Wednesday's Top Stories in the United States
* Federal Reserve Vice Chair Janet Yellen will not give many clues as to distinctions between her and current Chair Ben Bernanke when she delivers her opening statement before the Senate Banking Committee Thursday morning, but she does pledge to continue the work of the central bank to "promote a more robust recovery." In testimony prepared for her hearing, Yellen will say, the Federal Reserve is "using its monetary policy tools to promote a more robust recovery." She goes on, "A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases." She said, "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy." She will deliver that statement and begin answering questions of committee members after they deliver their opening statements, beginning at 10:00 ET.
* The libertarian Cato Institute think tank wants a National Monetary Commission to consider alternatives to the Federal Reserve and, on the central bank's 100th birthday, has invited critics of the Fed to its annual monetary policy conference Thursday. The conference is titled, "Was the Fed a Good Idea?" In this context, there is special interest in what one of the Fed's own, Philadelphia Federal Reserve Bank President Charles Plosser, will have to say when it is his turn Thursday to speak to the Cato audience. Plosser has long disparaged "easy money" but disappointed the "new monetarists" by not espousing an altered target for Fed policy, either the level or rate of growth of nominal GDP. In fact, he has repeated it is "dangerous" to think of monetary policy in general, no matter how it is executed, as a permanent antidote to any congressional aversion to raising taxes and cutting spending. Plosser speaks at 9:00 ET.
* The U.S. Energy Information Administration Wednesday reduced its forecast for world oil demand growth in this month's Short-term Energy Outlook, while slightly lowering its outlook for supply from non-OPEC producers, in a month where U.S. output exceeded imports for the first in nearly two decades. The agency also adjusted its prediction for prices of Brent and West Texas Intermediate crude this year, forecasting lower prices given the increase oil output from countries outside of OPEC. EIA said U.S. crude oil production increased to an average of 7.7 million barrels per day in October, the highest production for any October in 25 years, while oil imports were 7.6 million bpd.
* Doug Elmendorf, director of the Congressional Budget Office, said Wednesday the U.S. faces daunting long-term fiscal challenges, but urged Congress not to take a "World Series or Bust" approach to the current fiscal negotiations. In testimony to the House-Senate budget conference committee, Elmendorf said incremental fiscal progress that rearranges spending cuts and provides fiscal "certainty" would be a positive outcome for the budget talks. Elmendorf said fiscal uncertainty has been a "considerable drag on economic activity." He said it would be positive for the nation's economic and budgetary situation for lawmakers to agree to take "some small steps now."
* Moody's Investor Service believes GSE reform is still a long way off and therefore its debt rating of Fannie Mae and Freddie Mac is likely to continue to move in "lock-step" with the U.S. sovereign rating. Both Fannie Mae and Freddie Mac again reported strong earnings in the third quarter and even though a significant amount of their profits since 2012 - when both companies started reporting positive net income - have been the result of lower loan loss reserves, Moody's believes the companies will continue to be profitable. And they are seen likely to be the dominant player in the housing finance market while continuing to raise guarantee fees.
* Containerized import volumes at many of the largest U.S. ports softened in September from August, as a tepid peak holiday shipping season wore on, port officials and maritime experts told MNI. An earlier start to retailers' annual holiday importing and marketing accounts for some of the month-on-month falloff, maritime experts said. But so too do unimpressive U.S. consumer confidence data and lingering caution among retailers, now long after the official end of the recession. Trade volumes, both inbound and outbound, appear to be tracking the economy's achingly slow recovery.
* Market players were quick to take profit ahead of Thursday's key events which includes flash eurozone GDP data and Federal Reserve chairman candidate Janet Yellen's confirmation hearing. The paring and squaring of positions resulted in lower U.S. Treasury yields and a softer dollar overall, which underpinned commodities as well as stocks, which posted new life-time highs in most cases. Ten-year Treasury yields were closing at 2.715%, up from an earlier low of 2.694% after the Yellen remarks were published and down from the 2.792% seen Tuesday. This week, the 10-year yield, which saw a low around 2.473% only October 30, decisively penetrated yield resistance in the from of the October 16 peak at 2.757%. This week, the ten-year yield, which saw a low around 2.473% only October 30, decisively penetrated yield resistance in the from of the October 16 peak at 2.757%.
* On the FX front, the dollar followed U.S. Treasury yields lower, with the euro and cable (underpinned also by solid U.K. employment data) especially firm. The euro, closing at $1.3492 Wednesday (high at $1.3495), topped out at $1.3832 October 25 and tumbled subsequently on a combination of softer-than-expected eurozone inflation data and upbeat U.S. data that underpinned U.S. Treasury yields, bottoming around $1.3500 ahead of last Thursday's ECB decision. Dollar-yen was trading at Y99.15 in late afternoon action, in the middle of a Y99.11 to Y99.67 range.
* In other markets, NYMEX December light sweet crude oil futures settled up $0.84 at $93.88 per barrel after trading in a $92.93 to $94.54 range. Spot gold held around $1282.75/oz late Wednesday, after trading in a $1265.86 to $1284.63 range.
* U.S. stocks were firm at the close Wednesday, with the DJIA ending the day up 0.45% to a record close at 15,821.63 and the Nasdaq Composite ending up 1.16% at 3965.575. The DJIA earlier posted a new intraday high of 15,822.98, which took out the prior life high of 15,797.70 seen Nov. 7. The Nasdaq Composite topped out at 3965.575 earlier, just shy of the 13-year high of 3966.70 seen Oct 30. The S&P 500 also set another record close, up 0.81% to 1782.00. At the close, the index was up 24.9% year-to-date.
* A day after the Canadian government projected a return to a larger-than-anticipated budget surplus for FY 2015-16, Standard & Poor's affirmed the country's AAA rating Wednesday, leaving it in a shrinking club that only counts 40 sovereign entities out of the 210 rated by the agency. And the club could kick out a few more members which have negative outlooks, a threat that is not applying to Canada, as S&P maintained a stable outlook despite the elevated household debt that worries the country's central bank. This is all good news for the Canadian bond market, where the 10-year government bond yield is trading around 2.65%. Besides, even in the event of a housing collapse, Standard & Poor's indicated that Canada's banking system is strong enough to handle the subsequent asset quality deterioration.
* Most analysts expect the international trade deficit to narrow by C$0.3 billion to C$1.0 billion in September, which, however, would still leave the contribution to GDP negative in the third quarter. Analysts' expectations for September's trade deficit range from -C$0.8 billion to -C$1.3 billion, following a C$0.1 billion deterioration to C$1.3 billion in August from July. Statistics Canada will release the international merchandise trade report for September at 8:30 am ET Thursday. At Scotiabank, where analysts expect a C$1.0 billion trade deficit in September, economist Dov Zigler told MNI that, "Generally speaking, we saw strong output of commodities in the July and August GDP numbers."
--MNI Washington Bureau; tel: +1 202-371-2121; email: dgulino@mni-news.com
