There were no surprises in today's Personal Income and Spending report. At $14.188 trillion, Personal Income rose 0.4% in August, just as expected, and up from an upward revised 0.2% in July. On the spending side, US Personal Outlays were $11.94 trillion, an increase of 0.3% from July, and also higher than the upwardly revised July spending of 0.2%. The PCE Deflator came in at 0.1%, as expected, while the PCE Core rose 0.2% compared to expectations of 0.1% and up from 0.1% last month. The breakdown of components at both income and spending levels was uniformly distributed with nothing standing out. Real Disposable income rose 1.6% Y/Y but only due to a change in the current-dollar series as a result of an adjustment in the implicit price deflator which revised recent numbers to appear larger. Finally, since in nominal terms incomes rose a fraction more than spending, the implied savings rate rose by the same fraction: 4.5% to 4.6%, the highest since May.
Following yesterday's modest bounce in equities punctuated by the traditional last minute spike, sentiment has reverted lower once again, driven by the uncertainty surrounding debt ceiling talks in the US, where lawmakers have until next Tuesday to agree to a spending bill, or much of the government will shut down. The Senate will vote on a spending bill later today, which will then be sent back to the House putting republicans in a quandary (Politico explains the complications surrounding the GOP's "Plan C"). It was reported that US House leaders are considering postponing action on a bill to extend the US government's borrowing power, with the leadership discussing a change of strategy to complete action on the stopgap spending bill before debating the debt-limit debate. In FX, GBP strengthened across the board this morning after BoE’s Carney said he does not see a case for more quantitative easing.
The Federal Reserve continues to cling to a destabilizing and ineffective strategy. By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad. By now, the global repercussions are clear, falling most acutely on developing economies with large current-account deficits. But there is an even more insidious problem brewing on the home front - wealth effects are for the wealthy (as the Fed knows too well). QE benefits the few who need it the least. That is not exactly a recipe for a broad-based and socially optimal economic recovery.
Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.
The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.
This is The System Of The World. It lays out in logical frankness how the various layers of the facade we call “democracy” and “free markets” interoperate and together create a grotesque caricature of the ideals they purport to serve and keep us all enslaved. Join us on a trip through The System.
Throughout this year, the consensus view has been that current economic weakness is justified and we are just one or two quarters away from faster growth. Now, in the third quarter Guggenheim's Scott Minerd exclaims we are hearing the same arguments, although growth targets are starting to dip. He calls this "hope", the growth mirage. Minerd adds, that, in the heat of the desert, the eye perceives water on the horizon, but the closer one tries to get, the farther away it moves – until the traveler realizes that he has been chasing an illusion caused by shimmering layers of hot and cool air.
Reading the financial press, one gets the impression there are only two sides to the austerity debate: pro-austerity and anti-austerity. In reality, we have three forms of austerity. There is the Keynesian-Krugman-Robert Reich form which promotes more government spending and higher taxes. There is the Angela Merkel form of less government spending and higher taxes, and there is the Austrian form of less spending and lower taxes. Of the three forms of austerity, only the third increases the size of the private sector relative to the public sector, frees up resources for private investment, and has actual evidence of success in boosting growth.
"It's not worth shopping in China," said one disgruntled middle-class Chinese consumer, adding, "If you can wait, do it elsewhere." The reason is simple - massive price inflation. As the WSJ reports, clothing and other apparel is on average 70% more expensive for consumers in China than in the US. Government taxes and import tariffs are to blame for some of the price discrepancy, but, the WSJ goes on to note, for years the burgeoning Chinese middle class also seemed willing to pay more for products with consumer cachet, particularly imported goods - especially given the easy availability of credit. But today more Chinese consumers are pushing back, weary of sticker shock - and enlightened by the ability to compare prices elsewhere, thanks to the Internet - and China is starting to crack down on over-zealous pricing.
On the surface, today's Personal Income and Savings data was not pretty: with Incomes and Spending both rising at 0.1% in July, both missed the expected growth rate of 0.2% and 0.3% respectively. This also meant that the US consumer's savings rate was unchanged at 4.4% in the month, and the downtrend from recent highs continues as more and more of the savings buffer has to be depleted. But it was once again below the headlines that the truly ugly data lay. A quick look at the components of income showed something very disturbing. After holding relatively firm for the past five months (excluding the violent swings surrounding the 2012 year end accelerated bonus payouts), compensation of employees - the core component of personal income - tumbled by $21.9 billion. This was the biggest monthly slide since May 2012, and as the chart below shows, the downtrend in sequential wage growth has now resulted in a sequential decline in wages.
Early-year tax increases and higher gasoline prices have probably dented U.S. consumer expenditures and as Bloomberg's Joseph Brusuelas notes, tomorrow's report of July’s personal income and spending report may illustrate the weakness that poses a significant risk to the much-anticipated economic growth renaissance in the second half of the year.
The reality is that the recession never ended for 95% of U.S. households, and by many metrics the recession has deepened. The trick is to not measure those metrics; what isn't measured doesn't exist, especially recession.
A quiet week to send off August ahead of a deluge of key data next week and as the fateful Septembr 18 FOMC announcement approaches. Still, quite a few macro events to keep track of.
Last week it was the Nasdaq, today it was the Eurex Exchange, which broke down "due to technical issues" shortly after 2 am Eastern and which was offline for over an hour. Further keeping a lid on liquidity and upward momentum is today's UK market holiday which has resulted in a driftless move lower across European stocks, following a red close in the Nikkei225. It only means that the inevitable ramp up in the disconnected from all fundamentals and reality market will have to come only during US trading hours when the NY Fed trading desk steps up its POMO-aided levitation.
Next weeks events placed within the larger context.