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Low Loan Demand to Remain a Challenge in 2014, Turner Says
Monday, December 16, 2013 6:55 AM

The Labor Department reports wholesale inflation edged down -0.1 percent in November - excluding food and energy prices, core inflation increased +0.1 percent. Food prices were unchanged while energy prices declined -0.4 percent. Gasoline prices declined -0.1 percent last month, after falling -3.8 percent in October.

Over the past 12 months, wholesale inflation has increased at a very modest rate of +0.7 percent while core inflation has increased +1.3 percent. The measures show inflation, at the producer level, remains well in check, despite the volatility in energy prices.

“The holiday season appears to have started strong, as initial reports showed retail sales rising +0.7 percent in November, the largest monthly increase since June 2013,” notes Brian Turner, director and chief strategist with Catalyst Strategic Solutions. “This is welcome news given the latest GDP reported a sharp drop in consumer spending.”

Other Key Releases this Week:

  • Business Inventories – Inventory balances held steady in October as a +0.7 percent rise left the stock-to-sales ratio unchanged at 1.29.
  • MBA Purchase Applications – Mortgage purchase applications increased +1.0 percent in the week ending December 6th. The index has fallen 10 percent from this time last year.
  • Jobless Claims – Initial claims for unemployment benefits jumped 68,000 last week to 368,000.

According to Turner, the low inflation environment at the producer level reduces the pressure to pass on higher costs to the consumer.

“This supports member disposable income and will help increase share growth,” notes Turner.

The Labor Department will release the figures on consumer inflation this week. Those reports should confirm price stability remains in the market.

“Some analysts are expected to suggest policy corrections might be in order, to inject a certain amount of inflation into the economy to promote additional growth,” suggests Turner. “We also should expect more conjecture on whether the Federal Reserve should begin altering its government security purchase program, QE3.”

In the meantime, Turner says the benchmark five- and 10-year Treasury note rates are 83 basis points and 113 basis points higher, respectively, than one year ago, and the three-month Treasury rate is only one basis point higher. These movements in rates have increased the slope of the yield curve and provided opportunities to experience wider marginal spreads between asset and funding activities.

“We just need greater loan demand – a challenge that will remain with most of the industry in 2014,” Turner adds.