Beige Book

Some important economic data upcoming, which will certainly be drowned in the headline rush, now that Asia is once again on the radar.

The September Beige Book, which had exactly zero new informational content, had just the right amount of impact on the market: zero.

Relatively quiet, rainy day punctuated by the JOLTS report, the Fed's Beige Book and speeches from Fed officials. Headline news will again dominate market momentum.

The Fed's most irrelevant report, the Beige Book, is out. Here is the gist

• Fed Beige Book Says U.S. Economy Slowed in Eight of 12 Regions
• Droughts, flooding adversely affected seven regions
• Wage pressures ‘subdued,’’ inflation pressures ‘‘weakened”
• Spending in majority of regions saw modest growth of nonauto retail sales
• Inventories still lean due to Japanese supply chain disruptions.
• Manufacturing was steady or slowed in many regions
• Most of residential real estate market still weak

We get it: it's all the weather and Japan's fault. Also, somehow Japan is to blame for "lean" inventories which somehow have increased for 2 years running.

Today's economic docket consists of Durable Goods numbers (if the Paris Air Show was indeed as bad as we expect, Boeing, i.e., aircraft, orders may slip substantially), the Beige Book, and $35 billion in 5 Year Notes (+$20.065 net). All of it irrelevant: the double whammy of major headline risk out of both Europe and the US (Europe bailout 2 unwinding, no deal 24 hours ahead of the Thursday congressional deadline) will be the key driver of the market once again.

According to the just released Beige Book, there was slower growth seen in New York, Philadelphia, Atlanta, Chicago districts. Only Dallas reported acceleration. And yet the denials continue: "wage growth generally remained modest", and there was "widespread improvement reported in credit quality." We wonder where they get these imaginary data feeds from. More from the report: "Manufacturing activity continued to expand in most parts of the country, though a number of Districts noted some slowing in the pace of growth. Activity in the non-financial service sectors expanded at a steady pace, led by industries related to information technology  and business and professional services." Shockingly, the Fed admits there is food price inflation: "Elevated food and energy prices, as  well as unfavorable weather in some parts of the country, were said to be weighing on consumers’ propensity to spend." Lastly, Japan is the new snow: "Widespread supply disruptions—primarily related to the disaster in Japan—were reported to have substantially reduced the flow of new automobiles into dealers’ inventories, which in turn held down sales in some Districts. Widespread shortages of used cars were also reported to be driving up prices....Many Districts indicated that supply disruptions, primarily from Japan, have contributed to lean inventories, which have impeded auto sales somewhat....Inventory levels are mixed, with one retailer explaining inventory has been temporarily increased due to global supply concerns, such as output disruptions in Japan." And so forth. Key word count of the word: Japan - 25 times; Inflation - 1 time; Deflation - zero.

A beige book and a bond auction.

Busy day with quite a bit on the economic front: if Gallup is right March retail sales will be weaker than expected. Other key events include the JOLTS survey, business inventories, a Treasury auction and the inverse - POMO; and last Obama is presenting at noon his deficit reduction plan.

The key highlights, in which we read that yes, the margin squeeze is here.

• Non-wage input costs increased for manufacturers and retailers in most Districts.
• Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months
  
• Manufacturers, in a number of Districts reported having greater ability to pass through higher input costs to customers. (oh really, good luck)
• Most reporting Districts noted continued strong agricultural commodity prices.
• Wage pressures remained minimal across all Districts; although Philadelphia, Dallas, and San Francisco noted that most wage increases were for workers with specialized skills.
  

Noisy day today as Portugal issues €1.25b in 5yr & 10yr paper, although higher-range allotment did require a bit of low bidding. 5yr BTC worsens from 2.8x prior to 2.6x, while the 10yr sees a step-up from 2.1x to 3.2x bid-to-cover. Although the 2020 paper saw a decline in 10yr auction yield from 681bps to 672bps, the lower-duration notes jumped from 404bps prior to 540bps. Despite initial weakness, encouraging comments from EU officials and rumors of further EFSF expansion sparked a squeeze in euro assets and contributed to a pervasive risk-wide bid. Meanwhile, November Eurozone IP jumps to 1.2% MoM vs 0.5% consensus vs 0.7% prior, and a constructive Beige Book and bullish supply/demand figures from crude inventories and the WASDE report contribute to an overall risk-on/USD-off day.

• Manufacturing continued to expand in most districts
• Consumer spending steady to up slightly, purchases mostly limited to necessities
• Housing markets remained weak and house prices seen stabilising, commercial real estate subdued and construction weak
• Home inventories elevated or rising in most districts
• Input costs, notably for agricultural commodities and metals rose further but not passed on to consumers
• Prices of final goods and services mostly stable and says wage pressures minimal
• 'Lending activity was stable at low levels' in most areas

This is not what the market wanted to hear: "Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods."

FOMC's Beige Book indicates that things could not be better... if you ignore the record unemployment of course and the tens of trillions in rollover debt, and the quadrillions in 2100 deficits, and that damn snowfall which came at a very sensitive time for the economy. So yes, aside from that, all is great.

CRE is still the biggest wildcard: "Commercial real estate was still weak in nearly all Districts with rising vacancy rates and falling rents. Since the last report, loan demand continued to decline or remained weak in most Districts, while credit quality continued to deteriorate." - Beige Book

The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all Districts. Banking also faltered in several Districts, with Kansas City and San Francisco noting continued erosion in credit quality (often with more expected in the future). One bright spot in the banking sector was lending to new homebuyers, in response to the first-time homebuyer tax credit. Finally, labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement.