In response to the near 2 month high in the 10 yr Treasury yield, Bankrate.com said the average 30 yr mortgage rate rose to a 3 1/2 week high at 3.45%. It’s obviously still historically low but the move higher dilutes the Fed’s best attempts to lower it further. The day before the MBS driven QE3 began, the 30 yr FNMA coupon was 2.36%. It closed yesterday just 6 bps lower. Also, the Fed has spent about $650B on buying Treasuries 6-30 yrs out in the OT program begun on Sept 21, 2011. The day before it started the 10 yr yield was 1.94% and the 30 yr was 3.2% vs 1.82% and 3.0% respectively today. A lot of money has been spent between OT and QE3 for very little incremental reward. The true cost, yet to be determined, will of course occur when the likely market forced exit begins. More likely to seasonal distortions at yr end rather than the uptick in mortgage rates, the MBA said refi’s fell 13.8% and purchases were lower by 4.8%. Ahead of tomorrow’s decision from the BoJ, the yen is falling again and the Nikkei rallied another 2.4% to above 10,000 for the 1st time since April. In Europe, the euro is rising to near an 8 month high after Germany’s IFO business confidence figure rose 1 pt to 102.4 vs the est of 102. The drop in the Current component was offset by a 7 month high in Expectations. The ECB said they will again start accepting Greek bonds as collateral for repo. The Greek 10 yr bond is at a new high at .48, up another 2.5 pts. Lastly, Spanish PM Rajoy said “We have taken the decision to not ask” for a bailout but that doesn’t rule out “in the future we won’t take the decision to ask for it.”

Source: The Big Picture

Retail Sales in Nov, a quite disruptive month to say the least in terms of the dense, large economy of the Northeast, rose .3% headline and was flat ex auto’s vs expectations of up .5% and flat. However, after taking out the 4% drop in gasoline sales, sales were up .8% m/o/m after a .5% drop in Oct. The core rate of sales which take out gas, autos and building materials were up .5%, a touch better than the estimate of up .3%. On the hurricane, the census bureau said they were not able to isolate the effect but said they “did receive indications from co’s that the hurricane had both positive and negative effects on retail sales data. Some firms reported a drop in sales due to permanent or temporary store closures and stores having reduced business due to damage, fewer customers, and/or lack of employees. On the other hand, some firms reported sales increases due to significant sales of supplies for the affected areas and evacuees purchasing retail and food services in different geographic locales.” Bottom line, because of the hurricane, we may have to wait until the Dec retail sales data to get a more complete view of the state of consumer spending during the holiday season.

Separately, Initial Jobless Claims totaled 343k, well below expectations of 26k and down from 372k last week. It’s near the lowest since early ’08 but the Labor Dept is cautioning that the seasonal adjustments are more difficult this time of the year because of planned layoffs that some industries have. Continuing Claims fell by 23k while Extended Benefits rose a large 188k as we approach the expiration of many extended benefits. Bottom line, I’d like to say how bullish the Claims # is with the large drop but the Labor Dept seems to want us to average out the upcoming weeks into yr end to get a more clear trend with a smoothing of the seasonals.

Source: The Big Picture

While yesterday’s QE4 announcement was widely expected, the actual post news rally lasted just one hour. Attention immediately shifts back to DC with discussions likely continuing past the scheduled recess of next Friday. The combination of more Fed action and what I see will be inevitably contractionary fiscal policy in 2013 on top of a lackluster economy, stagflation is the only scenario that makes sense to me and I repeat my belief that we must buy the flation (gold/energy/ag) and sell the stag (consumer related and any business without pricing power). I also think you can stick a fork in long term US Treasuries as its been almost 5 mo’s now that the 10 yr yield in particular saw its low yield, notwithstanding the Fed’s best attempts to squash them further. Even in the MBS market, as of yesterday’s close, the 30 yr FNMA coupon is down all of 16 bps since QE3 began.

The only equity market that is responding with substance to the likelihood of more QE is the Nikkei as it rallied another 1.7% overnight as the yen is now approaching a 9 month low vs the US$. The PM election is Sunday. Both South Korea and the Philippines left rates unchanged as expected.

In Europe, Greece finally got approval for its long awaited bailout money with the inevitable writedown of public sector bond holdings though still in front of them in the next yr or 2. Italian and Spanish bond yields are lower for a 3rd day as both countries sold both short and long term debt. In the US, we’ll see how much the hurricane impacted retail sales in the important holiday season and whether the Q3 GDP inventory related boost takes a breather in Q4.

Source: The Big Picture

If I was able to ask Ben Bernanke a question at today’s press conference, I would ask this: What in your models make you believe that GDP growth can accelerate to a range of 2.3-3% in 2013, 3-3.5% in 2014 and 3-3.7% in 2015 from 1.7-1.8% in 2012 but somehow forecast that PCE inflation will be no greater than 2% in each of those years vs 1.6-1.7% in 2012 in light of the massive expansion in your balance sheet?

Source: The Big Picture

The FOMC voted 11-1 to embark on QE4 in 2013 when OT expires. This was very much as expected and the Fed’s balance sheet, which is below the record high earlier in the year (as more securities expired than they’ve purchased), will resume its ascent. Also of important note, the Fed took away its 2015 low rate time frame and replaced it with this: “the current exceptionally low range for the fed funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than half % pt above the Committee’s 2% longer run goal, and longer term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date based guidance.” The first criteria is objective in that we will see the monthly unemployment rate but what happens if we get there with a continued shrinking in the labor force? The 2nd two are more subjective in that it relies on Fed forecasts. Remember, he PCE inflation deflator was above their .5 % above the 2% target for 7 mo’s in a row in 2011. CPI was above 3% for 9 mo’s in a row. Bottom line, the Fed continues to think that without them, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.” Central planners always think that but it’s also why they’ll remain so easy for so long. With a 0-.25% fed funds rate and a 2T increase in the size of their balance sheet over the years, GDP, after falling 3.1% in ’09, grew 2.4% in ’10, 1.8% in ’11 and will likely be less than 2% again in ’12. Thus, this is the best we’ve gotten with this grand experiment and also face the prospect of a likely very uncomfortable eventual unwind of policy to look forward to. The book is far from finished on the Greenspan/Bernanke Fed. In the meantime, markets will continue the dance of slow economic/earnings growth on one hand and massive central bank money printing on the other.

Source: The Big Picture