So, yesterday’s and today’s US data has come in mixed. So far, markets have twisted the results to the upside. On Monday, Personal Income and Outlays for July came in above expectations at 0.8 in July, and real PCE increased 0.5% as the price index 0.4 percent. Pending Home Sales Index came in below expectations with a 1.3 percent fall to 89.7 in July from 90.9 in June. It is 14.4 percent above the 78.4 index in July 2010. The Dallas Fed Manufacturing Survey for August came in above expectations but only because they were so low following the Philly Fed collapse. The index fell from 10.8 to 1.1, suggesting growth stalled in the month. The new orders index fell from 16 to 4.8 suggesting further weakness ahead.
Today’s data was also a mix. The S&P/Case-Shiller Home Price Index was flat on a seasonally adjusted basis for June. On the other hand, the Conference Board’s consumer confidence index for August was anything but flat, smashing the consensus to bits with a plunge from 59.2 to 44.2, confirming the results of the Michigan survey last week. The 6 month outlook chart also collapsed from 74.9 to 51.9.
So, that’s gathering evidence of a very serious slowdown on both the production and consumption sides of the economy in August, with a few trailing indicators looking decent. On balance, very weak and weakening.
In our upside down world of liquidity loving equity markets and, being optimistic, limited economic growth, this balance of poor data has been interpreted as truly excellent news and has been greeted with a rally on the prospect of more fair dinkum QE3.
The sad irony of that, of course, is that commodities have rallied steeply and the CCI is now just 5% below its April peak, making it damn near impossible to see any of the disinflationary forces that the FOMC has said it will need to see before QE3.
Ahead this week are the August ADP and NFP on employment, and the PMI and ISM on production input and output. The two big ones are the ISM and NFP. If either of these were to come in very weak then the acceptance of the forthcoming (in my view) US recession will broaden. The mood the markets are in, however, that is just as likely to cause a rally as the expectations for QE3 will grow.
That happened to an extent anyway last night with two further events raising expectations of further fair dinkum stimulus. The first was the release of the Minutes of the last FOMC meeting:
Reinforcing the Committee’s forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates.Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System’s portfolio–perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities–could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve’s balance sheet and the quantity of reserve balances. A few participants noted that areduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment. Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time.
As well, as Zero Hedge highlights, one of the three FOMC dissenters from further stimulus, Narayana Kocherlakota, said the following last night:
The rise in core inflation in the first part of the year is consistent with the view that labor market slack has fallen. But some observers argue that core PCE inflation is only temporarily high because of the tragic events in Japan or transitory spikes in commodity prices. If so, the disinflationary pressures of 2010 should soon reappear in the form of a sharp decline in current and expected core PCE inflation rates. In that eventuality, increasing policy accommodation might well be appropriate.
The question has to be asked, then, where does that leave the FOMC on its definition of disinflation or deflation as a trigger for more stimulus? If real economic data is weak enough to be signaling recession but commodity markets are still strong enough to be causing input cost and consumer inflation then they’ll have to duck under their own bar on inflation to offer the QE3 the equity market increasingly expects.
