Consumer Credit outstanding fell $14.8b in Sept seasonally adjusted, almost $5b more than expected and marks the 11th month in the past 12 of declines. At $2.456T outstanding, it is 4.9% below the record high in July ‘08. After a flat reading in Aug, (didn’t fall b/c of the CARS program), non revolving debt outstanding fell by $4.9B. Revolving (mostly credit cards) balances outstanding fell by $9.9B. To fully put into perspective today’s data, look at the current level of consumer credit (doesn’t include mortgages, the biggest chunk of consumer credit) relative to GDP. As of Q3, it totaled 17.2% of GDP vs 17.8% at the end of ‘08 , 16.9% at year end ‘00, 15.1% at year end ‘95, 13.8% at year end ‘90 and 11.7% at year end ‘82 just as that economic expansion began.
The Home Buying Tax Credit costs what? On the day President Obama signed the extension of the home buying tax credit, Rasmussen Reports released the results of a poll today saying that 57% favor the $8,000 tax credit for 1st time home buyers but when they hear that it will cost an additional $10b+, support falls to 42%. The provision that expands it to existing homeowners and for those with higher incomes than the original threshold is supported by just 29% of those polled with 57% against it. With the homebuilders ETF down 11.5% since the mid Sept high, the law of diminishing returns may becoming evident as those who wanted to take advantage of the credit mostly did so already. The benefits of the tax credit will filter into the spring (must sign contract by April 30th) which is the busiest part of the home buying selling season following the slowest being the winter. According to the bill, “the credit applies to the purchase of a principal residence before July 1, 2010 by any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010.” Make no mistake that heading into the 2010 elections, both sides of the aisle will come up with plenty of “jumpstart the economy” programs that will have a variety of price tags.
Oct Payrolls fell by 190k, 15k more than expected BUT net revisions were up by 91k over the two prior months. The unemployment rate rose to 10.2%, .3% more than expected and up from 9.8% in Sept as household employment fell by 589k and the labor force shrunk by 31k. The all in rate rose to 17.5% from 17% and the average duration of unemployment rose to 26.9 weeks from 26.2 in Sept and 22.5 back in May. Average weekly hours held at the lowest level since at least ‘64 but Average hourly earnings rose .3%, .2% more than expected. Manufacturing shed 61k jobs, 19k more than expected. Most other sectors lost jobs. The one positive was the 34k increase in temp workers, up for a 3rd month and is historically a precursor to permanent hiring assuming economic trends continue to improve. Education, health and federal government added jobs. The Birth/Death model magically added 86k jobs vs 94k in Oct ‘08. Bottom line, sluggish labor picture continues albeit at a less bad level.
With respect to future fed policy, here is an update in the fed funds futures for what is priced in for rate hikes in 2010. Odds of a 25 bps hike by the April meeting is now down to 28% vs 54% priced in just prior to yesterday’s FOMC statement release. Last Monday, the market had priced in a 90% chance of a hike by April. For the following June meeting, odds are down to 82% of a 25 bps hike to .5% down from 100% priced in midday yesterday and from a 64% chance of a total of 50 bps in hikes by June priced in last Monday. It is not until the August meeting now that the fed funds futures are fully pricing in a 25 bps hike. Inflation expectations in the 10 yr TIPS is up another 2 bps today to 2.14% and also is higher by 2 bps in the 5 yr to 1.79%.
Following the very dovish FOMC statement, the odds of a 25 bps rate hike by April have fallen to 36% from 54% yesterday and the odds of a hike by June have fallen below 100% for the first time. In response, inflation expectations 10 yrs out have risen to 2.12%, up from 2% just one week ago and are at the highest level since Aug ‘08. The BoE left rates unchanged as expected and raised the total size of their asset purchases by 25b pounds but that was less than expected and they did say they expected inflation to rise sharply above the 2% target in the near term in part due to higher energy prices and the pound is higher in response. Their inflation outlook in the medium term is more uncertain. The ECB also left rates unchanged after Euro region retail sales unexpectedly fell in Sept. CSCO #’s have the futures well above fair value ahead of Jobless Claims and Q3 Productivity data at 8:30am. Retail comps look mostly better than expected so far.
Ben the Bartender is working the after hours party as the Fed will keep rates at “exceptionally low levels…for an extended period.” Also with respect to inflation, the commentary is identical to the Sept 23rd meeting which is highly dovish, this even as gold is at a record high, the CRB index is up 8% and the implied inflation rate in the 10 yr TIPS is up almost 30 bps. The 1st paragraph on the economy is very similar to the Sept 23rd meeting but they referred to household spending as “expanding” from “stabilizing” in Sept. The FOMC said they will buy $175b of agency paper in total from $200b previously. Bottom line, the Fed seems solely focused on keeping the yield curve as steep as possible in order to further recapitalize the banking system and also to boost the housing market by trying to keep mortgage rates low. They don’t care about the US$ and thus don’t care about inflation. DOVISH is the word of the day!
Looking out to the April 2010 FOMC meeting, the very dovish Fed statement has reduced the odds of a 25 bps rate hike to 40% from 54% priced in just prior.
Ahead of the 2:15pm FOMC statement, the implied inflation rate today in the 10 yr TIPS is rising to 2.08%, matching the highest level since Sept 1st ‘08 when the fed funds rate was at 2%. Of course much has changed since with the economy but it highlights the dilemma the Fed faces with their dual mandate where they have to both satisfy the need for price stability and full employment. Assuming the FOMC leaves the statement about unchanged particularly with the part about keeping rates “substantially” low for an “extended period,” it will be clear evidence that the Fed doesn’t worry about a weaker US$ and some inflation as they seem solely focused on growth and rebuilding the capital of the US banking system. The problem is that price stability (and a stable currency) is historically the precursor to healthy growth.
The ISM services index was a touch below expectations at 50.6 vs forecasts of 51.5 and it’s down from 50.9 in Sept. Business Activity did rise a hair to 55.2, the highest since Oct ‘07. Unlike the rise in the employment component in the ISM manufacturing report, services employment fell 3.2 pts to 41.1, the lowest since May and combine this with the ADP report and there is little reason to expect big upside in Friday’s payroll # with services making up more than 80% of the labor force. New Orders were a positive as they rose 1.4 pts, the highest since Oct ‘07 and Backlogs rose 2 pts to the most since Nov ‘06, both likely boosting the market. Export Orders were also a bright spot as they rose back above to 50 to 53.5. Prices Paid rose more than 4 pts to 53. Half of the industries surveyed reported growth and ISM sums up the # with “respondents’ comments remain mixed and are mostly cautious about business conditions and the overall economy.”
ADP said the private sector shed a net 203k jobs in Oct, a touch more than expectations of a drop of 198k. It is though the smallest amount of job losses since July ‘08 but is now running 21 straight months. Sept was revised up by 27k to a loss of 227k. The goods producing sector lost 117k jobs, 65k of which was in manufacturing. The service sector shed 86k jobs. As has been seen, small and medium size businesses have mostly led the job cuts. Construction jobs fell by 51k and total job losses in this industry is now 1.675mm since the top in Jan ‘07. The financial services sector saw a decline of 18k jobs, down for a 23rd straight month. With the monthly correlation to the government Payroll figure being tenuous, the markets will await Friday’s number before drawing conclusions on the labor market but today’s report still reflects a tough environment for jobs, albeit less so. Friday’s estimate, which includes the public sector, is -175k.
As a parent, the easiest thing to do is say yes to the kids and give them what they want. What’s harder is to say no and instill some discipline. The Fed faces a similar issue today in deciding when to say no to extraordinarily easy money. Ben’s in a no win situation for now in that the risk trade dynamics change for the worse if he signals that rates won’t stay “exceptionally low” for an “extended period” and he risks further inflaming asset inflation if he stays put. The economic outlook though won’t change much if the fed funds rate is at .25, .50 or even .75%. The Fed put themselves in this box by cutting rates to almost zero and fingers crossed on where we go from here. ABC confidence rose 2 pts to -49 and is the first gain in a month. The MBA said purchases fell 1.8% to the lowest since Feb as people await clarity on the tax credit. Refi’s rose 14.5% as mortgage rates fell below 5%.
