Consensus Prior
Monday, 7/2
June Manufacturing ISM 55 55
Prices Paid 69 71
May’s level highest in past year
New orders at 1.25 year high as inventory correction subsides
Regional reports have displayed strength (Empire, Philly, Richmond)
Durable goods orders were broadly weaker in May, falling -2.8% MoM
Tuesday, 7/3
May Pending Home Sales MoM +.6% -3.2%
Over the past two months, pending home sales have fallen -7.6%
Index at a four year low
Demand remains weak as interest rates rise, credit tightens, and home prices soften
May Factory Orders MoM -.8% +.3%
Expected to weaken less than durable goods
June Total Vehicle Sales 16.4M 16.2M
Domestic Vehicle Sales 12.4M 12.3M
Wednesday, 7/4
U.S. Markets Closed for Independence Day
Thursday, 7/5
June ADP Employment Change 103k 97k
Need to mentally add 15-20k government jobs to equal payrolls estimate
Initial Jobless Claims 315k 313k
Continuing Claims 2490k
June ISM Non-Manufacturing 57.7 59.7
Expected to ease back from May’s one year high
Real GDP has tended to grow around 3% when non-manu ISM at 57
Non-manufacturing ISM’s pricing index has correlated well with CPI
Friday, 7/6
June Change in Non-Farm Payrolls 120k 157k
Change Manufacturing Payrolls -13k -19k
Expected to soften below last month’s level and the 6m average of 148k
Though initial claims spiked the week of the survey, they have been relatively low, but up an average 9k versus May
Jobs plentiful survey at 2007 low, plus signs layoffs are rising
Growth should be dominated by service jobs again
June Unemployment Rate 4.5% 4.5%
Labor market remains tight
Labor supply growing around 140k a month
Unemployment rate has ranged between 4.4-4.6% for last nine months
June Average Hourly Earnings MoM +.3% +.3%
YoY +3.8%
Year-over-year rate expected to slow to +3.7% - peaked at 4.3% in Dec
Index of aggregate hours worked expected to be unchanged
June Average Weekly Hours 33.9 33.9
San Francisco Fed President Yellen speaks on “Capital Flows and Asset Prices: The International Dimension of Risk”
Friday, June 29, 2007
Michigan Confidence Survey
The final University of Michigan Confidence Survey for June strengthened from the preliminary estimate, but still sits at a ten month low of 85.3 (preliminary 83.7, May 88.3). It is believed that falling home prices and rising mortgage rates, combined with high gas prices are dampening optimism, and raises concerns that consumers will reduce spending further.
Current conditions rose to 101.9, down from 105.1 in May. Expectations for the next six month fell to 74.7 in June versus 77.6 in May.
Inflation expectations remain elevated. The one year outlook is at 3.4%, at the highest level for this year, and up from 2.9% in December. The five year inflation expectation is at 2.9% in June, versus 3.1% in May.
Current conditions rose to 101.9, down from 105.1 in May. Expectations for the next six month fell to 74.7 in June versus 77.6 in May.
Inflation expectations remain elevated. The one year outlook is at 3.4%, at the highest level for this year, and up from 2.9% in December. The five year inflation expectation is at 2.9% in June, versus 3.1% in May.
Chicago Purchasing Managers Survey Holds Near 2 Year High
June Chicago Purchasing Manager survey coming in at 60.2 (consensus 58) in June, down only marginally from the rise to 61.7 in May. Any reading greater than 50 indicates growth. The Chicago survey includes U.S. and international operations, so is more broad based than other surveys, and members do not have to be located in the Midwest.
Prices paid eased back to 68.1 from a high of 70.2 in May. Almost all of the subcomponents eased from their May levels, except for inventory levels, which rose to 55.9. Every category though is running above its six month average, as corporate spending re-emerges following the inventory reductions seen earlier this year.
Prices paid eased back to 68.1 from a high of 70.2 in May. Almost all of the subcomponents eased from their May levels, except for inventory levels, which rose to 55.9. Every category though is running above its six month average, as corporate spending re-emerges following the inventory reductions seen earlier this year.
Surprise Jump in Construction Spending - Highest Monthly Gain in a Year
Construction spending in May unexpectedly rose +.9% MoM (consensus +.1%). This was the largest monthly gain since March 2006. In addition, last month's figure was revised higher to +.2% MoM from +.1%. All of the gain was in non-residential construction. Every category gained except residential.
Non-residential construction grew 2.5% MoM in May, and is up +15% YoY. Construction of hospitals and highways pushed up public building by +2.2% MoM. Private non-residential rose +2.7%, driven by factory and utility demand.
Homebuilding remains sluggish, falling -.8% MoM (-17.3% YoY). Within the residential category, private growth fell -.8% MoM (-17.6% YoY), but public projects rose +4.2% MoM (+13.5% YoY).
Federal construction grew twice as fast at state and local in May at 4.1% versus 2.1%, but over the last year state and local has led the charge, growing by +11.5% YoY versus Federal growth of +8% YoY.
Non-residential construction grew 2.5% MoM in May, and is up +15% YoY. Construction of hospitals and highways pushed up public building by +2.2% MoM. Private non-residential rose +2.7%, driven by factory and utility demand.
Homebuilding remains sluggish, falling -.8% MoM (-17.3% YoY). Within the residential category, private growth fell -.8% MoM (-17.6% YoY), but public projects rose +4.2% MoM (+13.5% YoY).
Federal construction grew twice as fast at state and local in May at 4.1% versus 2.1%, but over the last year state and local has led the charge, growing by +11.5% YoY versus Federal growth of +8% YoY.
Core PCE falls to +1.9% YoY
Personal spending continues to rise fast than personal income, but both grew more slowly than expected in May. Inflation indicators came in right at expectations with core PCE falling to 1.9% YoY.
Personal income rose +.4% MoM (consensus +.6%), with last month's figure being revised lower to -.2% MoM from -.1%. Compensation, wages & salaries, and disposable incomes all rose +.4% MoM in May.
Personal spending rose +.5% MoM (consensus +.7%), consistent with the +.5% MoM gain in April. Spending rose only +.1% MoM when adjusted for inflation, a slowdown from the +.2% MoM gain the prior month. Demand for durable goods rebounded in May, rising +.6% MoM after falling -.4% MoM the prior month. Non-durable goods also saw a rebound with demand rising +.2% MoM after declining -.2% in April. Unfortunately the gains in goods were offset by a decline in service demand, which accounts for 60% of the economy. Spending on services fell -.1% MoM in May after rising +.6% in April. Consumer spending accounts for about 70% of GDP, and it has been hurt recently by rising gasoline prices and higher interest rates. The slowdown in consumer consumption will have a negative impact on GDP growth.
The savings rate continues to degenerate, to a negative -1.4%, as consumers continue to spend more than they earn to maintain their standard of living. The savings rate was only -.4% in March.
Core PCE, considered the Fed's preferred inflation measure, rose at the slowest pace in over three years, since March 2004. The 1.9% YoY pace of core PCE growth brings the measure back into the perceived Fed comfort range of 1-2%. On a monthly basis, core PCE, which excludes food and energy, rose a trend like +.1% MoM. Headline inflation though rose to +2.3% YoY from +2.2% the prior month. Yesterday the Fed indicated that they will need to see inflation stabilizing at lower levels before they declare success in containing inflation.
Ten year Treasury yields have declined following this report, falling almost 3bps.
Personal income rose +.4% MoM (consensus +.6%), with last month's figure being revised lower to -.2% MoM from -.1%. Compensation, wages & salaries, and disposable incomes all rose +.4% MoM in May.
Personal spending rose +.5% MoM (consensus +.7%), consistent with the +.5% MoM gain in April. Spending rose only +.1% MoM when adjusted for inflation, a slowdown from the +.2% MoM gain the prior month. Demand for durable goods rebounded in May, rising +.6% MoM after falling -.4% MoM the prior month. Non-durable goods also saw a rebound with demand rising +.2% MoM after declining -.2% in April. Unfortunately the gains in goods were offset by a decline in service demand, which accounts for 60% of the economy. Spending on services fell -.1% MoM in May after rising +.6% in April. Consumer spending accounts for about 70% of GDP, and it has been hurt recently by rising gasoline prices and higher interest rates. The slowdown in consumer consumption will have a negative impact on GDP growth.
The savings rate continues to degenerate, to a negative -1.4%, as consumers continue to spend more than they earn to maintain their standard of living. The savings rate was only -.4% in March.
Core PCE, considered the Fed's preferred inflation measure, rose at the slowest pace in over three years, since March 2004. The 1.9% YoY pace of core PCE growth brings the measure back into the perceived Fed comfort range of 1-2%. On a monthly basis, core PCE, which excludes food and energy, rose a trend like +.1% MoM. Headline inflation though rose to +2.3% YoY from +2.2% the prior month. Yesterday the Fed indicated that they will need to see inflation stabilizing at lower levels before they declare success in containing inflation.
Ten year Treasury yields have declined following this report, falling almost 3bps.
Thursday, June 28, 2007
Today's Tidbits
Economists Thoughts on the Fed Statement
From Goldman Sachs: “Statements on recent and prospective inflation are slightly more hawkish than we expected; however, the FOMC retains its focus on core inflation (as expected) and gives no hint of discomfort with policy on its current setting.”
From Lehman: “The FOMC statement acknowledges the recent improvement in core inflation - somewhat odd given the the year-over-year rate is likely to be unchanged versus the last core PCE reading prior to the 9 May FOMC statement which described inflation as "elevated." This suggests that the removal of the word had less to do with a change in the FOMC's view on the inflation outlook and more to do with removing a word that was garnering unwanted attention. The use of the phrase "convincingly demonstrated" sounds much like President Lacker's comments regarding the statistical significance of the recent movements in core inflation and reflects future uncertainty about the inflation outlook which is further highlighted by the retention of the inflation bias…This statement highlights the contrast between the reported inflation figures and the upside risks to future inflation. The trends in total and core inflation are likely to further aggravate this contrast and could lead to further surprises despite the Fed's best efforts to educate the market.”
From Deutsche Bank: “The Fed is not going to drop its inflation bias until core inflation has moved lower and/or until the unemployment rate rises noticeably.”
From FTN: “The Fed was expected to adopt a less alarmist tone in its discussion of inflation, and indeed, core inflation was no longer described as “elevated.” But the Fed is also clearly skeptical of the recent drop in core inflation, because it was accomplished without the increase in the unemployment rate that is central to the Fed staff’s improving inflation forecast. As such, the new language about inflation, which appears below, does not suggest any chance of a rate cut in the near future: “Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.” The refusal to allow GDP growth to return to potential despite inflation that is now in the upper end of the Fed’s target band raises the odds that inflation will fall through the lower end of the band at some point down the road. After all, monetary policy works with a considerable lag, even if Bernanke and his colleagues choose to conduct policy as if the lag is negligible. In the meantime, the Bernanke Fed’s strict adherence to the NAIRU theory, which holds that there is a trade-off between unemployment and inflation, makes it considerably less friendly toward working Americans than the Greenspan Fed was in the Nineties, something that is likely to further cool the relationship with a Congress that is already unhappy with the Fed’s lack of action on mortgage regulation in the wake of the subprime mess.”
Easy Credit Diminishing in Buyout Market
From The Boston Globe: “Investors who put their money to work in credit markets ask themselves two basic questions every day: How much risk do I want to take, and how much will I insist on being paid for it? The debt bubble, which has bent all kinds of credit markets out of shape in the last couple of years, changed the usual answers to those questions. Investors began to take on more and more risk, which wasn't a particularly good thing to begin with. Worse, they weren't getting paid any more for their trouble. The bubble put a practically unknown subprime mortgage market on the front page. It paid for an increasingly risky leveraged buy out boom. It helped boost debt offerings from emerging markets around the world. But investors who rolled over before are pushing back a bit now, and that would be a good thing. How the debt bubble ultimately unwinds, or blows up, is the single most important issue facing all stock and credit markets today… investors in all kinds of credit markets appear to be rethinking risk… That speculation has been driven by excess liquidity, huge amounts of global money looking for ways to earn more income.”
From USA Today: “Wall Street is cooling on a popular money-making strategy: borrowing gobs of cash to fund deals and other investments with the potential to deliver big gains. Leverage, the financial tool that has fueled the private-equity buyout boom and helped hedge funds amplify returns, is now being viewed more cautiously by professional investors. The rising concern stems from a belief that interest rates are on the rise, especially for riskier bonds, which would make it more costly for Wall Street titans to fund deals. Another warning flag: recent financial stress at two Bear Stearns' hedge funds that got in trouble using leverage to invest in pools of bonds tied to the faltering subprime mortgage market. "There is definitely a dark side to leverage," says Jeremy Siegel, professor of finance at the Wharton School.”
From Bloomberg: “Lenders increasingly worried about financial risks of takeover deals are demanding higher interest rates…Lenders fear that easy credit for takeovers could come back to haunt them if buyout targets get into financial trouble. In recent days, the deepening woes of the sub-prime mortgage market have reminded Wall Street of the risks of cheap credit…Carl Icahn, who has spent more than four decades on Wall Street buying and selling companies, said private equity firms have enjoyed "a walk in the park" in terms of financing deals in recent years, as yield-hungry lenders and investors have fallen over themselves to provide credit…Investors have demanded higher yields on junk bonds in recent weeks…Bond investors "have drawn a bit of a line in the sand," said Brian Arsenault, high-yield strategist at Morgan Stanley in New York. "Investors are saying 'I have my pick of quite a few high-yield offerings over the next few months, so I am going to be a little more selective.' " The deal market also has been rattled by proposals by some in Congress to change the tax structure of buyout firms and hedge funds, lifting the top tax rate from 15% to 35% on certain of their investment earnings. That could make takeover deals less lucrative. Asked about the proposed legislation, Treasury Secretary Henry M. Paulson Jr. said Wednesday that "I don't believe it makes sense to single out one industry." He warned that a tax increase could have "unintended consequences."”
From Barclays: “For all the fear and loathing currently being inspired by events in the credit markets, it is worthwhile putting developments into their historical context. Although lower rated US mortgage securities have imploded in value, the widening in corporate credit spreads has been barely significant enough to warrant the term “blip.” Spreads on BBB rated US home equity loans currently range between 1,000 and 2,200 bp for 2006 and early 2007 paper. In contrast, the prevailing spread on BBB corporate paper is all of 71 bp. Even junk bond spreads are barely above 300 bp. A 2,130 bp spread differential between two debt instruments of the same credit rating does rather call into question the utility and credibility of the ratings system itself. As far as recent trading patterns are concerned, to be sure, corporate high yield spreads are widening in a significant manner, but set against the collapse in sub-prime mortgage paper, or indeed against the broader sweep of history, recent events are no more than a minor wriggle in the corporate credit markets.”
CDO Woes Highlight Pricing Concerns – Mark-to-Model Risks
From The Financial Times: “…collateralised debt obligations (CDOs), are designed to yield juicy returns while also carrying high credit ratings. They have proved popular with hedge funds as well as with longer-term investors such as pension funds and insurance companies, many of which have bought billions of dollars of such securities in recent years - thus providing the liquidity that was then channelled into mortgage loans. But heavy losses incurred at the two Bear Stearns hedge funds as a result of such financial haute couture have prompted fears that the CDO emperor may turn out to have no clothes. Such a revelation could threaten the value of investor portfolios around the globe - not just in the mortgage sector but in the way many sorts of company fund themselves…CDOs are rarely traded…many of these new-fangled instruments have never been priced through market trading. Instead, products such as CDOs, which are designed to be held until they mature, have often been valued in investor portfolios or on the books of investment banks according to complex mathematical models and other non-market techniques. In addition, fund managers and bankers often have broad discretion as to what kind of model they use - and thus what value is attached to their assets. So when Wall Street creditors last week threatened fire sales of CDOs seized from the stricken Bear Stearns funds, thus creating a market price for them for the first time, they also threatened to create a wider shock for the system. Fire sales rarely realise anything close to the previously expected value of assets. But if these deals went ahead, they would provide a legitimate trading level that would challenge current portfolio valuations…the crisis at Bear's funds has left investors, brokers and regulators asking an uncomfortable question: can the pricing models that have provided the foundations for this new financial edifice really be trusted? Or will valuations turn out to be over-optimistic and result in further investor losses…To an extent, the valuation problem for CDOs reflects the fact that the frenetic pace of innovation seen in the financial industry this decade has outpaced the development of its infrastructure. It has often been the case that when new instruments emerge in the banking world, the market is initially quite illiquid, meaning that the level of trading is low. But the murky nature of new products has rarely had broad systemic implications, because they have typically occupied a small niche. What makes the CDO sector unusual is that it has exploded at such a breakneck pace with bankers packaging bonds, loans and other debts into ever more complex structures. Last year alone, about $1,000bn in cash and derivatives CDOs was issued in Europe and the US, according to data from the Bank for International Settlements. More than one-third was composed of asset-backed securities, often including low-grade mortgages…However, many other such products are created by bankers directly with their clients and then simply left to sit on the books of an investor. Since such instruments typically last three to five years - and the CDO boom is so recent - many have not come to the end of their life. Nor have they been traded…"The lack of a publicly quoted market for CDOs and like assets is exacerbating the liquidity problems for these assets beyond the underlying economics, for example, in subprime real estate." To compensate, investment institutions and banks use a variety of techniques to assign a value to these instruments in their accounts. In some areas, third-party data groups exist that can offer price estimates. However, the pace of innovation is so intense that it is hard for these providers to keep up with all corners of the market. So in many cases, investors are turning to alternative techniques to create prices. One tactic used by hedge funds entails asking several brokers for price quotes and taking an average. Results vary - not least because dealer banks may hold positions in these instruments themselves. "It is very easy for hedge funds to shop around to find valuations that suit them best and then book their assets at that," says one banker who advises hedge funds. "Going back to the bank that sold you a CDO and asking for a price is rarely likely to produce an accurate picture." Another approach is to estimate valuations based on the ratings the instruments receive from credit rating agencies. Yet this does not offer a fail-safe valuation method either. The rating agencies have been downgrading bonds backed by subprime mortgages in recent weeks but critics say they have been slow to act and face difficulties in analysing the market. Christian Stracke, analyst at CreditSights, a research company, says: "With so little truly relevant historical data on the behaviour of subprime mortgages, and with such massive structural changes having occurred in the mortgage landscape in recent years, any time-series analysis approach is little more than a not-so-educated guess." Moreover, while ratings attempt guidance on the chance of default, they offer no indication of how market prices could behave - as the rating agencies stress. As the BIS noted in its annual report this week, ratings reflect expected credit losses rather than the "unusually high probability" of events that "could have large effects on market values". That means that on the rare occasions that instruments are traded, a large gap can suddenly emerge between the market price and its book value. This week Queen's Walk Fund, a London hedge fund, admitted it had been forced to write down the value of its US subprime securities by almost 50 per cent in just a few months. That was because when it was forced to sell them, the price achieved was far lower than the value created with the models the fund had previously used - which had been supplemented with brokers' quotes. But unless circumstances arise that force a market trade, valuations often remain at the investment managers' discretion. While managers say they strive to assign honest values, these are often difficult for an outside accountant to verify, since the techniques used are invariably highly complex. Moreover, incentives do not always encourage fair valuations: hedge fund managers, for example, are typically paid a percentage of the profits they book, giving them a vested interest in reporting a high asset valuation. At best, this means that the valuations of CDOs, for example, may often lag behind any swings in broader asset classes; at worst, this ambiguity may enable hedge fund managers or investment bankers to keep posting profits - even when markets fall…history also shows that large-scale structural dislocations - such as a serious mispricing of assets - are rarely corrected in an orderly manner. Thus the big risk now is that if thousands of banks and investment groups suddenly have to slash the value of the securities they hold, the wave of accounting losses might at best leave investors wary of purchasing all manner of complex financial instruments. At worst, it could trigger more distressed sales and a broader repricing of financial assets, not just in the subprime sector but in other illiquid markets too.”
Supreme Court Reversal May Cause Some Retail Prices to Rise
From AP: “The Supreme Court on Thursday abandoned a 96-year-old ban on manufacturers and retailers setting price floors for products. In a 5-4 decision, the court said that agreements on minimum prices are legal if they promote competition. The ruling means that accusations of minimum pricing pacts will be evaluated case by case. The Supreme Court declared in 1911 that minimum pricing agreements violate federal antitrust law. Supporters said that allowing minimum price floors would hurt upstart discounters and Internet resellers seeking to offer new, cheaper ways to distribute products…“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail,” Justice Stephen Breyer wrote in dissent.”
Globalization, and Willingness to Take Risks, Helps Wealthy Get Richer
From The Financial Times: “Last year, the assets of those with more than $30m (£15m) to invest - the so-called ultra-high net worth individuals - expanded by 16.8 per cent. By comparison, people with assets of $1m-$5m saw their wealth grow by 6.4 per cent. The number of ultra-high net worth individuals also swelled by more than 10 per cent - more than the growth in the total pool of wealthy individuals. The number of people with $1m or more to invest grew by 8 per cent to 9.5m last year, and the wealth they control expanded to $37,200bn. About 35 per cent is in the hands of just 95,000 people with assets of more than $30m. The study, prepared by Merrill Lynch and Capgemini, highlights a growing gap between the super-rich and those who would normally consider themselves wealthy. The gap has been exacerbated by rising markets and the forces of globalisation, which have allowed a relatively small number of people to accumulate vast fortunes…the difference reflected a willingness by the very rich to take greater risks. "Ultra-high net worth individuals are very aggressive investors," he said. "If things are good, they will do better than the high net worth individuals, who are more cautious." The study found wealthy investors reduced their investments in hedge funds and private equity last year, increasing their exposure to real estate and equities. The developed world continues to dominate the ranks of the world's rich: 64 per cent of high net worth individuals live in the United States, Japan, Germany, France or the UK. But in Singapore, India, Indonesia and Russia the number of high net worth individuals grew by more than15 per cent last year.”
MISC
From Bank of America: “Revisions to the core PCE deflator increase the probability that tomorrow's year-over-year (yoy) core PCE deflator will remain at 2.0% in May [rather than fall to] 1.9% yoy [as previously expected].
From Merrill Lynch: “Utilities have proven that they remain extremely sensitive to changes in long-term interest rates, despite many Wall Street assertions to the contrary… Utilities performed quite well as fixed-income volatility fell. However, they quickly began to retrace their advance when volatility began to increase.”
From MarketWatch: “…in the past 10 quarters the net issuance of stocks has also been declining. "At the same time, we've seen money flowing powerfully into the foreign equity markets," …As a result, he believes that U.S. stocks have surged in the past 12 months "more from a lack of supply than an increase in demand." “
From Citi: “Over the past year, capital spending did not contribute to growth or blunt the drag from housing.”
Market Recap
Interest rates increased, with 2y Treasuries gaining 5bp in yield to 4.94%, while the 30y bond saw yields rise less than a basis point to 5.20%, causing the curve to flatten by 4bp. Shorter maturity Treasuries are more sensitive to changing Fed rate expectations, and the continued focus on inflation concerns extended the time of the next anticipated Fed easing further into the future.
Equities are closing near unchanged, after trading higher most of the day.
The dollar index is unchanged on the day, but gold rallied $5.75.
Oil is unchanged, after trading 50 cents higher during the day.
From Goldman Sachs: “Statements on recent and prospective inflation are slightly more hawkish than we expected; however, the FOMC retains its focus on core inflation (as expected) and gives no hint of discomfort with policy on its current setting.”
From Lehman: “The FOMC statement acknowledges the recent improvement in core inflation - somewhat odd given the the year-over-year rate is likely to be unchanged versus the last core PCE reading prior to the 9 May FOMC statement which described inflation as "elevated." This suggests that the removal of the word had less to do with a change in the FOMC's view on the inflation outlook and more to do with removing a word that was garnering unwanted attention. The use of the phrase "convincingly demonstrated" sounds much like President Lacker's comments regarding the statistical significance of the recent movements in core inflation and reflects future uncertainty about the inflation outlook which is further highlighted by the retention of the inflation bias…This statement highlights the contrast between the reported inflation figures and the upside risks to future inflation. The trends in total and core inflation are likely to further aggravate this contrast and could lead to further surprises despite the Fed's best efforts to educate the market.”
From Deutsche Bank: “The Fed is not going to drop its inflation bias until core inflation has moved lower and/or until the unemployment rate rises noticeably.”
From FTN: “The Fed was expected to adopt a less alarmist tone in its discussion of inflation, and indeed, core inflation was no longer described as “elevated.” But the Fed is also clearly skeptical of the recent drop in core inflation, because it was accomplished without the increase in the unemployment rate that is central to the Fed staff’s improving inflation forecast. As such, the new language about inflation, which appears below, does not suggest any chance of a rate cut in the near future: “Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.” The refusal to allow GDP growth to return to potential despite inflation that is now in the upper end of the Fed’s target band raises the odds that inflation will fall through the lower end of the band at some point down the road. After all, monetary policy works with a considerable lag, even if Bernanke and his colleagues choose to conduct policy as if the lag is negligible. In the meantime, the Bernanke Fed’s strict adherence to the NAIRU theory, which holds that there is a trade-off between unemployment and inflation, makes it considerably less friendly toward working Americans than the Greenspan Fed was in the Nineties, something that is likely to further cool the relationship with a Congress that is already unhappy with the Fed’s lack of action on mortgage regulation in the wake of the subprime mess.”
Easy Credit Diminishing in Buyout Market
From The Boston Globe: “Investors who put their money to work in credit markets ask themselves two basic questions every day: How much risk do I want to take, and how much will I insist on being paid for it? The debt bubble, which has bent all kinds of credit markets out of shape in the last couple of years, changed the usual answers to those questions. Investors began to take on more and more risk, which wasn't a particularly good thing to begin with. Worse, they weren't getting paid any more for their trouble. The bubble put a practically unknown subprime mortgage market on the front page. It paid for an increasingly risky leveraged buy out boom. It helped boost debt offerings from emerging markets around the world. But investors who rolled over before are pushing back a bit now, and that would be a good thing. How the debt bubble ultimately unwinds, or blows up, is the single most important issue facing all stock and credit markets today… investors in all kinds of credit markets appear to be rethinking risk… That speculation has been driven by excess liquidity, huge amounts of global money looking for ways to earn more income.”
From USA Today: “Wall Street is cooling on a popular money-making strategy: borrowing gobs of cash to fund deals and other investments with the potential to deliver big gains. Leverage, the financial tool that has fueled the private-equity buyout boom and helped hedge funds amplify returns, is now being viewed more cautiously by professional investors. The rising concern stems from a belief that interest rates are on the rise, especially for riskier bonds, which would make it more costly for Wall Street titans to fund deals. Another warning flag: recent financial stress at two Bear Stearns' hedge funds that got in trouble using leverage to invest in pools of bonds tied to the faltering subprime mortgage market. "There is definitely a dark side to leverage," says Jeremy Siegel, professor of finance at the Wharton School.”
From Bloomberg: “Lenders increasingly worried about financial risks of takeover deals are demanding higher interest rates…Lenders fear that easy credit for takeovers could come back to haunt them if buyout targets get into financial trouble. In recent days, the deepening woes of the sub-prime mortgage market have reminded Wall Street of the risks of cheap credit…Carl Icahn, who has spent more than four decades on Wall Street buying and selling companies, said private equity firms have enjoyed "a walk in the park" in terms of financing deals in recent years, as yield-hungry lenders and investors have fallen over themselves to provide credit…Investors have demanded higher yields on junk bonds in recent weeks…Bond investors "have drawn a bit of a line in the sand," said Brian Arsenault, high-yield strategist at Morgan Stanley in New York. "Investors are saying 'I have my pick of quite a few high-yield offerings over the next few months, so I am going to be a little more selective.' " The deal market also has been rattled by proposals by some in Congress to change the tax structure of buyout firms and hedge funds, lifting the top tax rate from 15% to 35% on certain of their investment earnings. That could make takeover deals less lucrative. Asked about the proposed legislation, Treasury Secretary Henry M. Paulson Jr. said Wednesday that "I don't believe it makes sense to single out one industry." He warned that a tax increase could have "unintended consequences."”
From Barclays: “For all the fear and loathing currently being inspired by events in the credit markets, it is worthwhile putting developments into their historical context. Although lower rated US mortgage securities have imploded in value, the widening in corporate credit spreads has been barely significant enough to warrant the term “blip.” Spreads on BBB rated US home equity loans currently range between 1,000 and 2,200 bp for 2006 and early 2007 paper. In contrast, the prevailing spread on BBB corporate paper is all of 71 bp. Even junk bond spreads are barely above 300 bp. A 2,130 bp spread differential between two debt instruments of the same credit rating does rather call into question the utility and credibility of the ratings system itself. As far as recent trading patterns are concerned, to be sure, corporate high yield spreads are widening in a significant manner, but set against the collapse in sub-prime mortgage paper, or indeed against the broader sweep of history, recent events are no more than a minor wriggle in the corporate credit markets.”
CDO Woes Highlight Pricing Concerns – Mark-to-Model Risks
From The Financial Times: “…collateralised debt obligations (CDOs), are designed to yield juicy returns while also carrying high credit ratings. They have proved popular with hedge funds as well as with longer-term investors such as pension funds and insurance companies, many of which have bought billions of dollars of such securities in recent years - thus providing the liquidity that was then channelled into mortgage loans. But heavy losses incurred at the two Bear Stearns hedge funds as a result of such financial haute couture have prompted fears that the CDO emperor may turn out to have no clothes. Such a revelation could threaten the value of investor portfolios around the globe - not just in the mortgage sector but in the way many sorts of company fund themselves…CDOs are rarely traded…many of these new-fangled instruments have never been priced through market trading. Instead, products such as CDOs, which are designed to be held until they mature, have often been valued in investor portfolios or on the books of investment banks according to complex mathematical models and other non-market techniques. In addition, fund managers and bankers often have broad discretion as to what kind of model they use - and thus what value is attached to their assets. So when Wall Street creditors last week threatened fire sales of CDOs seized from the stricken Bear Stearns funds, thus creating a market price for them for the first time, they also threatened to create a wider shock for the system. Fire sales rarely realise anything close to the previously expected value of assets. But if these deals went ahead, they would provide a legitimate trading level that would challenge current portfolio valuations…the crisis at Bear's funds has left investors, brokers and regulators asking an uncomfortable question: can the pricing models that have provided the foundations for this new financial edifice really be trusted? Or will valuations turn out to be over-optimistic and result in further investor losses…To an extent, the valuation problem for CDOs reflects the fact that the frenetic pace of innovation seen in the financial industry this decade has outpaced the development of its infrastructure. It has often been the case that when new instruments emerge in the banking world, the market is initially quite illiquid, meaning that the level of trading is low. But the murky nature of new products has rarely had broad systemic implications, because they have typically occupied a small niche. What makes the CDO sector unusual is that it has exploded at such a breakneck pace with bankers packaging bonds, loans and other debts into ever more complex structures. Last year alone, about $1,000bn in cash and derivatives CDOs was issued in Europe and the US, according to data from the Bank for International Settlements. More than one-third was composed of asset-backed securities, often including low-grade mortgages…However, many other such products are created by bankers directly with their clients and then simply left to sit on the books of an investor. Since such instruments typically last three to five years - and the CDO boom is so recent - many have not come to the end of their life. Nor have they been traded…"The lack of a publicly quoted market for CDOs and like assets is exacerbating the liquidity problems for these assets beyond the underlying economics, for example, in subprime real estate." To compensate, investment institutions and banks use a variety of techniques to assign a value to these instruments in their accounts. In some areas, third-party data groups exist that can offer price estimates. However, the pace of innovation is so intense that it is hard for these providers to keep up with all corners of the market. So in many cases, investors are turning to alternative techniques to create prices. One tactic used by hedge funds entails asking several brokers for price quotes and taking an average. Results vary - not least because dealer banks may hold positions in these instruments themselves. "It is very easy for hedge funds to shop around to find valuations that suit them best and then book their assets at that," says one banker who advises hedge funds. "Going back to the bank that sold you a CDO and asking for a price is rarely likely to produce an accurate picture." Another approach is to estimate valuations based on the ratings the instruments receive from credit rating agencies. Yet this does not offer a fail-safe valuation method either. The rating agencies have been downgrading bonds backed by subprime mortgages in recent weeks but critics say they have been slow to act and face difficulties in analysing the market. Christian Stracke, analyst at CreditSights, a research company, says: "With so little truly relevant historical data on the behaviour of subprime mortgages, and with such massive structural changes having occurred in the mortgage landscape in recent years, any time-series analysis approach is little more than a not-so-educated guess." Moreover, while ratings attempt guidance on the chance of default, they offer no indication of how market prices could behave - as the rating agencies stress. As the BIS noted in its annual report this week, ratings reflect expected credit losses rather than the "unusually high probability" of events that "could have large effects on market values". That means that on the rare occasions that instruments are traded, a large gap can suddenly emerge between the market price and its book value. This week Queen's Walk Fund, a London hedge fund, admitted it had been forced to write down the value of its US subprime securities by almost 50 per cent in just a few months. That was because when it was forced to sell them, the price achieved was far lower than the value created with the models the fund had previously used - which had been supplemented with brokers' quotes. But unless circumstances arise that force a market trade, valuations often remain at the investment managers' discretion. While managers say they strive to assign honest values, these are often difficult for an outside accountant to verify, since the techniques used are invariably highly complex. Moreover, incentives do not always encourage fair valuations: hedge fund managers, for example, are typically paid a percentage of the profits they book, giving them a vested interest in reporting a high asset valuation. At best, this means that the valuations of CDOs, for example, may often lag behind any swings in broader asset classes; at worst, this ambiguity may enable hedge fund managers or investment bankers to keep posting profits - even when markets fall…history also shows that large-scale structural dislocations - such as a serious mispricing of assets - are rarely corrected in an orderly manner. Thus the big risk now is that if thousands of banks and investment groups suddenly have to slash the value of the securities they hold, the wave of accounting losses might at best leave investors wary of purchasing all manner of complex financial instruments. At worst, it could trigger more distressed sales and a broader repricing of financial assets, not just in the subprime sector but in other illiquid markets too.”
Supreme Court Reversal May Cause Some Retail Prices to Rise
From AP: “The Supreme Court on Thursday abandoned a 96-year-old ban on manufacturers and retailers setting price floors for products. In a 5-4 decision, the court said that agreements on minimum prices are legal if they promote competition. The ruling means that accusations of minimum pricing pacts will be evaluated case by case. The Supreme Court declared in 1911 that minimum pricing agreements violate federal antitrust law. Supporters said that allowing minimum price floors would hurt upstart discounters and Internet resellers seeking to offer new, cheaper ways to distribute products…“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail,” Justice Stephen Breyer wrote in dissent.”
Globalization, and Willingness to Take Risks, Helps Wealthy Get Richer
From The Financial Times: “Last year, the assets of those with more than $30m (£15m) to invest - the so-called ultra-high net worth individuals - expanded by 16.8 per cent. By comparison, people with assets of $1m-$5m saw their wealth grow by 6.4 per cent. The number of ultra-high net worth individuals also swelled by more than 10 per cent - more than the growth in the total pool of wealthy individuals. The number of people with $1m or more to invest grew by 8 per cent to 9.5m last year, and the wealth they control expanded to $37,200bn. About 35 per cent is in the hands of just 95,000 people with assets of more than $30m. The study, prepared by Merrill Lynch and Capgemini, highlights a growing gap between the super-rich and those who would normally consider themselves wealthy. The gap has been exacerbated by rising markets and the forces of globalisation, which have allowed a relatively small number of people to accumulate vast fortunes…the difference reflected a willingness by the very rich to take greater risks. "Ultra-high net worth individuals are very aggressive investors," he said. "If things are good, they will do better than the high net worth individuals, who are more cautious." The study found wealthy investors reduced their investments in hedge funds and private equity last year, increasing their exposure to real estate and equities. The developed world continues to dominate the ranks of the world's rich: 64 per cent of high net worth individuals live in the United States, Japan, Germany, France or the UK. But in Singapore, India, Indonesia and Russia the number of high net worth individuals grew by more than15 per cent last year.”
MISC
From Bank of America: “Revisions to the core PCE deflator increase the probability that tomorrow's year-over-year (yoy) core PCE deflator will remain at 2.0% in May [rather than fall to] 1.9% yoy [as previously expected].
From Merrill Lynch: “Utilities have proven that they remain extremely sensitive to changes in long-term interest rates, despite many Wall Street assertions to the contrary… Utilities performed quite well as fixed-income volatility fell. However, they quickly began to retrace their advance when volatility began to increase.”
From MarketWatch: “…in the past 10 quarters the net issuance of stocks has also been declining. "At the same time, we've seen money flowing powerfully into the foreign equity markets," …As a result, he believes that U.S. stocks have surged in the past 12 months "more from a lack of supply than an increase in demand." “
From Citi: “Over the past year, capital spending did not contribute to growth or blunt the drag from housing.”
Market Recap
Interest rates increased, with 2y Treasuries gaining 5bp in yield to 4.94%, while the 30y bond saw yields rise less than a basis point to 5.20%, causing the curve to flatten by 4bp. Shorter maturity Treasuries are more sensitive to changing Fed rate expectations, and the continued focus on inflation concerns extended the time of the next anticipated Fed easing further into the future.
Equities are closing near unchanged, after trading higher most of the day.
The dollar index is unchanged on the day, but gold rallied $5.75.
Oil is unchanged, after trading 50 cents higher during the day.
Fed Statement
U.S. Federal Open Market Committee Statement: Text2007-06-28 14:14 (New York)
June 28 (Bloomberg) -- The following is the full text of thestatement released today by the Federal Reserve:
The Federal Open Market Committee decided today to keep itstarget for the federal funds rate at 5 1/4 percent.
Economic growth appears to have been moderate during thefirst half of this year, despite the ongoing adjustment in thehousing sector. The economy seems likely to continue to expand ata moderate pace over coming quarters.
Readings on core inflation have improved modestly in recentmonths. However, a sustained moderation in inflation pressureshas yet to be convincingly demonstrated. Moreover, the high levelof resource utilization has the potential to sustain thosepressures.
In these circumstances, the Committee's predominant policyconcern remains the risk that inflation will fail to moderate asexpected. Future policy adjustments will depend on the evolutionof the outlook for both inflation and economic growth, as impliedby incoming information.
Voting for the FOMC monetary policy action were: Ben S.Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M.Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan;Frederic S. Mishkin; Michael H. Moskow; William Poole; and KevinM. Warsh.
--Washington newsroom +1-202-624-1820
June 28 (Bloomberg) -- The following is the full text of thestatement released today by the Federal Reserve:
The Federal Open Market Committee decided today to keep itstarget for the federal funds rate at 5 1/4 percent.
Economic growth appears to have been moderate during thefirst half of this year, despite the ongoing adjustment in thehousing sector. The economy seems likely to continue to expand ata moderate pace over coming quarters.
Readings on core inflation have improved modestly in recentmonths. However, a sustained moderation in inflation pressureshas yet to be convincingly demonstrated. Moreover, the high levelof resource utilization has the potential to sustain thosepressures.
In these circumstances, the Committee's predominant policyconcern remains the risk that inflation will fail to moderate asexpected. Future policy adjustments will depend on the evolutionof the outlook for both inflation and economic growth, as impliedby incoming information.
Voting for the FOMC monetary policy action were: Ben S.Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M.Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan;Frederic S. Mishkin; Michael H. Moskow; William Poole; and KevinM. Warsh.
--Washington newsroom +1-202-624-1820
Final 1st Qtr GDP +.7% QoQ Annualized
First quarter real (inflation-adjusted) gross domestic product (GDP) grew at the slowest rate in four years. The +.7% QoQ annualized final revision was lower than the consensus estimate of +.8%, but is still higher than the originally reported estimate of +.6%. Core PCE was unexpectedly revised higher to +2.4% QoQ annualized from +2.2% previously. The GDP price index was also revised up +.2% to 4.2%. Personal consumption was revised lower to 4.2% from 4.4% originally.
Core PCE, which excludes food and energy price increases, was revised higher due to higher medical costs. It is likely that the slight improvement in GDP growth is due to a slightly smaller than expected trade deficit, and slower inventory accumulation than originally projected. Investment fell substantially in the last two quarters versus the first three quarters of 2006. National defense spending also saw a notable slowing in the first quarter.
Profits before tax rebounded in the 1st quarter to +$24B versus a decline of -$16B in the 4th quarter.
Nominal GDP grew 4.9% QoQ annualized in the first quarter, up from +4.1% in the fourth quarter. The dollar value of goods and services produced in the 1st quarter was $13.6 trillion, at an annualized rate. (Note taking 4.9% (nominal GDP) minus 4.2% (GDP inflation rate) = +.7% real GDP growth)
Core PCE, which excludes food and energy price increases, was revised higher due to higher medical costs. It is likely that the slight improvement in GDP growth is due to a slightly smaller than expected trade deficit, and slower inventory accumulation than originally projected. Investment fell substantially in the last two quarters versus the first three quarters of 2006. National defense spending also saw a notable slowing in the first quarter.
Profits before tax rebounded in the 1st quarter to +$24B versus a decline of -$16B in the 4th quarter.
Nominal GDP grew 4.9% QoQ annualized in the first quarter, up from +4.1% in the fourth quarter. The dollar value of goods and services produced in the 1st quarter was $13.6 trillion, at an annualized rate. (Note taking 4.9% (nominal GDP) minus 4.2% (GDP inflation rate) = +.7% real GDP growth)
Wednesday, June 27, 2007
Durable Goods Fall More Than Expected in May
May durable goods orders fell -2.8% MoM (consensus -1%), but does follow a revision higher for April from +.6% MoM to +1.1% MoM. This is the first decline in durable goods orders following three months of increases. Excluding the volatile transportation category, new orders fell -1% MoM (consensus +.2%), but the April figure was revised up a full point to +2.5%. Versus a year ago, new durable goods orders are up a slight +.3% YoY, and ex-transportation orders have fallen -1.1% YoY. Ex-defense, orders are down a smaller -.2% YoY.
As expected, the decline in Boeing Aircraft sales of -22.7% MoM was a substantial drag. Total transportation orders fell -6.8% MoM in May following a -1.8% MoM decline in April. Metals and electrical equipment were also negative contributors, each declining close to 4% MoM. Defense spending was the largest growth category in May, rising +6.7% MoM (+20% YoY). Improvement was also seen in vehicles and parts (+2.3% MoM) and computers (+1.8% MoM).
Capital goods non-defense new orders fell a substantial -8.3% MoM, and are now up only +1.4% YoY. This was the largest decline in this category since January, when the economy was in the depths of the inventory correction cycle. Non-defense capital goods excluding the volatile aircraft category fell -3% MoM. This figure is used to judge demand for future business investment, and will be a disappointment to observers, especially as it takes away almost half the bounce in the category during March and April. Shipments of this category are used for calculating GDP. Shipments fell -.2% MoM in May after rising +.9% MoM in April.
Shipments rose for the third month in a row, increasing +.4% MoM (+.2% YoY), with transportation shipments fueling the gain. Non-defense capital goods shipments excluding aircraft fell -.2% MoM (-1.8% YoY).
Unfilled orders rose +.8% MoM (+19.9% YoY), continuing an almost unbroken two year string of increases bringing the category to a record high. Backlogs of aircraft production are responsible for the majority of the gains. Non-defense capital goods unfilled orders are up an even sharper +1.6% MoM and +31% YoY.
Inventories rose +.2% MoM (+6.4% YoY), and the inventory to sales ratio held steady at 1.46, the lowest level since January. Manufacturing inventories have risen for 15 straight months and are also at record high levels. Transportation equipment inventory gains have been rising steadily since last fall.
May's fall in durable goods orders casts in doubt the rebound seen in manufacturing indicators. The housing slump appears to continuing to dampen demand for goods lasting multiple years. If businesses don't accelerate capital goods demand soon, it raises concerns about the economic health of the economy for the balance of this year. Demand for machinery equipment fell -1.6% MoM, though it had been expected to rebound this month after declining -1.2% MoM in April. Today's data suggests that estimates for second quarter GDP will be revised lower by up to .4%, especially if consumer spending doesn't improve. It should be noted that durable goods data tends to be more volatile than other economic indicators due to the high volatility of transportation orders, but the other components of today's release were also weaker than expected.
As expected, the decline in Boeing Aircraft sales of -22.7% MoM was a substantial drag. Total transportation orders fell -6.8% MoM in May following a -1.8% MoM decline in April. Metals and electrical equipment were also negative contributors, each declining close to 4% MoM. Defense spending was the largest growth category in May, rising +6.7% MoM (+20% YoY). Improvement was also seen in vehicles and parts (+2.3% MoM) and computers (+1.8% MoM).
Capital goods non-defense new orders fell a substantial -8.3% MoM, and are now up only +1.4% YoY. This was the largest decline in this category since January, when the economy was in the depths of the inventory correction cycle. Non-defense capital goods excluding the volatile aircraft category fell -3% MoM. This figure is used to judge demand for future business investment, and will be a disappointment to observers, especially as it takes away almost half the bounce in the category during March and April. Shipments of this category are used for calculating GDP. Shipments fell -.2% MoM in May after rising +.9% MoM in April.
Shipments rose for the third month in a row, increasing +.4% MoM (+.2% YoY), with transportation shipments fueling the gain. Non-defense capital goods shipments excluding aircraft fell -.2% MoM (-1.8% YoY).
Unfilled orders rose +.8% MoM (+19.9% YoY), continuing an almost unbroken two year string of increases bringing the category to a record high. Backlogs of aircraft production are responsible for the majority of the gains. Non-defense capital goods unfilled orders are up an even sharper +1.6% MoM and +31% YoY.
Inventories rose +.2% MoM (+6.4% YoY), and the inventory to sales ratio held steady at 1.46, the lowest level since January. Manufacturing inventories have risen for 15 straight months and are also at record high levels. Transportation equipment inventory gains have been rising steadily since last fall.
May's fall in durable goods orders casts in doubt the rebound seen in manufacturing indicators. The housing slump appears to continuing to dampen demand for goods lasting multiple years. If businesses don't accelerate capital goods demand soon, it raises concerns about the economic health of the economy for the balance of this year. Demand for machinery equipment fell -1.6% MoM, though it had been expected to rebound this month after declining -1.2% MoM in April. Today's data suggests that estimates for second quarter GDP will be revised lower by up to .4%, especially if consumer spending doesn't improve. It should be noted that durable goods data tends to be more volatile than other economic indicators due to the high volatility of transportation orders, but the other components of today's release were also weaker than expected.
Tuesday, June 26, 2007
Consumer Confidence Weakens More Than Expected/ Richmond Fed Strengthens
Consumer confidence in June fell to the lowest level since last August, as the index fell over 4 points to 103.9. The present conditions index fell by an even more substantial 8 points (to the weakest level in 7 months), while expectations for the next six months only declined by a little over 2 points. The decline in confidence was largest for those over 55 years of age. By income, those earning less than $50k were more worried. By region, the West saw the largest deterioration in consumer confidence. This is a worry as California alone accounts for about 15% of US GDP.
More Americans perceive business conditions as deteriorating. Jobs plentiful fell while jobs hard to get rose. A rising percentage of people expect their incomes to fall over the next 6 months than anticipate increases. Interest in buying a home in the next six months held steady at 2.8%. Most consumer goods categories saw slight declines in anticipated purchases, but demand for TVs is expected to rise.
Confidence remains at levels that historically have supported 2.5-3% growth in consumption.
************
The Richmond Fed survey jumped back into positive territory in June to +4 (consensus -7), following the recent strength in other manufacturing surveys.
More Americans perceive business conditions as deteriorating. Jobs plentiful fell while jobs hard to get rose. A rising percentage of people expect their incomes to fall over the next 6 months than anticipate increases. Interest in buying a home in the next six months held steady at 2.8%. Most consumer goods categories saw slight declines in anticipated purchases, but demand for TVs is expected to rise.
Confidence remains at levels that historically have supported 2.5-3% growth in consumption.
************
The Richmond Fed survey jumped back into positive territory in June to +4 (consensus -7), following the recent strength in other manufacturing surveys.
New Home Sales and Median Prices Continue to Tumble
New home purchases fell more than expected in May, to 915k (consensus 924k). The MoM decline though was less than expected, at -1.6% MoM, because the surprisingly large gain from April was revised lower from +16.2% MoM to +12.5% MoM. Even with the downward revising to April's leap in sales, it was still the largest monthly gain since 1993. New home sales have fallen -16% versus a year ago.
Median home prices recovered slightly to decline only -.9% YoY. This compares to the shockingly large, though revised to be a smaller decline, of -9.5% YoY in April. Median house prices rose to $236k in May, from $233k in April, but are still significantly below the $258k in March. Shifting mixes of homes by regions can impact the median national home price, which can be volatile. In general though, homebuilders have been competing with existing home owners by reducing prices and/or increasing amenities and other incentives.
The months' supply of homes inventory only rose slightly, to 7.1 months, a decline of over a month versus the 8.3 months' supply peak set in March, as inventories fell more slowly than sales. New home starts slowed in May, as builders attempt to pare down excess inventories.
By region, only the Midwest saw an increase in new home sales (+31% MoM). All other regions of the country saw declines in May, versus April, sales levels. The Northeast fell -11% MoM, the South declined -7% MoM, and the West eased by -2% MoM.
New homes account for 15-20% of total home sales in most months. New home sales data is considered more timely than existing home sales, which are based on closings and lag original contracts by 1-2 months.
The housing market continues to deteriorate as rising interest rates, and tighter credit standards, reduce the supply of new buyers. Thirty year mortgage rates rose to an 11-month high of 6.75% in mid-June.
Median home prices recovered slightly to decline only -.9% YoY. This compares to the shockingly large, though revised to be a smaller decline, of -9.5% YoY in April. Median house prices rose to $236k in May, from $233k in April, but are still significantly below the $258k in March. Shifting mixes of homes by regions can impact the median national home price, which can be volatile. In general though, homebuilders have been competing with existing home owners by reducing prices and/or increasing amenities and other incentives.
The months' supply of homes inventory only rose slightly, to 7.1 months, a decline of over a month versus the 8.3 months' supply peak set in March, as inventories fell more slowly than sales. New home starts slowed in May, as builders attempt to pare down excess inventories.
By region, only the Midwest saw an increase in new home sales (+31% MoM). All other regions of the country saw declines in May, versus April, sales levels. The Northeast fell -11% MoM, the South declined -7% MoM, and the West eased by -2% MoM.
New homes account for 15-20% of total home sales in most months. New home sales data is considered more timely than existing home sales, which are based on closings and lag original contracts by 1-2 months.
The housing market continues to deteriorate as rising interest rates, and tighter credit standards, reduce the supply of new buyers. Thirty year mortgage rates rose to an 11-month high of 6.75% in mid-June.
April Case-Shiller 20 City Home Price Index Falls -2.1% YoY, as expected
The 10 city index, which is focused on the more bubbly areas, fell a larger -2.7% YoY. While these annual changes reflect new record level declines for the indexes, on a three month annualized basis, both indexes are showing a slight deceleration in the rate of decline. The 20 city composite is now running at -3.6% (3m annualized), down from 6% in February. The 10 city composite has fallen to -4.2% (3m annualized) in April, versus -6.1% in February.
In April, the city showing the largest MoM decline remains Detroit, down -.2.5% MoM (-9.4% YoY). On an annual basis, the next largest decline is in San Diego (-6.7% YoY), followed by Washington, DC (-5.7% YoY). Phoenix and Tampa trail with declines of -4.5 to 5% YoY.
Seattle continues to show the most strength, with house prices rising +1.3% MoM and +9.6% YoY. Other areas showing strength are Charlotte and Portland, each rising over 6% YoY. Dallas is also showing strength this month, rising +1.3% MoM, perhaps tied to rising oil fortunes?
For comparison, the national existing home price index for April showed an annual decline of -1.3% YoY. The Case-Shiller index is more heavily weighted toward California and Florida than the national index.
In April, the city showing the largest MoM decline remains Detroit, down -.2.5% MoM (-9.4% YoY). On an annual basis, the next largest decline is in San Diego (-6.7% YoY), followed by Washington, DC (-5.7% YoY). Phoenix and Tampa trail with declines of -4.5 to 5% YoY.
Seattle continues to show the most strength, with house prices rising +1.3% MoM and +9.6% YoY. Other areas showing strength are Charlotte and Portland, each rising over 6% YoY. Dallas is also showing strength this month, rising +1.3% MoM, perhaps tied to rising oil fortunes?
For comparison, the national existing home price index for April showed an annual decline of -1.3% YoY. The Case-Shiller index is more heavily weighted toward California and Florida than the national index.
Monday, June 25, 2007
Today's Tidbits
Explosive Growth in Mortgage Debt Since Early 90’s Dwarfs Other Borrowing
From FTN: “The economy has been awash in liquidity since the late Nineties, keeping yields low, compressing spreads and generally forcing investors to settle for low returns. The favorite explanation for this super-abundance of liquidity is high Asian savings rates, especially in China, that created a surplus of investor capital searching for a home. But a case can be made that lax mortgage lending standards and Federal Reserve policy are responsible for creating a liquidity surge, which is simply the flipside of the housing bubble. Now, with housing in decline, the air is clearly coming out of the liquidity bubble, too. The vast majority of the debt created in the past ten years in the US was mortgage debt, most of which was financed domestically. (Yes, foreign buyers have stepped up mortgage buying in recent years, but still own just 11% of the total.) From 1992 through 2000, there was no acceleration in borrowing at all in the US aside from the acceleration in mortgage borrowing. There was some quarter-to-quarter variance, but the trend was steady at about $400bn a quarter at an annual rate. Mortgage borrowing, which had slowed to about $100bn at an annual rate in 1991, took off from that trough, rising to an $800bn pace in 2001. Through the Nineties expansion, mortgages filled the vacuum left
by the lack of growth of all other types of borrowing, especially by the Treasury once the budget turned to a surplus. But when other borrowing began to accelerate after the 2001 recession, mortgage borrowing never slowed down. Eventually, quarterly underwriting topped out in the third quarter of 2005 at an astonishing annualized rate of $1.65 trillion. In just ten years, total credit market borrowing in the US had tripled, with mortgage borrowing up tenfold and all other debt up just 75%. The biggest increases were in 2003 and 2004, when the Fed cut the fed funds rate to 1%. This was an irresistible environment for borrowers and lenders alike. Banks and mortgage companies were able to make secured loans at a decent spread above their cost of funds – something they will do all day long when given the opportunity – while borrowers were able to borrow at the lowest rates in modern history. Just how low rates were is astonishing in hindsight. If you add the tax savings from interest deductibility and the expected appreciation of house purchases in what was then a raging bull market for real estate, the real, tax-adjusted rate on ARM loans was deeply negative in the summer of 2004, -13.25% assuming a 25% marginal tax rate, and only rose above zero in September 2006, when house prices started to fall. The incentive to take a mortgage, not just to buy a house but to buy everything else, was tough to pass up. Rates were so low that mortgage equity withdrawal took off in addition to home purchases. Many homeowners thought they were “taking something off the table” by cashing in their capital gains. But they were not really taking profits at all, they were borrowing against an assumed future sale, and levering up in the process. That has left many with high loan-to-value ratios and increased sensitivity to home prices. Now, with home prices falling at a rate of about 1.5% a year and effective rates on adjustable rate mortgages above 6%, “real” tax-adjusted ARM rates are about 6%, a 12-year high. That’s not nearly low enough to lure in anyone that isn’t either refinancing out of a higher rate loan or buying for shelter. In fact, more than 80% of the loans underwritten this spring were fixed-rate loans, creating digestion problems that accounted for much of the back-up in long yields in May and June. Banks were perfectly happy to write adjustable mortgages at very low yields when their cost of funds was lower still. But they are not going to write an unlimited number of long-term fixed-rate loans in an inverted curve environment. Because of the backup, fixed rates are now higher than adjustable rates, slowing the pace of underwriting and shifting the borrowers back into ARMS. In the first quarter, borrowing in many sectors accelerated, but the rise was dwarfed by the drop in mortgage underwriting. As a result, the contraction of credit growth that began in the fourth quarter of 2005 continued…From an economic point of view, however, the most important aspect of the slowdown in credit is that the liquidity boom is over. Eventually, that means spreads will widen and asset price appreciation will slow and the curve will normalize. In the short-term, however, it means that in the second half, GDP growth is not likely to remain at the 3%+ expected in the second quarter.”
Analysts Expect Capital Expenditures to Drop Substantially This Year in US & EU
From The Financial Times: “The amount of capital that European and US companies are willing to spend on factories and equipment, the traditional engine of profit and economic growth, is set to plunge this year, according to business analysis. Capital expenditure as a percentage of profit before tax in Europe will fall from 64 per cent in 2006 to 55 per cent this year, according to a consensus forecast compiled by Thomson Financial, the data provider. In the US, the decline in the ratio is worse: spending is expected to fall from 51 per cent last year to 45 per cent in 2007. Historically, such dramatic declines would have triggered sharp falls in company profits. But this time economists have mixed views about the implications of these projections. Some say the forecasts are too pessimistic because analysts tend to underestimate capex, and investment has been revised up consistently in recent years. Moreover, companies have seen a profits explosion since 2003, which means the ratio of capex to earnings may look low because earnings are rising. Another factor is greater spending in emerging markets, where goods are less expensive… companies have been more focused on returning cash to shareholders by increasing buybacks and dividends in recent years, but are nevertheless still investing…. In the US, Goldman Sachs estimates that of the $1,600bn of funds companies have to spend this year, about 36 per cent will go on share buybacks; 33 per cent towards capex; 16 per cent on dividends; and 15 per cent for M&A.”
MISC
Treasury yields fell 3.5 -4.5 bp today, as investors sought safety following concerns about subprime problems expanding, after Bear Stearns put up only half the money they had pledged to support their hedge funds. The 10y Treasury yield is settling at 5.08%. After rallying over a hundred points in the morning, the Dow is closing down 8 points. The dollar index has closed unchanged. Concerns about maintaining refinery output put crude oil prices back in positive territory, after falling over a dollar in the morning, on news that a strike had been averted in Nigeria.
From Goldman Sachs: “Final domestic demand is softening noticeably as housing remains a big drag and both consumer spending growth and confidence have trended down recently. Moreover, financial conditions have begun to tighten, with our GSFCI up 40bp and as much as 60bp on an oil-adjusted basis since early May. Reflecting these trends, our estimates for final domestic demand growth are below 2% for both Q2 and Q3, which would in fact be slightly weaker than the mid-2006 period that triggered the initial inventory correction. Even if foreign trade remains a net positive -- as we expect -- this suggests that the risks are tilted toward a return to below-trend growth grates in late 2007 or early 2008.”From Bank of America: “Slowing growth in corporate tax receipts suggests slower corporate profit growth…”
From UBS: “The two week build in Fed Custody Holdings of Treasury and GSE debt of nearly $22B flies in the face of those who claim that foreign central banks have diversified away from Treasuries for good. Even though the slice of the foreign reserve manager's investment pie occupied by Treasuries may be thinning, it's also lengthening as the "pie" gets bigger. We see that the overall volume of overseas Treasury investments continues to expand-- which is important when squared against the cutbacks in new Treasury supply and the significant run-off of large maturing Treasury issues.”
From Deutsche Bank: “The gradual withdrawal of liquidity should continue, causing steeper curves and wider credit and swap spreads. Investor moves out of bonds and into money markets has richened the TED spread, and tightened repo rates. This could lead to swap spread widening further out the curve. Banks are unlikely to resume buying mortgages without a steeper yield curve. Narrower net interest margins and large negative OCI prevent banks from profitably adding mortgages to their balance sheet.”
From Morgan Stanley: “On the week, big gains at the front end and little change at the longer end left 2’s-10’s and 2’s-30’s [Treasuries] at their steepest levels since 2005, with the 2-year yield falling 12 bp to 4.92%, the 3-year 10 bp to 4.97%, the 5-year 8 bp to 5.02%, and the 10-year 2 bp to 5.14%, while the long bond held steady at 5.26%. The combination of disappearing supply and rising demand for cash kept yields at the very short end in freefall. After another 19 bp decline in the latest week, the 4-week bill yield has now plunged 71 bp in the past four weeks to just 4.24%.”
From JP Morgan: “Mexico vows to increase [corporate] tax collection…The package introduces a flat tax on factors of production, and it would require firms to pay taxes on whichever tax system—the new or old—yields the greater liability. The tax reform would lead to higher revenue by eliminating all exemptions. Moreover, the new tax package would favor investment and employment as it allows firms to fully offset capex and workers' compensation. However, with no exemption for interest payments, highly leveraged firms would be disadvantaged. Fiscal stimulus would be largely unchanged initially because the additional revenue would be spent on education and poverty alleviation. Some of the revenue would also be used to help fund the privatization of
the civil servants pension system.”
From Merrill Lynch: “The US economy has moved from the middle of the pack in 2006 to the end of the line in 2007; and the performance of the S&P 500 this year has hinged critically on owning sectors/companies with deep foreign exposure. Capital goods exports remain a source of strength The export boom is not just an Asian story, although US shipments to the region is up 10% year-on-year. But we also see that exports to the Pacific Rim have risen 13% and the leader is actually South America, which has taken in American-made goods at an impressive 17% pace in the past 12 months.”
From The Financial Times: “Fertilizer production is undergoing a significant structural change as production facilities increasingly move from regions such as the US, Europe and former Warsaw Pact countries…where [natural] gas prices are high, to areas where gas prices are low because of local supply…increasingly moving to the Middle East …High gas prices, rising global demand for agricultural products because of population increase, and burgeoning demand for biofuels have resulted in a booming market for fertilizer around the world…Algeria has the third largest reserves of natural gas in the world.”
From Bloomberg: “A mystery malady that's killing U.S. honeybees has also been found in Europe, Asia and South America, raising the possibility of global colony collapse… Die-offs in bees used commercially to pollinate almonds, apples and oranges may eventually affect production of U.S. crops valued at $14.6 billion, according to the Department of Agriculture. U.S. crop production so far has not been harmed partly because of bee imports. Global collapse would curtail that option… The disorder, which killed up to 90 percent of the bees in some U.S. hives last winter, has been found in 35 states and one Canadian province…” [Another factor that could push up food prices]
From FTN: “The economy has been awash in liquidity since the late Nineties, keeping yields low, compressing spreads and generally forcing investors to settle for low returns. The favorite explanation for this super-abundance of liquidity is high Asian savings rates, especially in China, that created a surplus of investor capital searching for a home. But a case can be made that lax mortgage lending standards and Federal Reserve policy are responsible for creating a liquidity surge, which is simply the flipside of the housing bubble. Now, with housing in decline, the air is clearly coming out of the liquidity bubble, too. The vast majority of the debt created in the past ten years in the US was mortgage debt, most of which was financed domestically. (Yes, foreign buyers have stepped up mortgage buying in recent years, but still own just 11% of the total.) From 1992 through 2000, there was no acceleration in borrowing at all in the US aside from the acceleration in mortgage borrowing. There was some quarter-to-quarter variance, but the trend was steady at about $400bn a quarter at an annual rate. Mortgage borrowing, which had slowed to about $100bn at an annual rate in 1991, took off from that trough, rising to an $800bn pace in 2001. Through the Nineties expansion, mortgages filled the vacuum left
by the lack of growth of all other types of borrowing, especially by the Treasury once the budget turned to a surplus. But when other borrowing began to accelerate after the 2001 recession, mortgage borrowing never slowed down. Eventually, quarterly underwriting topped out in the third quarter of 2005 at an astonishing annualized rate of $1.65 trillion. In just ten years, total credit market borrowing in the US had tripled, with mortgage borrowing up tenfold and all other debt up just 75%. The biggest increases were in 2003 and 2004, when the Fed cut the fed funds rate to 1%. This was an irresistible environment for borrowers and lenders alike. Banks and mortgage companies were able to make secured loans at a decent spread above their cost of funds – something they will do all day long when given the opportunity – while borrowers were able to borrow at the lowest rates in modern history. Just how low rates were is astonishing in hindsight. If you add the tax savings from interest deductibility and the expected appreciation of house purchases in what was then a raging bull market for real estate, the real, tax-adjusted rate on ARM loans was deeply negative in the summer of 2004, -13.25% assuming a 25% marginal tax rate, and only rose above zero in September 2006, when house prices started to fall. The incentive to take a mortgage, not just to buy a house but to buy everything else, was tough to pass up. Rates were so low that mortgage equity withdrawal took off in addition to home purchases. Many homeowners thought they were “taking something off the table” by cashing in their capital gains. But they were not really taking profits at all, they were borrowing against an assumed future sale, and levering up in the process. That has left many with high loan-to-value ratios and increased sensitivity to home prices. Now, with home prices falling at a rate of about 1.5% a year and effective rates on adjustable rate mortgages above 6%, “real” tax-adjusted ARM rates are about 6%, a 12-year high. That’s not nearly low enough to lure in anyone that isn’t either refinancing out of a higher rate loan or buying for shelter. In fact, more than 80% of the loans underwritten this spring were fixed-rate loans, creating digestion problems that accounted for much of the back-up in long yields in May and June. Banks were perfectly happy to write adjustable mortgages at very low yields when their cost of funds was lower still. But they are not going to write an unlimited number of long-term fixed-rate loans in an inverted curve environment. Because of the backup, fixed rates are now higher than adjustable rates, slowing the pace of underwriting and shifting the borrowers back into ARMS. In the first quarter, borrowing in many sectors accelerated, but the rise was dwarfed by the drop in mortgage underwriting. As a result, the contraction of credit growth that began in the fourth quarter of 2005 continued…From an economic point of view, however, the most important aspect of the slowdown in credit is that the liquidity boom is over. Eventually, that means spreads will widen and asset price appreciation will slow and the curve will normalize. In the short-term, however, it means that in the second half, GDP growth is not likely to remain at the 3%+ expected in the second quarter.”
Analysts Expect Capital Expenditures to Drop Substantially This Year in US & EU
From The Financial Times: “The amount of capital that European and US companies are willing to spend on factories and equipment, the traditional engine of profit and economic growth, is set to plunge this year, according to business analysis. Capital expenditure as a percentage of profit before tax in Europe will fall from 64 per cent in 2006 to 55 per cent this year, according to a consensus forecast compiled by Thomson Financial, the data provider. In the US, the decline in the ratio is worse: spending is expected to fall from 51 per cent last year to 45 per cent in 2007. Historically, such dramatic declines would have triggered sharp falls in company profits. But this time economists have mixed views about the implications of these projections. Some say the forecasts are too pessimistic because analysts tend to underestimate capex, and investment has been revised up consistently in recent years. Moreover, companies have seen a profits explosion since 2003, which means the ratio of capex to earnings may look low because earnings are rising. Another factor is greater spending in emerging markets, where goods are less expensive… companies have been more focused on returning cash to shareholders by increasing buybacks and dividends in recent years, but are nevertheless still investing…. In the US, Goldman Sachs estimates that of the $1,600bn of funds companies have to spend this year, about 36 per cent will go on share buybacks; 33 per cent towards capex; 16 per cent on dividends; and 15 per cent for M&A.”
MISC
Treasury yields fell 3.5 -4.5 bp today, as investors sought safety following concerns about subprime problems expanding, after Bear Stearns put up only half the money they had pledged to support their hedge funds. The 10y Treasury yield is settling at 5.08%. After rallying over a hundred points in the morning, the Dow is closing down 8 points. The dollar index has closed unchanged. Concerns about maintaining refinery output put crude oil prices back in positive territory, after falling over a dollar in the morning, on news that a strike had been averted in Nigeria.
From Goldman Sachs: “Final domestic demand is softening noticeably as housing remains a big drag and both consumer spending growth and confidence have trended down recently. Moreover, financial conditions have begun to tighten, with our GSFCI up 40bp and as much as 60bp on an oil-adjusted basis since early May. Reflecting these trends, our estimates for final domestic demand growth are below 2% for both Q2 and Q3, which would in fact be slightly weaker than the mid-2006 period that triggered the initial inventory correction. Even if foreign trade remains a net positive -- as we expect -- this suggests that the risks are tilted toward a return to below-trend growth grates in late 2007 or early 2008.”From Bank of America: “Slowing growth in corporate tax receipts suggests slower corporate profit growth…”
From UBS: “The two week build in Fed Custody Holdings of Treasury and GSE debt of nearly $22B flies in the face of those who claim that foreign central banks have diversified away from Treasuries for good. Even though the slice of the foreign reserve manager's investment pie occupied by Treasuries may be thinning, it's also lengthening as the "pie" gets bigger. We see that the overall volume of overseas Treasury investments continues to expand-- which is important when squared against the cutbacks in new Treasury supply and the significant run-off of large maturing Treasury issues.”
From Deutsche Bank: “The gradual withdrawal of liquidity should continue, causing steeper curves and wider credit and swap spreads. Investor moves out of bonds and into money markets has richened the TED spread, and tightened repo rates. This could lead to swap spread widening further out the curve. Banks are unlikely to resume buying mortgages without a steeper yield curve. Narrower net interest margins and large negative OCI prevent banks from profitably adding mortgages to their balance sheet.”
From Morgan Stanley: “On the week, big gains at the front end and little change at the longer end left 2’s-10’s and 2’s-30’s [Treasuries] at their steepest levels since 2005, with the 2-year yield falling 12 bp to 4.92%, the 3-year 10 bp to 4.97%, the 5-year 8 bp to 5.02%, and the 10-year 2 bp to 5.14%, while the long bond held steady at 5.26%. The combination of disappearing supply and rising demand for cash kept yields at the very short end in freefall. After another 19 bp decline in the latest week, the 4-week bill yield has now plunged 71 bp in the past four weeks to just 4.24%.”
From JP Morgan: “Mexico vows to increase [corporate] tax collection…The package introduces a flat tax on factors of production, and it would require firms to pay taxes on whichever tax system—the new or old—yields the greater liability. The tax reform would lead to higher revenue by eliminating all exemptions. Moreover, the new tax package would favor investment and employment as it allows firms to fully offset capex and workers' compensation. However, with no exemption for interest payments, highly leveraged firms would be disadvantaged. Fiscal stimulus would be largely unchanged initially because the additional revenue would be spent on education and poverty alleviation. Some of the revenue would also be used to help fund the privatization of
the civil servants pension system.”
From Merrill Lynch: “The US economy has moved from the middle of the pack in 2006 to the end of the line in 2007; and the performance of the S&P 500 this year has hinged critically on owning sectors/companies with deep foreign exposure. Capital goods exports remain a source of strength The export boom is not just an Asian story, although US shipments to the region is up 10% year-on-year. But we also see that exports to the Pacific Rim have risen 13% and the leader is actually South America, which has taken in American-made goods at an impressive 17% pace in the past 12 months.”
From The Financial Times: “Fertilizer production is undergoing a significant structural change as production facilities increasingly move from regions such as the US, Europe and former Warsaw Pact countries…where [natural] gas prices are high, to areas where gas prices are low because of local supply…increasingly moving to the Middle East …High gas prices, rising global demand for agricultural products because of population increase, and burgeoning demand for biofuels have resulted in a booming market for fertilizer around the world…Algeria has the third largest reserves of natural gas in the world.”
From Bloomberg: “A mystery malady that's killing U.S. honeybees has also been found in Europe, Asia and South America, raising the possibility of global colony collapse… Die-offs in bees used commercially to pollinate almonds, apples and oranges may eventually affect production of U.S. crops valued at $14.6 billion, according to the Department of Agriculture. U.S. crop production so far has not been harmed partly because of bee imports. Global collapse would curtail that option… The disorder, which killed up to 90 percent of the bees in some U.S. hives last winter, has been found in 35 states and one Canadian province…” [Another factor that could push up food prices]
Existing Home Sales Fall to a Four Year Low in May/ Supply at 15 Year High
As expected, existing home sales fell -.3% MoM, to a new low for this housing slump. In addition, inventory rose 6% MoM, to 8.9 months of supply at the current sales pace, and a 15 year high. Median sales prices fell -2.1% YoY, for the tenth consecutive monthly decline in YoY home prices.
Single-family home sales fell -.8% MoM and are down -10.8% YoY. The supply has risen to 8.7 months, and the median price has fallen -2.4% YoY.
Condos sales rose +2.6% MoM and are only down -6.7% YoY. The supply has fallen to 9.7 months, from a peak of 10 months in April. Existing condo prices have declined -.4% YoY.
Seasonally adjusted, total sales fell -.8% MoM. The Northeast had a 6.9% MoM gain in sales, followed by a +.8% MoM gain in the Midwest. The West saw a -.9% MoM decline, followed by the South with a -4.1% MoM decline. The gain in the Northeast appears to have been payback for the unusually weak sales the prior two months (-12.2% and -8.9%).
This data reflects actual purchase agreements made one to two months before the contract signing represented in these figures. So, these figures are just beginning to feel the impact of the subprime fall-out and tightening credit standards. The housing market is expected to remain depressed for the rest of the year, and will continue to impede economic growth. A study for the Joint Center for Housing Studies at Harvard University indicates that housing and the related industries (furniture, appliances, etc) account for 23% of the U.S. economy.
Single-family home sales fell -.8% MoM and are down -10.8% YoY. The supply has risen to 8.7 months, and the median price has fallen -2.4% YoY.
Condos sales rose +2.6% MoM and are only down -6.7% YoY. The supply has fallen to 9.7 months, from a peak of 10 months in April. Existing condo prices have declined -.4% YoY.
Seasonally adjusted, total sales fell -.8% MoM. The Northeast had a 6.9% MoM gain in sales, followed by a +.8% MoM gain in the Midwest. The West saw a -.9% MoM decline, followed by the South with a -4.1% MoM decline. The gain in the Northeast appears to have been payback for the unusually weak sales the prior two months (-12.2% and -8.9%).
This data reflects actual purchase agreements made one to two months before the contract signing represented in these figures. So, these figures are just beginning to feel the impact of the subprime fall-out and tightening credit standards. The housing market is expected to remain depressed for the rest of the year, and will continue to impede economic growth. A study for the Joint Center for Housing Studies at Harvard University indicates that housing and the related industries (furniture, appliances, etc) account for 23% of the U.S. economy.
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