Thursday, January 07, 2010

Jobs Report and Inflation?

Well, I'm in the camp that expects the jobs report to be positive tomorrow, but this camp is getting uncomfortably crowded. I never like being on the same side as the consensus. In December, my read from companies that were contemplating cuts is that they put those plans on hold to see how the end of the year shook out. I think as things plod along in 2010 we might see another round of job cuts coming in the next six months. Also, states like Ohio, Illinois, NY and California could be forced to cut large numbers of state jobs later this year. But I'm getting ahead of myself.

The real elephant in the room that we've been avoiding is inflation. So far we've been fortunate to dodge inflation -- in fact deflation seems more prevalent in some markets -- but if there is a perception that the economy is improving while the Fed is still injecting money in the economy then inflation could rear it's head.

Consider these two recent developments --

1) Mortgage rates (based on the 10yr note) have risen steadily for 4 weeks to 5.3% for 30yr loans.

2) The FDIC issued a interest rate risk advisory. "In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates. In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution’s capital and earnings." This is bank speak for "be careful loaning out money at 4.5% for 30 yrs while paying 0.3% in 3 mth cds because if short-term rates soar you are F'd".

The FDIC has asked banks to "consider interest rate risk exposures beyond typical industry conventions, including changes in rates of greater magnitude (e.g., up and down 300 and 400 basis points." Yikes!

Heckuva job Timmy!

Most people have beaten this story to death already but again I think it highlights the conflicted history of our Treasury Secretary.

"The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. "


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