Interest Rate Roundup

Wednesday, May 31, 2006

FOMC meeting minutes chock full of inflation worry

The meeting minutes for the last Federal Open Market Committee gathering just came out. They're chock full of inflation concern, a lot more than seen in the past. Some meaningful excerpts:

"During the twelve months ending in March, overall inflation rose at a slightly faster pace than that in the preceding twelve-month period, while core prices for the same period increased a bit more slowly than in the previous year."


"Some financial-market and survey indicators suggested that inflation expectations, both for the upcoming year and for the longer term, had moved up since the
March meeting."


"Meeting participants expressed some concern about recent price developments and their implications for inflation prospects. Core consumer inflation lately had been a little higher than expected. Moreover, energy prices had risen steeply in the period since the March meeting, and, although pass-through apparently had been limited to date, the most recent increases might be reflected to a greater degree in core inflation in coming months. Participants noted that prices of non-energy commodities, such as industrial metals and building supplies, also had been climbing. The recent decline in the dollar was another factor that could add to inflation pressures, although the effect of prior changes in the foreign exchange value of the dollar on core consumer prices had apparently been limited. Business contacts had reported continued shortages of certain types of skilled labor and related wage pressures in some occupations, which would tend to boost costs"

AND lastly ...

"On balance, participants judged that inflation expectations had risen somewhat--a development that would have to be taken into account in policymaking and warranted close monitoring."

All told, this is not the nice friendly Fed the market was expecting in my view. They even discussed a 50-point rate hike (in all fairness, they also discussed keeping rates unchanged). Bonds sold off pretty hard when the numbers came out, then bounced. Not sure where they'll settle out, but it's possible we see new price lows in bonds this week, especially if Friday's jobs report is strong enough on the headline growth and wage stats.

Tuesday, May 30, 2006

inflation expectations and why they matter...

The Fed has tried to toe a simple party line the past several months: Not only is current inflation "well-contained," but expectations for future inflation are tame. So rates can stay low. But is that really true? Not according to the data. Core inflation is running at a 3.2% annualized pace now. A different measure of inflation in the personal income and spending report from last week rose at its fastest pace in a year.

And now, we just learned that inflation EXPECTATIONS are rising. Specifically, the Conference Board asks consumers every month what they expect the rate of inflation to be a year down the road. The answer in May? A whopping 5.6%. That’s up from 5.3% in April and 4.8% a year ago. So there goes another leg in the Fed's "we don't need any more rate hikes" stool.

Thursday, May 25, 2006

Slicing and dicing the home sales numbers

When you look BEHIND the headlines, it becomes clear the housing news just keeps getting worse and worse.

NEW HOMES: While the seasonally adjusted annual rate (SAAR) of sales technically “rose” between March and April, the government drastically revised DOWN the sales figures for the last two months. Census cut March sales by 71,000 units and February sales by 46,000. So on net, sales are actually falling. And the inventory of homes for sale rose yet again to a fresh record high of 565,500. Prices are basically flat YOY, a huge deceleration from double-digit growth a few quarters back. Next up -- outright declines.

EXISTING HOMES: Sales declined outright – 2% month-over-month and 5.7% from last April. Condo, co-op and single-family home inventory skyrocketed 36.7% from last year to a whopping 3.38 million units. We don’t know about you, but when we see the demand for ANYTHING fall almost 6% and supply jump almost 37%, we come to one conclusion: Prices are way out of whack!

The median price measure used by the National Association of Realtors hasn’t dropped year-over-year yet. But it’s only a matter of time. We’re already seeing drastic price reductions in our market, and reading about similar cuts from one end of the country to the other.

Speaking of my market, YOY sales in the West Palm Beach/Boca Raton market collapsed by a whopping 43%. Statewide sales were off by almost a third. Median sales prices are still up slightly from a year ago, but the rate of appreciation is rapidly decelerating -- to just 4% in the most recent month from 30% last year.

Tuesday, May 23, 2006

Big news coming soon

Interest rates are in somewhat of a holding pattern here ahead of key data -- April new and existing home sales tomorrow and Thursday, and personal income and spending on Friday. One force that seems to be keeping a lid on yields in the short term -- sickly trading in stocks both overseas and here in the U.S. Volatility is rising and fear is creeping in. So you're seeing "flight to safety" buying in bonds. Doesn't impact the longer-term fundamentals, but it is what it is.

Friday, May 19, 2006

Back in the saddle

I just got back from the Las Vegas Money Show, so I'm going to be back online posting again. Quick hit: Bonds have bounced in the past few days amid more hawkish Fed talk. Presumption is that higher short-term rates now mean less inflation later. The yield curve is flattening as a result.

Also, one thing about housing. I want you to look at this graphic of sales vs. inventory for sale in my general area (greater West Palm Beach, FL). If you can't see this is a massive bubble exploding before our very eyes, I can't help you. The figures are tough to make out, but it looks like a 45% decline YOY in sales and a 140% increase in for-sale inventory. It also appears to show the market as having a whopping 17 months of inventory on the market at the current sales pace. Disaster. Disaster. Disaster.

Thursday, May 11, 2006

US assets on sale ...

Here's a long bond futures weekly price chart ...

No question that we're in a downtrend. There's something more significant about today's market action, though: Virtually ALL U.S. assets are being sold. Bonds? Selling off. Stocks? Selling off. The dollar? Selling off. Looks like real revulsion. Definitely something to keep an eye on. The market is loudly and clearly saying that it thinks the Fed is falling behind the curve on inflation.

What a surprise? The Fed gets it wrong

Yesterday, the Fed screwed up. There's no other way to describe its actions.

Yes, the Ben Bernanke Fed increased short-term rates by one-quarter of a percentage point to 5%. And yes, the post-meeting statement acknowledged that "possible increases in resource
utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."

But in practically the same breath, the Fed claimed: "The run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing
productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained."

What planet are these people living on? Seriously. Higher prices for energy and commodities are the very definition of inflation. To continue focusing on this ridiculous artificial construct of "core inflation" is insane.

The bottom line is, we have too much money chasing too few goods, services, and assets -- worldwide. Money is pouring out of central banks in every corner of the globe. While short-term rates are rising in the U.S. and elsewhere, they're NOT rising enough to stem the liquidity flow. That means this "tightening cycle" is not tight at all.

Little surprise this morning, then, that oil prices are jumping again ... gold is surging ... copper is going ballistic ... and long-term Treasuries are getting spanked. Traders realize the Fed is NOT being tough enough on inflation. So they're flocking to inflation hedges and running away from assets most vulnerable to price declines from rising inflation.

Tuesday, May 09, 2006

The Fed: What it SHOULD do vs. what it WILL do

Tomorrow is the big kahuna -- Fed day. It's widely expected (by me and just about every other market participant) that the Fed will raise interest rates by 25 basis points to 5%. The federal funds rate has been marching higher since June 2004. But ask yourself: Is money really "tight?" I sure don't think so.

Would oil be at $70 if that were the case? Would gold be testing $700? Would CPI and core inflation be generally rising? Would the spread between TIPS and nominal Treasury yields be blowing out? Would various stock market indices be at all-time highs or close to it? Would the spreads between yields on high-risk debt and risk-free debt (Treasuries) be so tight? No.

The fact is, this is a non-tight tightening cycle. Inflation pressures have continued to build because the Fed has allowed too much money to chase too few goods and services.

What SHOULD the Fed do tomorrow? Put this "pause" talk to bed. Talk tough about inflation. Highlight that ALL of the inflation indicators they follow have pretty much gotten worse, not better -- and that financial conditions in the market are exceedingly loose.

What WILL the Fed do? That's the real question. I think it could go either way. Bernanke probably realizes he's rapidly becoming the laughing stock of the financial markets world. He and the rest of his Fed cronies keep talking about how "well-contained" inflation is ... while the market keeps making liars out of them. Maybe he takes this opportunity to sound tough.

On the other hand, the housing market is clearly imploding before our eyes. And the Fed continues to insist that the economy as a whole is going to slow any day now. These guys could throw out a bunch of platitudes and give the market what it wants -- an indication that a pause is right around the corner.

At least we don't have to wait very long to find out. 2:15 p.m. or so tomorrow is when the Fed news hits the tape.

Wednesday, May 03, 2006

It's the inflation, stupid

Why the "experts" on CNBC just don't seem to get it, I don't know. But the fact is, every single indicator hitting the tape is pointing toward a big rise in inflation and inflation pressure. Just today, the Institute for Supply Management released its latest report on the service sector. Keep in mind these are APRIL numbers -- so they're as close to real time as you get in monthly data.

Not only was the overall index above expectations (63 vs. 60), the prices paid sub-index surged to 70.5 from 60.5 in March. The April reading is the highest since November. The group's manufacturing prices paid indicator also jumped -- to 71.5 in April from 66.5 a month earlier. That's also a six-month high.

Then there's all the stuff I've talked about before -- long term bond yields rising more than short-term ones, the nominal/TIPS yield spread blowing out, etc., etc. If former President Bill Clinton were still in office, he just might say: "It's the inflation, stupid!"

Monday, May 01, 2006

There's reality ... and there's FED-land

Just what exactly are these Fed guys smoking? Seriously. Oil is up another $1.50 or so today ... and both technically and fundamentally looking set to run to new highs. Gold is trading around $660 and ounce. Market-based indicators of inflation (like the TIPS vs. nominal Treasury yield spread) are blowing out. The dollar is dropping like a lead balloon. And yet here, on the wire, Atlanta Fed president Jack Guynn is saying:

"I am of the view that we are very close to having Fed policy properly calibrated for now."

The market is SCREAMING that the Fed has it dead wrong. It's saying that money is STILL too easy. But these Fed "geniuses" just keep going on their merry way, saying everything is hunky-dory. It must be nice to live in FED-land instead of reality.

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