Morning Report – The unexpected economic gift of low gasoline prices 10/28/14

US stocks are up on European strength. Bonds and MBS are flattish.

The FOMC meeting starts today.  I think the action will be in the minutes, not so much the FOMC statement – the markets are looking for the words “considerable time” and will probably trade off that. In other words, they want to see a commitment to keep rates low for a “considerable time” after other indicators (unemployment) reach the Fed targets. I don’t think Yellen is holding a press conference for this one, and there won’t be any updates to the economic forecasts. Given the rebound in markets, I suspect they wrap up QE at this meeting to clear the decks for monetary policy normalization (Fed-speak for bringing the Fed Funds rate off the zero bound). Conducting monetary policy with a massive balance sheet is something new, and there are mechanical details that need to be worked out. I still think the Fed will do nothing more than a symbolic increases in the Fed Funds rate to get off the zero bound until they start seeing wage inflation. With the dollar rallying and commodities falling (see below regarding gasoline), the Fed has the room to let the economy run.

Durable Goods orders fell for the second straight month, with the headline number falling 1.3% after falling 18.3% (yes, 18.3%, not a typo) the month before. Capital Goods Orders ex defense / air (a proxy for business capital expenditures) fell 1.7%. Durable Goods orders are notoriously volatile and subject to big revisions after the fact,  however two drops in a row is not a good sign. Manufacturing is not the driver of the economy it used to be, however it is important.

In other economic data, we had a big jump in consumer confidence, from 89 to 94.5 and an increase in the Richmond Fed Manufacturing Index.

Home Prices fell .15% in August, according to Case-Shiller. The weakness was led by the previously hot California metros. On an annual basis, home prices are still up 5.6%. Home Price Appreciation is clearly decelerating, and it probably means that the rebound from the bottom is over. Further home price appreciation will be a function of wage growth. As you can see from the chart below, the median house price to median income ratio is back out of its historic range. Not predicting a big decline in home prices – just thinking that we go nowhere for a while until wages increase.

Gasoline prices continue to fall, and that means good things for consumption. Americans spend about $2,000 a year on gasoline, so lower prices can have a great stimulative effect. David Kotok of Cumberland Securities was on Bloomberg radio this morning, and he says that a $1.00 drop in the price of gasoline over the year puts about the same amount of money in an average American’s hands as the 2% payroll tax cut did. For what its worth, the annual drop in gas prices right now is around 70 cents or so. Retailers will certainly find this welcome news as we head into the all-important holiday shopping season. Note that the consumer confidence numbers are heavily influenced by gas prices and are hitting mid 2007 levels.

One Response

  1. Snowden interview in the Nation.

    The observation on the Putin interview blowing up in his face is telling, but I believe he’s simply playing to the interviewers.


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