Morning Report – Hotel California Monetary Policy 12/14/12

Vital Statistics:

  Last Change Percent
S&P Futures  1412.1 0.1 0.01%
Eurostoxx Index 2628.7 1.1 0.04%
Oil (WTI) 86.4 0.5 0.59%
LIBOR 0.308 0.000 0.00%
US Dollar Index (DXY) 79.91 -0.023 -0.03%
10 Year Govt Bond Yield 1.71% -0.02%  
RPX Composite Real Estate Index 191.6 0.4  

Stock index futures are flat after a benign CPI report.  Of course the Fed explicitly told us that until unemployment drops below 6.5%, they do not care what inflation does. Industrial Production rebounded in November, and Capacity Utilization rose. Bonds and MBS are up small.

Markit’s flash Purchasing Manager’s Index is generally upbeat and shows US manufacturing rebounding in December after reaching post-crisis lows in Aug and Sep. There has been some concern that Q4’s GDP numbers have been goosed by an inventory build, which means we are borrowing growth from next quarter.  FWIW, the report does not bear that out as it shows inventories are falling. The report notes employment is picking up in the manufacturing sector as well.  

CoreLogic’s December Market Pulse is reasonably optimistic on housing.  Punch Line:  Residential Real Estate is finally contributing to economic growth instead of being a drag. While residential real estate is not a massive driver of the economy, it usually is the first to recover after a recession and makes its largest contributions early in the economic cycle. It is the piece of the puzzle that allows us to shift from first to second gear.  

The Man With The Tan – Angelo Mozilo has no regrets about how he ran Countrywide and only agreed to a $67.5 million settlement to protect his children.  (BTW, it looks like Bank of America paid the lion’s share of that) You can read his entire deposition here

Great perspective on the history of banking from my favorite financial author, Jim Grant. “You can have the fear of God or the socialization of risk, but you cannot have both.”

Interview with Dallas Fed President Richard Fisher on the Fed’s “Hotel California” monetary policy.  He lays out the argument that the problem with the economy is not monetary policy, it is regulatory uncertainty out of Washington. He also notes that we are reaching the point of diminishing returns. 

FOMC Minutes


Economic Projections

Longer Run Policy Considerations

Big Picture:  The Fed is on hold until late 2014. Previously they anticipated low interest rates through mid-2013.   Inflation target is 2%.  The Fed will continue to re-roll its investments into mortgage backed debt.  Operation Twist will continue.

In this new age of transparency, the Fed is giving investors more of a look at their thinking.

More granular stuff:  The Fed has taken down its forecast for GDP growth in 2012 and 2013.  In November, they projected 2.5% – 2.9% GDP growth for 2012 and 3.0% to 3.5% for 2013.  They now expect 2.2% to 2.7% growth for 2012 and 2.8% to 3.2% for 2013.  So, while the general tenor of most observers seems to be more optimistic, the Fed is going in the opposite direction.

However, they took down their unemployment estimates from November, so that is a positive.  What is interesting is that they stated the “normal rate of unemployment” range was 5.2% to 6.0%.  Which means that once unemployment gets in the mid 5-s, the Fed will start tightening. At least that is how I interpret it.  Don’t expect to see long-term unemployment rates similar to the ones Clinton (5.19%) and Bush (5.27%) enjoyed.  6 is the new 5. The Fed is at least paying lip service to the idea of preventing future bubbles.

The Fed introduced an inflation target of 2%.  Note the 10 year is yielding 2%.  Get the message?  Nope, the 10 year rallied hard on the announcement.  Stocks also rallied.

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