Consensus Prior
Monday, 6/18
June NAHB Housing Market Index 30 30
May’s level fell back to September’s cycle low of 30
Rising mortgage rates reduce affordability, as do subprime woes
Range is zero to 100, with zero indicating all builders view conditions as poor, and 100 indicating all builders see potential as good
Tuesday, 6/19
May Housing Starts 1480k 1528k
3.3% drop anticipated following declines in building permits Large supply of new homes for sale precludes fast recovery
Vacancy rates at record levels
May Building Permits 1480k 1457k
1.6% increase expected
Building permits fell a revised 7% in April to a decade low
Cancellation rates remain high
Boston Fed President Minehan speaks on “Labor Supply in the New Century”
Greenspan speaks on “Corruption in the Financial World”
Wednesday, 6/20
Mortgage Applications +6.6%
Seeing a last surge as interest rates move rapidly higher
Treasury Secretary Paulson testifies to House Financial Services Committee on the International Financial System
San Francisco Fed President Yellen and NY Fed President Geithner at SF Fed Conference on “Trends in the Asian Financial Sector”
Dallas Fed President Fisher speaks on the Regional Economy and the Fed
Thursday, 6/21
Initial Jobless Claims 310k 311k
Expected to hold steady at 4-week average of 311k
May Leading Indicators +.2% -.5%
Improvement expected from lower jobless claims and rising equity prices
Weakness expected from lower manufacturing hours
Likelihood of a recession is below 20%
June Philadelphia Fed 6.5 4.2
Pennsylvania, Delaware, and NJ are expected to rebound more slowly than the nation as a whole, with modest growth in June
Federal Reserve Advisory Council holds meetings on the Truth in Lending Act and the Home Ownership Equity Protection Act
Friday, 6/22
No Data
Cleveland Fed President Pianalto speaks at Fed’s 2007 Community Development Summit on “Partnering for Success”
Friday, June 15, 2007
Consumer Confidence Slumps in June
The University of Michigan consumer confidence survey unexpectedly tumbled to a ten month low in June of 83.7 (consensus 87.8) from 88.3 in May. Current conditions fell a little harder than future expectations, with a decline of 4.9 versus 4.6.
Inflation expectations rose , with one year expectations rising to 3.5% from 3.3% last month, representing the highest 1-yr inflation expectation level since last August. Expectations for inflation over the next five years fell to 3% from 3.1% in May.
The gloomier outlook is probably representing concerns about rising fuel prices and falling house prices, combined with recent reports of anemic GDP growth in the first quarter.
Inflation expectations rose , with one year expectations rising to 3.5% from 3.3% last month, representing the highest 1-yr inflation expectation level since last August. Expectations for inflation over the next five years fell to 3% from 3.1% in May.
The gloomier outlook is probably representing concerns about rising fuel prices and falling house prices, combined with recent reports of anemic GDP growth in the first quarter.
Foreign Demand for Equities and Short-Term Assets More than Offsets Selling of U.S. Treasuries in April
Net total foreign purchases of U.S. securities were much stronger than anticipated in April, increasing by $111.8B, twice as much as the $55B consensus, and almost four times the net $30.1B pace of acquisitions during March. Long-term TIC flows also improved, but at a slower pace. April long-term demand was $84.1 billion versus $51.2B in in March. Both of the Mach net and long-term TIC flows were revised down by around $15B from the originally reported figure.
Private demand for U.S. securities (+$93.6B) swamped official/central bank (+$18.2B) flows in April. The 5-to-1 ratio was much higher than the 3-to-1 average ratio for the past year. Most of this increase was in short-term securities, as net long-term private demand fell $5B from March to April. Within the private sector demand for long-term securities, equities and agencies saw the largest increase from the prior month. Corporate bonds experienced slower demand, and there was outright selling of Treasuries. The approximately $20B increase in equity purchases coincides with a gain of +5.7% in the DOW during April.
Holdings of agency debt continue to expand, increasing by $36B in April and $15B in March. On the other hand, demand for U.S. Treasuries fell to the lowest level in almost four years during April as purchases fell barely into positive territory for the month. Japan increased its purchases of Treasuries, but China was a net seller of $6B. It is likely that the Middle East was also a seller of over $10B, as were the hedge funds.
U.S. investor demand for foreign securities declined in April to $13.3 billion from $47.4B during March.
Private demand for U.S. securities (+$93.6B) swamped official/central bank (+$18.2B) flows in April. The 5-to-1 ratio was much higher than the 3-to-1 average ratio for the past year. Most of this increase was in short-term securities, as net long-term private demand fell $5B from March to April. Within the private sector demand for long-term securities, equities and agencies saw the largest increase from the prior month. Corporate bonds experienced slower demand, and there was outright selling of Treasuries. The approximately $20B increase in equity purchases coincides with a gain of +5.7% in the DOW during April.
Holdings of agency debt continue to expand, increasing by $36B in April and $15B in March. On the other hand, demand for U.S. Treasuries fell to the lowest level in almost four years during April as purchases fell barely into positive territory for the month. Japan increased its purchases of Treasuries, but China was a net seller of $6B. It is likely that the Middle East was also a seller of over $10B, as were the hedge funds.
U.S. investor demand for foreign securities declined in April to $13.3 billion from $47.4B during March.
Industrial Production Didn't Expand In May/ Capacity Utilization Falls
Industrial production unexpectedly remained unchanged in May versus expectations for growth of +.2% MoM. In addition, capacity utilization fell to 81.3% from 81.5% in April, which was also revised lower from an 81.6% original estimate. In addition, the growth rate for April industrial production was scaled back to +.4% MoM, instead of +.7% MoM. Industrial production has risen 1.6% versus a year earlier.
It appears that manufacturers of autos (-.5% MoM) and other machinery scaled back production, and mild weather reduced utility demand (-1.3% MoM). Mining production did rebound though to rise +.5% MoM, on gains in coal and natural gas. Consumer goods production fell -.2%, mainly in durable goods, most likely in reaction to the slow down in retail spending.
Factory output accounts for about 80% of industrial production, and rose +.1% MoM. Manufacturing capacity utilization slipped to 79.9% in May, as capacity grew faster than output.
Today's data will put into doubt the rebound seen in other manufacturing measures, and may indicate a hesitancy to raise production when interest rates and fuel prices are rising.
It appears that manufacturers of autos (-.5% MoM) and other machinery scaled back production, and mild weather reduced utility demand (-1.3% MoM). Mining production did rebound though to rise +.5% MoM, on gains in coal and natural gas. Consumer goods production fell -.2%, mainly in durable goods, most likely in reaction to the slow down in retail spending.
Factory output accounts for about 80% of industrial production, and rose +.1% MoM. Manufacturing capacity utilization slipped to 79.9% in May, as capacity grew faster than output.
Today's data will put into doubt the rebound seen in other manufacturing measures, and may indicate a hesitancy to raise production when interest rates and fuel prices are rising.
Current Account Deficit Continues to Grow, Now 5.7% of GDP
The current account balance continues to move further into deficit, but at a slower pace than anticipated. The first quarter deficit expanded by $192.6 billion which was lower than the consensus expectation of -$201B. The fourth quarter deficit was also revised lower to -$187.9B versus a prior estimate of -$195.8B. At this pace, the U.S. needs to attract over $2.1B per day in investments to fund the deficit. As a percentage of GDP, the deficit has grown to 5.7%, from 5.6% in the fourth quarter. For all of last year, the current account deficit was $811.5 billion, the largest on record. Just this month Fed Chairman Bernanke mentioned that the current account deficits and global imbalances remain "worrisome". The current account measure is the broadest indication of trade as it includes transfer payments and investment income.
An increase in investment income, of $4.5 billion, to the U.S. from overseas, helped reduce the size of the deficit as the actual trade deficit held steady between the 4Q06 and 1Q07. U.S. government payments abroad rose by $6B during the quarter.
An increase in investment income, of $4.5 billion, to the U.S. from overseas, helped reduce the size of the deficit as the actual trade deficit held steady between the 4Q06 and 1Q07. U.S. government payments abroad rose by $6B during the quarter.
Empire Manufacturing Rebounds
New York factories picked up the production pace in June, to raise the NY Fed's general economic index to 25.8 (consensus 11.3), versus 8 in May, as new orders and shipments rose. Any reading above zero indicates expansion. The index had slowed down considerably this year to an average reading of 9.4 in the first five months of 2007 versus and average of over 20 during 2006.
Inventory rebuilding helped both new orders and shipments to more than double in June versus May. New orders were 17.2, while shipments rose to 29.8. Inventories moved into positive territory at 3.2. Prices paid rose to 42.6 while prices received fell to 9.6.
The New York Fed is the earliest of the regional surveys, and is considered to be a better predictor for high-tech and apparel than some of the other regional surveys.
Inventory rebuilding helped both new orders and shipments to more than double in June versus May. New orders were 17.2, while shipments rose to 29.8. Inventories moved into positive territory at 3.2. Prices paid rose to 42.6 while prices received fell to 9.6.
The New York Fed is the earliest of the regional surveys, and is considered to be a better predictor for high-tech and apparel than some of the other regional surveys.
Headline CPI Inflation Higher Than Expected, Core Lower
Headline CPI inflation in May was slightly greater than expected rising +.7% MoM (consensus +.6%) and +2.7% YoY (consensus unchanged at +2.6%). This was the largest increase in the headline figure on a monthly basis since September 2005. Core CPI, which excludes food and energy, rose +.1% MoM (consensus +.2%) and +2.2% YoY (consensus unchanged at +2.3%). There were no revisions to the April data. The CPI figure is considered to be the broadest inflation figure because it includes goods and services.
As anticipated, energy prices rose a strong +5.4% MoM, with gasoline gaining +10.5% MoM to a record high. Owners equivalent rent continues to decelerate to +.1% MoM in May, down from +.3% MoM in March. Food and beverage prices rose +.3% MoM, as did medical care. Rising transportation costs (+2.8% MoM) had the strongest impact on the rising CPI headline figure, after energy, in May, while auto costs fell -.2%..
The market liked the decline in core CPI inflation to the lowest level since the first quarter of 2006. Ten year Treasury yields fell around 3bp to 5.19% after the number.
As anticipated, energy prices rose a strong +5.4% MoM, with gasoline gaining +10.5% MoM to a record high. Owners equivalent rent continues to decelerate to +.1% MoM in May, down from +.3% MoM in March. Food and beverage prices rose +.3% MoM, as did medical care. Rising transportation costs (+2.8% MoM) had the strongest impact on the rising CPI headline figure, after energy, in May, while auto costs fell -.2%..
The market liked the decline in core CPI inflation to the lowest level since the first quarter of 2006. Ten year Treasury yields fell around 3bp to 5.19% after the number.
Thursday, June 14, 2007
Today's Tidbits
Peak Oil Summary
From The Independent: “Scientists have criticised a major review of the world's remaining oil reserves, warning that the end of oil is coming sooner than governments and oil companies are prepared to admit…scientists led by the London-based Oil Depletion Analysis Centre, say that global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives. According to "peak oil" theory our consumption of oil will catch, then outstrip our discovery of new reserves and we will begin to deplete known reserves. Colin Campbell, the head of the depletion centre, said: "It's quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it's gone." Dr Campbell, is a former chief geologist and vice-president at a string of oil majors including BP, Shell, Fina, Exxon and ChevronTexaco. He explains that the peak of regular oil - the cheap and easy to extract stuff - has already come and gone in 2005. Even when you factor in the more difficult to extract heavy oil, deep sea reserves, polar regions and liquid taken from gas, the peak will come as soon as 2011, he says. This scenario is flatly denied by BP, whose chief economist Peter Davies has dismissed the arguments of "peak oil" theorists. "We don't believe there is an absolute resource constraint. When peak oil comes, it is just as likely to come from consumption peaking, perhaps because of climate change policies as from production peaking." In recent years the once-considerable gap between demand and supply has narrowed. Last year that gap all but disappeared. The consequences of a shortfall would be immense. If consumption begins to exceed production by even the smallest amount, the price of oil could soar above $100 a barrel. A global recession would follow…In 1999, Britain's oil reserves in the North Sea peaked, but for two years after this became apparent… it was heresy for anyone in official circles to say so. "Not meeting demand is not an option. In fact, it is an act of treason," … One thing most oil analysts agree on is that depletion of oil fields follows a predictable bell curve. This has not changed since the Shell geologist M King Hubbert made a mathematical model in 1956 to predict what would happen to US petroleum production. The Hubbert Curve shows that at the beginning production from any oil field rises sharply, then reaches a plateau before falling into a terminal decline. His prediction that US production would peak in 1969 was ridiculed by those who claimed it could increase indefinitely. In the event it peaked in 1970 and has been in decline ever since. In the 1970s Chris Skrebowski was a long-term planner for BP. Today he edits the Petroleum Review and is one of a growing number of industry insiders converting to peak theory. "I was extremely sceptical to start with," he now admits. "We have enough capacity coming online for the next two-and-a-half years. After that the situation deteriorates." What no one, not even BP, disagrees with is that demand is surging. The rapid growth of China and India matched with the developed world's dependence on oil, mean that a lot more oil will have to come from somewhere. BP's review shows that world demand for oil has grown faster in the past five years than in the second half of the 1990s. Today we consume an average of 85 million barrels daily. According to the most conservative estimates from the International Energy Agency that figure will rise to 113 million barrels by 2030. Two-thirds of the world's oil reserves lie in the Middle East and increasing demand will have to be met with massive increases in supply from this region. BP's Statistical Review is the most widely used estimate of world oil reserves but as Dr Campbell points out it is only a summary of highly political estimates supplied by governments and oil companies. As Dr Campbell explains: "When I was the boss of an oil company I would never tell the truth. It's not part of the game." A survey of the four countries with the biggest reported reserves - Saudi Arabia, Iran, Iraq and Kuwait - reveals major concerns. In Kuwait last year, a journalist found documents suggesting the country's real reserves were half of what was reported. Iran this year became the first major oil producer to introduce oil rationing - an indication of the administration's view on which way oil reserves are going. Sadad al-Huseini knows more about Saudi Arabia's oil reserves than perhaps anyone else. He retired as chief executive of the kingdom's oil corporation two years ago, and his view on how much Saudi production can be increased is sobering. "The problem is that you go from 79 million barrels a day in 2002 to 84.5 million in 2004. You're leaping by two to three million [barrels a day]" each year, he told The New York Times. "That's like a whole new Saudi Arabia every couple of years. It can't be done indefinitely." The importance of black gold A reduction of as little as 10 to 15 per cent could cripple oil-dependent industrial economies. In the 1970s, a reduction of just 5 per cent caused a price increase of more than 400 per cent. Most farming equipment is either built in oil-powered plants or uses diesel as fuel. Nearly all pesticides and many fertilisers are made from oil. Most plastics, used in everything from computers and mobile phones to pipelines, clothing and carpets, are made from oil-based substances. Manufacturing requires huge amounts of fossil fuels. The construction of a single car in the US requires, on average, at least 20 barrels of oil. Most renewable energy equipment requires large amounts of oil to produce. Metal production - particularly aluminium - cosmetics, hair dye, ink and many common painkillers all rely on oil.”
MISC
From Dow Jones: “Investors lifted Treasury securities back out of the hole they had appeared ready to bury them in earlier Thursday morning, as technical forces helped move some prices back into positive territory by midmorning. The gains were not large, but they lifted part of the yield curve to price gains and helped wash away bigger losses seen at the start of the session…The dollar is split, still up against a beleaguered yen but little changed against the euro as investors remain on hold ahead of Friday’s CPI report….A report of tame wholesale inflation helped stocks rise Thursday, as the markets
shook off disappointing earnings releases from Wall Street banks Goldman Sachs and Bear Stearns as well as pressure from rising oil prices. Stocks continued the rally that started Wednesday, when the Dow posted its biggest point gain of the year, as bond yields pulled back from multiyear highs after an anecdotal economic survey suggested moderate growth and little inflation…Crude oil futures climbed to a two-and-half-month high of more than $67 a barrel Thursday, boosted by worries about tight summer gasoline supplies. The Department of Energy on Wednesday reported an unexpected drop in U.S. refinery utilization and said gasoline stocks remained unchanged last week, sparking a sharp rally that deepened Thursday morning as the front-month July crude contract smashed through key technical resistance.” {10y Treasury up 2.5bp to 5.22. Dow up 71 to 13,554}
From CNN: “The average rate on 30-year fixed-rate loans climbed to 6.74 percent for the week ending June 14, from 6.53 percent the previous week. That marked the biggest one-week increase since July 2003…The 0.59-percentage point increase since May 10 represents a jump of $115 a month on a $300,000 loan…The rate on 15-year loans averaged 6.43 percent, up from 6.22 the previous week…Five-year adjustable-rate mortgages rose to 6.37 percent …One-year ARMs averaged 5.75 percent…”
From Morgan Stanley: “Global growth is currently strong and looks sustainable. But if it were to slow, it could depress US business conditions and earnings, while a prolonged spike in gasoline prices or a deeper housing recession could force consumers to retreat.”
From UBS: “The Swiss National Bank said they still fear a spillover of US housing weakness into the global banking industry and credit…”
From Citi: “The bond market is leading Equities and FX these days with a sell-off that we haven't seen for years. In the last 18 years (using monthly data) we counted only 10 occasions where the bond market reacted in such a way in both magnitude and speed.”
From the Los Angeles Times: “The California Public Employees' Retirement System is considering using derivatives to speculate on declines in the creditworthiness of corporate bond issuers. The pension agency would start with a pilot program in which the derivatives, known as credit-default swaps, would be limited to a small fraction of its $49-billion fixed-income portfolio… CalPERS currently gains from its recognition of "overvalued" bonds only by not investing in them… The new program would provide another way of profiting "from a decline in the price of an issuer or instrument." Credit-default swaps, which act like insurance, are bought by bondholders to protect themselves from default. The market value of the swaps rises as the bond issuer's financial health declines. CalPERS, however, would be buying the derivatives without holding the bonds they cover, so it would profit from a decline in the market value of the bonds. CalPERS, with $240 billion under management, is looking at generating greater returns as the cost of covering retirement and healthcare benefits for public workers grows.”
From Bloomberg: “Freddie Mac, the second-largest source of money for home loans, lost money for the third straight quarter because of a decline in the value of derivatives used to hedge against swings in interest rates. Fees from guaranteeing mortgage bonds surged as it increased market share. The net loss was $211 million, or 46 cents a share, compared with net income of $2 billion, or $2.80 a share, a year earlier…Freddie Mac, which ranks behind Fannie Mae in the $10.9 trillion U.S. residential mortgage market, said growing concern about mortgage credit risk drove down the value of some assets. Smaller swings in interest rates created losses on derivatives used to hedge against the cost of borrowing. The mortgage portfolio, which grew at a 6 percent annualized rate, limited declines…The report is the first regular quarterly report by the government-chartered company in five years. “
From The Independent: “Scientists have criticised a major review of the world's remaining oil reserves, warning that the end of oil is coming sooner than governments and oil companies are prepared to admit…scientists led by the London-based Oil Depletion Analysis Centre, say that global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives. According to "peak oil" theory our consumption of oil will catch, then outstrip our discovery of new reserves and we will begin to deplete known reserves. Colin Campbell, the head of the depletion centre, said: "It's quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it's gone." Dr Campbell, is a former chief geologist and vice-president at a string of oil majors including BP, Shell, Fina, Exxon and ChevronTexaco. He explains that the peak of regular oil - the cheap and easy to extract stuff - has already come and gone in 2005. Even when you factor in the more difficult to extract heavy oil, deep sea reserves, polar regions and liquid taken from gas, the peak will come as soon as 2011, he says. This scenario is flatly denied by BP, whose chief economist Peter Davies has dismissed the arguments of "peak oil" theorists. "We don't believe there is an absolute resource constraint. When peak oil comes, it is just as likely to come from consumption peaking, perhaps because of climate change policies as from production peaking." In recent years the once-considerable gap between demand and supply has narrowed. Last year that gap all but disappeared. The consequences of a shortfall would be immense. If consumption begins to exceed production by even the smallest amount, the price of oil could soar above $100 a barrel. A global recession would follow…In 1999, Britain's oil reserves in the North Sea peaked, but for two years after this became apparent… it was heresy for anyone in official circles to say so. "Not meeting demand is not an option. In fact, it is an act of treason," … One thing most oil analysts agree on is that depletion of oil fields follows a predictable bell curve. This has not changed since the Shell geologist M King Hubbert made a mathematical model in 1956 to predict what would happen to US petroleum production. The Hubbert Curve shows that at the beginning production from any oil field rises sharply, then reaches a plateau before falling into a terminal decline. His prediction that US production would peak in 1969 was ridiculed by those who claimed it could increase indefinitely. In the event it peaked in 1970 and has been in decline ever since. In the 1970s Chris Skrebowski was a long-term planner for BP. Today he edits the Petroleum Review and is one of a growing number of industry insiders converting to peak theory. "I was extremely sceptical to start with," he now admits. "We have enough capacity coming online for the next two-and-a-half years. After that the situation deteriorates." What no one, not even BP, disagrees with is that demand is surging. The rapid growth of China and India matched with the developed world's dependence on oil, mean that a lot more oil will have to come from somewhere. BP's review shows that world demand for oil has grown faster in the past five years than in the second half of the 1990s. Today we consume an average of 85 million barrels daily. According to the most conservative estimates from the International Energy Agency that figure will rise to 113 million barrels by 2030. Two-thirds of the world's oil reserves lie in the Middle East and increasing demand will have to be met with massive increases in supply from this region. BP's Statistical Review is the most widely used estimate of world oil reserves but as Dr Campbell points out it is only a summary of highly political estimates supplied by governments and oil companies. As Dr Campbell explains: "When I was the boss of an oil company I would never tell the truth. It's not part of the game." A survey of the four countries with the biggest reported reserves - Saudi Arabia, Iran, Iraq and Kuwait - reveals major concerns. In Kuwait last year, a journalist found documents suggesting the country's real reserves were half of what was reported. Iran this year became the first major oil producer to introduce oil rationing - an indication of the administration's view on which way oil reserves are going. Sadad al-Huseini knows more about Saudi Arabia's oil reserves than perhaps anyone else. He retired as chief executive of the kingdom's oil corporation two years ago, and his view on how much Saudi production can be increased is sobering. "The problem is that you go from 79 million barrels a day in 2002 to 84.5 million in 2004. You're leaping by two to three million [barrels a day]" each year, he told The New York Times. "That's like a whole new Saudi Arabia every couple of years. It can't be done indefinitely." The importance of black gold A reduction of as little as 10 to 15 per cent could cripple oil-dependent industrial economies. In the 1970s, a reduction of just 5 per cent caused a price increase of more than 400 per cent. Most farming equipment is either built in oil-powered plants or uses diesel as fuel. Nearly all pesticides and many fertilisers are made from oil. Most plastics, used in everything from computers and mobile phones to pipelines, clothing and carpets, are made from oil-based substances. Manufacturing requires huge amounts of fossil fuels. The construction of a single car in the US requires, on average, at least 20 barrels of oil. Most renewable energy equipment requires large amounts of oil to produce. Metal production - particularly aluminium - cosmetics, hair dye, ink and many common painkillers all rely on oil.”
MISC
From Dow Jones: “Investors lifted Treasury securities back out of the hole they had appeared ready to bury them in earlier Thursday morning, as technical forces helped move some prices back into positive territory by midmorning. The gains were not large, but they lifted part of the yield curve to price gains and helped wash away bigger losses seen at the start of the session…The dollar is split, still up against a beleaguered yen but little changed against the euro as investors remain on hold ahead of Friday’s CPI report….A report of tame wholesale inflation helped stocks rise Thursday, as the markets
shook off disappointing earnings releases from Wall Street banks Goldman Sachs and Bear Stearns as well as pressure from rising oil prices. Stocks continued the rally that started Wednesday, when the Dow posted its biggest point gain of the year, as bond yields pulled back from multiyear highs after an anecdotal economic survey suggested moderate growth and little inflation…Crude oil futures climbed to a two-and-half-month high of more than $67 a barrel Thursday, boosted by worries about tight summer gasoline supplies. The Department of Energy on Wednesday reported an unexpected drop in U.S. refinery utilization and said gasoline stocks remained unchanged last week, sparking a sharp rally that deepened Thursday morning as the front-month July crude contract smashed through key technical resistance.” {10y Treasury up 2.5bp to 5.22. Dow up 71 to 13,554}
From CNN: “The average rate on 30-year fixed-rate loans climbed to 6.74 percent for the week ending June 14, from 6.53 percent the previous week. That marked the biggest one-week increase since July 2003…The 0.59-percentage point increase since May 10 represents a jump of $115 a month on a $300,000 loan…The rate on 15-year loans averaged 6.43 percent, up from 6.22 the previous week…Five-year adjustable-rate mortgages rose to 6.37 percent …One-year ARMs averaged 5.75 percent…”
From Morgan Stanley: “Global growth is currently strong and looks sustainable. But if it were to slow, it could depress US business conditions and earnings, while a prolonged spike in gasoline prices or a deeper housing recession could force consumers to retreat.”
From UBS: “The Swiss National Bank said they still fear a spillover of US housing weakness into the global banking industry and credit…”
From Citi: “The bond market is leading Equities and FX these days with a sell-off that we haven't seen for years. In the last 18 years (using monthly data) we counted only 10 occasions where the bond market reacted in such a way in both magnitude and speed.”
From the Los Angeles Times: “The California Public Employees' Retirement System is considering using derivatives to speculate on declines in the creditworthiness of corporate bond issuers. The pension agency would start with a pilot program in which the derivatives, known as credit-default swaps, would be limited to a small fraction of its $49-billion fixed-income portfolio… CalPERS currently gains from its recognition of "overvalued" bonds only by not investing in them… The new program would provide another way of profiting "from a decline in the price of an issuer or instrument." Credit-default swaps, which act like insurance, are bought by bondholders to protect themselves from default. The market value of the swaps rises as the bond issuer's financial health declines. CalPERS, however, would be buying the derivatives without holding the bonds they cover, so it would profit from a decline in the market value of the bonds. CalPERS, with $240 billion under management, is looking at generating greater returns as the cost of covering retirement and healthcare benefits for public workers grows.”
From Bloomberg: “Freddie Mac, the second-largest source of money for home loans, lost money for the third straight quarter because of a decline in the value of derivatives used to hedge against swings in interest rates. Fees from guaranteeing mortgage bonds surged as it increased market share. The net loss was $211 million, or 46 cents a share, compared with net income of $2 billion, or $2.80 a share, a year earlier…Freddie Mac, which ranks behind Fannie Mae in the $10.9 trillion U.S. residential mortgage market, said growing concern about mortgage credit risk drove down the value of some assets. Smaller swings in interest rates created losses on derivatives used to hedge against the cost of borrowing. The mortgage portfolio, which grew at a 6 percent annualized rate, limited declines…The report is the first regular quarterly report by the government-chartered company in five years. “
Producer Prices Rise More Than Expected
The May headline PPI rose +.9% MoM (consensus +.6%), and +4.1% YoY (consensus +3.6%). The annual increase is the highest since rising at +4.9% last June. Core PPI inflation (excluding food and energy) rose +.2% MoM, as expected, but the first monthly increase in three months. The annual core PPI level did edge up to +1.6% YoY, after hitting a 2007 low of 1.5% in April.
Both crude and intermediate PPI prices rose in May. Crude goods rose +2% MoM in May after falling -1.5% MoM in April. Intermediated goods accelerated to +1.1% MoM from +.9% in April. Over the past year, intermediate goods prices have risen +3.7% YoY, and crude goods prices have increased by +11.5% YoY. Crude food prices have risen a substantial 31.2% YoY while crude energy prices have only increased by +.3% YoY. Core crude and intermediate prices both decelerated in May on lower metals prices.
As expected, energy prices continued to rise, growing by +4.1% MoM in May, with gasoline prices advancing +10.2% MoM. This was the largest monthly increase in gas prices since last November, when they rose +18.5%, and contrasts sharply with the -13% decline in January. Over the past year, gasoline prices have risen +13.9% as refinery problems continue to plague output growth. In contrast, food prices fell -.2% MoM, the first decline in over six months, as vegetable prices fell over 35% MoM. Over the past year, most categories have seen rising prices. The only categories seeing deflation versus a year ago are computers (-22.6% YoY), passenger cars (-2.6% YoY), and light trucks (-.4% YoY). Overall consumer goods prices rose +4.8% YoY and +1.2% MoM.
Tomorrow we have the release of the consumer price index, which is also expected to accelerate higher on a monthly basis, due to higher gas prices.
Initial jobless claims came in as expected at 311k.
Both crude and intermediate PPI prices rose in May. Crude goods rose +2% MoM in May after falling -1.5% MoM in April. Intermediated goods accelerated to +1.1% MoM from +.9% in April. Over the past year, intermediate goods prices have risen +3.7% YoY, and crude goods prices have increased by +11.5% YoY. Crude food prices have risen a substantial 31.2% YoY while crude energy prices have only increased by +.3% YoY. Core crude and intermediate prices both decelerated in May on lower metals prices.
As expected, energy prices continued to rise, growing by +4.1% MoM in May, with gasoline prices advancing +10.2% MoM. This was the largest monthly increase in gas prices since last November, when they rose +18.5%, and contrasts sharply with the -13% decline in January. Over the past year, gasoline prices have risen +13.9% as refinery problems continue to plague output growth. In contrast, food prices fell -.2% MoM, the first decline in over six months, as vegetable prices fell over 35% MoM. Over the past year, most categories have seen rising prices. The only categories seeing deflation versus a year ago are computers (-22.6% YoY), passenger cars (-2.6% YoY), and light trucks (-.4% YoY). Overall consumer goods prices rose +4.8% YoY and +1.2% MoM.
Tomorrow we have the release of the consumer price index, which is also expected to accelerate higher on a monthly basis, due to higher gas prices.
Initial jobless claims came in as expected at 311k.
Wednesday, June 13, 2007
Import Prices Continue to Rise
Prices of goods and services imported to the U.S. in May rose +.9% MoM, continuing a string of recent gains. Over the past three months, gains have averaged +1.3% MoM, in sharp contrast with the deflation import prices brought earlier this decade.
The rise in prices is not limited to just energy products. Non-petroleum import prices rose +.5% MoM in May, the largest gain since December, and have risen +2.8% YoY, which is a much faster pace than overall import prices have risen (+1.1% YoY). Higher metals prices led the gains, but higher food and automotive prices have also contributed. Over the past year, food prices have risen +7.9% YoY, while auto prices have grown just +.9% YoY. Consumer goods prices have risen +1.6% YoY, while capital goods prices have declined -.1% YoY. On a year-over-year basis, petroleum product import prices have actually fallen -4.6% YoY.
China is no longer exporting deflation as their economy heats up and internal inflation rises. Prices for goods form China rose +.3% MoM in May, the largest increase ever reported. Prices from China are now up year-over-year, for the first time ever, at +.1% YoY. Higher energy prices pushed up import prices from Mexico and Canada. Import prices from Europe also rose, but they held steady from Japan. On an annual basis, prices from Canada, a major US trade partner, rose +1.7%YoY. Import prices from Mexico and Canada have risen even more, +3.2% YoY and +2.5% YoY respectively.
Export price gains slowed in May to +.1% MoM, with the gains coming from non-agricultural prices increasing by +.2% MoM. Non-agricultural export prices have been trending higher for the last year, and are up +3.4% YoY. Agricultural export prices were unchanged in May, after rising substantially earlier this year. Agricultural export prices have risen over 18% YoY. Overall export prices have risen +4.3% YoY.
The rise in prices is not limited to just energy products. Non-petroleum import prices rose +.5% MoM in May, the largest gain since December, and have risen +2.8% YoY, which is a much faster pace than overall import prices have risen (+1.1% YoY). Higher metals prices led the gains, but higher food and automotive prices have also contributed. Over the past year, food prices have risen +7.9% YoY, while auto prices have grown just +.9% YoY. Consumer goods prices have risen +1.6% YoY, while capital goods prices have declined -.1% YoY. On a year-over-year basis, petroleum product import prices have actually fallen -4.6% YoY.
China is no longer exporting deflation as their economy heats up and internal inflation rises. Prices for goods form China rose +.3% MoM in May, the largest increase ever reported. Prices from China are now up year-over-year, for the first time ever, at +.1% YoY. Higher energy prices pushed up import prices from Mexico and Canada. Import prices from Europe also rose, but they held steady from Japan. On an annual basis, prices from Canada, a major US trade partner, rose +1.7%YoY. Import prices from Mexico and Canada have risen even more, +3.2% YoY and +2.5% YoY respectively.
Export price gains slowed in May to +.1% MoM, with the gains coming from non-agricultural prices increasing by +.2% MoM. Non-agricultural export prices have been trending higher for the last year, and are up +3.4% YoY. Agricultural export prices were unchanged in May, after rising substantially earlier this year. Agricultural export prices have risen over 18% YoY. Overall export prices have risen +4.3% YoY.
May Retail Sales Much Stronger Than Expected
May retail sales rose +1.4% MoM (consensus +.6%), the best gain in almost a year-and-a-half. Last month retail sales fell a revised -.1% MoM. Most economists had expected sales to be stagnant for everything but service stations, which benefit from the rising price of gasoline. But, it appears that the consumer was more resilient than expected.
All major categories showed sales gains last month, with service stations growing the most at +3.8% MoM, its fourth monthly increase as gasoline prices have risen 50% from the low earlier this year. Sales excluding gasoline rose +1.2% MoM, the best gain since last summer. Vehicle sales grew +1.8% MoM, and department store sales saw their biggest monthly gain since 2005, rising by +1.3% MoM. Building material demand rebounded to grow +2.1% MoM, and clothing sales also improved by +2.7% MoM. The weakest growth were in furniture and food, which each grew +.3% MoM.
In calculating GDP, the government uses retail sales less autos, gasoline, and building materials (which they gather from other sources for GDP), sales jumped to +.8% MoM in May from +.1% MoM April.
Retail sales are an important barometer of economic health because they account for over two-thirds of the economy. Improving consumer spending should help support other sectors of the economy. Latest estimates are pushing 2nd quarter GDP toward 4%.
All major categories showed sales gains last month, with service stations growing the most at +3.8% MoM, its fourth monthly increase as gasoline prices have risen 50% from the low earlier this year. Sales excluding gasoline rose +1.2% MoM, the best gain since last summer. Vehicle sales grew +1.8% MoM, and department store sales saw their biggest monthly gain since 2005, rising by +1.3% MoM. Building material demand rebounded to grow +2.1% MoM, and clothing sales also improved by +2.7% MoM. The weakest growth were in furniture and food, which each grew +.3% MoM.
In calculating GDP, the government uses retail sales less autos, gasoline, and building materials (which they gather from other sources for GDP), sales jumped to +.8% MoM in May from +.1% MoM April.
Retail sales are an important barometer of economic health because they account for over two-thirds of the economy. Improving consumer spending should help support other sectors of the economy. Latest estimates are pushing 2nd quarter GDP toward 4%.
Today's Tidbits
Worries
From Dow Jones: “What’s really keeping investors awake at night is the dread of a self-perpetuating cycle. The weaker the markets in the U.S. are, the greater the fear that Asian investors will turn their backs on U.S. assets, leaving the country to wallow in its record current account deficit with all its ramifications for the dollar and future investment. This fear has at its heart the suspicion that the U.S. has lost its place at the forefront of the world economy, not to mention its financial markets. U.S. growth, which officials expect to struggle toward its potential growth rate this year of 3%, is less than half the rates seen in Asia. Japanese gross domestic product, powered by both domestic demand and exports, last quarter overtook the U.S. And the euro zone, once considered hamstrung by its own restrictive monetary and fiscal policy conditions, is now a solid rival.”
From Reuters: “There is little reason to fear a wholesale pullout by China out of U.S. government bonds, former Federal Reserve Chairman Alan Greenspan said on Tuesday. While expressing concerns about China's runaway growth rate and what he described as overvalued stocks, Greenspan played down the prospect that Chinese authorities would sell Treasuries in earnest, forcing a sharp spike in U.S. interest rates. Asked at a commercial real estate conference if investors should be worried about this oft-cited concern, Greenspan said: "I wouldn't be, no." Still, Greenspan said the reason such a withdrawal was unlikely was that China would not have anyone to sell the securities to, hardly the sort of comfort jittery bond investors were seeking…Greenspan reinforced the nervousness, saying that a global liquidity boom which he traced back to the end of the Cold War would not go on forever. "Enjoy it while it lasts," he told the audience…. Greenspan reiterated his prediction that China's latest growth spurt had come too far, too fast. "We cannot continue this rate of growth in China and the Third World. This cannot continue indefinitely," Greenspan said in a speech. "Some of these price/earnings ratios are discounting nirvana."
End of an Unusual Era?
From NY Fed President Geithner: “We’ve been through this really remarkable period in markets globally where you had this pretty unique, unusual constellation of low forward interest rates, very low risk premia, very low term premia, very low credit spreads, and very low realized and expected volatility across a whole range of asset prices,…”
From Bloomberg: “Former Federal Reserve Chairman Alan Greenspan said low long-term interest rates may not last, bringing an end to a global boom in financial liquidity.
``It's liquidity that is driving the world,'' Greenspan said to a conference in Mexico City. ``It will continue to be strong as long as real long-term interest rates stay low. This is not a permanent feature. It's an intermediate-term period in world economic history that has never occurred before.''
China and U.S. Protectionism
From Dow Jones: “The Bush administration, in a decision sure to fire up critics on Capitol Hill, has again declined to name China or any other trade partner guilty of currency manipulation…“Although the renminbi is undervalued and market sentiment
clearly favors appreciation, Treasury concluded that China did not meet the technical requirements for designation,” Treasury said.”
From Morgan Stanley: “As expected Senators Baucus, Grassley, Schumer and Graham unveiled their bill on FX today. It does not specifically name China but rather establishes a framework to deal with FX issues…The legislation requires Treasury to develop a new biannual report that identifies two categories of currencies (1) fundamentally misaligned currencies based on objective criteria (2) misaligned due to clear policy actions by the relevant governments. A lack of progress in resolving the misalignment would trigger consequences: After 180 days, the US would forbid Federal procurement of goods and services from that country, forbid Overseas Private Investment Corporation investment or financing for projects in that country, and oppose multilateral bank financing for projects in that country.….The bill would likely come to a floor vote in the fall… the Senators made clear that they expect the bill to pass. Schumer stated that the bill is expected to pass House and Senate with veto-proof majority. Sen Baucus noted that it would be very difficult for Pres Bush to veto this bill as it is WTO compliant.”
From Dow Jones: “Rising inflation and a surprisingly strong rally by Chinese
stocks has Beijing planning a further tightening of the monetary screws by another notch to drain excess cash from the economy. State Council, China’s Cabinet, in a meeting Wednesday called for an appropriate tightening of monetary policy and efforts to reduce excess liquidity. It also said in a statement posted on a government Web site that it would curb rapid growth in the country’s trade surplus and prevent a rebound in fixed-asset investment growth. Traders and economists don’t expect an interest rate hike this
week, but they see it happening this year and they’re bracing for another rise in banks’ reserve requirement ratio at any time.”
Misc
From Bloomberg: “U.S. 10-year Treasuries surged the most since February after yields at a five-year high convinced speculators that rising borrowing costs will curb the economy and inflation. The rally, which follows the longest streak of weekly declines since 2005, pushed yields back below the Federal Reserve's 5.25 percent target rate for overnight loans between banks. Ten-year yields exceeded the Fed's benchmark yesterday for the first time in a year.”
From Dow Jones: “Treasury prices continued to strengthen early Wednesday afternoon as buyers stepped in to snatch up bonds after yields hit fresh highs earlier in the day. With longer maturity Treasury prices holding higher into the afternoon, George Goncalves, chief Treasury, TIPS and agency strategist at Morgan Stanley in New York, called the gains “the beginning steps of consolidating after a dramatic move.”… The dollar remained up across the board, having moved little from its opening levels despite the release of better than expected retail and business inventory data earlier in the session. The greenback continued to track with Treasury yields and showed little lasting reaction
to the U.S. Treasury’s semi-annual forex report and a currency bill that did not single out China, as many had expected….U.S. stocks rallied…Crude oil futures climbed above $66 a barrel Wednesday, extending their gains after the Energy Information Administration reported an unexpected drop in U.S. refinery utilization and said gasoline stockpiles failed to increase last week. It was the second straight week in which utilization fell, indicating refiners continue to have trouble bringing on line recently shuttered units. The July crude contract on the New York Mercantile Exchange rallied $1.13…”
[As of 4pm, 2y Treasury yield is down 1.7bp to 5.08%, 10y down 8.6bp to 5.21%. Dow closing up 187 points at 13,482. Dollar index closing at 83.03.]
From Bloomberg: “Bill Gross, manager of the world's biggest bond fund, raised his holdings of cash-equivalent securities to the highest since February while retaining his
forecast for the Federal Reserve to lower interest rates.”
From Goldman Sachs: “The Beige Book was broadly consistent with other measures of the economy: (1) manufacturing is recovering, (2) services are quite strong, (3) the housing sector remains weak and (4) consumer spending decent. In short, there was little information to change market perceptions of the current state of the economy. Wage and price pressures across the regions remained relatively muted. Despite noting higher energy and commodity prices, the report did not seem overly concerned about price pressures.”
From American Banker: “The industry’s decade of free deposit insurance will end Friday, when the Federal Deposit Insurance Corp. begins charging [again]…”
From Bloomberg: “China's retail sales unexpectedly accelerated at the fastest pace in three years, buoyed by rising incomes and a stock market that's doubled this year. Sales rose 15.9 percent from a year earlier…”
From JP Morgan: “China’s retail sales boomed in May, consistent with the view that the economy continues to grow at a double-digit pace. Energy prices are regulated in China and so consumers are not subject to this headwind, at least not in real time. Food prices have surged, however, at an 11% annual rate over the past six months. Food accounts for 1/3 of the CPI basket, so this represents a subtraction of 3.4% points from real income growth.”
From Dow Jones: “Investment bankers and analysts are keenly watching the global rise in interest rates, but said that they don’t expect it to derail deal-making or IPO activity anytime soon…Falling equity markets generally make it harder for bankers to sell initial public offerings…”
From JP Morgan: “Business inventories rose 0.4% in April, providing an early indication that stockpiling will make a solid contribution to 2Q growth.”
From UBS: “The mortgage applications purchase index rose 7.2% the week of June 8th, while the refi index was up 5.6%. We sense a "J-Curve" effect at work here as borrowers rushed through a closing (rate) exit?” [30-year fixed mortgage rates rose 26bp over the last week.]
From Bloomberg: “Chevron Corp., the second-largest U.S. oil company, won't resume drilling at the $3 billion Jack prospect in the Gulf of Mexico until late this year or early 2008 because of a shortage of rigs….There are only 33 drillships and other vessels that can drill in waters as deep as those above the largest reserves of oil in the Gulf of Mexico…Another 48 are under construction.”
From UBS: “Swap spreads made a massive 3.5bps round trip today, finishing about 1bp narrower…Agencies traded in line to swaps for the most part, ending the day 0.5-1bp tighter. Mortgages were all over the place early in the day, but finished 1-2 ticks wider to swaps, and unchanged to treasuries.”
From Dow Jones: “What’s really keeping investors awake at night is the dread of a self-perpetuating cycle. The weaker the markets in the U.S. are, the greater the fear that Asian investors will turn their backs on U.S. assets, leaving the country to wallow in its record current account deficit with all its ramifications for the dollar and future investment. This fear has at its heart the suspicion that the U.S. has lost its place at the forefront of the world economy, not to mention its financial markets. U.S. growth, which officials expect to struggle toward its potential growth rate this year of 3%, is less than half the rates seen in Asia. Japanese gross domestic product, powered by both domestic demand and exports, last quarter overtook the U.S. And the euro zone, once considered hamstrung by its own restrictive monetary and fiscal policy conditions, is now a solid rival.”
From Reuters: “There is little reason to fear a wholesale pullout by China out of U.S. government bonds, former Federal Reserve Chairman Alan Greenspan said on Tuesday. While expressing concerns about China's runaway growth rate and what he described as overvalued stocks, Greenspan played down the prospect that Chinese authorities would sell Treasuries in earnest, forcing a sharp spike in U.S. interest rates. Asked at a commercial real estate conference if investors should be worried about this oft-cited concern, Greenspan said: "I wouldn't be, no." Still, Greenspan said the reason such a withdrawal was unlikely was that China would not have anyone to sell the securities to, hardly the sort of comfort jittery bond investors were seeking…Greenspan reinforced the nervousness, saying that a global liquidity boom which he traced back to the end of the Cold War would not go on forever. "Enjoy it while it lasts," he told the audience…. Greenspan reiterated his prediction that China's latest growth spurt had come too far, too fast. "We cannot continue this rate of growth in China and the Third World. This cannot continue indefinitely," Greenspan said in a speech. "Some of these price/earnings ratios are discounting nirvana."
End of an Unusual Era?
From NY Fed President Geithner: “We’ve been through this really remarkable period in markets globally where you had this pretty unique, unusual constellation of low forward interest rates, very low risk premia, very low term premia, very low credit spreads, and very low realized and expected volatility across a whole range of asset prices,…”
From Bloomberg: “Former Federal Reserve Chairman Alan Greenspan said low long-term interest rates may not last, bringing an end to a global boom in financial liquidity.
``It's liquidity that is driving the world,'' Greenspan said to a conference in Mexico City. ``It will continue to be strong as long as real long-term interest rates stay low. This is not a permanent feature. It's an intermediate-term period in world economic history that has never occurred before.''
China and U.S. Protectionism
From Dow Jones: “The Bush administration, in a decision sure to fire up critics on Capitol Hill, has again declined to name China or any other trade partner guilty of currency manipulation…“Although the renminbi is undervalued and market sentiment
clearly favors appreciation, Treasury concluded that China did not meet the technical requirements for designation,” Treasury said.”
From Morgan Stanley: “As expected Senators Baucus, Grassley, Schumer and Graham unveiled their bill on FX today. It does not specifically name China but rather establishes a framework to deal with FX issues…The legislation requires Treasury to develop a new biannual report that identifies two categories of currencies (1) fundamentally misaligned currencies based on objective criteria (2) misaligned due to clear policy actions by the relevant governments. A lack of progress in resolving the misalignment would trigger consequences: After 180 days, the US would forbid Federal procurement of goods and services from that country, forbid Overseas Private Investment Corporation investment or financing for projects in that country, and oppose multilateral bank financing for projects in that country.….The bill would likely come to a floor vote in the fall… the Senators made clear that they expect the bill to pass. Schumer stated that the bill is expected to pass House and Senate with veto-proof majority. Sen Baucus noted that it would be very difficult for Pres Bush to veto this bill as it is WTO compliant.”
From Dow Jones: “Rising inflation and a surprisingly strong rally by Chinese
stocks has Beijing planning a further tightening of the monetary screws by another notch to drain excess cash from the economy. State Council, China’s Cabinet, in a meeting Wednesday called for an appropriate tightening of monetary policy and efforts to reduce excess liquidity. It also said in a statement posted on a government Web site that it would curb rapid growth in the country’s trade surplus and prevent a rebound in fixed-asset investment growth. Traders and economists don’t expect an interest rate hike this
week, but they see it happening this year and they’re bracing for another rise in banks’ reserve requirement ratio at any time.”
Misc
From Bloomberg: “U.S. 10-year Treasuries surged the most since February after yields at a five-year high convinced speculators that rising borrowing costs will curb the economy and inflation. The rally, which follows the longest streak of weekly declines since 2005, pushed yields back below the Federal Reserve's 5.25 percent target rate for overnight loans between banks. Ten-year yields exceeded the Fed's benchmark yesterday for the first time in a year.”
From Dow Jones: “Treasury prices continued to strengthen early Wednesday afternoon as buyers stepped in to snatch up bonds after yields hit fresh highs earlier in the day. With longer maturity Treasury prices holding higher into the afternoon, George Goncalves, chief Treasury, TIPS and agency strategist at Morgan Stanley in New York, called the gains “the beginning steps of consolidating after a dramatic move.”… The dollar remained up across the board, having moved little from its opening levels despite the release of better than expected retail and business inventory data earlier in the session. The greenback continued to track with Treasury yields and showed little lasting reaction
to the U.S. Treasury’s semi-annual forex report and a currency bill that did not single out China, as many had expected….U.S. stocks rallied…Crude oil futures climbed above $66 a barrel Wednesday, extending their gains after the Energy Information Administration reported an unexpected drop in U.S. refinery utilization and said gasoline stockpiles failed to increase last week. It was the second straight week in which utilization fell, indicating refiners continue to have trouble bringing on line recently shuttered units. The July crude contract on the New York Mercantile Exchange rallied $1.13…”
[As of 4pm, 2y Treasury yield is down 1.7bp to 5.08%, 10y down 8.6bp to 5.21%. Dow closing up 187 points at 13,482. Dollar index closing at 83.03.]
From Bloomberg: “Bill Gross, manager of the world's biggest bond fund, raised his holdings of cash-equivalent securities to the highest since February while retaining his
forecast for the Federal Reserve to lower interest rates.”
From Goldman Sachs: “The Beige Book was broadly consistent with other measures of the economy: (1) manufacturing is recovering, (2) services are quite strong, (3) the housing sector remains weak and (4) consumer spending decent. In short, there was little information to change market perceptions of the current state of the economy. Wage and price pressures across the regions remained relatively muted. Despite noting higher energy and commodity prices, the report did not seem overly concerned about price pressures.”
From American Banker: “The industry’s decade of free deposit insurance will end Friday, when the Federal Deposit Insurance Corp. begins charging [again]…”
From Bloomberg: “China's retail sales unexpectedly accelerated at the fastest pace in three years, buoyed by rising incomes and a stock market that's doubled this year. Sales rose 15.9 percent from a year earlier…”
From JP Morgan: “China’s retail sales boomed in May, consistent with the view that the economy continues to grow at a double-digit pace. Energy prices are regulated in China and so consumers are not subject to this headwind, at least not in real time. Food prices have surged, however, at an 11% annual rate over the past six months. Food accounts for 1/3 of the CPI basket, so this represents a subtraction of 3.4% points from real income growth.”
From Dow Jones: “Investment bankers and analysts are keenly watching the global rise in interest rates, but said that they don’t expect it to derail deal-making or IPO activity anytime soon…Falling equity markets generally make it harder for bankers to sell initial public offerings…”
From JP Morgan: “Business inventories rose 0.4% in April, providing an early indication that stockpiling will make a solid contribution to 2Q growth.”
From UBS: “The mortgage applications purchase index rose 7.2% the week of June 8th, while the refi index was up 5.6%. We sense a "J-Curve" effect at work here as borrowers rushed through a closing (rate) exit?” [30-year fixed mortgage rates rose 26bp over the last week.]
From Bloomberg: “Chevron Corp., the second-largest U.S. oil company, won't resume drilling at the $3 billion Jack prospect in the Gulf of Mexico until late this year or early 2008 because of a shortage of rigs….There are only 33 drillships and other vessels that can drill in waters as deep as those above the largest reserves of oil in the Gulf of Mexico…Another 48 are under construction.”
From UBS: “Swap spreads made a massive 3.5bps round trip today, finishing about 1bp narrower…Agencies traded in line to swaps for the most part, ending the day 0.5-1bp tighter. Mortgages were all over the place early in the day, but finished 1-2 ticks wider to swaps, and unchanged to treasuries.”
Tuesday, June 12, 2007
Today's Tidbits
Oil Demand Rising Faster than Anticipated in Developing Countries
From Barclays: “The latest IEA oil market report represents a significant change to its projections of oil market balances in 2007. A substantial upward revision to its estimates of the 2006 consumption baseline and upward adjustments to 2007 demand growth forecasts (alongside a very small downward adjustment to its non-OPEC supply numbers) mean, that it now forecasts oil demand this year will average a stunning 86.1mn bpd, representing growth of 1.7mn bpd over the 2006 level…The higher numbers are very much in line with the trend that has seen non-OECD accounting for the bulk of demand growth in recent years, while OECD demand as a whole has stagnated. If the IEA's forecasts for 2007 are correct, then by the end of this year non-OECD demand will have grown 3.6mn bpd since 2004, while OECD demand will be up by less than one-tenth of that at just 300,000 bpd. The message is that in countries where rapid development is leading to big increases in living standards and GDP growth, the price elasticity of oil demand is very low, and furthermore, this factor is more than enough to offset more price-sensitive oil consumption in the mature industrialised nations. As far as oil market prospects for the rest of 2007 are concerned, the picture is one of a much tighter balance between supply and demand that was being projected by the IEA just one month ago…Given that OPEC production was running at around just 30.4m bpd in May, a very substantial increase in output is required if the market is to avoid severe tightening, rapidly falling inventory levels and substantially higher prices. We doubt that any increase in OPEC supplies will materialise fast enough, and thus, significantly higher oil prices over the second half of 2007 look inevitable.”
From AP: “World energy consumption rose 2.4% last year, slowing from a rise of 3.2% in 2005, while China's energy use soared 8.4%, BP [British Petroleum] said Tuesday in its annual survey of global trends. Global energy growth in 2006 was just above the 10-year average, and the rate of growth slowed for every fuel except nuclear power, the oil company said in its Statistical Review of World Energy. The Asia-Pacific region again recorded the highest growth, at 4.9%, while consumption in North America fell 0.5% — with a 1.0% drop in the United States partially countered by increases of 1.7% in Canada and 4% in Mexico. In Europe and Eurasia, total consumption rose 1.5% in 2006 over 2005…Chinese energy use continued to account for the majority of global energy consumption growth and the country now accounts for over 15% of world energy use…Coal consumption rose 4.5% — fastest growth among hydrocarbons — pushed mainly by an 8.7% growth in China. Coal use was down in the United States but up in Britain and other countries for the third year in a row. Nuclear power output grew by 1.4% in 2006, mainly because of increased capacity use and upgrades. The use of wind and solar energy continued to grow in 2006, but from a low base. Despite a 25% increase of installed wind power capacity, it still made up less than 1% of global electricity production, while solar power accounted for even less. Ethanol use rose 22%.”
From USA Today: “The USA… is the biggest hybrid market. It accounted for 163,000 of Toyota's 313,000 total hybrid sales last year, or 52%. And the USA accounted for about 57% of the first 1 million worldwide sales…”
Rapid Growth of Global Reserves, to Support Dollar, Causes Dislocations/Inflation
From Merrill Lynch: “…over the past six months global reserves have increased by 11.6% [as foreign countries let their reserves rise rapidly to slow appreciation of their currencies versus the U.S. dollar.] We have estimated that 54% of the US current account deficit last year was accounted for by central bank buying…What this suggests is that there is a big gap between US funding needs and the foreign private sector’s desire to acquire USD assets. The implication is that the dollar is being buoyed largely by official purchases. Moreover by several alternative measures, the pace of USD reserves accumulation picked up in 2006…What is more interesting is that the most up to date data suggest that, if anything, central banks have accelerated their buying so far this year…implies that the share of the US current account deficit that is being funded by central banks is at levels that have historically been associated with very rapid USD depreciation….US residents are adding to the pressure as they are net buyers of foreign assets at an unprecedented pace around USD35bn per month. With the US current account deficit close to USD60bn on average each month, this means that there is more than USD100bn of a structural financing need. Central banks as a group are probably much longer USD than they want to be - the decline in the USD share in their portfolios is virtually entirely valuation effects rather than reallocation across currencies. The roughly 65% USD share is above any global private sector USD benchmark, which are more closer to 40%. Overall this suggests that there is a steady supply of USD waiting to be sold.”
From Bloomberg: “Cheap money is fast becoming an expensive habit for Asia. Easy liquidity has already pushed some asset prices out of kilter. Chinese stock markets are clearly overheated…Monetary conditions kept too loose for too long appear to have firmed inflation expectations… Squeezing growth out of underpriced capital is a good way for policy makers to pull an economy out of a bad patch, and for politicians to get a rally going in asset prices. It isn't a recipe for keeping the good times rolling…Those Asian policy makers who seek to actively manage inflation using short-term interest rates have a dilemma. If they raise interest rates in response to a tightening job market, they invite yield-searching speculative capital. And then, if the central bank buys the incoming dollars, domestic liquidity increases, stoking inflation. And if the central bank doesn't buy the dollars, it risks making the local currency too expensive -- too quickly -- for exporters… The strategy of restraining interest rates to avoid inviting in ``hot money'' is eventually self-destructing because it allows inflation to take hold in the domestic economy. Asian companies will eventually stop investing if the consumer doesn't have the purchasing power to buy their goods…it may be time for central bankers in the region to do some soul-searching. They have been complacent about wage inflation and their ability to control it. They are also wrong, perhaps, to view money-supply growth -- alarming in many countries -- as irrelevant. That indicator may herald an avalanche of price increases.”
Baby Boomer Retirement Trends and Issues (or be glad you had children)
From AP: “A new report portrays aging boomers as better educated, with higher incomes and longer life expectancies than the generations that preceded them. They also have fewer children and are less likely to be married, leaving them fewer options if they need help in their old age. "That one child they had will be very valuable," said William Frey, a demographer at the Brookings Institution, a Washington think tank. Frey is releasing a report today that says higher rates of divorce and separation could result in greater financial hardship for aging baby boomers. In 1980, about two-thirds of Americans age 55 to 64 lived in married-couple households. That percentage fell to less than 58 percent in 2005. Americans had been retiring at ever-younger ages since the growth of private pensions and Social Security began more than 50 years ago. However, the trend appears to be reversing. In 1950, nearly half of men 65 and older were still in the labor force, according to the Census Bureau. That percentage bottomed out in the 1980s at less than 16 percent. It has since edged up to about 19 percent, and experts believe it will increase even more as the oldest baby boomers reach 65. Women work in much larger numbers earlier in life, but among those 65 and older, their participation in the labor force has remained steady at about 10 percent since 1950. There are about 78 million baby boomers, those born from 1946 to 1964. The oldest will turn 62 next year, the age at which they become eligible for Social Security benefits. Some will continue working by choice — a government survey shows that most U.S. workers nearing retirement age want to gradually reduce their workload rather than abruptly stop. Others will have to stay on the job as fewer companies offer health insurance to retirees and many private pensions fail.”
MISC
From Morgan Stanley: “The USD continued to rise alongside surging US yields… However, the spotlight of the day fell on US fixed income, as US 10-yr Treasury yields extended their rise by 10bp to reach 5.25%, beating the June 2006 peak to claim a 5-yr high. In tow, the stock markets pared its gains as the S&P 500 fell back below 1500.”
[ As of 4:15 pm, 2y Treasury yields are at 5.07% (+6bp), and 10y Treasury yields are at 5.26% (+10.5bp). The dollar index has rallied .22 to 82.93. The Dow is closing down 130 points at 13,295. with the S&P falling 16 to 1493. Oil slid by 75 cents a barrel.]
From Bloomberg: “Yields on 10-year Treasury notes climbed to the highest in five years as former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt… Ten-year note yields climbed as high as 5.272 percent, surpassing the Fed's target rate for overnight loans …at 5.25 percent…Referring to historically low premiums on emerging-market debt, Greenspan said ``it ain't going to continue that way. And indeed, all the spreads you are looking at, including your spreads relative to the 10-year are going to start to open up and
the 10-year is going to be moving as well.'' ``So I'd suggest someone out there is not going to be as happy as we are today,'' Greenspan said at an event hosted by the
Commercial Mortgage Securities Association in New York.”
From Morgan Stanley: “There is very little mortgage extension still left, with 95% of the mortgage universe non-refinaceable. Assuming that current hedging needs have been met, it is conceivable that there should be less convexity hedging in a sell-off. That said, increased supply of fixed-rate mortgages as well as slowing prepays could lead to further paying pressure over the course of the year; however it will be far more gradual than recent paying pressures.”
From JP Morgan: “According to the Manpower survey of hiring intentions for the third
quarter, a net 18% of firms planned to increase employment, unchanged from the second quarter’s share. Note, however, that this share tends to lag actual payroll growth by about a quarter. Regionally, the largest changes in hiring expectations were in the Northeast, (from 21% to 15%, and the West (from 19% to 24%). Nationally, construction hiring expectations were unchanged at 16%, but down from a peak of 27% in 3Q05…”
From The Financial Times: “The hiring outlook in India, driven by continuing shortages in many sectors such as accountancy and middle-management roles, continues to outpace that elsewhere in Asia, with some of the job creation from offshoring by multinationals starting to abate…India, Japan, Hong Kong and Australia were among those countries with the strongest hiring prospects going into the third quarter, with Germany, Norway and the UK all displaying resilient growth, though prospects have dipped in both France and Italy.”
From Bloomberg: “Wages are rising rapidly, recording annual growth rates ranging from about 5 percent in Singapore and 8 percent in China and the Philippines to a staggering 14 percent in India. Corporate profitability and expansion are now at risk. A recent Duke University/CFO Magazine survey reveals that chief financial officers in Asia are bracing for a 10 percent increase in their wage bill in the next 12 months. The CFOs expect labor productivity -- output per hour worked -- to grow only 4 percent.”
From the Union-Tribune: “Doug Duncan, chief economist for the Mortgage Bankers Association, yesterday said subprime loans had done far more good than harm to the economy. Such loans have opened the door to homeownership to millions of Americans in pricey markets like San Diego County, Duncan said. Of all outstanding U.S. home loans, about 14 percent are subprime, he said. Of those, about 19 percent are delinquent or in the process of being foreclosed on. Duncan expects less than one-third of those will actually be lost to foreclosure. Among causes of the nation's housing slump, subprime lending “was a contributing factor, but it was not the driving issue,” Duncan said.”
From Bloomberg: “U.S. foreclosure filings surged 90 percent in May from a year earlier as more homeowners fell behind on their monthly mortgage payments...A jump in foreclosures at ta time of the year that traditionally is the busiest for home sales means the slide in prices probably isn’t over…Typically, more than half of all home sales occur in the April to June period…California topped the list…and Florida was No. 2…[As a percentage of homes in the state] Nevada was the No. 1…Colorado was second…followed by California, Florida, Ohio, and Arizona. Michigan ranked No. 8…New Jersey was in the No. 15 slot…”
From Dow Jones: “General Electric Co.’s WMC Mortgage Corp. and Merrill Lynch & Co.’s First Franklin Financial Corp. are among the first subprime home lenders to adopt proposed federal guidelines on underwriting low-initial-payment mortgages to people
with flawed credit….In particular, the guidance calls for lenders to take into account the highest possible monthly payments - as opposed to the initial low payments - when deciding borrowers’ ability to repay the loans.”
From Barclays: “The latest IEA oil market report represents a significant change to its projections of oil market balances in 2007. A substantial upward revision to its estimates of the 2006 consumption baseline and upward adjustments to 2007 demand growth forecasts (alongside a very small downward adjustment to its non-OPEC supply numbers) mean, that it now forecasts oil demand this year will average a stunning 86.1mn bpd, representing growth of 1.7mn bpd over the 2006 level…The higher numbers are very much in line with the trend that has seen non-OECD accounting for the bulk of demand growth in recent years, while OECD demand as a whole has stagnated. If the IEA's forecasts for 2007 are correct, then by the end of this year non-OECD demand will have grown 3.6mn bpd since 2004, while OECD demand will be up by less than one-tenth of that at just 300,000 bpd. The message is that in countries where rapid development is leading to big increases in living standards and GDP growth, the price elasticity of oil demand is very low, and furthermore, this factor is more than enough to offset more price-sensitive oil consumption in the mature industrialised nations. As far as oil market prospects for the rest of 2007 are concerned, the picture is one of a much tighter balance between supply and demand that was being projected by the IEA just one month ago…Given that OPEC production was running at around just 30.4m bpd in May, a very substantial increase in output is required if the market is to avoid severe tightening, rapidly falling inventory levels and substantially higher prices. We doubt that any increase in OPEC supplies will materialise fast enough, and thus, significantly higher oil prices over the second half of 2007 look inevitable.”
From AP: “World energy consumption rose 2.4% last year, slowing from a rise of 3.2% in 2005, while China's energy use soared 8.4%, BP [British Petroleum] said Tuesday in its annual survey of global trends. Global energy growth in 2006 was just above the 10-year average, and the rate of growth slowed for every fuel except nuclear power, the oil company said in its Statistical Review of World Energy. The Asia-Pacific region again recorded the highest growth, at 4.9%, while consumption in North America fell 0.5% — with a 1.0% drop in the United States partially countered by increases of 1.7% in Canada and 4% in Mexico. In Europe and Eurasia, total consumption rose 1.5% in 2006 over 2005…Chinese energy use continued to account for the majority of global energy consumption growth and the country now accounts for over 15% of world energy use…Coal consumption rose 4.5% — fastest growth among hydrocarbons — pushed mainly by an 8.7% growth in China. Coal use was down in the United States but up in Britain and other countries for the third year in a row. Nuclear power output grew by 1.4% in 2006, mainly because of increased capacity use and upgrades. The use of wind and solar energy continued to grow in 2006, but from a low base. Despite a 25% increase of installed wind power capacity, it still made up less than 1% of global electricity production, while solar power accounted for even less. Ethanol use rose 22%.”
From USA Today: “The USA… is the biggest hybrid market. It accounted for 163,000 of Toyota's 313,000 total hybrid sales last year, or 52%. And the USA accounted for about 57% of the first 1 million worldwide sales…”
Rapid Growth of Global Reserves, to Support Dollar, Causes Dislocations/Inflation
From Merrill Lynch: “…over the past six months global reserves have increased by 11.6% [as foreign countries let their reserves rise rapidly to slow appreciation of their currencies versus the U.S. dollar.] We have estimated that 54% of the US current account deficit last year was accounted for by central bank buying…What this suggests is that there is a big gap between US funding needs and the foreign private sector’s desire to acquire USD assets. The implication is that the dollar is being buoyed largely by official purchases. Moreover by several alternative measures, the pace of USD reserves accumulation picked up in 2006…What is more interesting is that the most up to date data suggest that, if anything, central banks have accelerated their buying so far this year…implies that the share of the US current account deficit that is being funded by central banks is at levels that have historically been associated with very rapid USD depreciation….US residents are adding to the pressure as they are net buyers of foreign assets at an unprecedented pace around USD35bn per month. With the US current account deficit close to USD60bn on average each month, this means that there is more than USD100bn of a structural financing need. Central banks as a group are probably much longer USD than they want to be - the decline in the USD share in their portfolios is virtually entirely valuation effects rather than reallocation across currencies. The roughly 65% USD share is above any global private sector USD benchmark, which are more closer to 40%. Overall this suggests that there is a steady supply of USD waiting to be sold.”
From Bloomberg: “Cheap money is fast becoming an expensive habit for Asia. Easy liquidity has already pushed some asset prices out of kilter. Chinese stock markets are clearly overheated…Monetary conditions kept too loose for too long appear to have firmed inflation expectations… Squeezing growth out of underpriced capital is a good way for policy makers to pull an economy out of a bad patch, and for politicians to get a rally going in asset prices. It isn't a recipe for keeping the good times rolling…Those Asian policy makers who seek to actively manage inflation using short-term interest rates have a dilemma. If they raise interest rates in response to a tightening job market, they invite yield-searching speculative capital. And then, if the central bank buys the incoming dollars, domestic liquidity increases, stoking inflation. And if the central bank doesn't buy the dollars, it risks making the local currency too expensive -- too quickly -- for exporters… The strategy of restraining interest rates to avoid inviting in ``hot money'' is eventually self-destructing because it allows inflation to take hold in the domestic economy. Asian companies will eventually stop investing if the consumer doesn't have the purchasing power to buy their goods…it may be time for central bankers in the region to do some soul-searching. They have been complacent about wage inflation and their ability to control it. They are also wrong, perhaps, to view money-supply growth -- alarming in many countries -- as irrelevant. That indicator may herald an avalanche of price increases.”
Baby Boomer Retirement Trends and Issues (or be glad you had children)
From AP: “A new report portrays aging boomers as better educated, with higher incomes and longer life expectancies than the generations that preceded them. They also have fewer children and are less likely to be married, leaving them fewer options if they need help in their old age. "That one child they had will be very valuable," said William Frey, a demographer at the Brookings Institution, a Washington think tank. Frey is releasing a report today that says higher rates of divorce and separation could result in greater financial hardship for aging baby boomers. In 1980, about two-thirds of Americans age 55 to 64 lived in married-couple households. That percentage fell to less than 58 percent in 2005. Americans had been retiring at ever-younger ages since the growth of private pensions and Social Security began more than 50 years ago. However, the trend appears to be reversing. In 1950, nearly half of men 65 and older were still in the labor force, according to the Census Bureau. That percentage bottomed out in the 1980s at less than 16 percent. It has since edged up to about 19 percent, and experts believe it will increase even more as the oldest baby boomers reach 65. Women work in much larger numbers earlier in life, but among those 65 and older, their participation in the labor force has remained steady at about 10 percent since 1950. There are about 78 million baby boomers, those born from 1946 to 1964. The oldest will turn 62 next year, the age at which they become eligible for Social Security benefits. Some will continue working by choice — a government survey shows that most U.S. workers nearing retirement age want to gradually reduce their workload rather than abruptly stop. Others will have to stay on the job as fewer companies offer health insurance to retirees and many private pensions fail.”
MISC
From Morgan Stanley: “The USD continued to rise alongside surging US yields… However, the spotlight of the day fell on US fixed income, as US 10-yr Treasury yields extended their rise by 10bp to reach 5.25%, beating the June 2006 peak to claim a 5-yr high. In tow, the stock markets pared its gains as the S&P 500 fell back below 1500.”
[ As of 4:15 pm, 2y Treasury yields are at 5.07% (+6bp), and 10y Treasury yields are at 5.26% (+10.5bp). The dollar index has rallied .22 to 82.93. The Dow is closing down 130 points at 13,295. with the S&P falling 16 to 1493. Oil slid by 75 cents a barrel.]
From Bloomberg: “Yields on 10-year Treasury notes climbed to the highest in five years as former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt… Ten-year note yields climbed as high as 5.272 percent, surpassing the Fed's target rate for overnight loans …at 5.25 percent…Referring to historically low premiums on emerging-market debt, Greenspan said ``it ain't going to continue that way. And indeed, all the spreads you are looking at, including your spreads relative to the 10-year are going to start to open up and
the 10-year is going to be moving as well.'' ``So I'd suggest someone out there is not going to be as happy as we are today,'' Greenspan said at an event hosted by the
Commercial Mortgage Securities Association in New York.”
From Morgan Stanley: “There is very little mortgage extension still left, with 95% of the mortgage universe non-refinaceable. Assuming that current hedging needs have been met, it is conceivable that there should be less convexity hedging in a sell-off. That said, increased supply of fixed-rate mortgages as well as slowing prepays could lead to further paying pressure over the course of the year; however it will be far more gradual than recent paying pressures.”
From JP Morgan: “According to the Manpower survey of hiring intentions for the third
quarter, a net 18% of firms planned to increase employment, unchanged from the second quarter’s share. Note, however, that this share tends to lag actual payroll growth by about a quarter. Regionally, the largest changes in hiring expectations were in the Northeast, (from 21% to 15%, and the West (from 19% to 24%). Nationally, construction hiring expectations were unchanged at 16%, but down from a peak of 27% in 3Q05…”
From The Financial Times: “The hiring outlook in India, driven by continuing shortages in many sectors such as accountancy and middle-management roles, continues to outpace that elsewhere in Asia, with some of the job creation from offshoring by multinationals starting to abate…India, Japan, Hong Kong and Australia were among those countries with the strongest hiring prospects going into the third quarter, with Germany, Norway and the UK all displaying resilient growth, though prospects have dipped in both France and Italy.”
From Bloomberg: “Wages are rising rapidly, recording annual growth rates ranging from about 5 percent in Singapore and 8 percent in China and the Philippines to a staggering 14 percent in India. Corporate profitability and expansion are now at risk. A recent Duke University/CFO Magazine survey reveals that chief financial officers in Asia are bracing for a 10 percent increase in their wage bill in the next 12 months. The CFOs expect labor productivity -- output per hour worked -- to grow only 4 percent.”
From the Union-Tribune: “Doug Duncan, chief economist for the Mortgage Bankers Association, yesterday said subprime loans had done far more good than harm to the economy. Such loans have opened the door to homeownership to millions of Americans in pricey markets like San Diego County, Duncan said. Of all outstanding U.S. home loans, about 14 percent are subprime, he said. Of those, about 19 percent are delinquent or in the process of being foreclosed on. Duncan expects less than one-third of those will actually be lost to foreclosure. Among causes of the nation's housing slump, subprime lending “was a contributing factor, but it was not the driving issue,” Duncan said.”
From Bloomberg: “U.S. foreclosure filings surged 90 percent in May from a year earlier as more homeowners fell behind on their monthly mortgage payments...A jump in foreclosures at ta time of the year that traditionally is the busiest for home sales means the slide in prices probably isn’t over…Typically, more than half of all home sales occur in the April to June period…California topped the list…and Florida was No. 2…[As a percentage of homes in the state] Nevada was the No. 1…Colorado was second…followed by California, Florida, Ohio, and Arizona. Michigan ranked No. 8…New Jersey was in the No. 15 slot…”
From Dow Jones: “General Electric Co.’s WMC Mortgage Corp. and Merrill Lynch & Co.’s First Franklin Financial Corp. are among the first subprime home lenders to adopt proposed federal guidelines on underwriting low-initial-payment mortgages to people
with flawed credit….In particular, the guidance calls for lenders to take into account the highest possible monthly payments - as opposed to the initial low payments - when deciding borrowers’ ability to repay the loans.”
Monday, June 11, 2007
Today's Tidbits
Real Interest Rates Rising Much Faster than Inflation, But Still Below Trend
From Barclays: “In TIPS, forward breakevens are up over 15 bp since mid-May…”
From Merrill Lynch: “Bond selloff NOT an inflation story… It has NOT been due to rising inflation expectations. How do we know? Well, when you look at the TIPS market, what becomes apparent is that breakeven levels have risen the grand total of six-basis points since the 10-year Treasury note yield bottomed at 4½% in late February while the real rate has risen 56 basis points. In addition, other inflation barometers, such as gold and the CRB index are down 6% and 16% respectively from their nearby highs. So there is no validation to the view that this is about inflation expectations, in our opinion. The key University of Michigan 5-10 year inflation expectation component of the May survey stood at 3.1%, still in the range (though at the top end) of the past 10 years. If this was about inflation, the dollar would be getting crushed; the exact opposite has happened.
…The major story here is that the move in the real rate has been ten times more powerful than inflation expectations.”
From JP Morgan: “Real policy rates have been moving higher but have remained below long-term norms, despite sustained above-trend growth. In the past year, a Fed pause, a BoJ crawl, and an Emerging Market reserve accumulation haul has supported low real
interest rates and narrowing risk premia across the globe. Against this backdrop, the threat ahead comes from financial market adjustments as central bankers respond to sustained above-trend growth. The compression of risk premia largely reflects a healthy structural backdrop of low inflation, balanced income, and stable growth.”
From Bear Stearns: “We interpret almost all of the recent increase in bond yields as reflecting a higher real return component, not yet a higher inflation component. Increases in core CPI and the core PCE deflator were both low in March and April. Gold prices, a reliable inflation barometer, have fallen to $650 from $690 at the end of April. The 10-year TIPs yield, a measure of real return expectations, has risen 54 basis points since the beginning of May, while the TIPs spread, the difference between the nominal Treasury yield of 5.15% and the TIPs real yield of 2.73%, is unchanged.”
Shape of Yield Curve Tells a Story
From Merrill Lynch: “Yield curves are very good forecasters of future nominal economic growth and of profits growth, although the lag times are sometimes inconsistent. Steepening yield curves, however, can occur in 2 forms. The first form, the one with which most investors are more familiar, occurs when central banks signal that they plan to ease or actually ease monetary policy. Markets begin to anticipate a liquidity infusion into the economy, and longer-term interest rates begin to discount stronger nominal growth. The second form occurs when central banks are "behind the curve". In other words, nominal growth is stronger than was previously recognized, and central banks have to tighten monetary policies to catch up to the markets and the economy. The current steepening of yield curves appears to be the latter. None of the four major central banks (the Fed, ECB, BOE, or BOJ) have even hinted at an easing of monetary policy. Rather, all are basically in some form of restrictive mode. If their policies were too tight, then curves would be inverted, and the markets would be anticipating easing. That is clearly not the case.”
Reasons Why Bond Yields Were So Low the Past Few Years
From The Financial Times: “…over the past five years, bond markets have exhibited a significant change in the way they react to economic fundamentals. Relative to comparable points in past economic cycles, bond yields are now much lower and yield curves much flatter than would typically be the case. Since both central banks and bond investors respond in a predictable manner to economic fundamentals, this change of bond market behaviour can be quantified with some precision… models show us that while short-term or official policy rates are more or less where they should be, given the current economic environment, longer-term interest rates are about one percentage point below their equilibrium value. The obvious explanation for any market anomaly is a disruption to the usual patterns of supply and demand. In this instance, the bond market is no exception. The bond market "conundrum"dates back to 2003. In that year, the global demand for bonds surged. The main source of this excess demand was a jump in global foreign exchange reserve growth, which accelerated from annual growth of $75bn in the previous decade to as much as $800bn by 2004. In tandem with accelerating reserve growth was an increase of some $300bn in bond purchases by pension and insurance funds. This latter shift in asset allocation - which was mirrored by a decrease in equity purchases of a similar magnitude - was driven by regulators tightening solvency requirements for the relevant institutions. With a horrid inevitability, the largest equity sales were at the bear market lows, the largest bond purchases at bond price highs. The total of reserve manager, pension fund and insurance company bond purchases rose from an average 30 per cent of net bond supply to over 100 per cent in 2004. Although this appetite has slowed somewhat over the past two years, it remains equivalent to 60-70 per cent of net bond issuance, double the historic average. The side effects of this depression in bond yields have been dramatic. The displacement of orthodox bond investors out of government bonds into corporate bonds and derivatives has generated the easiest credit conditions seen for a generation. The one percentage point or more depression in bond yields has not been replicated by a similar depression in equity yields, leaving equities priced at extremely cheap levels to bonds. This has spurred companies to releverage. The surge in global economic growth, commodity prices, property prices, LBO activity, private equity deals and general M&A similarly testify to the effects of the financial Viagra conferred by low long-term rates. However, these trends contain the seeds of their own reversal. Corporate releveraging is sharply increasing the overall supply of debt instruments, while simultaneously decreasing the supply of equities. On the demand side of the equation, the extraordinary size of FX reserves is prompting global reserve managers to diversify away from low risk bonds into higher return assets. China alone may be responsible for a redirection of capital away from bonds and into equities worth some $300bn-$400bn over the next 12 months or so. Like all markets, both bonds and equities are subject to the inexorable law of supply and demand. While this redirection of capital flows will initially benefit equities, we can be sure that the impending increase in bond supply and decrease in bond demand will lead to a gradual deflation of the great bond bubble. As this process unrolls, we can be equally sure that the expected returns underpinning many recent investment decisions will be subject to a similar deflation of prospects.”
FED Delinquency Study Suggests Homeownership Demand Declining
From Dow Jones: “In an economic letter, “House Prices and Subprime Mortgage
Delinquencies,” San Francisco Federal Reserve economists noted a close link between house-price appreciation and the severity of recent subprime mortgage delinquencies, with metropolitan areas where home prices decelerated the most in 2006 showing the largest rise in subprime delinquency rates. Areas near the Gulf Coast close to where Hurricane Katrina hit in 2005 were among areas with the highest delinquency rates, according to data from First American LoanPerformance, or FALP. FALP data show the median delinquency rate in 2006 among the 309 metropolitan statistical areas was 12.2%, with a range of 3% to 25%. Overall, of the 18 areas with the highest delinquency rates in 2006, 14 were in Michigan or Ohio…The delinquency rate is defined as the percent of subprime loans that are delinquent for more than 60 days….One possible explanation as to why borrowers in areas of low appreciation foreclosed more, they said, was that, given the sharp declines in the pace of home appreciation, those borrowers may have lowered expectations for future appreciation of rates, making homeownership a less attractive investment. “The finding that changes in delinquencies are related to house-price deceleration raises the possibility that the increases in delinquencies reflect not just borrower distress but also a decline in the demand for housing,” the Fed economists said.”
Local Study Indicates Real Estate Agents Might Not Be Worth Cost
From The New York Times: “Who gets the better deal: the cautious economist who sells his house through a real estate agent, or his risk-taking colleague who finds a buyer on his own? But the question — debated by two Northwestern University economists who chose different methods to sell their homes — and the research it helped prompt are serious. And the answer will be of interest to anyone who has paused to consider whether paying a real estate agent’s commission, typically 5 to 6 percent of the sale price, is worth it. The conclusion, in a study … based on home-sales data from 1998 to 2004 in Madison, Wis., is that people in that city who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves. When the agent’s commission is factored in, the for-sale-by-owner people came out ahead financially… (Nationally, about 13 percent of home sales were for-sale-by-owner in 2005, the group said. For the seven-year Madison study, the market share of homes sold on the FSBO Web site was 14 percent.)… The results, from another perspective, show that with agents failing to bring a higher price, their commission pays only for the actual work they do… sellers will begin to examine more closely the cost of all the small tasks handled by agents. To justify a $12,000 fee on a $200,000 house, he said, “you’d have to have a very high hourly rate” for an agent’s work.”
Russia Is Back on the Playing Field
From The Financial Times: “On a range of issues, the most serious rift in two decades has opened between the west and Russia, stoked by Moscow's aggressive rhetoric of recent months. The question is whether the apparent slide towards a new nuclear stand-off can be reversed, and how. Part of the answer may lie in understanding what is behind Russia's sabre-rattling and what it wants to achieve. In his combative, acerbic interview with western journalists last week, Mr Putin left a hefty clue. "We want to be heard," he said. "We want our position to be understood. We do not exclude that our American partners might reconsider their decision [on missile defence]." The desire to be heeded is a message voiced with surprising unanimity by senior Russian officials. As Russia enjoys an oil-fuelled economic recovery, Moscow seethes that the west still treats it as a vanquished power. Rightly or wrongly, Russia believes it has been forced for 15 years to swallow western foreign policy actions, its objections simply trampled on. Above all, it believes the west broke an early 1990s promise that Nato would not expand eastwards. Instead, the military alliance now encompasses not just former Soviet satellites but the three former Soviet Baltic republics. Moscow ignores that these new democracies asked to join Nato, motivated largely by residual distrust of Russia. Instead, it sees attempts to encircle it… Russia has embraced a cut-throat capitalism. And while the west accuses it of using energy as a political weapon, there is something to Moscow's claims that hard-nosed business logic drove its move to raise the subsidised natural gas prices it charged former Soviet republics to market levels - even if some got longer transition periods than others. Yet if Russia is no longer committed to exporting socialist revolution, it still insists on its right to maintain a sphere of influence in former Soviet states, which the west rejects. It also opposes the Bush administration's "freedom agenda" and insists attempts to impose western democracy such as in Iraq are imperialistic and doomed to failure. Officials and analysts say Mr Putin's Munich speech was a signal that Russia is no longer prepared to be pushed around. Missile defence is the issue on which it has decided to take its strongest stand…”
From The International Herald Tribune: “President Vladimir Putin sought to reassure investors and foreign leaders that Russia remained committed to free trade and investment for businesses that work here, in spite of a chill in political relations with the West. But Putin said Russia would integrate with the world economy on its own terms - and possibly not by embracing the current rules of the global economic order. Speaking at a business forum here Sunday, Putin called for a new world economic framework based on regional alliances rather than global institutions like the International Monetary Fund. The new system, he said, would reflect the rising power of emerging market economies like Russia, China, India and Brazil, and the decline of the old heavyweights of the United States, Japan and many European countries. The developed countries, Putin said, were dominating the institutions of world trade in an "inflexible" manner, even as their own share of the global wealth is diminishing. He said the world needed a "new architecture of international economic relations based on trust and mutually beneficial integration." Putin said 60 percent of the world's Gross Domestic Product was now produced outside of the Group of 7 countries - the United States, France, Germany, Britain, Italy, Japan and Canada. Putin's combative tone came even as Russia was seeking membership in World Trade Organization, the Geneva-based regulator of the world economy, and perhaps reflected frustration at the long-drawn-out process of admission… In another swipe at the economic traditions that benefit the rich nations, Putin called for central banks to hold reserves in a wider selection of currencies. Now, banks largely hold their reserves in dollars and euros.”
MISC
From Dow Jones: “Treasury prices were under some pressure and the yield curve was steeper [Treasury curve 2y 5% (+2bp), 5y 5.07% (+3bp), 10y 5.15% (+5bp), 30y 5.26% (+5bp)]… The dollar was little changed…[Stocks finished the day near Friday’s closing levels.]… Crude oil futures edged higher…”
From RBSGC: “MBS holdings by US banks decreased by $1 bn [in May]. Both pass-through holdings and CMO holdings decreased by approximately $0.5 bn….Commercial and industrial loans…increased $16 bn since April.”
From FTN: “…members of the FOMC, including the Chairman, agree with their staff that Americans invest too much in housing.”
From Barclays: “One beneficiary of higher rates has been the corporate pension universe. They benefit because their liabilities are fixed and, thus, the present value of these obligations decreases as rates head higher. While much was noted about the pension deficits, the past few years have been very good to these pensions. Asset returns have been very strong, and the universe in aggregate has closed its funding gap.”
From Bank of America: “Equity funds investing in international markets continue to dominate investors’ interest, given their recent outperformance which stems from strong economies overseas and the weak US dollar…Equities owned directly by households amounted to $5.4 trillion at the end of 1q07, according to new estimates of macro flows and levels released last week by the Federal Reserve. As a portion of the total, households’ ownership fell -1% to 26%, with offsetting increases in the amounts held by a) mutual funds (which control $5.2T); b) the foreign sector (which owns $2.9T); and c) insurance companies (which control $1.7T). According to the Fed data, private pension plans’ exposure to equities has been relatively stagnant over the past 30 years, while public plans’ exposure keeps rising.”
From Bloomberg: “Crude oil rose more than $1 a barrel after Saudi Arabia, the world's biggest exporter, told Asian refiners that it would curb shipments for a ninth month in July. Saudi Aramco, the world's largest state oil company, will cut supplies of its Arab Light and Arab Heavy crude to refiners in Japan, China and South Korea by between 9.5 percent and 10 percent below their contracted volume, officials said. The Organization of Petroleum Exporting Countries last year pledged to cut supplies by 1.7 million barrels a day to support prices… Iran, OPEC's second-largest oil producer, will start gasoline rationing ``very shortly,''…”
From Bloomberg: “Wheat rose to an 11-year high…”
From Time: “In 2006…the U.S.’s long-running investment –income surplus gave way to a deficit of $7.3 billion If that keeps up – and all indications are that it will…the U.S. will effectively be sending big checks abroad each year to pay for good times past. Which is money American’s won’t be able to spend on oil, cars and consumer electronics.”
From JP Morgan: “China’s exports rose 3%m/m in May, boosting the trade balance to a seasonally-adjusted annual rate of $281 billion—double the level of a year ago. Back-to-back increases in exports suggest that the early-year volatility is past, with exports providing strong support for domestic manufacturers. This should drive a corresponding pickup in import demand, which would give a boost to exports and manufacturing activity elsewhere in Asia.”
From Time: “A groundbreaking new study by three socialogists shows that diversity training has little to no effect on the racial and gender mix of a company’s top ranks… Networking didn’t do much, either. Mentorships did. Among the least common tactics, one – assigning a diversity point person or task force – has the best record of success…at companies that assigned a person or committee to oversee diversity, ensuring direct accountability for results, the number of minorities and women climbed 10% in the years following the appointment. Mentorships worked too, particularly for black women, increasing their numbers in management 23.5%.”
From Barclays: “In TIPS, forward breakevens are up over 15 bp since mid-May…”
From Merrill Lynch: “Bond selloff NOT an inflation story… It has NOT been due to rising inflation expectations. How do we know? Well, when you look at the TIPS market, what becomes apparent is that breakeven levels have risen the grand total of six-basis points since the 10-year Treasury note yield bottomed at 4½% in late February while the real rate has risen 56 basis points. In addition, other inflation barometers, such as gold and the CRB index are down 6% and 16% respectively from their nearby highs. So there is no validation to the view that this is about inflation expectations, in our opinion. The key University of Michigan 5-10 year inflation expectation component of the May survey stood at 3.1%, still in the range (though at the top end) of the past 10 years. If this was about inflation, the dollar would be getting crushed; the exact opposite has happened.
…The major story here is that the move in the real rate has been ten times more powerful than inflation expectations.”
From JP Morgan: “Real policy rates have been moving higher but have remained below long-term norms, despite sustained above-trend growth. In the past year, a Fed pause, a BoJ crawl, and an Emerging Market reserve accumulation haul has supported low real
interest rates and narrowing risk premia across the globe. Against this backdrop, the threat ahead comes from financial market adjustments as central bankers respond to sustained above-trend growth. The compression of risk premia largely reflects a healthy structural backdrop of low inflation, balanced income, and stable growth.”
From Bear Stearns: “We interpret almost all of the recent increase in bond yields as reflecting a higher real return component, not yet a higher inflation component. Increases in core CPI and the core PCE deflator were both low in March and April. Gold prices, a reliable inflation barometer, have fallen to $650 from $690 at the end of April. The 10-year TIPs yield, a measure of real return expectations, has risen 54 basis points since the beginning of May, while the TIPs spread, the difference between the nominal Treasury yield of 5.15% and the TIPs real yield of 2.73%, is unchanged.”
Shape of Yield Curve Tells a Story
From Merrill Lynch: “Yield curves are very good forecasters of future nominal economic growth and of profits growth, although the lag times are sometimes inconsistent. Steepening yield curves, however, can occur in 2 forms. The first form, the one with which most investors are more familiar, occurs when central banks signal that they plan to ease or actually ease monetary policy. Markets begin to anticipate a liquidity infusion into the economy, and longer-term interest rates begin to discount stronger nominal growth. The second form occurs when central banks are "behind the curve". In other words, nominal growth is stronger than was previously recognized, and central banks have to tighten monetary policies to catch up to the markets and the economy. The current steepening of yield curves appears to be the latter. None of the four major central banks (the Fed, ECB, BOE, or BOJ) have even hinted at an easing of monetary policy. Rather, all are basically in some form of restrictive mode. If their policies were too tight, then curves would be inverted, and the markets would be anticipating easing. That is clearly not the case.”
Reasons Why Bond Yields Were So Low the Past Few Years
From The Financial Times: “…over the past five years, bond markets have exhibited a significant change in the way they react to economic fundamentals. Relative to comparable points in past economic cycles, bond yields are now much lower and yield curves much flatter than would typically be the case. Since both central banks and bond investors respond in a predictable manner to economic fundamentals, this change of bond market behaviour can be quantified with some precision… models show us that while short-term or official policy rates are more or less where they should be, given the current economic environment, longer-term interest rates are about one percentage point below their equilibrium value. The obvious explanation for any market anomaly is a disruption to the usual patterns of supply and demand. In this instance, the bond market is no exception. The bond market "conundrum"dates back to 2003. In that year, the global demand for bonds surged. The main source of this excess demand was a jump in global foreign exchange reserve growth, which accelerated from annual growth of $75bn in the previous decade to as much as $800bn by 2004. In tandem with accelerating reserve growth was an increase of some $300bn in bond purchases by pension and insurance funds. This latter shift in asset allocation - which was mirrored by a decrease in equity purchases of a similar magnitude - was driven by regulators tightening solvency requirements for the relevant institutions. With a horrid inevitability, the largest equity sales were at the bear market lows, the largest bond purchases at bond price highs. The total of reserve manager, pension fund and insurance company bond purchases rose from an average 30 per cent of net bond supply to over 100 per cent in 2004. Although this appetite has slowed somewhat over the past two years, it remains equivalent to 60-70 per cent of net bond issuance, double the historic average. The side effects of this depression in bond yields have been dramatic. The displacement of orthodox bond investors out of government bonds into corporate bonds and derivatives has generated the easiest credit conditions seen for a generation. The one percentage point or more depression in bond yields has not been replicated by a similar depression in equity yields, leaving equities priced at extremely cheap levels to bonds. This has spurred companies to releverage. The surge in global economic growth, commodity prices, property prices, LBO activity, private equity deals and general M&A similarly testify to the effects of the financial Viagra conferred by low long-term rates. However, these trends contain the seeds of their own reversal. Corporate releveraging is sharply increasing the overall supply of debt instruments, while simultaneously decreasing the supply of equities. On the demand side of the equation, the extraordinary size of FX reserves is prompting global reserve managers to diversify away from low risk bonds into higher return assets. China alone may be responsible for a redirection of capital away from bonds and into equities worth some $300bn-$400bn over the next 12 months or so. Like all markets, both bonds and equities are subject to the inexorable law of supply and demand. While this redirection of capital flows will initially benefit equities, we can be sure that the impending increase in bond supply and decrease in bond demand will lead to a gradual deflation of the great bond bubble. As this process unrolls, we can be equally sure that the expected returns underpinning many recent investment decisions will be subject to a similar deflation of prospects.”
FED Delinquency Study Suggests Homeownership Demand Declining
From Dow Jones: “In an economic letter, “House Prices and Subprime Mortgage
Delinquencies,” San Francisco Federal Reserve economists noted a close link between house-price appreciation and the severity of recent subprime mortgage delinquencies, with metropolitan areas where home prices decelerated the most in 2006 showing the largest rise in subprime delinquency rates. Areas near the Gulf Coast close to where Hurricane Katrina hit in 2005 were among areas with the highest delinquency rates, according to data from First American LoanPerformance, or FALP. FALP data show the median delinquency rate in 2006 among the 309 metropolitan statistical areas was 12.2%, with a range of 3% to 25%. Overall, of the 18 areas with the highest delinquency rates in 2006, 14 were in Michigan or Ohio…The delinquency rate is defined as the percent of subprime loans that are delinquent for more than 60 days….One possible explanation as to why borrowers in areas of low appreciation foreclosed more, they said, was that, given the sharp declines in the pace of home appreciation, those borrowers may have lowered expectations for future appreciation of rates, making homeownership a less attractive investment. “The finding that changes in delinquencies are related to house-price deceleration raises the possibility that the increases in delinquencies reflect not just borrower distress but also a decline in the demand for housing,” the Fed economists said.”
Local Study Indicates Real Estate Agents Might Not Be Worth Cost
From The New York Times: “Who gets the better deal: the cautious economist who sells his house through a real estate agent, or his risk-taking colleague who finds a buyer on his own? But the question — debated by two Northwestern University economists who chose different methods to sell their homes — and the research it helped prompt are serious. And the answer will be of interest to anyone who has paused to consider whether paying a real estate agent’s commission, typically 5 to 6 percent of the sale price, is worth it. The conclusion, in a study … based on home-sales data from 1998 to 2004 in Madison, Wis., is that people in that city who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves. When the agent’s commission is factored in, the for-sale-by-owner people came out ahead financially… (Nationally, about 13 percent of home sales were for-sale-by-owner in 2005, the group said. For the seven-year Madison study, the market share of homes sold on the FSBO Web site was 14 percent.)… The results, from another perspective, show that with agents failing to bring a higher price, their commission pays only for the actual work they do… sellers will begin to examine more closely the cost of all the small tasks handled by agents. To justify a $12,000 fee on a $200,000 house, he said, “you’d have to have a very high hourly rate” for an agent’s work.”
Russia Is Back on the Playing Field
From The Financial Times: “On a range of issues, the most serious rift in two decades has opened between the west and Russia, stoked by Moscow's aggressive rhetoric of recent months. The question is whether the apparent slide towards a new nuclear stand-off can be reversed, and how. Part of the answer may lie in understanding what is behind Russia's sabre-rattling and what it wants to achieve. In his combative, acerbic interview with western journalists last week, Mr Putin left a hefty clue. "We want to be heard," he said. "We want our position to be understood. We do not exclude that our American partners might reconsider their decision [on missile defence]." The desire to be heeded is a message voiced with surprising unanimity by senior Russian officials. As Russia enjoys an oil-fuelled economic recovery, Moscow seethes that the west still treats it as a vanquished power. Rightly or wrongly, Russia believes it has been forced for 15 years to swallow western foreign policy actions, its objections simply trampled on. Above all, it believes the west broke an early 1990s promise that Nato would not expand eastwards. Instead, the military alliance now encompasses not just former Soviet satellites but the three former Soviet Baltic republics. Moscow ignores that these new democracies asked to join Nato, motivated largely by residual distrust of Russia. Instead, it sees attempts to encircle it… Russia has embraced a cut-throat capitalism. And while the west accuses it of using energy as a political weapon, there is something to Moscow's claims that hard-nosed business logic drove its move to raise the subsidised natural gas prices it charged former Soviet republics to market levels - even if some got longer transition periods than others. Yet if Russia is no longer committed to exporting socialist revolution, it still insists on its right to maintain a sphere of influence in former Soviet states, which the west rejects. It also opposes the Bush administration's "freedom agenda" and insists attempts to impose western democracy such as in Iraq are imperialistic and doomed to failure. Officials and analysts say Mr Putin's Munich speech was a signal that Russia is no longer prepared to be pushed around. Missile defence is the issue on which it has decided to take its strongest stand…”
From The International Herald Tribune: “President Vladimir Putin sought to reassure investors and foreign leaders that Russia remained committed to free trade and investment for businesses that work here, in spite of a chill in political relations with the West. But Putin said Russia would integrate with the world economy on its own terms - and possibly not by embracing the current rules of the global economic order. Speaking at a business forum here Sunday, Putin called for a new world economic framework based on regional alliances rather than global institutions like the International Monetary Fund. The new system, he said, would reflect the rising power of emerging market economies like Russia, China, India and Brazil, and the decline of the old heavyweights of the United States, Japan and many European countries. The developed countries, Putin said, were dominating the institutions of world trade in an "inflexible" manner, even as their own share of the global wealth is diminishing. He said the world needed a "new architecture of international economic relations based on trust and mutually beneficial integration." Putin said 60 percent of the world's Gross Domestic Product was now produced outside of the Group of 7 countries - the United States, France, Germany, Britain, Italy, Japan and Canada. Putin's combative tone came even as Russia was seeking membership in World Trade Organization, the Geneva-based regulator of the world economy, and perhaps reflected frustration at the long-drawn-out process of admission… In another swipe at the economic traditions that benefit the rich nations, Putin called for central banks to hold reserves in a wider selection of currencies. Now, banks largely hold their reserves in dollars and euros.”
MISC
From Dow Jones: “Treasury prices were under some pressure and the yield curve was steeper [Treasury curve 2y 5% (+2bp), 5y 5.07% (+3bp), 10y 5.15% (+5bp), 30y 5.26% (+5bp)]… The dollar was little changed…[Stocks finished the day near Friday’s closing levels.]… Crude oil futures edged higher…”
From RBSGC: “MBS holdings by US banks decreased by $1 bn [in May]. Both pass-through holdings and CMO holdings decreased by approximately $0.5 bn….Commercial and industrial loans…increased $16 bn since April.”
From FTN: “…members of the FOMC, including the Chairman, agree with their staff that Americans invest too much in housing.”
From Barclays: “One beneficiary of higher rates has been the corporate pension universe. They benefit because their liabilities are fixed and, thus, the present value of these obligations decreases as rates head higher. While much was noted about the pension deficits, the past few years have been very good to these pensions. Asset returns have been very strong, and the universe in aggregate has closed its funding gap.”
From Bank of America: “Equity funds investing in international markets continue to dominate investors’ interest, given their recent outperformance which stems from strong economies overseas and the weak US dollar…Equities owned directly by households amounted to $5.4 trillion at the end of 1q07, according to new estimates of macro flows and levels released last week by the Federal Reserve. As a portion of the total, households’ ownership fell -1% to 26%, with offsetting increases in the amounts held by a) mutual funds (which control $5.2T); b) the foreign sector (which owns $2.9T); and c) insurance companies (which control $1.7T). According to the Fed data, private pension plans’ exposure to equities has been relatively stagnant over the past 30 years, while public plans’ exposure keeps rising.”
From Bloomberg: “Crude oil rose more than $1 a barrel after Saudi Arabia, the world's biggest exporter, told Asian refiners that it would curb shipments for a ninth month in July. Saudi Aramco, the world's largest state oil company, will cut supplies of its Arab Light and Arab Heavy crude to refiners in Japan, China and South Korea by between 9.5 percent and 10 percent below their contracted volume, officials said. The Organization of Petroleum Exporting Countries last year pledged to cut supplies by 1.7 million barrels a day to support prices… Iran, OPEC's second-largest oil producer, will start gasoline rationing ``very shortly,''…”
From Bloomberg: “Wheat rose to an 11-year high…”
From Time: “In 2006…the U.S.’s long-running investment –income surplus gave way to a deficit of $7.3 billion If that keeps up – and all indications are that it will…the U.S. will effectively be sending big checks abroad each year to pay for good times past. Which is money American’s won’t be able to spend on oil, cars and consumer electronics.”
From JP Morgan: “China’s exports rose 3%m/m in May, boosting the trade balance to a seasonally-adjusted annual rate of $281 billion—double the level of a year ago. Back-to-back increases in exports suggest that the early-year volatility is past, with exports providing strong support for domestic manufacturers. This should drive a corresponding pickup in import demand, which would give a boost to exports and manufacturing activity elsewhere in Asia.”
From Time: “A groundbreaking new study by three socialogists shows that diversity training has little to no effect on the racial and gender mix of a company’s top ranks… Networking didn’t do much, either. Mentorships did. Among the least common tactics, one – assigning a diversity point person or task force – has the best record of success…at companies that assigned a person or committee to oversee diversity, ensuring direct accountability for results, the number of minorities and women climbed 10% in the years following the appointment. Mentorships worked too, particularly for black women, increasing their numbers in management 23.5%.”
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