All Things in Moderation

Stocks are lower this morning on overseas weakness. Bonds and MBS are up. Slow news day.

China has given up on using state funds to support its stock market. The government has spent about $200 billion trying to support the stock market.

The highlight of the week will be the jobs report on Friday. This will be the last jobs report ahead of the September FOMC meeting. After last week’s market sell-off, the Fed Fund futures contracts took their assessment of a Sep hike from around 50% to about 30%.

Aside from the jobs report, we have some important economic data this week with the ISM surveys and construction spending. That said, the jobs report will be the big event.

The ISM Milwaukee Index came in at 47.67, a bit lower than expectations.

The Chicago Purchasing Manager’s index was almost flat at 54.4.

Stanley Fischer made some hawkish comments in Jackson Hole on Friday, which is what stopped the rally in stocks.

Stocks are taking a breather after a big two-day rally. Bonds and MBS are up.

Personal Income rose 0.4% in July, in line with expectations. Personal Spending rose 0.3%. The Core PCE Index (The Fed’s preferred measure of inflation) rose at 1.2% YOY. Nice to see a little wage inflation. On the other hand, the low PCE inflation is going to worry the Fed.

Note that the National Labor Relations Board just issued a pro-union decision to make a company that hires a temporary agency for workers a joint employer. This will supposedly make it easier for workers to unionize and it makes the ultimate employer liable for what happens to temps. This was considered a big win for the unions. Does it ultimately result in higher wages, or simply more campaign cash for Democrats? I am betting on the latter.

St. Louis Fed Head James Bullard says that the recent volatility in the markets isn’t going to be much of a factor in the FOMC’s decision-making next month. The Fed Funds futures however discounted the probability of a Sep rate hike from about 50% to about 30%.

Pending Home Sales rose 0.5% in July. The real estate market is inching better, but tight supply and affordability issues are holding things back a little.

Consumer sentiment fell in August, according to the University of Michigan. The 91.9 reading came in below expectations.

The global stock market sell-off continues this morning, with S&P futures down 64 handles. Bonds and MBS are up small.

Markets sold off hard overnight, with Japan down 4.6%, China down 8.5%, and Europe generally down 4.5%. Commodities are getting clocked, with oil down to $39 a barrel. Emerging markets are getting crushed.

The Chicago Fed National Activity Index rebounded from -0.07 in June to 0.34 in July.

The sell-off in risky assets over the past week has pushed out the market’s forecast for the first rate hike out of the Fed. Futures are pricing in a first hike in the Dec – March timeframe. Over the weekend, Larry Summers penned an editorial in the Financial Times encouraging the Fed to stand pat for a while. He makes the point that the sell-off in assets has a tightening effect all by itself, and hiking rates in this disinflationary environment risks another 1937.

After stocks bottomed in 1932, the Dow Jones Industrial Average went on a tear, increasing almost fivefold in 5 years. In 1937, however they started a brutal 1 year bear market, where stocks got cut in half. The most common explanation for the sell-off was the Fed’s tightening in late 1936 and early 1937. Now, there are a lot of reasons for the sell-off in the 1930s (markets sensing something afoot in Europe, FDR’s undistributed profits tax, etc), but the Fed is very cognizant of their role in the “recession in the depression” and this will certainly guide their decision-making.

With stocks hitting air pockets on the downside, you would expect to see Treasuries flying. Yes, they are up, but not by as much as you would expect. Supposedly there has been massive supply of Treasuries coming out of the Middle East, which is keeping a lid on prices.

Stocks are lower this morning after Asian markets got roughed up overnight. Bonds and MBS are up.

Initial Jobless Claims came in at 277k, a bit higher than expected but still at or close to 4 decade lows. The Bloomberg Consumer Comfort Index rose to 41.1.

Existing Home Sales rose to 5.59 million in July from 5,48 million. The median home price rose 5.6% YOY to $234,000. This puts the median house price to median income ratio around 4.3x, which is higher than historical averages. Distressed sales fell 2 percentage points YOY to 7%. First time homebuyers fell slightly to 28% from 29% a year ago. Investor purchases fell from 16% to 13% and days on market fell from 48 to 42. Unsold inventory is about 4.9 months’ worth, which indicates a tight market.

In other economic news, the Index of Leading Economic Indicators unexpectedly fell, while the Philthy Fed Index rose.

With the 10 year bond trading around 2.1%, we are at 3 – 4 month lows. Loan officers, you might want to ping any of your borrowers that are floating or who were on the fence for a refi.

The FOMC minutes didn’t really add any certainty to the September vs. December debate, however it did change the market’s perception of the probability of a rate hike from 50% to 36%. The key statement: “Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” The minutes address the labor market this way: (I bolded the interesting parts for emphasis)

“Participants agreed that labor market conditions had improved further, citing increases in payroll employment and job openings, the decrease in the unemployment rate, and some further reduction in broader measures of labor market underutilization. Although the labor force participation rate declined in June and the national hiring and quits rates were little changed in May, several participants noted that reports from business contacts in their Districts pointed to continued job gains and relatively strong labor markets. They cited anecdotal reports of firms having concerns about retaining workers and facing difficulties in filling even medium- and lower-skilled jobs. However, several participants contended that, despite the progress over the past few years, some noticeable margins of slack remained, citing as evidence the high number of workers not actively searching for jobs but available and interested in work as well as the high share of employees working part time for economic reasons compared with pre-recession levels.

The ongoing rise in labor demand still appeared not to have led to a broad-based firming of wage increases. While business contacts in a number of Districts continued to report that the pace of wage increases had picked up, recent national readings on hourly compensation and average hourly earnings of employees had remained subdued. The most recent employment cost index, released in April, had suggested an increase in wage gains. However, questions were raised about how to interpret this reading because the pickup was concentrated in the Northeast and might have resulted from particular factors that were not associated solely with a general tightening of labor market conditions, such as minimum wage adjustments and market conditions in certain occupations. In addition, it was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation.”

I found it interesting that filling lower-skilled jobs is difficult. If that is the case, then wages at the low end of the scale are going up, whether or not the government passes a new minimum wage law. (Of course the left is going to try and claim the minimum wage law did it, if wages do in fact rise). This would push the Fed to start hiking sooner rather than later. On the other hand, conditions in China and the fall in commodities (which they also mentioned) are going to naturally pull us towards a disinflationary scenario. The Fed does not foresee any sort of contagion from China, however they thought the same thing about the end of the subprime bubble. Punch line – not many people changed their forecasts after the minutes, and it is going to probably hinge on the August jobs report in a few weeks.

Zerohedge had an interesting oberservation: The Fed last hiked rates 110 months ago. Since then there have been 697 rate cuts around the world.

Did the Bernank get himself a new boat?