	817
2013	569	195	56	820
2014	630	264	60	953

by Calculated Risk on 2/03/2015 02:27:00 PM

Based on a WardsAuto estimate, light vehicle sales were at a 16.55 million SAAR in January. That is up 8.9% from January 2013, and down 1.5% from the 16.80 million annual sales rate last month.  The comparison to January 2014 was easy (sales were impacted by the severe weather last year).

From John Sousanis at Wards Auto: January 2015 U.S. LV Sales Thread: Trucks Spur Strong January Sales

Led by strong gains in truck sales, U.S. automakers sold 1.149 million light vehicles in January, a 9.3% increase in daily sales (over 26 days) compared with year-ago (25 days). The resultant seasonally adjusted annual rate - roughly 16.55 million - was the industry's highest January SAAR since 2006.

General Motors led all automakers, accounting for 17.7% of the month's LV sales, followed by Ford (15.2%) and Toyota (14.8%).

Subaru recorded the largest year-over-year growth with a 28.3% increase in daily sales, while Volvo and Volkswagen registered industry-worst 3.8% DSR declines.

Click on graph for larger image.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for January (red, light vehicle sales of 16.55 million SAAR from WardsAuto).

This was at the consensus forecast of 16.6 million SAAR (seasonally adjusted annual rate).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

This was another strong month for vehicle sales - the ninth consecutive month with a sales rate over 16 million.

by Calculated Risk on 2/03/2015 12:38:00 PM

A key question right now is how low the unemployment rate can fall before inflation picks up. Right now core inflation is falling, but some of that is probably due to bleed through from falling energy prices. So we have to be careful reading too much into the low core inflation numbers.

Last year, many of the "hawks" at the Fed were arguing inflation would pick up when the unemployment rate fell to 6%. They were clearly wrong since the unemployment rate was at 5.6% in December!

Professor Krugman wrote this morning: Tough Fedding

[M]y point is that recent data are perfectly consistent with the view that full employment requires an unemployment rate below 5 percent; the most recent data would suggest an even lower rate. This might or might not be right; I don’t know. But the Fed doesn’t know either.

And in the face of that uncertainty, the crucial question is what happens if you’re wrong. And the risks still seem hugely asymmetric.

Although monetary policy works with a lag, as Krugman notes, no one knows when inflation will pick up - and the risks of raising too soon far outweigh the risks of waiting too long.

I'd like to add on inflation that there might be a demographics component, as I noted early this year:

On inflation, I've been looking at this from a demographics perspective. If we look at the annual change in the prime working age population, there is one other period similar to the current situation - the early-to-mid 60s.
...
In the 1960s, inflation didn't pickup until the unemployment rate had fallen close to 4%. There could be several demographics reasons for the low inflation (in addition to policy reasons). As an example, maybe older workers were being replaced by younger workers who made less (just like today), and maybe the slow increase in the prime working age population put less pressure on resources.

Ignoring for the moment monetary and fiscal policy differences between the periods ... maybe the unemployment rate will have to fall below 5% before inflation picks up.

I expect the FOMC will wait until core inflation is clearly moving back towards their 2% target - and hopefully wait until wage growth is increasing.