Consensus Prior
Monday, 6/25
May Existing Home Sales 5.97M 5.99M
Expected to drop -.3% MoM in May, after falling -2.6% in April and -7.9% in March
Pending home sales declined -7.6% between February to April
Existing home sales are falling at around a -24% annualized pace
Existing home sales are based on actual contract signing, and lag initial agreement by 1-2 months. So, current existing home sales are based on
March purchases, when subprime credit tightening began to impact sales
Existing home supply reached a recent high of 8.4 months in April
Median sales prices fell -.8% YoY in April.
Tuesday, 6/26
April Case Shiller 20 City Home Price Index YoY -2.2% -1.4%
Both the 10 and 20 city indexes are expected to decline for the 4th consecutive month
The 10 city survey is focused on more bubble areas and is falling faster, declining -1.9% YoY in March
June Richmond Fed Manufacturing Index -8 -10
May New Home Sales 925k 981k
Expected to decline -5.7% MoM in May after jumping +16.2% in April
NAHB survey hitting new lows
Inventory remains excessive, but supply fell to 6.5 months in April, from 8.1 months in March, on surprise sales improvement last month, as median new home prices plummeted -10.9% YoY to induce demand
Tighter lending standards expected to continue depressing sales
Not clear how cancellations are currently impacting the data
June Consumer Confidence 105.5 108
Has been holding higher than other confidence surveys
More weighted towards employment, business conditions and income than other surveys
Expected to soften due to high gas prices, increasing number of “bad news”
headlines, and rising interest rates extending housing slump
Chicago Fed President Moskow receives a reward for “Exemplary Civic Involvement”. He will not speak on Monetary Policy or take questions.
Wednesday, 6/27
May Durable Goods MoM -1% +.8%
Ex-Transportation MoM +.2% +1.9%
Durable goods demand is expected to decline
After two months of strong transportation orders, Boeings’ aircraft orders slowed in May by over 25% MoM
Ex-transportation orders have rebounded strongly year-to-date, but may pause in May, before heading higher again based on stronger manufacturing ISM data
Machinery orders are expected to rebound +1.5%
Non-defense capital goods ex-aircraft has been steadily improving on a three month average annualized basis
Treasury Secretary Paulson speaks at Wall Street Journal Conference
FOMC 2-Day Meeting Begins
Thursday, 6/28
Initial Jobless Claims 310k 324k
Consensus looking for number to fall back to recent range, but risk is for a higher
number following last week’s jump
1st Qtr Final GDP Annualized +.8% +.6%
Expected to be revised higher due to a reduced drag from inventories and trade, as
trade deficit narrowed and inventory accumulation rose
2nd qtr GDP expectations running around 3.5 – 4%
1st Qtr Final Personal Consumption +4.4%
Some economists looking for a decline to 4.2%
1st Qtr Final GDP Price Index +4% +4%
1st Qtr Final Core PCE QoQ +2.2%
May Help Wanted Index 29 29
FOMC Meeting Concludes
Fed Funds expected to be left unchanged at 5.25%
Expect comments on economic growth reappearing
Continuing concerns about the housing market
Recognition of improvement in core inflation, but headline inflation remains elevated
Friday, 6/29
May Personal Income +.6% -.1%
Aggregate weekly payrolls rose +.8% in May suggesting rising income
Last month’s decline was tied to timing of bonus and option income
Real disposable personal income is expected to rise +.2% MoM
May Personal Spending +.7% +.5%
Expected to strengthen on higher gas prices and general retail sales
Auto sales have been soft, but other retail goods and services demand has been firm
Real consumer spending (after inflation) is expected to slow to +.1% MoM in May,
and around +2.25% annualized for the 2nd quarter.
May Savings Rate -1.6% -1.3%
Likely to become more negative as spending grows faster than income
May PCE Deflator (Headline Inflation) YoY +2.4% +2.2%
May Core PCE Deflator MoM +.1% +.1%
YoY +1.9% +2%
Risk is for core to rise +.2% MoM due to rounding
Moderation in owners’ equivalent rent increases helping contain core inflation
Annual rate expected to ease back below 2% upper Fed comfort band for the 1st
time in 3 years
June Chicago Purchasing Managers 57.5 61.7
Last month’s gain correctly indicated strengthening national manu ISM
Expect some giveback from last month’s booming growth, as the trend higher has
been choppy
May Construction Spending MoM +.1% +.1%
Private residential construction spending is expected to decline again, by 1% in May
Strength remains focused on non-residential demand, for offices and schools
Final June Univ. of Michigan Consumer Confidence 84.2 83.7
The preliminary reading dropped sharply by 4.6 points
Small rebound expected as gas prices stop rising
Inflation expectations are anticipated to hold steady at 3.5% for next year and 3%
for next five years
Friday, June 22, 2007
Thursday, June 21, 2007
Jobless Claims Jump to Highest Level Since April
Jobless claims unexpectedly jumped to 324k (consensus 311k), and the prior week was revised higher by 3k to 314k. The four week moving average was 312k last week, and claims have averaged 319k on a weekly basis year-to-date. Continuing claims also rose more than expected, rising to 2523k (consensus 2500). The unemployment rate for people eligible to claim benefits held steady at 1.9%, and it closely correlates with changes in the unemployment rate.
This week's survey coincides with the June payroll survey, so the fall in job growth is worrisome for employment data, and may indicate a rise in firings. Payrolls grew above the recent trend rate in May as the unemployment rate held steady at 4.5%. New estimates are putting payroll growth for June around 100-125k vs the 157k in May. Recent studies have indicated that the unemployment rate has remained so low because fewer high school and college age students are seeking jobs than in the past.
37 states saw rising claims while only 16 saw decreases last week.
This week's survey coincides with the June payroll survey, so the fall in job growth is worrisome for employment data, and may indicate a rise in firings. Payrolls grew above the recent trend rate in May as the unemployment rate held steady at 4.5%. New estimates are putting payroll growth for June around 100-125k vs the 157k in May. Recent studies have indicated that the unemployment rate has remained so low because fewer high school and college age students are seeking jobs than in the past.
37 states saw rising claims while only 16 saw decreases last week.
Wednesday, June 20, 2007
Today's Tidbits
Sales of Bear Stearns Hedge Fund Assets Has Market Worried About Margin Calls
From Dow Jones: “The sale of collateral held by two hedge funds at Bear Stearns Cos. has the mortgage bond world holding its breath as investors pore over the $850 million worth of assets on the block. The forced sale, mostly of collateralized debt obligations,
could have wider repercussions in the credit markets as investors rethink valuations of bonds where subprime mortgages reside, and the structured finance products where a bulk of these bonds live….the concern is that the heavier than usual volume could
cause a broader repricing of bonds as the market struggles to digest the supply. This repricing, in turn, could lead to lower valuations of assets in portfolios. “If the prices realized for the securities cause people to mark their holdings lower, there is the fear that it could lead to more margin calls,” Wulf said. Then, he added, if a highly levered entity fails to make those margin calls, it could lead to further liquidations.”
Doom and Gloom on Housing Market
From Bloomberg: “The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported. ``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., …``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.'' Confidence among U.S. homebuilders fell in June to the lowest since February 1991… Housing starts declined in May for the first time in four months…New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession…Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006… Before last year, the index had gained sixfold in five years…The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago… ``Prices are going lower,'' …In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago. About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003…Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage…Roubini predicts the decline in U.S. home sales will last at least another 12 months, reducing the median house price by 5 percent this year and next. That would take home prices back to 2004, when the national median was $195,200…``The subprime market has changed character dramatically, and that takes a number of entry-level buyers out of the picture,'' …The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median price for a previously owned home hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group. This year it probably will fall 1.3 percent, Yun said. The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record…Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed…``We have a lot of people, even prime borrowers, who are at the edge because they either bought with no equity, they have an ARM that's seen a rate spike, or they used their house like an ATM and turned their equity into cash,'' …``Many of those people are under water today, and if they have to sell, it's going to drag down values in their neighborhood.'' …``Prices will continue to soften for as long as we have distressed sellers,'' … Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months…``A lot of people went out on a limb to pay the record high prices for homes, and they're in trouble now,'' …Borrowers who got loans with so-called teaser rates are in the biggest bind, … Prices surged a record 12 percent in 2005, spurring buyers to ``stretch'' to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments.”
China Retreats From Ethanol as Food Requirements Beat Fuel Demand
From The Financial Times: “Eight years ago, China's technocrats came up with an idea for what to do with the government's vast stockpile of corn reserves, a stockpile that was going stale. The plan was to transform the corn into starch, sweeteners or ethanol, which could be blended with gasoline to run cars. The move would create valuable products and potentially reduce China's oil dependency. Now there is growing concern that creating biochemical and biofuels industries worked too well. The stale corn reserves are used up and there is increasing competition for fresh supplies between rapidly growing industrial processors and livestock farmers who rely on it as feed for animals…Rising food and grain prices have propelled higher levels of inflation since last October…The search for corn sent China, the world's second-biggest corn producer, back into international markets in 2005 for the first time since the mid-1990s. …The government has halted approvals for new corn-based ethanol plants and is developing alternative biofuels using non-food crops.”
Demand For Russian Debt Grows as Oil Fuels Economic Recovery
From The Financial Times: “After Russia defaulted on its domestic debt in 1998, it was almost unanimously shunned by bond market investors. One foreign banker even claimed that he would rather eat nuclear waste than buy Russian paper. But rouble bonds are back on the menu. The market has taken off in the past 12 months, driven by the surge of issuance in corporate paper…The strength of demand has led to a dramatic compression of Russian corporate yields in the past two years, by about 70 basis points for top-class borrowers and 150bp-200bp for borrowers in the sub-investment grade category, in US dollar terms…The growing appetite for rouble bonds from domestic and increasingly international investors mirrors the dramatic change of fortune for Russia’s economy, which is buoyed by high commodity prices and swollen foreign currency reserves. Among the buyers, banks are the most active but there are also investment funds and asset managers, insurance companies and non-government pension funds. “We are starting to see for the first time more interest coming from Asia, both institutional and retail clients, which is new,”… “Now that Russia is firmly within the investment-grade universe, more investors are willing to take on both credit and currency risk by buying rouble-denominated corporate bonds.” The possibilty of further appreciation in the currency – which has risen about 9 per cent against the dollar in the past 18 months – gives investors potential extra return in addition to the bond coupon. And the rouble is “perceived as a strong and steadily appreciating currency”… Bankers say two technical developments in the past year have played a significant role in spurring bond market activity. Last July, the Russian government lifted all currency controls on the rouble, making it fully convertible. Investors are now able to move roubles freely in and out of the country, non-Russian investors can open rouble bank accounts and restrictions on rouble fixed-income investments have disappeared.”
MISC
From Dow Jones: “U.S. Treasury prices were lower [2y Treasury yield rose 3.5bp, 10 & 30y yields rose 6bp]… as the market showed no overt sense of concern over trouble at hedge funds run by Bear Stearns….The dollar continued to move along in tight ranges against the euro and yen in a session lacking any important U.S. data. A big mover Wednesday was sterling, which hit a two-week high against the dollar of $1.9946 after the minutes from the Bank of England’s last meeting were released, showing that
four board members favored a hike. This suggests rates could be lifted by the BOE in July….U.S. stocks fell in volatile trading Wednesday, [Dow fell 146 points] as rising bond yields kept a lid on the market, offsetting enthusiasm over oil prices backing away from $69 a barrel, blow-out earnings from Morgan Stanley, and a $22.5 billion share buy-back from Home Depot Inc. Leading the gains among blue chips, shares of Home Depot surged 6.6% after the home-improvement announced it would buy back up to $22.5 billion of its own shares. Trading volumes showed 1 billion shares exchanging hands on the New York Stock Exchange and 1.2 billion on the Nasdaq stock market. Declining issues topped gainers by 21 to 10 on the NYSE and by 9 to 5 on the Nasdaq….Crude oil futures were sharply lower Wednesday morning, after dropping in reaction to a mixed weekly inventory report, which showed surprisingly large builds in U.S. crude and gasoline stocks but an unexpected drop in refinery utilization.”
From Dow Jones: “The sale of collateral held by two hedge funds at Bear Stearns Cos. has the mortgage bond world holding its breath as investors pore over the $850 million worth of assets on the block. The forced sale, mostly of collateralized debt obligations,
could have wider repercussions in the credit markets as investors rethink valuations of bonds where subprime mortgages reside, and the structured finance products where a bulk of these bonds live….the concern is that the heavier than usual volume could
cause a broader repricing of bonds as the market struggles to digest the supply. This repricing, in turn, could lead to lower valuations of assets in portfolios. “If the prices realized for the securities cause people to mark their holdings lower, there is the fear that it could lead to more margin calls,” Wulf said. Then, he added, if a highly levered entity fails to make those margin calls, it could lead to further liquidations.”
Doom and Gloom on Housing Market
From Bloomberg: “The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported. ``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., …``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.'' Confidence among U.S. homebuilders fell in June to the lowest since February 1991… Housing starts declined in May for the first time in four months…New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession…Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006… Before last year, the index had gained sixfold in five years…The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago… ``Prices are going lower,'' …In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago. About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003…Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage…Roubini predicts the decline in U.S. home sales will last at least another 12 months, reducing the median house price by 5 percent this year and next. That would take home prices back to 2004, when the national median was $195,200…``The subprime market has changed character dramatically, and that takes a number of entry-level buyers out of the picture,'' …The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median price for a previously owned home hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group. This year it probably will fall 1.3 percent, Yun said. The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record…Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed…``We have a lot of people, even prime borrowers, who are at the edge because they either bought with no equity, they have an ARM that's seen a rate spike, or they used their house like an ATM and turned their equity into cash,'' …``Many of those people are under water today, and if they have to sell, it's going to drag down values in their neighborhood.'' …``Prices will continue to soften for as long as we have distressed sellers,'' … Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months…``A lot of people went out on a limb to pay the record high prices for homes, and they're in trouble now,'' …Borrowers who got loans with so-called teaser rates are in the biggest bind, … Prices surged a record 12 percent in 2005, spurring buyers to ``stretch'' to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments.”
China Retreats From Ethanol as Food Requirements Beat Fuel Demand
From The Financial Times: “Eight years ago, China's technocrats came up with an idea for what to do with the government's vast stockpile of corn reserves, a stockpile that was going stale. The plan was to transform the corn into starch, sweeteners or ethanol, which could be blended with gasoline to run cars. The move would create valuable products and potentially reduce China's oil dependency. Now there is growing concern that creating biochemical and biofuels industries worked too well. The stale corn reserves are used up and there is increasing competition for fresh supplies between rapidly growing industrial processors and livestock farmers who rely on it as feed for animals…Rising food and grain prices have propelled higher levels of inflation since last October…The search for corn sent China, the world's second-biggest corn producer, back into international markets in 2005 for the first time since the mid-1990s. …The government has halted approvals for new corn-based ethanol plants and is developing alternative biofuels using non-food crops.”
Demand For Russian Debt Grows as Oil Fuels Economic Recovery
From The Financial Times: “After Russia defaulted on its domestic debt in 1998, it was almost unanimously shunned by bond market investors. One foreign banker even claimed that he would rather eat nuclear waste than buy Russian paper. But rouble bonds are back on the menu. The market has taken off in the past 12 months, driven by the surge of issuance in corporate paper…The strength of demand has led to a dramatic compression of Russian corporate yields in the past two years, by about 70 basis points for top-class borrowers and 150bp-200bp for borrowers in the sub-investment grade category, in US dollar terms…The growing appetite for rouble bonds from domestic and increasingly international investors mirrors the dramatic change of fortune for Russia’s economy, which is buoyed by high commodity prices and swollen foreign currency reserves. Among the buyers, banks are the most active but there are also investment funds and asset managers, insurance companies and non-government pension funds. “We are starting to see for the first time more interest coming from Asia, both institutional and retail clients, which is new,”… “Now that Russia is firmly within the investment-grade universe, more investors are willing to take on both credit and currency risk by buying rouble-denominated corporate bonds.” The possibilty of further appreciation in the currency – which has risen about 9 per cent against the dollar in the past 18 months – gives investors potential extra return in addition to the bond coupon. And the rouble is “perceived as a strong and steadily appreciating currency”… Bankers say two technical developments in the past year have played a significant role in spurring bond market activity. Last July, the Russian government lifted all currency controls on the rouble, making it fully convertible. Investors are now able to move roubles freely in and out of the country, non-Russian investors can open rouble bank accounts and restrictions on rouble fixed-income investments have disappeared.”
MISC
From Dow Jones: “U.S. Treasury prices were lower [2y Treasury yield rose 3.5bp, 10 & 30y yields rose 6bp]… as the market showed no overt sense of concern over trouble at hedge funds run by Bear Stearns….The dollar continued to move along in tight ranges against the euro and yen in a session lacking any important U.S. data. A big mover Wednesday was sterling, which hit a two-week high against the dollar of $1.9946 after the minutes from the Bank of England’s last meeting were released, showing that
four board members favored a hike. This suggests rates could be lifted by the BOE in July….U.S. stocks fell in volatile trading Wednesday, [Dow fell 146 points] as rising bond yields kept a lid on the market, offsetting enthusiasm over oil prices backing away from $69 a barrel, blow-out earnings from Morgan Stanley, and a $22.5 billion share buy-back from Home Depot Inc. Leading the gains among blue chips, shares of Home Depot surged 6.6% after the home-improvement announced it would buy back up to $22.5 billion of its own shares. Trading volumes showed 1 billion shares exchanging hands on the New York Stock Exchange and 1.2 billion on the Nasdaq stock market. Declining issues topped gainers by 21 to 10 on the NYSE and by 9 to 5 on the Nasdaq….Crude oil futures were sharply lower Wednesday morning, after dropping in reaction to a mixed weekly inventory report, which showed surprisingly large builds in U.S. crude and gasoline stocks but an unexpected drop in refinery utilization.”
Tuesday, June 19, 2007
Housing starts fall -2.1% in May, while permits rise 3% MoM
In May, single-family starts fell -3.4% MoM, while multi-family starts rose +3.1% MoM. Housing permits saw an even greater dichotomy, with single-family starts falling -1.8% MoM, and multi-family rising +16.5% MoM. Housing under construction fell -1.2% MoM, again single-family led the decline, falling -2.5% MoM, while multi-family rose +1.1% MoM. Housing completed fell -.5% MoM, but the breakdown was counter to the other categories, as multi-family fell -10.4% MoM, and single-family rose +1.5% MoM.
Looking at the actual numbers, housing starts fell to 1474k (consensus 1472k) in May, but the decline was less than expected after April's figure was revised lower to 1506k from 1528k originally. Conversely, new building permits rose more than expected to 1501k in May (consensus 1473k), and were revised higher in April to 1457k, from the 1429k originally reported. Homes under construction fell 15k between April and May, and competed homes fell to 1534k from 1542k the prior month. On a trending basis, all four categories are below their three month averages, indicating further deterioration of the housing market.
Over the last year, housing starts have declined -24.5% YoY, and permits have fallen -22.9% YoY. While both single and multi-family construction has been in decline, single-family has outpaced multi-family in the contraction as single-family starts fell -26.3% YoY, and single-family permits fell -29% YoY. Net, the housing market remains depressed versus a year ago.
Regionally, on a seasonally adjusted basis, the Northeast and Midwest both saw housing starts rise over +15.5% MoM, while the West slide almost 20% MoM (its lowest level since 1996), and the South held relatively steady, only declining by -1.6% MoM. Most of these large move appear to be concentrated in multi-family, as single-family only rose +.9% MoM in the Northeast, and only fell -12.1% MoM in the West. Permits were also quite weak in the West, falling -29% YoY to have the worst annual showing of all the regions.
May's data was in line with expectations, and showed a further decline in housing starts following Aprils huge -7.1% decline. The gap between permits and starts is narrowing. The single-family sector is still clearly in decline, but strength in the multi-family sector may indicate some recovery. Demand is expected to remain weak, as interest rates rise and credit tightens. Residential construction will remain a drag on GDP.
Looking at the actual numbers, housing starts fell to 1474k (consensus 1472k) in May, but the decline was less than expected after April's figure was revised lower to 1506k from 1528k originally. Conversely, new building permits rose more than expected to 1501k in May (consensus 1473k), and were revised higher in April to 1457k, from the 1429k originally reported. Homes under construction fell 15k between April and May, and competed homes fell to 1534k from 1542k the prior month. On a trending basis, all four categories are below their three month averages, indicating further deterioration of the housing market.
Over the last year, housing starts have declined -24.5% YoY, and permits have fallen -22.9% YoY. While both single and multi-family construction has been in decline, single-family has outpaced multi-family in the contraction as single-family starts fell -26.3% YoY, and single-family permits fell -29% YoY. Net, the housing market remains depressed versus a year ago.
Regionally, on a seasonally adjusted basis, the Northeast and Midwest both saw housing starts rise over +15.5% MoM, while the West slide almost 20% MoM (its lowest level since 1996), and the South held relatively steady, only declining by -1.6% MoM. Most of these large move appear to be concentrated in multi-family, as single-family only rose +.9% MoM in the Northeast, and only fell -12.1% MoM in the West. Permits were also quite weak in the West, falling -29% YoY to have the worst annual showing of all the regions.
May's data was in line with expectations, and showed a further decline in housing starts following Aprils huge -7.1% decline. The gap between permits and starts is narrowing. The single-family sector is still clearly in decline, but strength in the multi-family sector may indicate some recovery. Demand is expected to remain weak, as interest rates rise and credit tightens. Residential construction will remain a drag on GDP.
Today's Tidbits
Financial Sector Has Grown and Changed Dramatically Over Last 25 Years
From The Financial Times: “Much of the institutional scenery of two decades ago - distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions - is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism. Above all, the financial sector, which was placed in chains after the Depression of the 1930s, is once again unbound… finance has exploded. According to the McKinsey Global Institute, the ratio of global financial assets to annual world output has soared from 109 per cent in 1980 to 316 per cent in 2005… the ratio of financial assets to gross domestic product there jumped from 180 per cent in 1995 to 303 per cent in 2005. Over the same period it grew from … from 303 per cent to 405 per cent in the US…. In 1980, bank deposits made up 42 per cent of all financial securities. By 2005, this had fallen to 27 per cent. The capital markets increasingly perform the intermediation functions of the banking system… by the end of 2006 the outstanding value of interest rate swaps, currency swaps and interest rate options had reached $286,000bn (about six times global gross product), up from a mere $3,450bn in 1990… The number of hedge funds is estimated to have grown from a mere 610 in 1990 to 9,575 in the first quarter of 2007, with a value of about $1,600bn under management. Hedge funds perform the classic functions of speculators and arbitrageurs… The sum of the international financial assets and liabilities owned (and owed) by residents of high-income countries jumped from 50 per cent of aggregate GDP in 1970 to 100 per cent in the mid-1980s and about 330 per cent in 2004… Between 1994 and 2005, for example, the liabilities of UK households jumped from 108 per cent of GDP to 159 per cent. In the US, they soared from 92 per cent to 135 per cent.”
MISC
From Dow Jones: [Treasury prices rose steadily during the day causing yields to fall 6-7bp across the curve] “The dollar has slipped” [-.15 to 82.56 for the dollar index. Equities are closing with small gains and just below record highs. Crude oil set a new 9.5 month high before closing slightly lower.]From Bank of America: “Tax withholdings, released late yesterday, showed year-over-year change in 13-week moving average fell to 4.6%, the weakest in almost two years; June 15th corporate taxes were down 0.2%, a dramatic slowdown from recent quarters.”
From UBS: “California's unemployment rate highest since Oct. '05: The BLS will release the May Regional and State Employment Report later today. Stone & McCarthy (SMR) noted that California released their own data early (last Friday) and it showed an uptick in the Calif. unemployment rate to 5.2% from 5.1%. The rise in unemployment apparently came despite an uptick in May farm employment-- suggesting that rising foreclosures may be stressing payrolls in California according to SMR. California accounts for some 13% of national payroll employment and GDP according to SMR…”
From Goldman Sachs: “Prices of key crops such as wheat, soybeans, and corn are up 40% to 60% over the past year… The rise in food prices is large enough to be meaningful in measures of headline inflation at the consumer level. Relative to trend consumer food inflation of 2½% annually over the previous decade, the recent acceleration of food inflation to 3.9% year-over-year has added roughly 0.2 percentage points to year-over-year headline CPI. Furthermore, the sharp increases in crop prices (particularly wheat) over the last several weeks have not yet made their way to store shelves…consumer food prices normally rise less than one-tenth as much as the prices of the commodities that go into their production. Under these circumstances, food prices are unlikely to add more than a few tenths of a percentage point to headline CPI inflation at their peak.”
From Bloomberg: “German investor confidence unexpectedly fell in June as borrowing costs climbed, suggesting economic growth may have reached a plateau… Manufacturing orders in Germany declined for the first time in three months in April, led by lower demand for intermediate goods such as car parts. Industrial production unexpectedly dropped 2.3 percent.”
From Citi: “S&P homebuilding index: Following the 10 fold rally from 2000-2005 this index has broken rising trend line support and the 55 and 200 week moving averages. In addition the 55-week moving average has crossed below the 200 week moving average. It is now sitting on the neckline of a potential head and shoulders top at around 703. A weekly close below here would suggest extended losses of as much as 50% from here.”
From HSBC: “…there is a reasonably good correlation between this index [NAHB] and residential construction as measured in GDP. It is suggesting -20% annualized for residential construction.”
From Dow Jones: “Continued pricing pressure on televisions and strong sales growth in lower-margin notebook computers and gaming equipment contributed to Best Buy Co.’s surprise 18% drop in first-quarter net income….The nation’s largest consumer lectronics-specific retailer…”
From Dow Jones: “About 22% of all homes sold last year were to single women, according to the National Association of Realtors.”
From Northern Trust: “Adjusted by the CPI, the year-over-year change in U.S. total bank credit (loans and investments) hit a recent peak of about 9% in October 2006. As of May, that year-over-change had slowed to about 4.8%. As mortgage defaults continue to rise and regulators issue new more restrictive mortgage lending “guidelines,” bank credit growth is likely to slow still more.”
From The Financial Times: “Much of the institutional scenery of two decades ago - distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions - is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism. Above all, the financial sector, which was placed in chains after the Depression of the 1930s, is once again unbound… finance has exploded. According to the McKinsey Global Institute, the ratio of global financial assets to annual world output has soared from 109 per cent in 1980 to 316 per cent in 2005… the ratio of financial assets to gross domestic product there jumped from 180 per cent in 1995 to 303 per cent in 2005. Over the same period it grew from … from 303 per cent to 405 per cent in the US…. In 1980, bank deposits made up 42 per cent of all financial securities. By 2005, this had fallen to 27 per cent. The capital markets increasingly perform the intermediation functions of the banking system… by the end of 2006 the outstanding value of interest rate swaps, currency swaps and interest rate options had reached $286,000bn (about six times global gross product), up from a mere $3,450bn in 1990… The number of hedge funds is estimated to have grown from a mere 610 in 1990 to 9,575 in the first quarter of 2007, with a value of about $1,600bn under management. Hedge funds perform the classic functions of speculators and arbitrageurs… The sum of the international financial assets and liabilities owned (and owed) by residents of high-income countries jumped from 50 per cent of aggregate GDP in 1970 to 100 per cent in the mid-1980s and about 330 per cent in 2004… Between 1994 and 2005, for example, the liabilities of UK households jumped from 108 per cent of GDP to 159 per cent. In the US, they soared from 92 per cent to 135 per cent.”
MISC
From Dow Jones: [Treasury prices rose steadily during the day causing yields to fall 6-7bp across the curve] “The dollar has slipped” [-.15 to 82.56 for the dollar index. Equities are closing with small gains and just below record highs. Crude oil set a new 9.5 month high before closing slightly lower.]From Bank of America: “Tax withholdings, released late yesterday, showed year-over-year change in 13-week moving average fell to 4.6%, the weakest in almost two years; June 15th corporate taxes were down 0.2%, a dramatic slowdown from recent quarters.”
From UBS: “California's unemployment rate highest since Oct. '05: The BLS will release the May Regional and State Employment Report later today. Stone & McCarthy (SMR) noted that California released their own data early (last Friday) and it showed an uptick in the Calif. unemployment rate to 5.2% from 5.1%. The rise in unemployment apparently came despite an uptick in May farm employment-- suggesting that rising foreclosures may be stressing payrolls in California according to SMR. California accounts for some 13% of national payroll employment and GDP according to SMR…”
From Goldman Sachs: “Prices of key crops such as wheat, soybeans, and corn are up 40% to 60% over the past year… The rise in food prices is large enough to be meaningful in measures of headline inflation at the consumer level. Relative to trend consumer food inflation of 2½% annually over the previous decade, the recent acceleration of food inflation to 3.9% year-over-year has added roughly 0.2 percentage points to year-over-year headline CPI. Furthermore, the sharp increases in crop prices (particularly wheat) over the last several weeks have not yet made their way to store shelves…consumer food prices normally rise less than one-tenth as much as the prices of the commodities that go into their production. Under these circumstances, food prices are unlikely to add more than a few tenths of a percentage point to headline CPI inflation at their peak.”
From Bloomberg: “German investor confidence unexpectedly fell in June as borrowing costs climbed, suggesting economic growth may have reached a plateau… Manufacturing orders in Germany declined for the first time in three months in April, led by lower demand for intermediate goods such as car parts. Industrial production unexpectedly dropped 2.3 percent.”
From Citi: “S&P homebuilding index: Following the 10 fold rally from 2000-2005 this index has broken rising trend line support and the 55 and 200 week moving averages. In addition the 55-week moving average has crossed below the 200 week moving average. It is now sitting on the neckline of a potential head and shoulders top at around 703. A weekly close below here would suggest extended losses of as much as 50% from here.”
From HSBC: “…there is a reasonably good correlation between this index [NAHB] and residential construction as measured in GDP. It is suggesting -20% annualized for residential construction.”
From Dow Jones: “Continued pricing pressure on televisions and strong sales growth in lower-margin notebook computers and gaming equipment contributed to Best Buy Co.’s surprise 18% drop in first-quarter net income….The nation’s largest consumer lectronics-specific retailer…”
From Dow Jones: “About 22% of all homes sold last year were to single women, according to the National Association of Realtors.”
From Northern Trust: “Adjusted by the CPI, the year-over-year change in U.S. total bank credit (loans and investments) hit a recent peak of about 9% in October 2006. As of May, that year-over-change had slowed to about 4.8%. As mortgage defaults continue to rise and regulators issue new more restrictive mortgage lending “guidelines,” bank credit growth is likely to slow still more.”
Monday, June 18, 2007
NAHB Sinks to 16 Year Low of 28
The National Association of Homebuilders confidence index shrank to 28 (consensus 30), a new low for this housing decline. The last time the confidence level was this low was in February 1991. Homebuilders continue to lose money as they have had to continue discounting new homes, in order to entice buyers. The fall-out from the subprime market caused further credit tightening just as 30-yr mortgage rates have risen 60 bps in a little over a month. Inventories are still too large for the current sales pace. All survey categories saw declines including prospective buyer traffic and expectations for sales six months from now. The only region to show improvement in confidence was the Northeast.
Today's Tidbits
Bond Sell-Off Based on Fundamentals
From Lehman: “To understand the implications of the sell-off, it is important to understand the cause. Most of the increase in rates has been “real”—with interest rates on inflation-protected bonds rising almost as much as nominal yields. The rise seems to be mostly the result of stronger economic news, including reduced risk of a U.S. recession and signs of global inflation pressure. Of course, this has helped change policy expectations, and some of the sharper moves seem to have been sparked by “capitulation” by dovish investors hoping for Fed rate cuts. Finally, the more recent sell-off has been concentrated in the long end, suggesting a small rise in term premia, perhaps on expectations of asset rebalancing by Asian central banks. So far, the contagion effects have been limited…At this stage, the sell-off is a relatively minor event for both the economy and policymakers. Interest rates remain low relative to inflation. The feed-through into other capital markets has been limited. And in typical model simulations, a 50 bp rise in bond yields slices only a few tenths off of GDP growth. In other words, the bond shock probably only “cancels out” some of the recent good growth news. Policymakers have probably been surprised by the speed of the sell-off but will likely
view most of the move as warranted by fundamentals. Many officials have warned that the current low risk premiums—including term premia—are unsustainable. Fed officials have puzzled in public over why markets were insisting that rate cuts were coming. With its repeated warnings of “strong vigilance,” the ECB cannot be too surprised by the weak
bond market. The BOJ has made clear that it is at the beginning of a long tightening cycle.
A number of other central banks are either hiking rates or warning of hikes to come.”
Comparing Current Declines to Past Housing Busts in the U.S.
From The New York Times: “During the 1930s, housing prices fell sharply across the nation. According to the S.& P./Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 percent from 1929 to 1933. More recently, there have been severe price declines in regional markets. The most severe was in the so-called oil patch during the 1980s. In the late 1970s, as global oil prices soared, oil-producing areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming and Alaska experienced an economic boom. As oil prices collapsed in the early 1980s, those economies crashed, and housing along with them. In the worst cases, nominal home prices fell 40 percent in Lafayette, La., and 33 percent in Casper, Wyo., from 1983 to 1988, according to the Office of Federal Housing Enterprise Oversight. In Houston, prices fell 22 percent. Then there were the sharp price declines in housing on both coasts during the early 1990s. At that time, a series of events including the recession of 1990-91, the military downsizing after the cold war and a commercial real estate collapse led to a housing downturn. For instance, in Los Angeles, Long Beach and Santa Ana areas of California, the average price of a home tumbled 19 percent from 1993 to 1998, while on the other side of the country, in the Hartford area, the average home price dropped 17 percent over the same period…So how far have prices actually fallen? The median price of an existing home has declined 4 percent, on average, since the peak in October 2005, according to the National Association of Realtors…In the 12 months that ended in March, for example, the median price of an existing single-family home in the Sarasota-Bradenton- Venice area of Florida fell by 12.4 percent, according to the National Association of Realtors. In Louisiana, in the area of New Orleans, Metairie and Kenner, the average price fell by 11 percent. And in the Reno-Sparks area of Nevada, the average decline was 8.8 percent…”
Bernanke Worried Falling House Prices Hurt Consumption of Poor More than Rich
From The Financial Times: “Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market. The Federal Reserve chairman told a conference hosted by the Atlanta Fed that, in addition to making homeowners richer or poorer, changes in house prices might influence the cost and availability of credit to consumers. This is because people with equity in their homes have more at stake in avoiding default…If this theory is correct, Mr Bernanke said, “changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect”. The Fed chief notes that this argument also indicates that the distribution of home price gains or losses matters for consumption. …This suggests the Fed may be relatively relaxed about declines in segments of the housing market where wealthy homeowners have a large stock of home equity, but more concerned about price falls in areas where people have little home equity. This is typically the segment with a high proportion of subprime loans….The Fed chief said he did not know whether the so-called “financial accelerator effect” on household spending via access to credit was big enough to affect the overall economy.”
Merrill Causes Bear Stearns’ Mortgage Hedge Fund Auction to be Postponed
From Dow Jones: “Merrill Lynch & Co. Monday morning postponed its planned auction of $400 million worth of collateral assets from a troubled Bear Stearns Cos. hedge fund, giving the fund’s managers more time to present a plan for salvaging it, say two people familiar with the matter. Worried that the Bear fund, called the High-Grade
Structured Credit Strategies Enhanced Leverage Fund, would be unable to make a margin call Merrill on Friday moved to seize the assets and prepared to auction them off at noon
Monday. But over the weekend the fund’s managers, led by Bear veteran Ralph Cioffi, cobbled together an 11th-hour plan to garner new investment capital and a short-term loan to meet the most immediate margin calls, said another person familiar with the
matter.”
Robust Chinese Economy Offsets Slowdown in European Manufacturing Growth
From JP Morgan: “China’s May activity indicators, including retail sales, fixed investment, exports, and industrial production, portray an economy that is firing on all cylinders, raising the possibility that current-quarter growth could be even faster than the
12.4% pace (q/q, saar) posted in 1Q. Although nonfood inflation remains dormant, the brisk pace of activity growth is raising concern among officials. An export surge in the first five months of 2007 boosted the overall trade surplus 84% above the same period last year, increasing the risk of political problems with the US. Renewed strength of fixed investment spending and a buoyant stock market have prompted Premier Wen Jiabao to state that policy needs “moderate tightening” to prevent the economy from overheating… The latest surge in manufacturing output in China contrasts with a sudden slowing in the Euro area. Despite these mixed signals, we remain comfortable with our view that global manufacturing activity is accelerating from the trend-like 3% growth pace averaged during 4Q06-1Q07. China’s central role in the global production cycle means that it is increasingly a bellwether for global demand and production. Indeed, the acceleration in China is being mirrored in the rest of EM Asia and in the United States. With Japan poised to join the rebound, global IP growth will gain speed despite a moderation in the Euro area. The sharp contraction in Euro area manufacturing output in April was a reminder that industry within the region is coming back down to earth, after almost two years of strong growth.”
Web Retail Growth Slows as Market Penetration Reaches 5%
From The New York Times: “Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies. Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade… Sales on the Internet are expected to reach $116 billion this year, or 5 percent of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits… The retailers that have started in-store pickup programs… have found that customers who choose the hybrid model are more likely to buy additional products when they pick up their items...Consumers are generally not committed to one form of buying over the other.”
Caution Warranted for Prescription Drugs Made in Asia
From The Washington Post: “India and China, countries where the Food and Drug Administration rarely conducts quality-control inspections, have become major suppliers of low-cost drugs and drug ingredients to American consumers. Analysts say their products are becoming pervasive in the generic and over-the-counter marketplace… After the pet food scandal that triggered fears over the safety of human and animal foods imported from China, experts say medicines from that country and from India pose a similar risk of being contaminated, counterfeit or simply understrength and ineffective… FDA officials say that they are not aware of any health problems caused by drugs imported from India or China and that the American companies that import them usually do their own quality and safety testing. But the agency acknowledges that it is virtually impossible for it to know whether poor-quality or contaminated drugs from lightly regulated Asian plants have caused patients to get sicker or remain ill, especially because patients and doctors are unlikely to suspect poorly manufactured drugs as a problem… Analysts estimate that as much as 20 percent of finished generic and over-the-counter drugs, and more than 40 percent of the active ingredients for pills made here, come from India and China… a former FDA associate commissioner, called the situation dire and deteriorating. ”
Underinvestment in Electrical Grid Increases Likelihood of Disruption this Summer
From Reuters: “Most people in the United States only think about where electricity comes from when the lights go out suddenly. But unless the antiquated transmission grid is fixed, expensive blackouts that bring modern life to a grinding halt will become ever more common…Before the 1980s, power generating companies were responsible for the entire chain of supply, from securing fuel to transmitting power to homes. Deregulation, meant to increase competition, has busted that chain apart and left the wires and substations that deliver electricity as a "neglected stepchild," …As demand for electricity rises, especially in the hot summer months when air conditioners are humming, the result is an overstretched grid, exploding transformers, brownouts and blackouts. Transmission only accounts for about 10 percent of the industry's assets, and for decades utilities and regulators have focused on more expensive parts of the system. Now, even electricity generated in ultramodern plants is dependent on the brittle transmission grid. "Imagine driving a Maserati over a road littered with potholes," …”
Analysts Improve Track Record Since No Longer Required to be Bullish
From Bloomberg: “Never in the history of Wall Street have analysts been so bearish. The good news is they're also getting it right more often, helping make investors richer by betting against corporate America. Thank the regulatory hammer of former New York Attorney General Eliot Spitzer. In 2003 he forced 10 big firms to separate investment banking from research to avoid the conflicts of interest that tempted analysts to keep their reports upbeat. ``The industry has changed: you're not anathematized if you
come out with a negative opinion,'' said Robert Stovall, whose work on Wall Street the past five decades included stints as a strategist at the securities unit of Newark, New Jersey-based Prudential Financial Inc. and research director at Nuveen Corp. in New York. ``It used to be that sell recommendations were frowned upon. I even worked at firms where the CEO said, `I never want to see a bearish word on my stationery.''' That transformation has helped investors following analysts' advice to beat the market. Nine of those 10 firms have been accurate the past two years, according to Investars, which tracks
analysts' performance.”
MISC
From Dow Jones: “U.S. Treasurys were [slightly higher in price with yields falling 2bp]…The dollar was weaker [dollar index down 13 to 82.72]… Stocks were little changed [Dow down 26.5]…Crude oil futures rose more than $1 Monday, climbing…[to the highest level] since last September after fresh militant attacks on Nigerian oil installations and separate plans by Nigerian and Brazilian workers to strike.”
From USA Today: “Because food is an item that people cannot do without, higher food costs mean consumers have less money to spend in other parts of the economy. And because consumer spending accounts for more than two-thirds of all U.S. economic activity, reduced spending in non-food segments of the economy could lead to slower growth in those areas... food prices could have a far more detrimental impact on the economy than higher gasoline costs. U.S. consumers on average spend 15% of their budgets on food and beverages, vs. 4% on gasoline. “
From UBS: “10-year Treasury yields are now more than 300bp above the y/y pace in core PCE prices, up from around 200bp at the time of Mr. Greenspan’s comments [on the bond rate conundrum in early 2005] and in line with the long-term average (330bp from 1960-2005).”
From Credit-Suisse: “After some volatile moves, the forward real yield spread between the US and Europe remains in the low end of the historical range.”
From Bear Stearns: “While industrial production was unchanged in May from April, the level of output in the second quarter is expanding from the first, which in turn expanded from the fourth quarter of 2006. This points to the winding down of the inventory correction which dragged on the economy in late 2006 and early 2007. Based on the continuing low level of initial and continuing jobless claims and other employment indicators, we expect the unemployment rate to decline further in June or July.”
From Merrill Lynch: “…at no point in the past 60 years did core inflation manage to go below 1% without there being a recession involved.”
From JP Morgan: “…the [Chinese] government is likely to cut or remove the 20% tax on interest income to try and limit the flow of funds from bank deposits to the equity market.”
From Merrill Lynch: “Pakistan, Singapore, Korea (moved above 1800) and the Hang Seng (a huge 565 point or 2.7% surge) all hit new record highs today. The snapback in emerging Asian stocks is occurring in tandem, as one would expect, with a sharp recovery in the CRB index as the commodity complex has been on fire of late and the gains broadly based.”
From JP Morgan: “…fear of higher bond yields is likely to cause the traditional dividend yield [equity] sectors to keep giving up market leadership (in the case of utilities) and for financials to underperform the broader market…”
From Barclays: “…commodities are increasingly bid, with WTI crude resuming its uptrend, while base and precious metals hold against key support. The most impressive, however, has been the grain complex…It is a similar story for global equity markets, as they continue their upside march. Japanese equities are on the verge of breaking key resistance, while the DAX futures have registered all-time highs, warning that the cash markets are not far behind.”
From Dow Jones: “Airbus appears to be catching up on its U.S. rival and shaking off its image as a lame-duck company beset by governance issues and industrial hiccups that will keep it in the red for the second straight year in 2007. Including deals announced Monday, Airbus has now taken firm orders this year for about 420 planes compared with 435 at Boeing…”
From Lehman: “To understand the implications of the sell-off, it is important to understand the cause. Most of the increase in rates has been “real”—with interest rates on inflation-protected bonds rising almost as much as nominal yields. The rise seems to be mostly the result of stronger economic news, including reduced risk of a U.S. recession and signs of global inflation pressure. Of course, this has helped change policy expectations, and some of the sharper moves seem to have been sparked by “capitulation” by dovish investors hoping for Fed rate cuts. Finally, the more recent sell-off has been concentrated in the long end, suggesting a small rise in term premia, perhaps on expectations of asset rebalancing by Asian central banks. So far, the contagion effects have been limited…At this stage, the sell-off is a relatively minor event for both the economy and policymakers. Interest rates remain low relative to inflation. The feed-through into other capital markets has been limited. And in typical model simulations, a 50 bp rise in bond yields slices only a few tenths off of GDP growth. In other words, the bond shock probably only “cancels out” some of the recent good growth news. Policymakers have probably been surprised by the speed of the sell-off but will likely
view most of the move as warranted by fundamentals. Many officials have warned that the current low risk premiums—including term premia—are unsustainable. Fed officials have puzzled in public over why markets were insisting that rate cuts were coming. With its repeated warnings of “strong vigilance,” the ECB cannot be too surprised by the weak
bond market. The BOJ has made clear that it is at the beginning of a long tightening cycle.
A number of other central banks are either hiking rates or warning of hikes to come.”
Comparing Current Declines to Past Housing Busts in the U.S.
From The New York Times: “During the 1930s, housing prices fell sharply across the nation. According to the S.& P./Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 percent from 1929 to 1933. More recently, there have been severe price declines in regional markets. The most severe was in the so-called oil patch during the 1980s. In the late 1970s, as global oil prices soared, oil-producing areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming and Alaska experienced an economic boom. As oil prices collapsed in the early 1980s, those economies crashed, and housing along with them. In the worst cases, nominal home prices fell 40 percent in Lafayette, La., and 33 percent in Casper, Wyo., from 1983 to 1988, according to the Office of Federal Housing Enterprise Oversight. In Houston, prices fell 22 percent. Then there were the sharp price declines in housing on both coasts during the early 1990s. At that time, a series of events including the recession of 1990-91, the military downsizing after the cold war and a commercial real estate collapse led to a housing downturn. For instance, in Los Angeles, Long Beach and Santa Ana areas of California, the average price of a home tumbled 19 percent from 1993 to 1998, while on the other side of the country, in the Hartford area, the average home price dropped 17 percent over the same period…So how far have prices actually fallen? The median price of an existing home has declined 4 percent, on average, since the peak in October 2005, according to the National Association of Realtors…In the 12 months that ended in March, for example, the median price of an existing single-family home in the Sarasota-Bradenton- Venice area of Florida fell by 12.4 percent, according to the National Association of Realtors. In Louisiana, in the area of New Orleans, Metairie and Kenner, the average price fell by 11 percent. And in the Reno-Sparks area of Nevada, the average decline was 8.8 percent…”
Bernanke Worried Falling House Prices Hurt Consumption of Poor More than Rich
From The Financial Times: “Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market. The Federal Reserve chairman told a conference hosted by the Atlanta Fed that, in addition to making homeowners richer or poorer, changes in house prices might influence the cost and availability of credit to consumers. This is because people with equity in their homes have more at stake in avoiding default…If this theory is correct, Mr Bernanke said, “changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect”. The Fed chief notes that this argument also indicates that the distribution of home price gains or losses matters for consumption. …This suggests the Fed may be relatively relaxed about declines in segments of the housing market where wealthy homeowners have a large stock of home equity, but more concerned about price falls in areas where people have little home equity. This is typically the segment with a high proportion of subprime loans….The Fed chief said he did not know whether the so-called “financial accelerator effect” on household spending via access to credit was big enough to affect the overall economy.”
Merrill Causes Bear Stearns’ Mortgage Hedge Fund Auction to be Postponed
From Dow Jones: “Merrill Lynch & Co. Monday morning postponed its planned auction of $400 million worth of collateral assets from a troubled Bear Stearns Cos. hedge fund, giving the fund’s managers more time to present a plan for salvaging it, say two people familiar with the matter. Worried that the Bear fund, called the High-Grade
Structured Credit Strategies Enhanced Leverage Fund, would be unable to make a margin call Merrill on Friday moved to seize the assets and prepared to auction them off at noon
Monday. But over the weekend the fund’s managers, led by Bear veteran Ralph Cioffi, cobbled together an 11th-hour plan to garner new investment capital and a short-term loan to meet the most immediate margin calls, said another person familiar with the
matter.”
Robust Chinese Economy Offsets Slowdown in European Manufacturing Growth
From JP Morgan: “China’s May activity indicators, including retail sales, fixed investment, exports, and industrial production, portray an economy that is firing on all cylinders, raising the possibility that current-quarter growth could be even faster than the
12.4% pace (q/q, saar) posted in 1Q. Although nonfood inflation remains dormant, the brisk pace of activity growth is raising concern among officials. An export surge in the first five months of 2007 boosted the overall trade surplus 84% above the same period last year, increasing the risk of political problems with the US. Renewed strength of fixed investment spending and a buoyant stock market have prompted Premier Wen Jiabao to state that policy needs “moderate tightening” to prevent the economy from overheating… The latest surge in manufacturing output in China contrasts with a sudden slowing in the Euro area. Despite these mixed signals, we remain comfortable with our view that global manufacturing activity is accelerating from the trend-like 3% growth pace averaged during 4Q06-1Q07. China’s central role in the global production cycle means that it is increasingly a bellwether for global demand and production. Indeed, the acceleration in China is being mirrored in the rest of EM Asia and in the United States. With Japan poised to join the rebound, global IP growth will gain speed despite a moderation in the Euro area. The sharp contraction in Euro area manufacturing output in April was a reminder that industry within the region is coming back down to earth, after almost two years of strong growth.”
Web Retail Growth Slows as Market Penetration Reaches 5%
From The New York Times: “Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies. Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade… Sales on the Internet are expected to reach $116 billion this year, or 5 percent of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits… The retailers that have started in-store pickup programs… have found that customers who choose the hybrid model are more likely to buy additional products when they pick up their items...Consumers are generally not committed to one form of buying over the other.”
Caution Warranted for Prescription Drugs Made in Asia
From The Washington Post: “India and China, countries where the Food and Drug Administration rarely conducts quality-control inspections, have become major suppliers of low-cost drugs and drug ingredients to American consumers. Analysts say their products are becoming pervasive in the generic and over-the-counter marketplace… After the pet food scandal that triggered fears over the safety of human and animal foods imported from China, experts say medicines from that country and from India pose a similar risk of being contaminated, counterfeit or simply understrength and ineffective… FDA officials say that they are not aware of any health problems caused by drugs imported from India or China and that the American companies that import them usually do their own quality and safety testing. But the agency acknowledges that it is virtually impossible for it to know whether poor-quality or contaminated drugs from lightly regulated Asian plants have caused patients to get sicker or remain ill, especially because patients and doctors are unlikely to suspect poorly manufactured drugs as a problem… Analysts estimate that as much as 20 percent of finished generic and over-the-counter drugs, and more than 40 percent of the active ingredients for pills made here, come from India and China… a former FDA associate commissioner, called the situation dire and deteriorating. ”
Underinvestment in Electrical Grid Increases Likelihood of Disruption this Summer
From Reuters: “Most people in the United States only think about where electricity comes from when the lights go out suddenly. But unless the antiquated transmission grid is fixed, expensive blackouts that bring modern life to a grinding halt will become ever more common…Before the 1980s, power generating companies were responsible for the entire chain of supply, from securing fuel to transmitting power to homes. Deregulation, meant to increase competition, has busted that chain apart and left the wires and substations that deliver electricity as a "neglected stepchild," …As demand for electricity rises, especially in the hot summer months when air conditioners are humming, the result is an overstretched grid, exploding transformers, brownouts and blackouts. Transmission only accounts for about 10 percent of the industry's assets, and for decades utilities and regulators have focused on more expensive parts of the system. Now, even electricity generated in ultramodern plants is dependent on the brittle transmission grid. "Imagine driving a Maserati over a road littered with potholes," …”
Analysts Improve Track Record Since No Longer Required to be Bullish
From Bloomberg: “Never in the history of Wall Street have analysts been so bearish. The good news is they're also getting it right more often, helping make investors richer by betting against corporate America. Thank the regulatory hammer of former New York Attorney General Eliot Spitzer. In 2003 he forced 10 big firms to separate investment banking from research to avoid the conflicts of interest that tempted analysts to keep their reports upbeat. ``The industry has changed: you're not anathematized if you
come out with a negative opinion,'' said Robert Stovall, whose work on Wall Street the past five decades included stints as a strategist at the securities unit of Newark, New Jersey-based Prudential Financial Inc. and research director at Nuveen Corp. in New York. ``It used to be that sell recommendations were frowned upon. I even worked at firms where the CEO said, `I never want to see a bearish word on my stationery.''' That transformation has helped investors following analysts' advice to beat the market. Nine of those 10 firms have been accurate the past two years, according to Investars, which tracks
analysts' performance.”
MISC
From Dow Jones: “U.S. Treasurys were [slightly higher in price with yields falling 2bp]…The dollar was weaker [dollar index down 13 to 82.72]… Stocks were little changed [Dow down 26.5]…Crude oil futures rose more than $1 Monday, climbing…[to the highest level] since last September after fresh militant attacks on Nigerian oil installations and separate plans by Nigerian and Brazilian workers to strike.”
From USA Today: “Because food is an item that people cannot do without, higher food costs mean consumers have less money to spend in other parts of the economy. And because consumer spending accounts for more than two-thirds of all U.S. economic activity, reduced spending in non-food segments of the economy could lead to slower growth in those areas... food prices could have a far more detrimental impact on the economy than higher gasoline costs. U.S. consumers on average spend 15% of their budgets on food and beverages, vs. 4% on gasoline. “
From UBS: “10-year Treasury yields are now more than 300bp above the y/y pace in core PCE prices, up from around 200bp at the time of Mr. Greenspan’s comments [on the bond rate conundrum in early 2005] and in line with the long-term average (330bp from 1960-2005).”
From Credit-Suisse: “After some volatile moves, the forward real yield spread between the US and Europe remains in the low end of the historical range.”
From Bear Stearns: “While industrial production was unchanged in May from April, the level of output in the second quarter is expanding from the first, which in turn expanded from the fourth quarter of 2006. This points to the winding down of the inventory correction which dragged on the economy in late 2006 and early 2007. Based on the continuing low level of initial and continuing jobless claims and other employment indicators, we expect the unemployment rate to decline further in June or July.”
From Merrill Lynch: “…at no point in the past 60 years did core inflation manage to go below 1% without there being a recession involved.”
From JP Morgan: “…the [Chinese] government is likely to cut or remove the 20% tax on interest income to try and limit the flow of funds from bank deposits to the equity market.”
From Merrill Lynch: “Pakistan, Singapore, Korea (moved above 1800) and the Hang Seng (a huge 565 point or 2.7% surge) all hit new record highs today. The snapback in emerging Asian stocks is occurring in tandem, as one would expect, with a sharp recovery in the CRB index as the commodity complex has been on fire of late and the gains broadly based.”
From JP Morgan: “…fear of higher bond yields is likely to cause the traditional dividend yield [equity] sectors to keep giving up market leadership (in the case of utilities) and for financials to underperform the broader market…”
From Barclays: “…commodities are increasingly bid, with WTI crude resuming its uptrend, while base and precious metals hold against key support. The most impressive, however, has been the grain complex…It is a similar story for global equity markets, as they continue their upside march. Japanese equities are on the verge of breaking key resistance, while the DAX futures have registered all-time highs, warning that the cash markets are not far behind.”
From Dow Jones: “Airbus appears to be catching up on its U.S. rival and shaking off its image as a lame-duck company beset by governance issues and industrial hiccups that will keep it in the red for the second straight year in 2007. Including deals announced Monday, Airbus has now taken firm orders this year for about 420 planes compared with 435 at Boeing…”
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