by Calculated Risk on 9/28/2010 10:00:00 AM

Note: Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth slowing, and domestic consumer demand sluggish, these surveys provide an early look at weakness in the manufacturing sector.

From the Richmond Fed: Manufacturing Activity Pulled Back in September, But Expectations Upbeat

Manufacturing activity in the central Atlantic region pulled back in September after expanding during the previous seven months, according to the Richmond Fed's latest survey. The index of overall activity was pushed lower as shipments and employment edged into negative territory. Other indicators also suggested softer activity. District contacts reported that the volume of new orders flattened, order backlogs turned negative, and delivery times held steady. Furthermore, manufacturers reported growth in capacity utilization flat lined, while inventories grew at a slightly quicker pace.
...
In September, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — turned negative, losing thirteen points to −2 from August's reading of 11. Among the index's components, shipments fell fifteen points to −4, new orders lost ten points to finish at 0, and the jobs index declined fifteen points to −3.

Other indicators also suggested weaker activity. The backlogs of orders measure turned negative losing eleven points to −11, and the index for capacity utilization flattened declining fourteen points to 0. The delivery times index held steady at 8, while our gauges for inventories were somewhat higher in September.
...
Labor market activity also weakened in September. The manufacturing employment index registered a −3 versus August's reading of 12, and the average workweek measure lost fourteen points to 0. In addition, wage growth posted a five-point loss to 8.

This is further evidence of the slowdown in manufacturing.

Also, from CNBC: Consumer Confidence Falls to Lowest Level Since February

The Conference Board, an industry group, said its index of consumer attitudes fell to 48.5 in September from a revised 53.2 in August.

by Calculated Risk on 9/28/2010 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for July (actually a 3 month average of May, June and July).

This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities).

Note: Case-Shiller reports NSA, I use the SA data.

From S&P: Home Prices Remain Stable Around Recent Lows According to the S&P/Case-Shiller Home Price Indices

Data through July 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the annual growth rates in 16 of the 20 MSAs and the 10- and 20-City Composites slowed in July compared to June 2010. The 10-City Composite is up 4.1% and the 20-City Composite is up 3.2% from where they were in July 2009. For June they were reported as +5.0% and +4.2%, respectively. Although home prices increased in most markets in July versus June, 15 MSAs and both Composites saw these monthly rates moderate in July.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 29.0% from the peak, and flat in July (SA).

The Composite 20 index is off 28.6% from the peak, and down 0.1% in July (SA).

The second graph shows the Year over year change in both indices.

The Composite 10 is up 4.0% compared to July 2009.

The Composite 20 is up 3.1% compared to July 2009.

The year-over-year changes appear to be rolling over - and will probably be negative later this year.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in only 4 of the 20 Case-Shiller cities in July seasonally adjusted.

Prices in Las Vegas are off 57.2% from the peak, and prices in Dallas only off 5.7% from the peak.

Prices probably declined just about everywhere in July, but this will not be evident in the Case-Shiller index until next month since the Case-Shiller index is an average of three months.

by Calculated Risk on 9/27/2010 10:28:00 PM

From the Telegraph: Savers told to stop moaning and start spending

[Bank of England deputy governor Charles Bean said] "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."
...
Mr Bean said that encouraging Britons to spend was one reason why the Bank had cut interest rates.

In the U.K., savers are receiving about £18 billion a year less in interest. In the U.S., using the monthly personal interest income data from the BEA, interest income is off about $143 billion from the peak - and falling ...

by Calculated Risk on 9/27/2010 06:20:00 PM

From Jon Hilsenrath at the WSJ: Fed Weighs New Tactics to Bolster Recovery

Rather than announcing massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.

Although QE2 isn't a done deal, I think it is very likely.

This article suggests two approaches: 1) a large scale purchase program ( longer-term Treasury securities), or 2) a smaller-scale program with the amounts set at each FOMC meeting.

In Fed Chairman Ben Bernanke's speech at Jackson Hole on Aug 27th, he seemed to favor the first approach:

The channels through which the Fed's purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. ...

The logic of the portfolio balance channel implies that the degree of accommodation delivered by the Federal Reserve's securities purchase program is determined primarily by the quantity and mix of securities the central bank holds or is anticipated to hold at a point in time (the "stock view"), rather than by the current pace of new purchases (the "flow view").

It is possible that they could do the smaller-scale program as a compromise (note: Hilsenrath clearly has great sources at the Fed). As I noted yesterday in Bernanke and QE2, there will be plenty of economic data between now and the two day meeting on November 2nd and 3rd, but the two key releases are the September employment report (to be released on October 8th) and the Q3 GDP advance estimate (to be released on October 29th). Barring a significant upside surprise in one or both of those reports, it appears likely that QE2 will arrive in November.

Now the question is how will they do QE2.

by Calculated Risk on 9/27/2010 04:03:00 PM

Another sign of weaker Wall Street earnings ...

From Bloomberg: Morgan Stanley Said to Freeze Investment-Bank Hiring for 2010 (ht Brian)

Morgan Stanley, the sixth-largest U.S. bank by assets, froze hiring at its investment-banking division for the rest of 2010 ... The freeze, which includes the New York-based firm’s sales and trading units, comes as weak trading and equity underwriting volume may lead the five largest Wall Street banks to post their lowest revenue from investment banking and trading since the fourth quarter of 2008.

This follows the weak results at Jefferies last week, from the Financial Times: Trading slump hits Jefferies earnings

In a preview of what might loom for investment banks, a sharp slowdown in trading activity led Jefferies to report its worst quarter since the market hit bottom last year.

by Calculated Risk on 9/27/2010 01:27:00 PM

From the Financial Times: Brazil warns of ‘currency war’

Guido Mantega, Brazil’s finance minister, said on Monday the world was in an “international currency war” ... Mr Mantega, who has made increasingly aggressive comments recently about the need to control Brazil’s currency, said governments around the world were trying to weaken their currencies to promote competitiveness.

"We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” he said ...
excerpt with permission

It seems everyone wants to devalue to export more.

As a reminder, Bernanke touched on devaluation in his well known 2002 speech: Deflation: Making Sure "It" Doesn't Happen Here

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.

Bernanke also said in 2002:

I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Of course a lower dollar only helps U.S. competitiveness with countries not pegged to the dollar - and not intervening in their currency. It sounds like Brazil might be intervening soon.

by Calculated Risk on 9/27/2010 10:30:00 AM

From the Dallas Fed: Texas Manufacturing Picks Up and Six-Month Outlook Improves

Texas factory activity rose slightly in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, edged back into positive territory following a reading near zero in August.

Other factory activity indicators also improved in September. The new orders and shipments indexes remained negative for the fourth month in a row but moved up from their August levels. The growth rate of orders index jumped from –13 to zero, suggesting the pace of incoming orders may be stabilizing. Meanwhile, the September capacity utilization index climbed back into positive territory ...

Measures of general business conditions continued to worsen. The general business activity index pushed further negative this month, falling to –18. The company outlook index dipped back into negative territory, with 25 percent of firms reporting a worsened outlook, the highest share in more than a year.

Labor market indicators improved slightly in September. The employment index turned positive, up from a negative reading in August. Nineteen percent of respondents said they hired additional employees, while 17 percent noted layoffs. Hours worked were largely unchanged, while wages and benefits rose modestly.

This report is at best mixed, especially with new orders down again.

The Richmond Fed survey will be released tomorrow and the Kansas City Fed survey on Thursday.  Earlier this month, the Philly Fed survey showed contraction, the NY Fed survey showed manufacturing growth slowing.

The national ISM manufacturing survey will be released on Friday.

by Calculated Risk on 9/27/2010 08:43:00 AM

Note: This is a composite index based on a number of economic releases.

From the Chicago Fed: Index shows economic activity weakened in August

Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index decreased to –0.53 in August from –0.11 in July. None of the four broad categories of indicators that make up the index made a positive contribution in August.

The index’s three-month moving average, CFNAI-MA3, declined to –0.42 in August from –0.27 in July. August’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

Click on graph for larger image in new window.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

by Calculated Risk on 9/26/2010 11:07:00 PM

A 2nd part in the interesting back story on the European crisis: Currency Union Teetering, 'Mr. Euro' Is Forced to Act

[A] senior commission official, debating with the German delegation, tried to persuade [German Finance Minister Wolfgang Schäuble's deputy Jörg] Asmussen to let Brussels run the stabilization fund.

"Why don't you let us handle this," he said.

"Because we do not trust you," Mr. Asmussen replied.

And the article concludes:

The deal allowed the ECB to press ahead with its bond-buying plan, and the package of EU measures has helped quell the panic. ... In the past month, financial markets have turned their sights on Ireland and Portugal. Doubts remain over the solvency of banks on Europe's stricken fringe. That leaves them dependent on Mr. Trichet's largesse, in the form of "temporary" lending facilities introduced by the ECB when the crisis first hit.

Despite Mr. Trichet's assurances that the bond-buying program is a stop-gap, it not only continues but has also increased in recent weeks—with no end in sight.

Here was the first part: On the Secret Committee to Save the Euro, a Dangerous Divide

Clearly Germany was calling the shots.

Earlier:

Summary for last Week ending Sept 25th (with plenty of graphs)

Weekly Schedule for coming week

by Calculated Risk on 9/26/2010 06:15:00 PM

On August 27th, Fed Chairman Bernanke gave a speech at the Jackson Hole symposium that might be worth reviewing. Note: I posted an analysis of the speech in August: Analysis: Bernanke paves the way to QE2

Although Bernanke pretty much stuck to the official forecast in his speech: "Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place", he also outlined the requirements for further Fed policy action:

Under what conditions would the FOMC make further use of these or related policy tools? At this juncture, the Committee has not agreed on specific criteria or triggers for further action, but I can make two general observations.

First, the FOMC will strongly resist deviations from price stability in the downward direction. ... It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.

Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.

Now fast forward to the recent FOMC statement (see Sept 21 FOMC statement and Paving the way for QE2):

"Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability."
...
[The FOMC] "is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."

Remember, on August 27th, Bernanke said the FOMC would "strongly resist deviations from price stability in the downward direction". The above change to the FOMC strongly suggests additional policy action is coming.

Also - the FOMC and staff forecasts will be presented this coming month, and these forecasts will probably be revised down again. That will probably meet the "significant weakening of the outlook" criteria.

In Bernanke's Jackson Hole speech he made his preference clear if the FOMC decided on additional monetary accommodation:

A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve's holdings of longer-term securities. As I noted earlier, the evidence suggests that the Fed's earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets. I regard the program (which was significantly expanded in March 2009) as having made an important contribution to the economic stabilization and recovery that began in the spring of 2009. Likewise, the FOMC's recent decision to stabilize the Federal Reserve's securities holdings should promote financial conditions supportive of recovery.

I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions.

And what does Bernanke think this will accomplish?

The channels through which the Fed's purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed's strategy relies on the presumption that different financial assets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

This probably pushes some investors into other assets as well, and historically quantitative easing has led to increases in asset prices in the short term. This is why I've been noting in the comments that "bad economic news" is perhaps "good stock market news" - since investors are now anticipating QE2 to be announced as early as November 3rd barring a sudden improvement in the news flow.

Although there will be plenty of economic data between now and the two day meeting on November 2nd and 3rd, the two key releases are the September employment report (to be released on October 8th) and the Q3 GDP advance estimate (to be released on October 29th). Barring a significant upside surprise in one or both of those reports, it appears QE2 might arrive as early as November.

Note:

Summary for last Week ending Sept 25th (with plenty of graphs)

Weekly Schedule for coming week