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April 21, 2005
The Beige Book, Thursday, April 21, 2005, 6:26 AM
As you know, the U.S. Federal Reserve Bank Open Market Committee (FOMC) meets every six weeks to discuss monetary policy, but did you know, two weeks before these meetings, that one of the 12 regional Fed banks (in rotation) produces an anecdotal summary of regional economic conditions? This is called the Beige Book, and makes for interesting reading because it is probably the best indicator of possible interest rate changes caused by transactions between the central bank and commercial banks.
If the Fed senses an unsustainable level of economic growth or if they believe that price inflation is rising at a pace that could destabilize (i.e., unduly weaken) the U.S. Dollar, they will produce a report of these pressures so that people can understand why they may have to raise interest rates.
On the other hand, if the Fed sees too much evidence of economic slowdown that might cause widespread business problems or if they see too many examples of price deflation, which could cause a business recession if left to its own course, they will produce a report of such pressures so that people can understand why they may have to lower interest rates in order to stimulate economic activity.
Yesterday at 2:00pm EDT, the Fed released this report called the Beige Book. Here are the highlights, as summarized by Econoday, Inc, and reproduced on the Nasdaq website:
"Price pressures were simmering in March and early April, according to the Federal Reserve's Beige Book of economic conditions that fall in line with today's CPI and will deepen expectations for a continuing series of rate hikes. The report said price pressures "intensified" in some of the nation's regions. It said many businesses have been able to pass-through at least some of the higher costs, the bulk of which are related to fuel. It noted that retail and auto sales were mixed, and that auto production was weak. Outside of autos, the report said manufacturing growth was solid but moderating while the service sector was healthy. The bond market dipped in initial reaction to the report. The opening section below is taken verbatim from the Federal Reserve's web site: "Reports from all twelve Federal Reserve Districts indicate that business activity continued to expand from late February through early April. Kansas City and San Francisco noted solid growth, Chicago and Dallas characterized growth as moderate, and Atlanta reported a robust pace. By contrast, while citing positive growth, New York and Cleveland mentioned uneven progress across sectors, and Richmond stated that signs of improvement in April followed a restrained March. "More than one-half of the Districts reported that retail activity was up, from modestly to strongly. Among the remaining Districts, Chicago said consumer spending was subdued, Dallas noted that retailers were disappointed with recent growth, and Cleveland reported some deterioration after improvement earlier in the year. Tourism was generally doing well in those Districts that mentioned it. Districts described manufacturing activity as ahead of year-earlier or previously-reported levels, with reports ranging from "rising briskly" in the Kansas City District to "continuing at solid levels" for contacts around Chicago. Information on service industries was generally positive. Residential real estate markets remained strong across most of the country, while commercial real estate conditions varied. Price pressures have intensified in a number of Districts, and most report that high or rising energy prices are a concern across sectors."
Combined with the government report on Producer Price Inflation (PPI) on Tuesday, and Consumer Price Inflation (CPI) on Wednesday, which were clearly indicating pricing pressures in the economy, the Beige Book gave evidence that Fed rates will continue to rise, and that monetary policy will continue to be restrictive.
Over a period of weeks and months, continuation of such Fed policy is a negative for both stock and bond markets. Hour to hour, it is my view that such events (i.e., the release of these PPI/CPI/Beige Book reports) are used by substantial market players to move markets in the extreme by playing on people's emotions.
But, rather than allowing emotions to be played by people in the media who have an ax to grind, investors simply ought to read the reports and understand the data. It's not that complex, and it doesn't take long to read.
The problem I have with the media is that rather than objectively summarizing the data, and pointing you to the links so that you can gain quick access to the detail, should you wish, the media prefers to present spin-doctors because these are the people whose employers are the advertisers that pay most of the media's revenues.
It used to be that "news and editorial" was off-limits to the sell-side, but today it is virtually impossible to read or listen to anything but paid advertorial. So, now, like yesterday, when CNBC tells you to ignore (obvious) CPI/Beige Book information " as I reported " but to focus on strengthening bonds, strengthening USD, "blow-out" corporate earnings, and so forth, you are being misled.
Because it happens every day, every week, I say it is part of an agenda. That agenda is paid for by capital market interests that expect a return on their investment, and they get it.
I don't see, by keeping these interests hidden, that social equity is enhanced by today's media.
Posted by Posted by Bill Cara on April 21, 2005 06:27:24 AM | Category: Economics , Social Equity
I have often wondered what happened to the young woman commentator with a Phd in economics that was replaced by Steve Leisman on CNBC about 2 years ago. She kept insisting that there was an emerging housing bubble which was causing the homebuilder's stocks to rise. Does anybody know the story there?
Posted by: Alan at April 21, 2005 8:09 AM [link]