Flash Update
FLASH UPDATE
September 17, 2007
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Inflationary Recession Deepens
System is as Vulnerable as at Any Time Since 1929 to 1933
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PLEASE NOTE: The SGS-Ongoing M3 series for August, based on full-month, reporting has been updated and posted to the Alternate Data Series tab at www.shadowstats.com. -- Best wishes to all, John Williams
This Flash Update provides a brief summary of last week's developments in advance of more complete analysis in the September newsletter, which should be published by the end of the coming weekend.
In the realm of the ongoing liquidity crisis, there have been some signs of lessening tensions, such as a somewhat slower pace of collapse in commercial paper outstanding, or the Fed having better luck pushing the effective fed funds rate towards the official 5.25% target rate (see accompanying graph), Nonetheless, the U.S. and global financial systems remain as vulnerable to extreme crisis as they have been at any time since the troubled 1929 to 1933 period.
Indicating the thinness of systemic stability, non-seasonal discount window borrowings jumped to a daily average of $2.018 billion during the two weeks ended September 12th, up from $1.301 billion in the two weeks ended August 29th, and up from just $6 million in the two weeks prior. Also, press reports over the weekend suggest mounting public distress as to banking liquidity in the United Kingdom.
With the spread between target and effective fed funds somewhat narrowed in the last week, the Fed still effectively has eased by 25 basis points (0.25%) since cutting the discount rate by 50 basis points a month ago. With the markets looking for at least a 25 basis point rate cut at tomorrow's FOMC meeting, it would be extraordinary if the U.S. central bank did not move to meet market expectations. Accordingly, I would look for the 25 basis point cut that already is in place. No easing, or a cut of 50 basis points or more, could be terribly disruptive to stocks and/or the U.S. dollar, reactions that only would confound the Fed's effort to stabilize a still highly unstable system.
On the economic front, Wall Street's spinmeisters were working hard last week. The heavily touted "only" 4,000 gain in new jobless claims was distorted in usual fashion by the Labor Department's inability to seasonally adjust weekly numbers around major holidays. In this case it was Labor Day. Claims deterioration has resumed in the last month or so and continues.
In general, it will be September reporting that should start showing the economic damage from the breaking of the liquidity crisis. Both retail sales and industrial production for August came in below expectations, but the July trade deficit did not improve quite as advertised. Due to six months of downward revisions to the guesstimated services surplus, the deficit was meaningfully wider in both the first and second quarters than previously reported. The first-quarter GDP, which now should be weaker as a result, cannot be changed until next year's annual revisions. There is a small possibility, however, that the data will trigger a downward revision in the upcoming second-quarter GDP "final" estimate.
For the week ahead, PPI (Tuesday, September 18th) and CPI (Wednesday, September 19th) inflation rates for August are expected to be flat to minus. While underlying risk is to the upside of expectations, weak inflation numbers would be a plus to the FOMC, which would prefer not to ease into strengthening inflation numbers. August housing starts, due Wednesday, September 19th, could show some intensifying weakness as a result of then mounting mortgage problems.
The financial system remains in flux and remains highly vulnerable to even minor negative surprises. Beyond unhappy implications from oil and brewing global political circumstances, the better-quality, more-independent economic numbers, in particular, hold a number of downside surprises in the month or two ahead.
Additional detail will follow in the September SGS newsletter.
The September SGS is targeted for posting on or before September 23rd. An e-mail advice will be made of its and any intervening Flash Update/Alert postings.