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Lots of data out this morning so let’s take a look at what was reported:

  • I don’t usually pay too much attention to the weekly mortgage applications, but this data starts to become interesting with the surge in rates over the last month.  The Mortgage Bankers Association is citing higher rates as the cause for a “sharp” decline in applications.  The purchase index is down -5% week over week.  This is a direct blow to the Fed’s QE program.  Mortgage debt represents 75% of the consumer’s outstanding debt so if QE is failing to keep rates low and therefore directly impacting refinancing and demand for new home loans it’s safe to say that Bernanke’s program is far from achieving its goal.  With rates surging it would be reasonable to expect this negative trend to continue in the near-term.
  • Yesterday’s PPI showed continued price increases, but this morning’s CPI shows that the increases aren’t being passed along.  This is consistent with weak end demand.  The BLS reported a 1.1% year over year increase in inflation.  My TP-CPI, which incorporates a mortgage cost component, is up 1.8% year over year.  Although this reflects a higher rate of inflation than the CPI it is consistent with the disinflation we continue to see.

“A solid headline masks softness in the Empire State manufacturing report for December. The index on general business conditions, which is a subjective assessment by respondents, rose to 10.57 to indicate meaningful month-to-month expansion vs October’s minus 11.14 which indicated meaningful contraction. The report otherwise shows mild contraction in employment, significant contraction in unfilled orders and little better than a flat month-to-month reading of 2.60 for new orders which contracted severely in October.

Shipments are a plus showing meaningful month-to-month growth at 7.11 and reversing comparable contraction in the prior month. Another plus is a big draw in inventories pointing to inventory rebuilding which is a plus for the production and employment outlooks.

This report, especially the flat new orders reading, sends an uncertain signal for Thursday’s Philadelphia Federal Reserve data for December. The manufacturing component of the industrial production report, to be posted at 9:15 a.m. ET this morning, will offer definitive data for November.”

  • Industrial production and capacity utilization showed signs that are consistent with tepid economic recovery.  Headline production rose 0.4% while capacity utilization increased to 75.2%.  This is the highest level since October 2008.  Although increasing, capacity utilization is still not consistent with high inflation concerns.  Historically, capacity utilization has triggered inflation fears at levels of 80%+.  At 75.2% we’re still operating well below our capacity as an economy.

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