Morning Report – GDP comes in at +3.5% 10/30/14

Stocks are higher this morning after the strong GDP number. Bonds and MBS are up with worldwide bonds.

Initial Jobless Claims came in at 287k, and the Bloomberg Consumer Comfort Index came in at 37.2. Initial Jobless Claims remain exceptionally low, evidence that companies have done all the cutting they are going to do and are keeping who they have. Next step is to see wage growth and a drop in the long-term unemployed. Which way that breaks will have a huge influence in how the Fed reacts. If we see the long term unemployed enter the labor force first, that means wage growth will remain weak. That will give the Fed room to run on maintaining low rates and ultimately raise the potential growth rate of the economy. If instead, companies end up competing with each other for the employed, that means wages increase sooner, but the Fed moves sooner as well. Also, it means the long-term unemployed remain so, which reduces the potential growth rate of the economy. This is a subject of debate with the staff economists at the Fed, with the staff leaning more towards the latter scenario and the governors leaning more towards the first one. The minutes of yesterday’s meeting will be interesting.

Note that the Fed’s new labor market conditions index is probably going to drive some of the Fed’s policies going forward. The issue with it is that it lumps a whole slew of leading and lagging indicators together. Initial Jobless claims and Job Openings are leading indicators. The labor force participation rate and the unemployment rate are lagging indicators. I would posit that the leading indicators are strong, and the lagging indicators simply haven’t caught up yet. Which means the Fed could stay with low interest rates too long. You could argue that worldwide monetary easing has created a sovereign debt bubble. When Italy can tie up money for 10 years at under 2.5%, and the German government can do it for 84 basis points, investors are making a gargantuan deflationary bet. This is akin to buying Cisco Systems at $70 a share in 2000. Yes Virginia, you can lose money in sovereign debt on a mark-to-market basis and on a purchasing power basis. The entire world’s central bankers are on a mission to create inflation. Eventually they will succeed.

The advance estimate for third quarter GDP came in at 3.5%. This will be subject to two revisions later. The Street estimate was 3.0%. The personal consumption expenditure index (the preferred inflation measure for the Fed) came in at +1.3%, well below what they would like to see. It looks like we had a big jump in Federal government spending (+10% for Q3 vs -.9% for Q2). Defense spending drove the increase in government spending. Disposable personal income increased 4% in the third quarter, while the savings rate increased from 5.4% to 5.5%.

The FOMC statement was more or less a non-event. As expected, the Fed ended QE, but kept the “considerable time” language in the press release. Bonds sold off a bit on the announcement, but they have recouped those losses and then some this morning. With QE done and dusted, attention focuses to “policy normalization”, which is Fed-speak for raising interest rates off the zero bound. Interestingly, the Wall Street Journal headline this morning is “Fed Closes Chapter on Easy Money.” Um no. The Fed is closing the chapter on “really, really, really easy money,” and ushered in the new era of “really, really easy money.”

Completed foreclosures ticked up to 46,000 in September, according to CoreLogic. This is down 33% year-over-year but up 4.7% versus August. Approximately 607k homes are in some stage of foreclosure, which is down 34% from a year ago. While foreclosures are down markedly from peak levels, they are still running at a little over 2x normal levels. Delinquencies continue to fall.

Ocwen reported a loss last night, and reserved $100 million to settle with the NY AG for the backdating issue. They note they do not have a deal yet. They generated about 60bps operating profit on $1.1 billion in origination.

10 Responses

  1. Jonathan Chait makes an excellent argument for splitting the country in half and calling it a day:

    “I know Republicans, and some of them are lovely human beings. That doesn’t mean I want one of them to move in next door and marry my daughter.”


    • jnc:

      Pretty astonishing Chait would say that. Just replace “Republican” with any number of other identifiers…Jews, blacks, homosexuals…and imagine such a thing being said.


  2. ah, the tolerant left…


  3. “. It’s not like the sports team you root for or even (exactly) like a religion”

    for most people, he’s wrong. this is exactly what it is.


  4. Republicans are evil and deserve no respect.


  5. “That is not the only ideological objection. I would likewise bring healthy skepticism to a Marxist, anarchist, radical Islamist, monarchist, or advocate of Greater Russia. That goes for advocates of belligerent, hypernationalism of any kind — though, come to think of it, most belligerent hypernationalists you run into in this country happen to be Republicans.”

    Just can’t help themselves. Reasonable, reasonable, blah blah, of course that’s true, reasonable . . . Republicans are the same as anarchists and radical Islamists!


  6. “There are millions of Americans who think it’s okay to deny legal citizens their voting rights or force them to go without health insurance. ”

    Cuz not providing them with health insurance is forcing them to go without. Sorry to be pedantic, but those aren’t the same things.

    “I believe their political views reflect something unflattering about their character.”

    You know, I can agree with that. People who can’t distinguish between a moderate Democrat and a radical Marxist . . . or vice versa . . . that would say something unflattering about their character.


    • Kevin:

      Sorry to be pedantic, but those aren’t the same things.

      I don’t think it is pedantic. It is necessary to point out.


      • Apparently, accuracy is pedantry now. Also, I point out accurate definitions of stuff and the assumption is I’m automatically opposed to whatever they are saying, or advocating racism (as is always the case when I point out that “racism” isn’t solely defined as “institutional racism”, no matter what Spike Lee says, or that “reverse racism” isn’t a thing because racism is the same whatever direction it’s pointed, from a strictly definitional standpoint.


  7. Also, I could completely support government run healthcare (I don’t) and it would still be just as true that not paying for their healthcare is not the same as denying them healthcare. It’s “not paying for everybody’s healthcare”. There’s a reason words can be linked together in that sequence, after all. 😉


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