Can QE Prop Up Asset Prices Forever?
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The economy in the first quarter was marginally stronger than previously believed as the Commerce Department's third estimate for GDP growth was nudged up to 1.9 percent annualized from the prior estimate of 1.8 percent. The consensus called for 1.9 percent growth.
Final sales of domestic product were unrevised at an annualized 0.6 percent. Final sales to domestic purchasers were revised down to 0.4 percent from the earlier estimate of 0.7 percent annualized. The lower estimate for final sales to domestic purchasers was from lower numbers for investment in equipment & software and government purchases. PCEs growth was unrevised overall.
Economy-wide inflation was incrementally higher with the GDP price index rising 2.0 percent, compared to the earlier estimate of 1.9 percent. Analysts expected 1.9 percent.
Manufacturing may not be as weak as suggested by recent manufacturing surveys. New factory orders for durables in May rebounded 1.9 percent, following a revised 2.7 percent decline the month before (previously estimated at down 3.6 percent). May's figure came in higher than analysts' projection for a 1.5 percent gain. New durables orders excluding transportation also made a comeback, increasing 0.6 percent after a 0.4 percent drop in April.
For the latest month, gains were broad-based by industry. Transportation led the way with a monthly 5.8 percent jump, following a 9.4 percent drop in April. The swing in both months was largely nondefense aircraft (Boeing) which surged 36.5 percent in May after a 29.0 percent fall the month before. Defense aircraft rebounded 5.5 percent after a 0.4 percent dip. However, the auto industry appears to still be suffering from supply shortages. Motor vehicles edged up only 0.6 percent, following a 5.3 percent fall in April.
Also seeing gains in May were primary metals, up 1.8 percent; machinery, up 1.2 percent; computers & electronics, up 0.4 percent; and electrical equipment, up 3.2 percent. Fabricated metals were flat while "other durables" slipped 0.8 percent.
Business investment is improving in coming months as new orders for nondefense capital goods excluding aircraft also rebounded, by 1.6 percent after dipping 0.8 percent in April. Shipments for this series rose 1.4 percent, following a 1.5 percent decline the month before.
Today's report is good news for manufacturing and the economy. Yes, durables orders are volatile but the gains were widespread and were not dependent on a rebound in autos. Once supply disruptions are addressed, autos will add to underlying strength in coming months.
Trichet Says Risk Signals ‘Red’ as Crisis Threatens Banks
June 23 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks.
“On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”
It's an uncertain jobless report for the June 18 week though the headline news isn't good showing a 9,000 rise in initial claims to a higher-than-expected 429,000. The Labor Department had to estimate results for six states, which is a sizable number, due to what it says are "technology issues" which must mean computer problems. Hopefully, the department erred to the high side and the total will come down with next week's revision. But revision is another negative in today's with the prior week revised 6,000 higher to 420,000.
A look at month-ago change, which offers a gauge for the monthly employment report, is also mixed. The 429,000 level is 15,000 higher than the May 14 week, a sampling comparison for the household survey which generates the unemployment rate. But a look at the four-week averages for the same weeks is a positive, showing a nearly 15,000 improvement to 426,250 in the latest week.
Among other data, there's little change in the June 11 count for continuing claims, at 3.710 million, and no change in the unemployment rate for insured workers, at 2.9 percent.
There's little initial reaction but this report won't be a positive for today's financial markets. And it's also a disappointment that initial claims aren't moving lower and seem stubbornly above 400,000, in fact they've been over 400,000 now for 11 straight weeks.
Change To Inflation Measurement On Table As Part Of Budget Talks -Aides
WASHINGTON -(Dow Jones)- Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.
According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.
Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.
The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report.
According to two congressional aides familiar with the budget negotiations, the shift is being "seriously discussed" as part of the ongoing talks to strike a budget deal, that would be used to ease the passage of a required increase in the country's debt limit.
Those talks involve Democratic and Republican lawmakers from both chambers and are led by Vice President Joe Biden. The group held its latest meeting Tuesday as they strive to reach the broad outlines of a compromise on federal spending by the end of the month.
In a press conference that took place before the meeting, House Majority Leader Eric Cantor (R., Va.) declined to comment on the specific proposal, other than to say that "a lot of things are on the table." But asked whether the proposal would be interpreted as a tax increase and therefore a non-starter for Republicans, Cantor said it could be seen as both impacting tax rates and benefits paid out by the federal government.
A positive swing in production-related indicators made for improvement in the Chicago Fed national activity index which comes in at minus 0.37 for May vs a revised minus 0.56 for April. Production, which brought down the April reading by 0.16, added 0.05 to May's headline.
But now the negatives. The drag from employment increased to minus 0.04 from minus 0.02 while consumption & housing subtracted 0.36, a heavy negative though a little less heavy than the minus 0.40 of the prior month.
The index's three-month average deepened to minus 0.19 from April's revised minus 0.15, which of course is a negative. A possible negative is the outlook for the June report where early indications on production are unusually negative and which point to an unwanted swing for what was May's biggest plus.
The housing slide deepens with existing home sales falling 3.8 percent in May to a 4.81 million annual rate. The year-on-year rate deepens to minus 15.3 percent from April's minus 13.8 percent. Supply on the market, at 3.72 million, is falling but not enough relative to the decline in sales as months supply rose to 9.3 months vs April's 9.0 months.
The glass half full shows a rise in prices, up 3.4 percent for the median to $166,500 and up 2.0 percent for the average to $214,400. But the heavy supply doesn't point to much pricing power in the months ahead. Another plus is that sales of single-family homes, the central component in the report, fell at a slower rate of minus 3.2 percent vs minus 8.1 percent for the much smaller condo category. Also, heavy weather may have played a role as the month's contraction is deepest in the Midwest.
The National Association of Realtors is definitely looking at the bright side and is actually spilling the beans on next week's pending home sales data saying the report, though based on incomplete data, will show "solid gains." The NAR believes, and hopefully they're right, that May will prove to be the year's bottom for the housing sector. New home sales, which had been especially weak though improving in the last couple of reports, will be posted on Thursday.
The number of mortgage applications fell in the June 17 week cutting into but not reversing very strong gains in the prior week. The index tracking purchase applications fell 2.8 percent with refinancing applications down 7.2 percent, which in combination pulled the composite index down 5.9 percent. Behind the pull back, at least in part, are the week's slightly higher rates, at 4.57 percent for 30-year loans for a six basis point rise in the week.