Morning Report: James Bullard explains his dissent

Vital Statistics:

Stocks are up this morning on no real news. Bonds and MBS are flat.

Existing home sales rose 1.3% in August, according to NAR. Sales are up 2.6% from a year ago to a seasonally adjusted annual rate of 5.49 million units. The median existing home price rose to $278,200, which was up 4.7%. “Sales are up, but inventory numbers remain low and are thereby pushing up home prices,” said Yun. “Homebuilders need to ramp up new housing, as the failure to increase construction will put home prices in danger of increasing at a faster pace than income.” Inventory did fall to 1.86 million units, which represents a 4.1 month supply. In the “every dog has its day” category, the Northeast led the pack with a 7.6% increase in sales although the median home prices was flat. The Northeast still has a glut of higher priced inventory it needs to work through.

In other economic news, the index of leading economic indicators was flat in August, and initial jobless claims came in at 205,000. The Fed’s balance sheet increased to $3.845 trillion in assets.

St. Louis Fed President James Bullard explained his dissent on Wednesday’s FOMC vote. While the Committee ended up easing by 25 basis points, Bullard wanted to cut rates by 50 basis points.

First, there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.

Second, core and headline personal consumption expenditures (PCE) inflation measures continue to run some 40 to 60 basis points, respectively, below the FOMC’s 2% inflation target. Market-based measures of inflation expectations continue to indicate expected longer-term inflation rates substantially below the Committee’s target. This is occurring despite the 25 basis point cut in July and the 25 basis point cut that was expected for the September meeting. While the unemployment rate is low by historical standards, there is little evidence that low unemployment poses a significant inflation risk in the current environment.

The quote about manufacturing is interesting. Industrial production rose 60 basis points last month and manufacturing production was up 50 bps. Capacity utilization rose 40 basis points as well. We had one reading on the ISM that came in at 49.1, which was technically below 50, where manufacturing is neither contracting nor expanding. For all intents and purposes, it was flat given the inherent error built into these sentiment surveys. Historically, a manufacturing ISM reading of 42 corresponds with an overall recession. FWIW, the ISM reading of 49.1 usually corresponds with a GDP growth rate of 1.8%. In other words, hardly recessionary, and manufacturing represents only about 13% of the US economy to begin with. The statement about G7 rates is probably what is driving things – the Fed is simply following the markets.

Home equity rose 4.8% in the second quarter, or about 428 billion. Negative equity fell by 9%, or about 151,000 homes. The home equity number is a new record, and home equity has doubled since the depths of the housing recession. You can see below which parts of the country still have a negative equity issue to work through.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical View all posts by Brent Nyitray