(…) Policy makers concluded at the meeting they were near their goal of “full employment,” but they weren’t convinced inflation is on its way back to their 2% target after undershooting it for more than three years.(…)
Some Fed officials have described the September decision as a close call. The minutes don’t suggest there was intense disagreement with the decision to hold off on raising rates. (…)
Thirteen of 17 Fed officials indicated in projections released after the meeting that they expected to move this year. Ms. Yellen emphasized in a speech after the meeting that she was among this group. (…)
“Most members agreed that their confidence that inflation would move to the [Fed’s] inflation objective would increase if, as expected, economic activity continued to increase at a moderate rate and labor market conditions improved further,” the minutes said. A few also said their confidence would rise if they saw wages picking up, though that wasn’t a precondition for a rate increase.
“Other factors important to the committee’s assessment of the inflation outlook were the expectation that the influences of lower energy and commodity prices on headline inflation would abate, as had occurred in previous episodes, and that inflation expectations would remain stable.” (…)
Here’s the FT’s take of the same minutes:
(…) At their September meeting, Fed rate-setters largely stuck with their view that an increase in rates was likely to be merited before the end of the year, arguing that global factors, including a possible China slowdown and stock market turbulence, should have only a small or fleeting impact on the US recovery.
But they agreed that given the new uncertainties overseas, they should wait for extra evidence that the economy had not deteriorated rather than pull the trigger on a rate rise in September. (…)
The minutes reveal nervousness among some rate-setters about the risks of lifting rates from their current near-zero levels too soon. “Downside risks” to inflation could materialise if the target range for the Fed funds rate were increased before it was clear that growth would remain at an above-trend pace and downward pressure on inflation had eased.
It was noted at the meeting that it was easier for the Fed to respond to unexpected upside inflation surprises by hiking rates than to persistently sluggish inflation, given that official rates remain on the floor.
The FOMC is managing risk, knowing its limits in combatting deflation. If it can choose its fight, it will fight inflation.
There is also this:
A study by the New York Federal Reserve estimates that a 10 per cent dollar appreciation over three months shaves 0.5 points off GDP growth over one year, and an additional 0.2 percentage points in the following year if the strength of the dollar persists. Even this estimate does not include the impact on domestic investments by US companies hurt by a stronger dollar, the NY Fed’s researchers stressed. (FT)
Eurogroup President Jeroen Dijsselbloem said monetary policies in the U.S. and Europe should “normalize” and the Federal Reserve should be clearer on how it communicates its rate moves.
“If everyone is expecting a step, then putting it off sometimes doesn’t help, but creates more expectations and makes it even more difficult to take it,” Dijsselbloem, who is also Dutch finance minister, said in a Bloomberg Television interview Thursday in Lima. “The question is whether postponing it is helping.”
Meanwhile:
Unemployment claims fell 13,000 to 263,000 for the week ending Oct 2. This puts the four-week moving average at 267,500, just above the cycle low reading of 266,000 on August 8. There is little market moving information in this release as it stayed in a range of 260,000 to 300,000. The market moving information is in continuing claims. They fell sharply for the week ending September 19 and just rose modestly last week. ISI views this as another sign that the labour market gains are solid and the slack in the labour market is diminishing, despite the disheartening report for September.
(…) Resource-linked currencies are generally doing well as certain commodity price climb higher, said London Capital Group chief analyst Brenda Kelly.
But along with that is a dip in the U.S. dollar, pulled lower as investors bet against the possibility of a rate hike by the Federal Reserve this year. (…)
More fundamentally, the Canadian economy finally seems to react to the 25% currency depreciation since 2013:
- The Canadian GDP seems to be growing faster than the U.S.
- Canadian industrial output rose 6.2% annualized in the last 3 months vs +1.9%% for the U.S.
- Canadian shipments of durable goods jumped at a 13% annualized rate during the last 3 months (in volume) while orders volume grew at a 26% rate.
- Canadian unit labour costs are down 20% in USD since 2013.
Add that the Canadian housing sector is not collapsing just yet.
But the recent CAD spike is not unique:
Emerging-market currencies are heading for their biggest weekly gain in seven years. A Bloomberg index tracking 20 developing-nation exchange rates climbed 3.2 percent this week, recovering from its biggest quarterly loss since 2011. Indonesia’s rupiah, Russia’s ruble and Malaysia’s ringgit were the best performers, with gains of at least 6 percent against the dollar. In fact, the rupiah posted its strongest weekly rally against the dollar since 2001 and the ringgit its strongest weekly gain since 1998 as commodity prices rise and the risk of the Federal Reserve tightening fades.
(…) “While this rally has occurred alongside a broader re-risking across assets after last week’s U.S. non-farm payrolls release, the oil move has been larger, exacerbated by still large short positioning and the break of key technical levels,” wrote Jeffrey Currie, head of commodities research at Goldman Sachs. (…)
The problem, according to Goldman, is that the fundamentals have not changed: in spite of the start of a roll-over in U.S. production, the market remains oversupplied. While the shale revolution was what provided the impetus for the plunge in oil prices seen over the past year, Currie claims that the oil glut is now being sustained by production outside the U.S.
The U.S. dollar index has given back ground over the past two weeks amid growing confidence that the Federal Reserve will refrain from lifting interest rates in 2015. But Currie claims continued inaction from the central bank isn’t necessarily a boon for crude prices; in fact, he contends that it would have the opposite effect.
While “a Fed on hold could offer some reprieve to the emerging market rebalancing, this decision would ultimately be driven by weaker underlying activity, leaving risks to oil demand and our forecast skewed to the downside,” he wrote. “Net, we expect this rally to reverse and reiterate our forecast for lower prices for longer.”
One month ago, Goldman’s commodities team indicated that the price of crude could fall as low as $20 per barrel and stay at relatively depressed levels for up to a decade and a half.
Yet:
U.S. crude oil production continues to fall
Depressed prices and a surge in financing costs – the yield on high yield energy companies has tripled over the past year – is starting to put a serious dent on U.S. petroleum production. Since hitting a record of 9.6 million barrels per day in April, crude oil output has dropped in twelve of the last fifteen weeks. As today’s Hot Charts show, the decline is already near 500 thousands of BPD, the largest such reduction since 2012 when the U.S. went exponential in shale oil production. At this juncture, the U.S. department of energy (EIA) expects production to remain on a downtrend through August 2016. (NBF)
The most recent EIA stats are for July. The AAR provides reliable data on rail carloads of “crude oil and other petroleum products” through the end of September showing the continued acceleration in the decline.
EARNINGS WATCH
As I reported yesterday, the earnings season was underway before yesterday’s AA results. Zacks Research has the tally so far:
(…) earnings reports from 23 S&P 500 members already on the books. All of these 23 reports are from companies that have fiscal quarters ending in August, which we count as part of our Q3 tally. Total earnings for the 23 S&P 500 members that have reported results already are up +1.9% from the same period last year on +7.2% higher revenues, with 73.9% beating EPS estimates and an above-average 65.2% coming ahead of revenue estimates.
Zacks says that this is a better performance than we have seen from the same group of 23 S&P 500 members in Q2’15 when the same 23 companies reported –0.5% in EPS on +0.5% in revenues.
Heck, most of Wall Street bankers could be sued on these basis!! Here’s the doc if you care.
