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Your Bank > News

CNB Economic Commentary: Sept 16

September 17, 2013

To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 09/13/13

By this time next week we’ll have a clearer picture of the Federal Open Market Committee (FOMC) intent and activity. This week’s economic releases remain mixed, suggesting that whatever actions occur following the FOMC meeting will be driven by economic expectations rather than current news.

This week’s inflation data continue to suggest that Fed spending on bonds will decline. The twelve month rate of wholesale inflation was reported to be 1.4%, lower than all but two months in the past year. The .3% increase for the month of August was slightly higher than anticipated, as geopolitical worries pushed gasoline prices upward. Without food and energy considerations, there was no increase in wholesale inflation in August. Neither was there an increase in intermediate goods prices, and prices at the crude goods level actually fell 2.7%. Simply put, wholesale prices remain tame enough to allow some Fed tightening next week.

Things get a little more complicated when we look at labor and consumer data. On the positive side, weekly initial unemployment claims fell below 300,000 for the week, and continuing claims are below 3 million weekly for most of the past five months. While speculation continues about shrinkage in the labor force as one cause, we’ll suggest that some real improvement in the jobs market continues, and that’s the data that most interests the Fed.

Offsetting the inflation and unemployment numbers was the data on consumers. Early in the week, consumer credit was reported to have risen $10.4 billion in July. While that number looks good, it equates to an annual rate of increase of 4.4%, the slowest rate this year, and slower than any quarterly rate since 2011. Credit card debt fell for the second consecutive month, while new car sales helped non revolving debt expand, but at a more modest pace than June. It’s too early to blame rising mortgage rates, but it does seem that consumers are being a bit more cautious about pulling out their credit cards.

That view is supported by retail sales figures for August. There was only a slight increase of .2% in retail sales in August, and without auto sales, the increase was a scant .1%. Home related items were mixed, with furniture and electronics posting good gains, while building materials sales fell almost 1%. Restaurant sales were modestly better, food stores almost flat, and declines in clothing, sporting goods, and general merchandise stores suggested either poor or very late back-to-school shopping. Add in today’s University of Michigan Consumer Sentiment Index indicating a poor consumer view of the economy (gasoline and home mortgage price influenced) and the picture of consumer happiness is not all that strong.

Still, most surveys indicate that a majority of economists are looking for some kind of declining Fed intervention next week. We’re still in the opposite camp, and remind readers that the coming battles over the budget, the decision on Fed Chairmanship, and our ever intriguing global geopolitical situation remain in the background. Chairman Bernanke has mentioned often that Fed movement is based solely on what is best for the American economy, but all of these events can easily change the velocity (if not the direction ) of the U.S. expansion.

The stock markets moved higher this week, thinking that the soft economic data would keep the Fed intervention from declining very much. At 3:25 p.m., for the week and year:

Dow Industrials 15370 +3.0% +17.3%
NASDAQ 3721 +1.7% +23.2%
S&P 500 1687 +1.9% +18.3%

There was some buying in the 5-10 year ranges for both Treasuries and Munis, pushing yields down as the size of any Fed intervention is less than clear.

  US Treasuries
Municipal Bonds
  9/13/13 9/6/13 9/13/13 9/6/13
2 Year .44% .46% .41% .40%
5 Year 1.70% 1.75% 1.52% 1.56%
10 Year 2.89% 2.92% 2.91% 3.03%