Likelihood Of Fed Rate Increase Falls With Falling Inflation (Not Until June ’18)

Today’s CPI report revealed that inflation remains ellusive for the US economy at 1.7% YoY, still below The Fed’s target rate of 2%.


According to Fed Funds futures data, the implied probability of a Fed rate hike doesn’t exceed 50% until June 2018 and after.


The most likely path of The Fed Funds target rate remains looking like a Carnival Cruise ship.


Inflation Mirage: Core Inflation Declines To 1.7% YoY, Real Average Hourly Earnings Decline To 0.7% YoY

Inflation must seem like a mirage to Janet Yellen and The Federal Reserve. And no, it isn’t an oasis either. The US economy can’t seem to find inflation or wage growth despite near full employment (according to the Federal government, that is).

Core CPI YoY less food and energy fell to 1.7%, but it is still higher than core PCE growth YoY of 1.505% (The Fed’s preferred inflation measure).


CPI for shelter YoY fell to 3.26% in July, still 2x core inflation. And 5x hourly wage growth.

US Real Average Hourly Earnings 1982-1984 USD YoY also declined to 0.7% YoY.


Now, if the Federal government included home prices in their inflation calculation, problem solved! Case-Shiller home prices are growing at a steady 5.7% YoY, considerably higher than wage growth.


Here is a breakdown of the headline CPI numbers.

cpi contrib_0

And here is a chart explaining why The Fed keeps saying inflation is around the corner, but never seems to get there.


With emphasis on hot air.


Puerto Rico’s Housing Debt Likely To Be Paid In Full (Opposed to PR’s General Obligation and Agency Debt)

Puerto Rico is seeking to reduce $74 billion of debt,  but Federal housing bonds may be paid in full. Thanks to the US Department of Housing and Urban Development (HUD).
(Bloomberg) — While Puerto Rico and its agencies seek to reduce $74 billion of debt in a record bankruptcy, commonwealth bonds repaid with federal housing money and tobacco settlement funds may dodge a restructuring, according to Moody’s Investors Service.

After Puerto Rico first began defaulting on its obligations two years ago, a federal oversight board on May 3 sought for the commonwealth a form of bankruptcy called Title III. There are six entities remaining that have yet to miss payments to investors. Of those, debt sold by Puerto Rico’s Housing Finance Authority and the Children’s Trust Fund may avoid asking bondholders to accept losses on their securities, Ted Hampton, a Moody’s analyst, wrote in an Aug. 9 report.

“We do not expect either of these securities to be involved in the commonwealth’s debt restructuring, and the federal oversight board has not initiated a proceeding under Title III of Promesa for either of them,” Hampton wrote.

The value of the bonds reflect the strong repayment pledges. Odd-lot trades of fixed-rate Children’s Trust bonds maturing 2039 averaged 97.8 cents on the dollar Wednesday, while Housing Finance debt maturing 2027 traded at an average 104.6 cents, data compiled by Bloomberg show. By comparison, general obligations with an 8 percent coupon and maturing 2035, one of the island’s most actively-traded bonds, changed hands Thursday at about 58.8 cents.


The island’s Housing Finance debt is repaid with yearly allocations from the U.S. Department of Housing and Urban Development, revenue that the commonwealth cannot use, according to Hampton.

“Because of HUD’s role in the program, pledged revenues are not available to the central government of Puerto Rico,” Hampton wrote in the report. “HUD sends the first dollars of amounts allocated to the authority into a line of credit control system for payment of debt service.”

The island’s tobacco bonds, sold by the Children’s Trust Fund, are secured by annual payments from cigarette manufactures under a 1998 Master Settlement Agreement between state attorneys general and the cigarette makers.

Puerto Rico and its agencies have missed about $4.45 billion in debt-service payments to investors, according to Moody’s. The four remaining entities that haven’t defaulted but may undergo a restructuring are Puerto Rico’s Aqueduct and Sewer Authority, the University of Puerto Rico, the Municipal Finance Agency and Highways & Transportation Authority bonds sold for the Teodoro Moscoso bridge.

So why Puerto Rico attempts to restructure its debt, housing debt is protected. Puerto Rico has already defaulted on it debt.


Puerto Rican debt is now selling at $51.25 with a yield of 11.82%.


I suppose Puerto Rico can always expand the export of rum.


And rum ham! 


More Cowbell? Producer Prices Falls For the First Time In 11 Months (Now 1.8% YoY)

Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market). PPI for July just fell MoM for the first time in 11 months.


And PPI Final Demand (less foods and energy) just fell to 1.8% YoY in July.


Is the only prescription more cowbell?


Corporate Profits (Per Unit of Real Gross Valued Added) Were Negative for 7 of Last 8 Quarters As Dow Hits 22,000

The Dow Jones Industrial Average keeps on rising and is now hovering around 22,000.

But not every indicator is rising. Corporate profit per unit of real gross value added (after tax with IVA and CCAdj) has been declining YoY for 7 of the last 8 quarters.


Corporate profit per unit follow a similar pattern following a recesssion. They rise rapidly, then begin slowing until the point at which they are consistently declining on a YoY basis.

The following chart shows the current slowdown in corprate profit per unit of real gross value added, similar to the slowdown following Q3 2006 and Q3 1997 before recessions.


Is Winter coming?


MBA Purchase Applications Up 7% YoY (Refi Applications Down 44% YoY) Despite Gains In Mortgage Credit Availability

Mortgage applications increased 3.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 4, 2017.


The Refinance Index increased 5 percent from the previous week, but was down 44% on a YoY basis. And refi applications seems to be in a quantum of solace since The Fed started raising their target rate.

The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 0.3 percent compared with the previous week and was 7 percent higher than the same week one year ago.


Despite the rise in mortgage credit availability.

Total MCAI