Daily Market Commentary for October 19, 2011
During September per the Commerce Department, housing starts surged 15% to the highest level in 1.5 years.
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The Labor Department reported consumer prices rose in September as Americans paid more for gasoline and a wide variety of groceries. Consumer price index rose a seasonally adjusted 0.3% last month, pushing the increase over the past 12 months up to 3.9% from 3.8% in August. For the first time in three years, millions of Americans who receive Social Security and other federal benefits will receive a 3.6% increase in 2012. The raise in benefits is tied to changes in the so-called CPI-W gauge during the U.S. government’s fiscal year, which runs from October to September and is based on how the government calculates payments due to the rise in consumer prices over the past year. Core rate of inflation, which strips out the volatile food and energy categories and is viewed as a more accurate gauge of inflation by investors and the Federal Reserve, rose 0.1% during September, keeping its 12-month increase at 2.0%. Energy prices soared at an alarming rate of 19.3% while food costs rose 4.7% over same period of time. When consumers have to spend more on basic necessities, they have less to cash to buy discretionary items resulting in slower demand and a weaker economy. During September, energy prices rose 2.0% and food prices climbed 0.5%. Real average hourly wages dipped 0.1% in September however since workers put more hours on the job, real weekly wages actually rose 0.2% last month with the average workweek rising by 0.3%. Higher prices resulted in a decline in the wages of American workers adjusted for inflation.
Boston Federal Reserve Bank President Eric Rosengren said that despite the Dodd-Frank bank reform legislation and global efforts to strengthen banks under the Basel III capital accord, the global economy is still at risk from "too big to fail" banks. "Some significant challenges remain to be addressed if we are to have a global banking system in which no institution is "too big to fail" given the collateral damage its disorderly demise would cause to economies and citizens," Rosengren said in a speech at a conference on the lessons of the recession hosted by his regional Fed bank. One issue he addresses was that foreign countries remain far apart on how to split up assets of a large international institution if it were to fail. He added that governments, particularly in Europe, must address the issue that some large banks rely on short-term wholesale funding that can evaporate in times of stress. Additionally, some countries have decided to protect only the domestic operation of their banks and regulators must be more proactive in forcing banks to retain and raise capital in times of stress, Rosengren added.
The Fed Beige Book, a report summarizing information from contacts used by the Federal Reserve to measure the strength of the economy, reported that the U.S. economy continues along about the same modest pace as seen in August. The economy was expanding, although many areas described the pace of growth as “modest” or “slight.” “Contacts generally noted weaker or less certain outlooks for business conditions,” the report said. The anecdotal evidence that the central bank collects before each interest-rate decision, was not very different from the report in August which found “economic activity continued to expand at a modest pace, though some districts noted mixed or weakening activity.” The report which is based on information collected on or before October 7 said that auto production and sales were the leading the recovery with energy production and tourism coming on strong. The harvest of crops produced lower yields than 2010, but were large enough to alleviate worries about shortages. A large number of districts reported that retail sales excluding autos were flat to down. Due to weak consumer confidence, many retailers said they were reluctant to build inventories ahead of the holiday season. Financial activity was reported to have weakened in the last few months with most districts reporting a drop in loan demand due mainly to the fact that banks have tightened credit conditions. Mortgage-refinancing activity showed an increase with mortgage rates hitting low levels but most districts reported residential and commercial real estate remained weak. Wage pressure remained subdued, and despite modest growth, there were reports pointing to somewhat higher inflation. Many districts said that wholesale prices were rising due to past increases in commodity prices. The New York Fed Bank’s district reported one “financial industry contact notes that securities firms have not been doing well recently, with all major business lines - including sales and trading, underwriting, and initial public offerings, weakening.” ”Despite recent downturns in crop prices, farm income expectations remained strong,” per reports from Kansas City Fed Bank. “For most of August and September, the district’s retailers reported that sales were flat to down compared with a year earlier. However, ‘October started off with a bang,’ said one department store chain manager,” according to the Philadelphia Fed Bank. “Contacts in most sectors reported that upward wage pressures were nearly nonexistent, held down by limited demand for new hires and high levels of unemployment. However, wage gains remained pronounced for narrow worker groups with specialized skills, particularly in information technology fields,” according to the San Francisco Fed Bank.
Dirty equipment at a Colorado fruit-packing plant, Jensen Farms, is likely the culprit behind a lethal listeria outbreak in cantaloupe, per reports from the FDA. The deadly germ thrived in pools of water on the floor that was caused by outdated, corroded and hard-to-clean equipment that the company recently purchased to process cantaloupe. The death toll from the outbreak now stands at 25.
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