Beige Book , Services data and the Big Kahuna…

Well yesterday was another crazy day for markets, but finished with a happy ending. We got one of my personal favorite reports, the Beige Book. Like I was saying yesterday on Twitter and on CSR, the Beige Book is a very useful but underrated report. I think after yesterdays reaction from people and the sell off in bonds it drove, it’ll be upgraded across the street. The comments in the report were the most bullish that I’ve read in a long time. Plenty of references to rising wages, tight labor markets and even improved manufacturing. However, there is one line in the report that will grab the Feds attention the most:

“Commercial real estate lenders in Chicago continued to be concerned that valuations were too high, leading some to put limits on the size of loans they make for financing new purchases.”

This statement poses two of the worst possible threats to the Fed. First, it invokes thoughts of yet another real estate bubble. Second, it shows lenders being afraid to lend. Valuations being too high are a result of demand and low financing rates. We know there is plenty of commercial demand across the regions from all the comments in the report. So that leaves how can the Fed fix this issue ? That’s right folks….Raise rates.  Raising rates will typically have the affect of bringing down the value of a levered asset (unless demand overpowers that) and will also give lenders more incentive to lend. We’ve seen plenty of other evidence that shows real estate is very strong, and the Fed is not going to stand by while another real estate bubble forms. (In this case, EM is irrelevant to the situation.)

Today we get a couple services reports from ISM and Markit. The last ISM NMI report was through the roof with a 60.3 print. If we stay anywhere above 55 (which is still strong), I’ll be happy. The job creation and wage components in the reports will give  good insight into tomorrow’s NFP report. These service reports are critical in gauging the health of the economy, as the US is a services / consumption based economy. There was a good article on Bloomberg yesterday talking about renewed demand for lawyers, which could play right into a jump in the Professional and Business Services (PBS) line item in the NFP report. PBS employs the most people of all sectors listed in NFP.

Once again, we are headed into the big kahuna of economic reports: non farm payrolls (NFP), which will be released tomorrow morning at 8:30 am. Tomorrows NFP will be the most significant report of the year as it’s right in front of the September Fed meeting. I’m hearing stats about how August data tends to underperform only to be revised up later. We’ll see if that’s a factor tomorrow. One thing is for sure, this report is capable of surprising wildly to the up or down side. We’ll have more about NFP tonight.

Have a great day..its almost the last official summer weekend…booooooooo!!!

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