Morning Musings

September 8th, 2015 10:34 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

There were a few developments over the long weekend (inclusive of this morning) worth discussing briefly, as the tension builds toward the September 17 FOMC decision.

1)      San Francisco Fed President Williams sat with Jon Hilsenrath of the Wall Street Journal for an extended interview (the transcript is available on the WSJ website).  The bottom line is that, as hard as Hilsenrath tried to pin him down, Williams refused to give any indication of which way he leans heading into next week’s meeting.  In fact, he was so insistent about not giving any signal that I am left to wonder if either he does not know which way Chair Yellen is likely to come down and he is very afraid of crossing her or that an edict came down from Washington to Yellen’s more loyal disciples on the FOMC (of which, Williams is certainly one) to avoid sending an explicit signal.  My own take is that, as Williams suggests, the economic data dictate that the Fed needs to go, but that the market turmoil over the past few weeks adds downside risk to the outlook, and most policymakers will wait as long as possible to understand what is going on in China and globally before forming a hard opinion.  Williams laid out in detail the case for going and the case for waiting.  It sounds to me like he is ready to go given some of his arguments, but he hedged his bets and made it very clear to Hilsenrath on multiple occasions that he would not show his hand now.  Hilsenrath speculates this morning that the absence of a clear signal from the Fed may itself be a signal – that they will not go in September.  I do not entirely dismiss that view, but I think Yellen gave sufficient signal in July to be able to say that markets have been forewarned, and I just think that the leadership does not want to be viewed as locked in since the market environment is very fluid and could change the calculus over the final week or so leading up to the meeting.  This strikes me as very consistent with the tone of Fischer’s comments at Jackson Hole.  In any case, as you know, I am “reasonably confident” that the FOMC will move next week.

2)      The NFIB small business optimism index for August was up slightly to 95.9 vs. July.  This is modestly below the year-to-date average (96.5) and well below the historical average of 98.  Assessments of current sales and expectations for the near term sales outlook both improved modestly.  The employment measures were quite strong, as the current employment gauge jumped by 8 points to +10, the best reading since 2005.  Hiring plans inched up by 1 point to +13, the third-best reading of the cycle.  Moreover, the percentage reporting job openings that they were unable to fill returned to +29, matching the highest reading since 2006 and the second-best since 2001.  A whopping 48% found few or no qualified applicants for job openings, unchanged from July but the high for the cycle.  Notwithstanding the smaller payroll gain in August, it is increasingly evident that labor markets are getting tight.  Current and expected wage indices have been trending higher this year but were flat and down 2 points respectively in August.  Meanwhile, the prices gauges were down in August and look pretty tame still.  The inventory satisfaction gauge provides yet another signal that stocks are too high, as the index posted a second straight -6 reading (a negative number signifies that more respondents felt their inventories were too high vs. those who thought inventories were too low), the lowest figure since the depths of the last recession.  Finally, after showing a flicker of life in July, the percentage of those who made a capital expenditure over the last 6 months slipped back by 3 points in August.  My broad takeaway from the August NFIB survey is that the economy continues to plod along at its 2%-ish growth rate, but the labor market is inexorably absorbing slack and nearing an outright tight setting.

3)      On that topic, the Manpower quarterly survey of hiring plans advanced by 2 points to +18, the strongest reading since 2008.  As Williams indicated in his WSJ interview, if payroll gains remain in the 200K range for another year or two, we will have overshot full employment (and well before the Fed will be able to get back to a neutral policy setting).

4)      The Federal Reserve Board’s LMCI (Labor Market Conditions Index) rose by 2.1 points in August, the strongest reading since January.  Converting the change index into a level measure, the current setting sits at the 75th percentile of all readings since the index began in 1976.  Just curious.  Where is monetary policy right now?  Easier than it’s ever been.  Hmmm.  Something seems amiss.

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