Free songs

Beige Book

Beige Book: Activity Slowed In About A Third Of The Country

FOMC published Beige Book which shows that,  during the reporting period of September through early October, activity slowed in about a third of the country mainly because of an increase in uncertainty due to the federal government shutdown and debt ceiling debate.

 

A few excerpts from the Fed classified by theme:

 

1/ Sum up
- Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of September through early October. Eight Districts reported similar growth rates in economic activity as during the previous reporting period, while growth slowed some in the Philadelphia, Richmond, Chicago, and Kansas City Districts. Contacts across Districts generally remained cautiously optimistic in their outlook for future economic activity, although many also noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate.
 
2/ Consumption
- Consumer spending grew modestly in most Districts. Auto sales continued to be strong, particularly in the New York District where they were said to be increasingly robust. Growth in retail sales was steady in most of the Districts, but picked up some in Cleveland and Richmond and slowed in Chicago, Kansas City, and Dallas. Contacts in Chicago and Atlanta noted that back-to-school spending was lower than a year ago. However, retailers generally remained optimistic about the holiday shopping season.
 
3/ Manufacturing
- Overall, manufacturing activity expanded modestly in September, but with some notable exceptions among the Districts
 
4/ Nonfinancial Services
- Demand for nonfinancial services increased modestly from the prior reporting period.
 
5/ Real Estate and Construction
- Construction and real estate activity continued to improve in September.
- Residential construction increased moderately on balance, growing at a stronger pace in the Minneapolis and Dallas Districts but only slightly in Richmond and Philadelphia.
- Multifamily construction remained stronger than single-family construction in a number of Districts.
- Nonresidential construction activity remained modest, but varied by market and District.
 
6/ Banking and Finance
- Financial conditions were little changed on balance from the prior reporting period.
- Overall loan growth remained modest in most Districts.
- Consumer loan demand weakened slightly.
- Reports on mortgage lending were mixed.
 
7/ Employment and wages
- Employment growth remained modest in September. Several Districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally.
 
8/ Inflation
- Price pressures remained limited in September. Most Districts reported only slight increases in commodity prices and limited ability to pass through these increases to their customers.

 

My view
 
It shows little change from last report. The pace of growth remains historically weak as it keeps on expanding at a modest to moderate rate. However, activity slowed in about a third of the country. Employment growth remains modest due to uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally, while inflation stays subdued. On the positive side, we can note that real estate activity continued to improve and in the meantime consumer spending grew modestly.

Beige Book: Little Changed From Last Report

Yesterday, FOMC published Beige Book which shows that activity continued to expand at a modest to moderate pace during the reporting period of early July through late August.

 

A few excerpts from the Fed classified by theme:

 

1/ Sum up
- Activity continued to expand at a modest to moderate pace during the reporting period of early July through late August. Eight Districts characterized growth as moderate; of the remaining four, Boston, Atlanta, and San Francisco reported modest growth, and Chicago indicated activity had improved.
 
2/ Consumption
- Reports indicated that consumer spending rose in most Districts. A few Districts mentioned that back-to-school sales contributed to overall consumer spending growth.
 
3/ Manufacturing
- Manufacturing activity expanded modestly during the reporting period.
 
4/ Nonfinancial Services
- Demand for nonfinancial services improved modestly overall since the previous Beige Book. Adjusting for seasonal fluctuations, providers of various professional and business services such as accounting, consulting, information, transportation, and legal services generally expanded their activities.
 
5/ Real Estate and Construction
- Activity in residential real estate markets increased moderately. The pace of sales of existing single-family homes continued to increase moderately in most Districts.
- Reports from several Districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many “fence sitters” were prompted to commit to purchases.
- Many Districts reported that limited inventories of desirable properties contributed to upward price pressures.
- Demand for nonresidential real estate increased. Office vacancy rates and other indicators in markets for office space improved modestly in the major metropolitan markets.
 
6/ Banking and Finance
- Lending activity weakened a bit, and several Districts reported less-favorable conditions than in the preceding reporting period.
- Lending standards were largely unchanged, while credit quality improved.
 
7/ Employment and wages
- For most industries and occupations, hiring held steady or increased somewhat in most Districts.
- Wage pressures remained modest overall.
 
8/ Inflation
- Upward price pressures were subdued, and price increases were limited during the reporting period.

 

My view
 
No surprise, the pace of growth remains historically weak as it keeps on expanding at a modest to moderate rate. Employment situation is slightly improving while inflation stays subdued. On the positive side, we can note that residential real estate market shows positive signs despite rising mortgage rates, however, on the negative side, financial conditions are weakening a bit with lower lending activity.

 

This analysis is broadly in line with Fed’s Williams comments yesterday which suggests that tapering should start later this year.  At the opposite, this morning, Fed’s Kocherlakota said the central bank’s outlook for inflation and unemployment calls for more accommodation.
 
 
***Remind that all Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (July 30-31) are available here.

Downside Risks Weighted on Chinese Stocks

Chinese equities markets were down as worries over the credit crunch in China continue to weigh on regional sentiment. Despite the second consecutive session of lower lending rates (7-day repo was down 230bps below 7%) and PBOC commentary reassuring investors (PBOC will implement “Fine-Tuning” policy in the short term), Shanghai Composite was  down nearly 5% and Hong Kong off by 2.0%, lowest levels since December and Sept of 2012 respectively. even though short-term lending rates are moving lower, they are still well above the levels seen just a few weeks ago and, moreover, the damage on the speculative property sector would be lasting. Even if short-term lending rates were moving lower, they are still well above the levels seen just a few weeks ago and that will penalize small banks according to Moody’s:

 

China’s worst cash squeeze in at least a decade may weigh on smaller banks’ financial strength as their reliance on interbank funding leads to an erosion of loan margins, according to Moody’s Investors Service. Mid-sized banks got 23 percent of their funding and capital from the interbank market at the end of last year, compared with 9 percent for the largest state-owned banks, Moody’s said in an e-mailed statement today. Those banks will probably compete “more aggressively” for deposits amid the credit crunch, which would increase cost of funds, it said.

 

Moreover, Goldman Sachs and CICC chose to cut their forecasts regarding growth:

Goldman Sachs became the latest bank to downgrade China’s economic growth on Monday, saying tighter financial conditions and reforms are downside risks for the world’s second largest economy. The bank cut China’s gross domestic product (GDP) growth forecast for the second quarter to 7.5 percent on the year from 7.8 percent previously. It also revised full-year growth estimates to 7.4 percent for 2013 and 7.7 percent for 2014, from 7.8 percent and 8.4 percent, respectively. The official growth target for the year is 7.5%.

 

China’s growth rate next year will probably drop to 7.3 percent, according to a report released by the China International Capital Corp Ltd on Monday. The government will likely cut growth targets for 2014 to 7 percent, compared with this year’s 7.5 percent, it said. CCIC hiked its forecast of M2 growth, a broad measure of money supply, to 14 percent for this year, but said the pace would moderate to 13 percent in 2014. And new yuan loans extended by commercial lenders next year will stand at 9.9 trillion yuan ($1.61 trilion), it added. The company maintained its GDP growth forecast for 2013 at 7.7 percent, while it cut the inflation rate forecast to 2.6 percent.

 

Finally, Chinese Beige Book confirmed the growth slowdown in Q2:

 

The latest China Beige Book showed fewer retailers reporting revenue growth along with a “sharp” pullback in service industries. An increased number of retailers said at least 60 percent of sales were to consumers.

Capital spending rose in transportation and was unchanged in manufacturing while weakening in retail, services, real estate and mining, according to the report. The property market cooled, while the labor market was “stable,” China Beige Book said.

Interest rates on loans averaged 7.10 percent, up 34 basis points from the previous quarter, while bond yields of 7.11 percent were up 80 basis points, the report said.