In Between Days

by CC January 12, 2012 12:49 am • Commentary

Federal Reserve

Contact reports from the twelve Federal Reserve Districts suggest that national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December. Seven Districts characterized growth as modest; of the remaining five, New York and Chicago noted a pickup in the pace of growth, Dallas and San Francisco reported moderate growth, and Richmond indicated that activity flattened or improved slightly. Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring through early fall.

Consumer spending picked up in most Districts, reflecting significant gains in holiday retail sales compared with last year’s season, and activity in the travel and tourism sector expanded in most areas. Demand strengthened further for nonfinancial services, including professional and transportation services. Manufacturing activity generally continued to expand, although the pace of growth has slowed for selected subsectors such as technology products. Agricultural producers and extractors of natural resources reported generally robust conditions. Activity stayed sluggish in residential real estate markets, and conditions in commercial real estate markets remained somewhat soft overall but showed signs of ongoing improvement in several Districts. Reports from financial institutions generally indicated a slight uptick in loan demand by businesses, along with improvements in overall credit quality.

Upward price pressures and price increases remained quite limited for most categories of final goods and services, as the effects of prior increases in the costs of selected inputs have eased. Upward wage pressures were modest overall, although a few Districts noted substantial compensation increases for workers with specialized skills in selected sectors and regions.


With a decline of 6.15% today, the bottom continues to fall out of natural gas.  As shown in the chart below, the trend has been sharply lower for natural gas for the last six months.

The steep drop in natural gas combined with the rallying price of oil has pushed the ratio of oil to natural gas to record levels.  As shown below, the ratio has basically gone parabolic over the past few weeks.  You would think that reversion to the mean would kick in at some point, but until the trend turns, it’s hard to step in front of this trade.

With its abundance here in the US and its low price, every day more people are wondering why nothing significant is being done to increase its use on a much wider scale.

Michael Pettis

The slowdown in growth is worrying an awful lot of people in Beijing and with all this concern, of course there is a lot of attention on trade policy.  Will the RMB appreciate or depreciate in 2012?  Within China many are going to argue that the rapid decline in the trade surplus, coupled with unmistakable evidence of flight capital, means that the PBoC should devalue the RMB.  Others within China will argue that debt levels and domestic imbalances are so worrying that the RMB should continue appreciating in order to speed up the pace of rebalancing.

If this were the whole extent of debate, it would be pretty easy to guess that the former side would win, but of course there is also international pressure.  Foreigners are going to argue that China’s maintaining a trade surplus will simply subtract from foreign growth, and given higher unemployment and lower growth in the US, Europe, and much of the developing world, China has no natural right to insist on a trade surplus at their expense.

With the trade environment getting worse all the time, I suspect that international pressure is ultimately going to decide the issue.  If China depreciates it will almost certainly set off furious retaliation – and remember, surplus countries always lose trade wars.  Deficit countries often win, at least in the near term.


The S&P 500 closed the day just fractionally above a flat finish, up 0.03%. Of the seven market days thus far in 2012, six have been advances, although a couple of them have been just a hair north of flat. The index has a year-to-date gain of 2.77%. From an intermediate perspective, the S&P 500 is 91.0% above the March 2009 closing low and 17.4% below the nominal all-time high of October 2007.

Tomorrow’s Tape- WSJ

Economics and FedSpeak and Eurozone Follies:

  • At 4:00 a.m. ET Italy sells some bills.
  • At 4:30 a.m. Spain sells some bonds.
  • At 7:00 a.m. we get the Bank of England’s rate decision.
  • At 7:45 a.m. the ECB announces its latest rate decision, followed by a press conference starting at 8:30 a.m.
  • At 8:30 a.m. we get US retail-sales data for December. Economists think sales rose 0.3% after gaining 0.2% in November.
  • At 8:30 a.m. we also get weekly jobless claims. Economists think these ticked up to 375,000 from 372,000 the week before.
  • At 10:00 a.m. we get business inventories data for November. Economists think these rose 0.4% after gaining 0.8% in October.
  • At 1:00 p.m. Treasury auctions some 30-year bonds.