Consensus Prior
Monday, 8/13
July Advance Retail Sales +.2% -.9%
Ex-Autos +.4% -.4%
Small rebound expected following steep decline in June
Furniture and restaurant sales expected to grow
Auto and apparel sales expected to be weak
Gasoline prices fell, which will reduce service station sales
Volume expected to be unchanged
June Business Inventories +.4% +.5%
Manufacturing rose +.3% and wholesale inventories rose +.5%
Tuesday, 8/14
June Trade Balance -$61B -$60B
Higher petroleum prices should push up imports (oil prices up 5% in June)
Global growth at record levels supports moderate export expansion
July Producer Price Index MoM +.1% -.2%
YoY +3.5% +3.3%
PPI Ex-Food and Energy MoM +.2% +.3%
YoY +2.5% +1.8%
Food prices expected to rise faster than energy prices
Seasonal factors, due to new model year, make auto prices volatile in July
Wednesday, 8/15
July Consumer Price Index MoM +.1% +.2%
YoY +2.5% +2.7%
CPI Ex-Food and Energy MoM +.2% +.2%
YoY +2.2% +2.2%
Larger incentives should reduce new auto prices
Pull-back expected after 6.1% rise in hotel prices over last three months
Rental vacancy rate has eased slightly to 9.5% from 10.1%
Tenant rent and OER expected to rise +.2% MoM
Retail gasoline prices fell 3% in July
Core inflation growing at trend +2.2% YoY, but headline should ease from +2.7% YoY of past two months to +2.5% YoY
August Empire Manufacturing 18 26.5
Expected to weaken following softer data from other regional surveys and national ISM last month
One of the stronger regions with new orders rising and strong shipments
June Total Net TIC Flows $105.9B
Net Long-Term TIC Flows $62.5B $126.1B
Net long-term TIC flows hit a record high in May, expected to ease back in June
Central bank demand for Treasuries appears to be cooling – averaged only $600mln purchases per month YTD
Saw good demand for Agencies, corporate bonds and equities last month
July Industrial Production +.3% +.5%
Hours worked were flat
Manufacturing ISM weakened, but vehicle production rose sharply
Cooler than normal July reduced utility demand
July Capacity Utilization 81.8% 81.7%
Sitting at high end of range for this year, and above long-term ave of 81%
August NAHB Housing Market Index 23 24
Sitting at low for this cycle, after falling 15 points since February
Record low is 20 set in 1991
Thursday, 8/16
Initial Jobless Claims 313k 316k
Have risen for last two weeks
July Housing Starts 1400k 1467k
Expected to fall -4.5% to the cycle low of January
Permits now running below starts
July Building Permits 1410k 1413k
Building permits hit a new cycle low in June, and they aren’t expected to recover soon as homebuilder sentiment remains weak
Multifamily permits at risk following surprise 13% gain last month
June single-family permits hit lowest level in a decade
August Philadelphia Fed 8 9.2
Most manufacturers upbeat in region, but capital goods producers indicated slower activity in the Beige book
Friday, 8/17
August Preliminary Univ. of Mich. Consumer Confidence 88 90.4
First look at consumer sentiment since stock market decline and credit crunch
Unemployment rate increased in July
Lower gasoline prices should cushion some of the drop
Five year inflation expectations rose to 3.1% last month, the high end of recent range
St. Louis Fed President Poole speaks on “US Export Opportunities”
Friday, August 10, 2007
July Import Prices Indicate Accelerating Inflation
High oil prices helped push import prices up +1.5% MoM (consensus +1%), the largest monthly increase since March.
Oil prices rose 7% MoM in July, and +4.1% YoY. If petroleum prices are excluded, import prices rose a much more modest +.2% MoM. Ex-petroleum prices have risen steadily for the last five months.
Food and beverage prices have also been rising, up +1.6% MoM in July and +9.8% YoY (the largest annual increase in 12 years). All categories show increases MoM and YoY in July, indicating that price rises are pervasive. This is partially due to the declining value of the dollar, which has been testing 12 year lows.
Over the last year, import prices have risen +2.8% YoY. This is a sharp increase from the +2% YoY revised increase reported last month.
Costs for Chinese imports have accelerated to a record high of +.4% MoM (records only go back to 2003), and are up +2.3% YoY. Conversely, Japan continues to export deflation, with prices down -.2% MoM and -.7% YoY.
Oil prices rose 7% MoM in July, and +4.1% YoY. If petroleum prices are excluded, import prices rose a much more modest +.2% MoM. Ex-petroleum prices have risen steadily for the last five months.
Food and beverage prices have also been rising, up +1.6% MoM in July and +9.8% YoY (the largest annual increase in 12 years). All categories show increases MoM and YoY in July, indicating that price rises are pervasive. This is partially due to the declining value of the dollar, which has been testing 12 year lows.
Over the last year, import prices have risen +2.8% YoY. This is a sharp increase from the +2% YoY revised increase reported last month.
Costs for Chinese imports have accelerated to a record high of +.4% MoM (records only go back to 2003), and are up +2.3% YoY. Conversely, Japan continues to export deflation, with prices down -.2% MoM and -.7% YoY.
Thursday, August 9, 2007
Today's Tidbits
Credit Crunch Likely to Lead to Recession
From FTN: “This is an old-fashioned credit crunch, something that has not happened in the US or Europe since the 1980s….This is not a small thing. A credit crunch – when the short-term credit markets seize up – is extraordinarily serious, almost always the precursor of a significant recession, and the fact that the ECB loaned $130bn last night suggests a severe absence of liquidity in the European banking system. Two of the biggest misunderstandings about this financial crisis are: 1. that it is a subprime mortgage crisis and 2. that it is hurting Wall Street and hedge funds, not Main Street. Subprime mortgages may have been the initial cause of the crisis, but it is becoming difficult to fund everything from jumbo mortgages to commercial loans. Spreads have widened across the board. Wall Street will be just fine once it adjusts to the new environment. End users of credit will be the ones to suffer, something that cannot happen without economic fallout. No economic expansion can long survive a significant decline in lending, even if it is a decline from “unrealistic” levels.”
From Bear Stearns: “Financial institutions are in capital accumulation and preservation mode. The incentive to lend is not evident…Spreads are widening, reflecting the increased cost of credit.”
Central Banks Worried About Liquidity
From Bloomberg: “The cost of borrowing dollars overnight jumped to the highest level in more than six years as the collapse of the U.S. subprime market made it harder for banks to secure funds…The overnight rate jumped to 5.86 percent today from 5.35 percent yesterday. “As liquidity is drying up, lines of credit are being pulled and commercial pater is more difficult to issue, so there appears to be a dash for cash… Unable to access the market or dispose of securities in an orderly fashion, banks and institutions are raising their desired holdings of cash. Greater demand, with supply unchanged, equals a higher price.””
From JP Morgan: “The drying up of short-term liquidity to financial institutions is a more serious concern to central banks than the shutdown in term credit financing
as credit reprices in a disorderly fashion. As a result, the ECB took action in order to protect the functioning of the Euro area money markets. It announced a special refi operation in which it agreed accept all bids at the current 4% policy target rate. This is first refi operation of this type conducted since the attacks of September 11. They allocated 94.8 billion euros today. In the first operation after September 11, they
allocated 69.3 billion euros. This action by the ECB sends two signals. First, that they are ready to provide liquidity to insure the smooth operation of European money markets.
Second, they are providing liquidity at their policy rate and thus far are not viewing a liquidity squeeze as a more fundamental reason to adjust its policy stance… the spreading of stress in the financial system highlights that we are far from a position of stability. That financial institutions are being constrained by a need to insure adequate liquidity and capital poses risks to the overall availability of credit in the coming months. The
spreading of credit problems to Europe will also weigh on global financial markets -- notably equities which have taken a step down this morning.”
From Market News International: “Fed Chairman Ben Bernanke appears to be bending over backward not to appear panicky in the face of mounting market fears that the subprime mess is spreading throughout the financial system and threatening an economically damaging "credit crunch." So far, as Fed watchers eagerly awaited a statement from the U.S. central bank, the Fed has chosen to let its body language -- its open market operations -- to convey its intention to ensure that there is adequate liquidity. But the New York Federal Reserve Bank's $24 billion reserve "add" -- $12 billion worth of overnight repurchase agreements plus $12 billion in 14-day repos -- proved unequal to the task of keeping the federal funds rate on target at 5.25%. Funds were trading at 5.5% or higher through much of Thursday morning… Lavorgna [chief U.S. economist for Deutsche Bank] noted that the spread between bank borrowings collateralized by Treasury securities and uncollateralized federal fund loans is a wider than usual 40 basis points. "That tells you there is a lot of fear in the market," he said.”
From Morgan Stanley: “The ECB only knew that there was a liquidity problem as the CP and the money market seized up, but they didn't know how big the problem was. By announcing that 100% of the bids would be allocated, they left it to the market to decide the size of the allocation. It so turned out that there was a huge need. Thus, the operation also helped the ECB to find out how big the problem was. The quick tender was part of the discovery procedure. The important message from the ECB is that they stand ready to do whatever is necessary. The EUR 94 bn question now is which (and how many) of the players are not only illiquid but insolvent.”
President Says No to Raising GSE Portfolio Caps Now
From Bloomberg: “President George W. Bush said Fannie Mae and Freddie Mac must first complete a ``robust reform package'' before…[“] I will consider other options,'' Bush told reporters at a White House news conference in response to a question about whether the two companies would be allowed to buy more mortgages to help spur the housing
market… Fannie Mae must limit its portfolio to $727.2 billion, its level on Dec. 31, 2005, while Freddie Mac must restrict annual growth of its $712.1 billion portfolio to 2 percent.
Fannie Mae and Freddie Mac own or guarantee 40 percent of the nation's $10.9 trillion residential mortgage market…”
30 Year Treasury Auction Suffers From Buyers Strike
From Lehman: “6 basis point tail in the long end, not surprisingly, putting massive pressure on the long end. 2s 30s now 16bp steeper on the day…”
From JP Morgan: “the issue only covered 1.57 times…the lowest for a bond auction since the 2/00 auction. Also, only 12.1% went to indirect bidders, which means the Street ended up w/ 7.895bb of the new issue.”
From Morgan Stanley: “…we are finally getting underlying signals that the re-pricing of risk is working its way down into the backend of the Treasury market – risk premiums and steeper curves are back. Put it this way, you know that the tide is changing when a Treasury auction is seen as a catalyst for risk assets to cheapen further…”
Fed Study of Carry Trade in Japan
From Dow Jones: “Japanese official institutions appear to have the largest positions in the yen carry trade, with more than 20 times more invested than the second-largest carry traders, Japanese banks, according to a report Wednesday from the U.S. Federal Reserve.
But the study was quick to note that there are are no published data on the magnitude of the yen carry trade through derivatives markets. That’s important, because it is in these markets that hedge funds, investment banks, charitable endowments and other investors that are thought to be lurking, with massive, and often times leveraged, carry trade positions. It’s possible that the positions held by these groups dwarf those of Japanese
official institutions. The 31-page report, titled “What Can The Data Tell Us About Carry Trades In Japanese Yen?,” was released in Washington by the Federal Reserve Board.
In defining the carry trade, the report said that “at its narrowest the carry trade refers to borrowing in low-interest currencies to fund deposits in high-interest currencies. At its
broadest the carry trade refers to any financial transaction that increases one’s high-yielding assets relative to one’s low-yielding assets.” This yen is the most common currency used in the borrowing phase of this strategy because Japan has had the lowest
interest rates in the world for more than 10 years, with its official rate currently at just 0.50%.”
MISC
From Deutsche Bank: “The Overnight LIBOR-fed funds target has risen to the highest level since the aftermath of the 9/11 terrorist attacks, and is now at 61 bp, while the average has been around 5 bp.”
From RBSGC: “The Fed Fund Futures market now prices in near certainty of an ease at the next FOMC meeting - Sept 18.”
From Market News International: “The investment by the Chinese government's new sovereign wealth fund in The Blackstone Group ahead of the private equity firm's initial public offering has fallen short of expectations, a government official familiar with the situation told Market News International, prompting a rethink of its investment strategy.”
From Goldman Sachs: “The central banks and the governments in the Eurozone are prohibited by EU rules from bailing out banks (or anyone else) in trouble. Hence, the solution to isolated cases is to get a "friendly" public or private institution to step in. But what's the capacity of the system to do this? Nobody knows (not even the central banks, I am sure), but if there are more institutions in trouble and/or there is a really big one (relative to the balance sheets of those "friendly institutions"), then you have greater problem to which there is only one solution: Fire fighting. Get the ECB to provide liquidity, and that’s what happened this morning….we are left with the following questions: Who are the CEO(s) who made that (or those) calls to the central banks that they could not survive until the next tender on Tuesday?”
From Bloomberg: “The U.S. economy will grow less than previously forecast as a rout in subprime borrowing hampers consumer spending, according to a survey of economists … Rising delinquencies in the subprime mortgage market are prompting lenders to limit the availability of credit, which may mean Americans buy fewer cars and spend less on vacations. The slackening expansion won't force the Federal Reserve to lower interest rates for the rest of the year as officials stay focused on taming inflation, economists said.”
From Deutsche Bank: “…the worst is by no means past us. One transmission mechanism that we would monitor closely is the subprime effect on European and Asian banks. Some of the mark-to-market losses can be hidden for extended periods, but when actual default experience starts to pick up and investors feel actual cash flow losses, high event risk should become more evident.”
From Dow Jones: “The back-to-school shopping season had a shaky start in July, stoking worries that consumers are feeling the pinch of a stumbling housing market and stiff prices for gasoline and food. Wal-Mart Stores Inc.’s July sales were slightly better than Wall Street had expected, but the big discounter cited strong demand among budget-minded shoppers for its low-priced groceries, as well as aggressive price cuts it began at the start of the month. At the malls, chains like Macy’s Inc., Gap Inc. and AnnTaylor Stores Corp. reported declines in comparable sales as they struggled to lure customers with heavy promotions.”
From Merrill Lynch: “Unlike Fed officials, we think that "diversification" introduces its own form of contagion, versus the LTCM form of contagion, as counter-party risk surges in the current context, secondary markets become highly illiquid, security prices are neither market determined, nor known, and a seizure of risk taking can nonetheless emerge - where market participants "disengage from risk taking" - just as they did in
August-October 1998 …”
From Merrill Lynch: “At an FOMC meeting several years ago, then Governor Janet Yellen asked Alan Greenspan what his definition of price stability was, and he didn't respond with 1-2% on "core". He said zero on the headline. But he added that the government statistics were so imperfect that one could not really target a CPI or PCE price index. This is key.”
From RBSGC: “…during the August- October 1998 credit crunch and also in June-July 2003 convexity event, GSEs grew their retained portfolio by almost 10%-15% providing much needed liquidity in the market.”
From Merrill Lynch: “This is a James Cramer market - it's manic.”
End-of-Day Market Update
From Bloomberg: “Treasuries rose, pushing the two-year note's yield down the most since 2004… Yields on short-term loans to packagers of consumer and business debt rose
to a six-year high today as subprime mortgage losses chastened money-market investors… Ten-year yields exceeded two-year yields by 27 basis points, the widest difference, or spread, since September 2005…” [2y Treasury yields down 22 to 4.44%, 10y Treasury yields drop 7 to 4.77%. 2/10 Treasury curve has bull steepened by 14bp]
From UBS: “Swaps saw heavy volume in curve trades all day long, and 10-year spreads ranged from 68.5bps to 72bps, finishing the day at 69.5bps. Front end swap spreads widened significantly more. Agencies saw mixed flows and traded mixed to swaps. Mortgages were under pressure all day with volatility up, and were 10 ticks wider to Treasuries and 8 ticks wider to swaps.”
From RBSGC: “Equities plunged lower -- with the major U.S. indices down -2% on the day -- solid downtrade, but still shy of the recent lows.” [Dow down 387, S&P down 44]
From CNN: “The Dow suffered its second worst session of the year Thursday as worries about the global credit market sparked a broad selloff in stocks, following a three-session rally. Bond prices rose as jittery investors dumped stocks in favor of the so-called safer haven of Treasuries… The Dow's decline Thursday equaled a loss of 2.8 percent…The broader S&P 500 index dropped 2.9 percent.”
The dollar index rose .46 to 80.79, and gold fell $13.
Oil fell to a new one month low, closing down 56 cents to $71.59 for WTI futures.
From FTN: “This is an old-fashioned credit crunch, something that has not happened in the US or Europe since the 1980s….This is not a small thing. A credit crunch – when the short-term credit markets seize up – is extraordinarily serious, almost always the precursor of a significant recession, and the fact that the ECB loaned $130bn last night suggests a severe absence of liquidity in the European banking system. Two of the biggest misunderstandings about this financial crisis are: 1. that it is a subprime mortgage crisis and 2. that it is hurting Wall Street and hedge funds, not Main Street. Subprime mortgages may have been the initial cause of the crisis, but it is becoming difficult to fund everything from jumbo mortgages to commercial loans. Spreads have widened across the board. Wall Street will be just fine once it adjusts to the new environment. End users of credit will be the ones to suffer, something that cannot happen without economic fallout. No economic expansion can long survive a significant decline in lending, even if it is a decline from “unrealistic” levels.”
From Bear Stearns: “Financial institutions are in capital accumulation and preservation mode. The incentive to lend is not evident…Spreads are widening, reflecting the increased cost of credit.”
Central Banks Worried About Liquidity
From Bloomberg: “The cost of borrowing dollars overnight jumped to the highest level in more than six years as the collapse of the U.S. subprime market made it harder for banks to secure funds…The overnight rate jumped to 5.86 percent today from 5.35 percent yesterday. “As liquidity is drying up, lines of credit are being pulled and commercial pater is more difficult to issue, so there appears to be a dash for cash… Unable to access the market or dispose of securities in an orderly fashion, banks and institutions are raising their desired holdings of cash. Greater demand, with supply unchanged, equals a higher price.””
From JP Morgan: “The drying up of short-term liquidity to financial institutions is a more serious concern to central banks than the shutdown in term credit financing
as credit reprices in a disorderly fashion. As a result, the ECB took action in order to protect the functioning of the Euro area money markets. It announced a special refi operation in which it agreed accept all bids at the current 4% policy target rate. This is first refi operation of this type conducted since the attacks of September 11. They allocated 94.8 billion euros today. In the first operation after September 11, they
allocated 69.3 billion euros. This action by the ECB sends two signals. First, that they are ready to provide liquidity to insure the smooth operation of European money markets.
Second, they are providing liquidity at their policy rate and thus far are not viewing a liquidity squeeze as a more fundamental reason to adjust its policy stance… the spreading of stress in the financial system highlights that we are far from a position of stability. That financial institutions are being constrained by a need to insure adequate liquidity and capital poses risks to the overall availability of credit in the coming months. The
spreading of credit problems to Europe will also weigh on global financial markets -- notably equities which have taken a step down this morning.”
From Market News International: “Fed Chairman Ben Bernanke appears to be bending over backward not to appear panicky in the face of mounting market fears that the subprime mess is spreading throughout the financial system and threatening an economically damaging "credit crunch." So far, as Fed watchers eagerly awaited a statement from the U.S. central bank, the Fed has chosen to let its body language -- its open market operations -- to convey its intention to ensure that there is adequate liquidity. But the New York Federal Reserve Bank's $24 billion reserve "add" -- $12 billion worth of overnight repurchase agreements plus $12 billion in 14-day repos -- proved unequal to the task of keeping the federal funds rate on target at 5.25%. Funds were trading at 5.5% or higher through much of Thursday morning… Lavorgna [chief U.S. economist for Deutsche Bank] noted that the spread between bank borrowings collateralized by Treasury securities and uncollateralized federal fund loans is a wider than usual 40 basis points. "That tells you there is a lot of fear in the market," he said.”
From Morgan Stanley: “The ECB only knew that there was a liquidity problem as the CP and the money market seized up, but they didn't know how big the problem was. By announcing that 100% of the bids would be allocated, they left it to the market to decide the size of the allocation. It so turned out that there was a huge need. Thus, the operation also helped the ECB to find out how big the problem was. The quick tender was part of the discovery procedure. The important message from the ECB is that they stand ready to do whatever is necessary. The EUR 94 bn question now is which (and how many) of the players are not only illiquid but insolvent.”
President Says No to Raising GSE Portfolio Caps Now
From Bloomberg: “President George W. Bush said Fannie Mae and Freddie Mac must first complete a ``robust reform package'' before…[“] I will consider other options,'' Bush told reporters at a White House news conference in response to a question about whether the two companies would be allowed to buy more mortgages to help spur the housing
market… Fannie Mae must limit its portfolio to $727.2 billion, its level on Dec. 31, 2005, while Freddie Mac must restrict annual growth of its $712.1 billion portfolio to 2 percent.
Fannie Mae and Freddie Mac own or guarantee 40 percent of the nation's $10.9 trillion residential mortgage market…”
30 Year Treasury Auction Suffers From Buyers Strike
From Lehman: “6 basis point tail in the long end, not surprisingly, putting massive pressure on the long end. 2s 30s now 16bp steeper on the day…”
From JP Morgan: “the issue only covered 1.57 times…the lowest for a bond auction since the 2/00 auction. Also, only 12.1% went to indirect bidders, which means the Street ended up w/ 7.895bb of the new issue.”
From Morgan Stanley: “…we are finally getting underlying signals that the re-pricing of risk is working its way down into the backend of the Treasury market – risk premiums and steeper curves are back. Put it this way, you know that the tide is changing when a Treasury auction is seen as a catalyst for risk assets to cheapen further…”
Fed Study of Carry Trade in Japan
From Dow Jones: “Japanese official institutions appear to have the largest positions in the yen carry trade, with more than 20 times more invested than the second-largest carry traders, Japanese banks, according to a report Wednesday from the U.S. Federal Reserve.
But the study was quick to note that there are are no published data on the magnitude of the yen carry trade through derivatives markets. That’s important, because it is in these markets that hedge funds, investment banks, charitable endowments and other investors that are thought to be lurking, with massive, and often times leveraged, carry trade positions. It’s possible that the positions held by these groups dwarf those of Japanese
official institutions. The 31-page report, titled “What Can The Data Tell Us About Carry Trades In Japanese Yen?,” was released in Washington by the Federal Reserve Board.
In defining the carry trade, the report said that “at its narrowest the carry trade refers to borrowing in low-interest currencies to fund deposits in high-interest currencies. At its
broadest the carry trade refers to any financial transaction that increases one’s high-yielding assets relative to one’s low-yielding assets.” This yen is the most common currency used in the borrowing phase of this strategy because Japan has had the lowest
interest rates in the world for more than 10 years, with its official rate currently at just 0.50%.”
MISC
From Deutsche Bank: “The Overnight LIBOR-fed funds target has risen to the highest level since the aftermath of the 9/11 terrorist attacks, and is now at 61 bp, while the average has been around 5 bp.”
From RBSGC: “The Fed Fund Futures market now prices in near certainty of an ease at the next FOMC meeting - Sept 18.”
From Market News International: “The investment by the Chinese government's new sovereign wealth fund in The Blackstone Group ahead of the private equity firm's initial public offering has fallen short of expectations, a government official familiar with the situation told Market News International, prompting a rethink of its investment strategy.”
From Goldman Sachs: “The central banks and the governments in the Eurozone are prohibited by EU rules from bailing out banks (or anyone else) in trouble. Hence, the solution to isolated cases is to get a "friendly" public or private institution to step in. But what's the capacity of the system to do this? Nobody knows (not even the central banks, I am sure), but if there are more institutions in trouble and/or there is a really big one (relative to the balance sheets of those "friendly institutions"), then you have greater problem to which there is only one solution: Fire fighting. Get the ECB to provide liquidity, and that’s what happened this morning….we are left with the following questions: Who are the CEO(s) who made that (or those) calls to the central banks that they could not survive until the next tender on Tuesday?”
From Bloomberg: “The U.S. economy will grow less than previously forecast as a rout in subprime borrowing hampers consumer spending, according to a survey of economists … Rising delinquencies in the subprime mortgage market are prompting lenders to limit the availability of credit, which may mean Americans buy fewer cars and spend less on vacations. The slackening expansion won't force the Federal Reserve to lower interest rates for the rest of the year as officials stay focused on taming inflation, economists said.”
From Deutsche Bank: “…the worst is by no means past us. One transmission mechanism that we would monitor closely is the subprime effect on European and Asian banks. Some of the mark-to-market losses can be hidden for extended periods, but when actual default experience starts to pick up and investors feel actual cash flow losses, high event risk should become more evident.”
From Dow Jones: “The back-to-school shopping season had a shaky start in July, stoking worries that consumers are feeling the pinch of a stumbling housing market and stiff prices for gasoline and food. Wal-Mart Stores Inc.’s July sales were slightly better than Wall Street had expected, but the big discounter cited strong demand among budget-minded shoppers for its low-priced groceries, as well as aggressive price cuts it began at the start of the month. At the malls, chains like Macy’s Inc., Gap Inc. and AnnTaylor Stores Corp. reported declines in comparable sales as they struggled to lure customers with heavy promotions.”
From Merrill Lynch: “Unlike Fed officials, we think that "diversification" introduces its own form of contagion, versus the LTCM form of contagion, as counter-party risk surges in the current context, secondary markets become highly illiquid, security prices are neither market determined, nor known, and a seizure of risk taking can nonetheless emerge - where market participants "disengage from risk taking" - just as they did in
August-October 1998 …”
From Merrill Lynch: “At an FOMC meeting several years ago, then Governor Janet Yellen asked Alan Greenspan what his definition of price stability was, and he didn't respond with 1-2% on "core". He said zero on the headline. But he added that the government statistics were so imperfect that one could not really target a CPI or PCE price index. This is key.”
From RBSGC: “…during the August- October 1998 credit crunch and also in June-July 2003 convexity event, GSEs grew their retained portfolio by almost 10%-15% providing much needed liquidity in the market.”
From Merrill Lynch: “This is a James Cramer market - it's manic.”
End-of-Day Market Update
From Bloomberg: “Treasuries rose, pushing the two-year note's yield down the most since 2004… Yields on short-term loans to packagers of consumer and business debt rose
to a six-year high today as subprime mortgage losses chastened money-market investors… Ten-year yields exceeded two-year yields by 27 basis points, the widest difference, or spread, since September 2005…” [2y Treasury yields down 22 to 4.44%, 10y Treasury yields drop 7 to 4.77%. 2/10 Treasury curve has bull steepened by 14bp]
From UBS: “Swaps saw heavy volume in curve trades all day long, and 10-year spreads ranged from 68.5bps to 72bps, finishing the day at 69.5bps. Front end swap spreads widened significantly more. Agencies saw mixed flows and traded mixed to swaps. Mortgages were under pressure all day with volatility up, and were 10 ticks wider to Treasuries and 8 ticks wider to swaps.”
From RBSGC: “Equities plunged lower -- with the major U.S. indices down -2% on the day -- solid downtrade, but still shy of the recent lows.” [Dow down 387, S&P down 44]
From CNN: “The Dow suffered its second worst session of the year Thursday as worries about the global credit market sparked a broad selloff in stocks, following a three-session rally. Bond prices rose as jittery investors dumped stocks in favor of the so-called safer haven of Treasuries… The Dow's decline Thursday equaled a loss of 2.8 percent…The broader S&P 500 index dropped 2.9 percent.”
The dollar index rose .46 to 80.79, and gold fell $13.
Oil fell to a new one month low, closing down 56 cents to $71.59 for WTI futures.
Wednesday, August 8, 2007
Today's Tidbits
HUD and OFHEO Considering Raising GSE Limits
From Bloomberg: “U.S. Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac in order to increase liquidity in the mortgage market. Jackson said today that he and Fannie Mae Chief Executive Officer Daniel Mudd talked about the government-chartered company's request to be allowed to buy mortgages beyond a current $722.5 billion federal limit. ``I told him we will take it under advisement and give him an answer probably by tomorrow,'' Jackson said in an interview in Washington. In addition to Mudd, Jackson also spoke yesterday with James Lockhart, director of the Office of Federal Housing Enterprise Oversight, about allowing Fannie Mae and Freddie Mac to buy mortgages that exceed the current federal cap of $417,000.”
China Threatens to Sell Treasury Hoard if U.S. Pushes Tougher Trade Sanctions
From UBS: “China, in an unsubtle response to potential trade sanctions by the US, threatened to flood the markets with US Treasuries from their $1.33 trillion stockpile of foreign reserves…Should China follow-through on the threat, liquidating some portion of the estimated $900 billion of US bond holdings, yields could be driven much higher as the dollar collapsed, and swap spreads could narrow rapidly. Although we believe China is unlikely to follow-through on such a threat, given the profound ramifications to their own economy, speculation in the financial press can add to the volatility.”
Subprime Problems Impacting “Low Risk” Commercial Paper Markets
From Bloomberg: “Companies are extending payments on commercial paper backed by home loans for the first time as the subprime mortgage crisis spreads to debt perceived to be among the safest in the market, according to Moody's Investors Service. Units of American Home Mortgage Investment Corp., the residential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and
Aladdin Capital Management LLC, this week exercised an option allowing them to delay repaying the debt, Moody's said. The three issuers are probably the only ones to defer
payments since extendible asset-backed commercial paper was first sold 12 years ago, according to New York-based Moody's. The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free… commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities… Extendible notes allow the issuer to delay repayment for as long as 397 days, the maximum U.S. money market funds may hold… Asset-backed commercial paper comprises about half, or $1.15 trillion, of the $2.16 trillion in commercial paper outstanding, with extendible notes making up about 15 percent of the asset-backed portion, or about $172.5 billion, according to Moody's. Investors are demanding higher interest rates on so-called asset-backed commercial paper, extendible or not, than on commercial paper issued by companies like General Electric Co. and Citigroup Inc. to fund their operations, because of concern about the value of the collateral. Extendible asset-backed commercial paper yesterday carried yields of 5.75 percent to 5.95 percent, compared with 5.45 percent for asset-backed commercial paper that isn't extendible
and 5.25 percent to 5.30 percent for corporate commercial paper.. ``Commercial paper buyers are notoriously risk averse because they have such thin margins,''…”
NAR Expects Existing Home Sales to Drop to 5y Low, New Home Sales to 10y Low
From Bloomberg: “U.S. home sales will tumble to a five-year low this year as a widening credit crunch reduces the number of buyers who can get mortgages, the National Association of Realtors said today. Sales of previously owned homes probably will fall 6.8 percent …the real estate trade group said today in its monthly forecast, lowering its outlook for the eighth time this year. New-home sales, which account for about 15 percent of the housing market, probably will fall 19 percent to … a 10-year low…”
From Dow Jones: “Toll Brothers Inc. said its fiscal third-quarter home-building
revenue fell 21% from a year earlier to $1.21 billion as the industry continues to struggle against a housing market further weakened by turmoil in mortgage markets.”
JOLTS Employment Data Shows New Hiring Slowing to 3 Year Low
From JP Morgan: “The hires rate slipped from 3.6% to 3.4% in June, the lowest level since fall 2004. But the separation rate was unchanged and the job openings rate edged up… The job openings rate remains near its cycle-high, pointing to labor shortages in some industries. This is consistent with the low unemployment rate and the high net percent of firms reporting job openings in the NFIB small business survey. The JOLTS indicates that the slowdown in nonfarm payroll growth between 2006 and 1H07 has been due mainly to a decline in new hiring, as opposed to a surge in separations. The quit rate has remained within a narrow range and the layoff and discharge rate is unchanged from a year ago.”
High School Students Better Educated on Basic Economics Than Expected
From Bloomberg: “High school seniors in the U.S. know more about personal finance and the world economy than about reading or math, according to the first nationwide exam in economics. In the test, administered last year, 79 percent of 12th-grade students demonstrated at least basic knowledge…The fact the test was conducted at all shows that the nation's educators see economics as a mainstream subject…On specific questions, 72 percent of respondents correctly described the benefits and risks of leaving a fulltime job to further one's education, and 60 percent could identify the factors that lead to an increase in the national debt. More than half, 52 percent, showed how commercial banks use money deposited in checking accounts, while only 11 percent showed how a change in the unemployment rate might affect income, spending and production. Performance among racial and ethnic groups varied. Eighty-seven percent of white students were at or above the basic level, compared with 64 percent of Hispanics and 57 percent of blacks.
Fifty-one percent of whites were proficient, as were 21 percent of Hispanics and 16 percent of blacks…Economics courses aren't required in about two-thirds of the
states.”
MISC
From UBS: “Conventional wisdom declares that a flight to quality is delineated by a period of widening credit spreads. The current flight has pushed swap spreads outside the tight range they have inhabited since 2005, and back into the center of the range they occupied in the 2000-04 period.”
From Dow Jones: “The inventories of U.S. wholesalers and demand for their goods grew moderately during June. Wholesale inventories rose by 0.5% for a second straight
month. Sales climbed 0.6%, slowing from their 1.3% surge in May and 1.5% run in April, the Commerce Department said. It was the weakest sales performance since a 0.9% drop in January.”
From JP Morgan: “Japan released more soft economic data, adding to the perception that the pace of economic activity was sluggish at midyear. Core machinery orders—a leading indicator of business equipment spending—tumbled 10%m/m in June.”
From Dow Jones: “Blackstone Group has closed the largest buyout fund ever raised at $21.7 billion, and despite the recent red flags in the debt markets, some of the New York buyout firm’s backers say it already may be thinking about its next offering.”
End-of-Day Market Update
From Lehman: “Treasury yields rose sharply as credit tightened, stocks rallied, and no one showed up for the 10 year auction, which tailed 1.25 bp or so after what was
already a large yield concession. The market did rebound sharply from intraday
lows though, when the stock market reversed in the afternoon and credit widened
as well…. Wednesday's yield changes were roughly as follows: 2 years: +9.1 bp…10 years: +11.3 bp…”
From Bloomberg: “Treasuries fell the most in more than a month…a decline in 10-year notes pushed yields to the highest in almost two weeks…Trading in credit-default swaps showed the risk of owning corporate bonds dropped.”
From UBS: “After a quiet and often choppy session, swap spreads narrowed about 4.5bps or so. Agencies traded in line with swaps for the most part, and saw better selling overall in the 5-year sector. Mortgages outperformed as the Street covered its shorts, finishing 8-9 ticks tighter to Treasuries and 2-3 better to swaps.”
The Dow closed up 154 points today, near the high for the week, and up around 500 points from the low of Monday morning. The rally places the Dow’s closing level back above its 50 day moving average for the first time since July 26th.
The dollar index fell .15 to 80.33. The yen weakened against most currencies, and is down 4.9% YTD versus the euro, as investors jumped back into the carry trade.
The slide in oil price slowed. NY futures prices settled only 13 cents lower after the government reported smaller than expected stockpiles.
From Bloomberg: “U.S. Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac in order to increase liquidity in the mortgage market. Jackson said today that he and Fannie Mae Chief Executive Officer Daniel Mudd talked about the government-chartered company's request to be allowed to buy mortgages beyond a current $722.5 billion federal limit. ``I told him we will take it under advisement and give him an answer probably by tomorrow,'' Jackson said in an interview in Washington. In addition to Mudd, Jackson also spoke yesterday with James Lockhart, director of the Office of Federal Housing Enterprise Oversight, about allowing Fannie Mae and Freddie Mac to buy mortgages that exceed the current federal cap of $417,000.”
China Threatens to Sell Treasury Hoard if U.S. Pushes Tougher Trade Sanctions
From UBS: “China, in an unsubtle response to potential trade sanctions by the US, threatened to flood the markets with US Treasuries from their $1.33 trillion stockpile of foreign reserves…Should China follow-through on the threat, liquidating some portion of the estimated $900 billion of US bond holdings, yields could be driven much higher as the dollar collapsed, and swap spreads could narrow rapidly. Although we believe China is unlikely to follow-through on such a threat, given the profound ramifications to their own economy, speculation in the financial press can add to the volatility.”
Subprime Problems Impacting “Low Risk” Commercial Paper Markets
From Bloomberg: “Companies are extending payments on commercial paper backed by home loans for the first time as the subprime mortgage crisis spreads to debt perceived to be among the safest in the market, according to Moody's Investors Service. Units of American Home Mortgage Investment Corp., the residential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and
Aladdin Capital Management LLC, this week exercised an option allowing them to delay repaying the debt, Moody's said. The three issuers are probably the only ones to defer
payments since extendible asset-backed commercial paper was first sold 12 years ago, according to New York-based Moody's. The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free… commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities… Extendible notes allow the issuer to delay repayment for as long as 397 days, the maximum U.S. money market funds may hold… Asset-backed commercial paper comprises about half, or $1.15 trillion, of the $2.16 trillion in commercial paper outstanding, with extendible notes making up about 15 percent of the asset-backed portion, or about $172.5 billion, according to Moody's. Investors are demanding higher interest rates on so-called asset-backed commercial paper, extendible or not, than on commercial paper issued by companies like General Electric Co. and Citigroup Inc. to fund their operations, because of concern about the value of the collateral. Extendible asset-backed commercial paper yesterday carried yields of 5.75 percent to 5.95 percent, compared with 5.45 percent for asset-backed commercial paper that isn't extendible
and 5.25 percent to 5.30 percent for corporate commercial paper.. ``Commercial paper buyers are notoriously risk averse because they have such thin margins,''…”
NAR Expects Existing Home Sales to Drop to 5y Low, New Home Sales to 10y Low
From Bloomberg: “U.S. home sales will tumble to a five-year low this year as a widening credit crunch reduces the number of buyers who can get mortgages, the National Association of Realtors said today. Sales of previously owned homes probably will fall 6.8 percent …the real estate trade group said today in its monthly forecast, lowering its outlook for the eighth time this year. New-home sales, which account for about 15 percent of the housing market, probably will fall 19 percent to … a 10-year low…”
From Dow Jones: “Toll Brothers Inc. said its fiscal third-quarter home-building
revenue fell 21% from a year earlier to $1.21 billion as the industry continues to struggle against a housing market further weakened by turmoil in mortgage markets.”
JOLTS Employment Data Shows New Hiring Slowing to 3 Year Low
From JP Morgan: “The hires rate slipped from 3.6% to 3.4% in June, the lowest level since fall 2004. But the separation rate was unchanged and the job openings rate edged up… The job openings rate remains near its cycle-high, pointing to labor shortages in some industries. This is consistent with the low unemployment rate and the high net percent of firms reporting job openings in the NFIB small business survey. The JOLTS indicates that the slowdown in nonfarm payroll growth between 2006 and 1H07 has been due mainly to a decline in new hiring, as opposed to a surge in separations. The quit rate has remained within a narrow range and the layoff and discharge rate is unchanged from a year ago.”
High School Students Better Educated on Basic Economics Than Expected
From Bloomberg: “High school seniors in the U.S. know more about personal finance and the world economy than about reading or math, according to the first nationwide exam in economics. In the test, administered last year, 79 percent of 12th-grade students demonstrated at least basic knowledge…The fact the test was conducted at all shows that the nation's educators see economics as a mainstream subject…On specific questions, 72 percent of respondents correctly described the benefits and risks of leaving a fulltime job to further one's education, and 60 percent could identify the factors that lead to an increase in the national debt. More than half, 52 percent, showed how commercial banks use money deposited in checking accounts, while only 11 percent showed how a change in the unemployment rate might affect income, spending and production. Performance among racial and ethnic groups varied. Eighty-seven percent of white students were at or above the basic level, compared with 64 percent of Hispanics and 57 percent of blacks.
Fifty-one percent of whites were proficient, as were 21 percent of Hispanics and 16 percent of blacks…Economics courses aren't required in about two-thirds of the
states.”
MISC
From UBS: “Conventional wisdom declares that a flight to quality is delineated by a period of widening credit spreads. The current flight has pushed swap spreads outside the tight range they have inhabited since 2005, and back into the center of the range they occupied in the 2000-04 period.”
From Dow Jones: “The inventories of U.S. wholesalers and demand for their goods grew moderately during June. Wholesale inventories rose by 0.5% for a second straight
month. Sales climbed 0.6%, slowing from their 1.3% surge in May and 1.5% run in April, the Commerce Department said. It was the weakest sales performance since a 0.9% drop in January.”
From JP Morgan: “Japan released more soft economic data, adding to the perception that the pace of economic activity was sluggish at midyear. Core machinery orders—a leading indicator of business equipment spending—tumbled 10%m/m in June.”
From Dow Jones: “Blackstone Group has closed the largest buyout fund ever raised at $21.7 billion, and despite the recent red flags in the debt markets, some of the New York buyout firm’s backers say it already may be thinking about its next offering.”
End-of-Day Market Update
From Lehman: “Treasury yields rose sharply as credit tightened, stocks rallied, and no one showed up for the 10 year auction, which tailed 1.25 bp or so after what was
already a large yield concession. The market did rebound sharply from intraday
lows though, when the stock market reversed in the afternoon and credit widened
as well…. Wednesday's yield changes were roughly as follows: 2 years: +9.1 bp…10 years: +11.3 bp…”
From Bloomberg: “Treasuries fell the most in more than a month…a decline in 10-year notes pushed yields to the highest in almost two weeks…Trading in credit-default swaps showed the risk of owning corporate bonds dropped.”
From UBS: “After a quiet and often choppy session, swap spreads narrowed about 4.5bps or so. Agencies traded in line with swaps for the most part, and saw better selling overall in the 5-year sector. Mortgages outperformed as the Street covered its shorts, finishing 8-9 ticks tighter to Treasuries and 2-3 better to swaps.”
The Dow closed up 154 points today, near the high for the week, and up around 500 points from the low of Monday morning. The rally places the Dow’s closing level back above its 50 day moving average for the first time since July 26th.
The dollar index fell .15 to 80.33. The yen weakened against most currencies, and is down 4.9% YTD versus the euro, as investors jumped back into the carry trade.
The slide in oil price slowed. NY futures prices settled only 13 cents lower after the government reported smaller than expected stockpiles.
Tuesday, August 7, 2007
Today's Tidbits
Comments on FOMC Statement
From Lehman: “Nothing in this report suggests that the Fed is entertaining cutting
rates anytime soon and supports our view that things would have to get significantly worse for the Fed to respond via a rate cut.”
From Goldman Sachs: “…the inflation bias remains and the majority of the FOMC still sees rate hikes as more likely than rate cuts.”
From FTN: “…the liquidity crisis is a sideshow, irrelevant to the health of the economy.”
From Morgan Stanley: “Fed policymakers may be signaling that they believe we are still in the midst of a needed repricing of risk, as opposed to an outright credit crunch. Moreover, the Fed believes – as we do – that the direct economic loss associated with the subprime problem is relatively modest (on the order of $50 to $100 billion). While volatility, delveraging, and a loss of investor confidence are clearly triggering a significant degree of stress in the financial system at present, such a situation is unlikely to persist since the underlying problem is of a manageable size. The shake-out could end badly for some market players, but in the Fed’s view, it might be more dangerous to risk reinflating the credit bubble by hinting that the Bernanke put is alive and well. In our view, the Fed will certainly act at some point should the situation continue to deteriorate, but the first line of defense might well be something other than a cut in the fed funds rate.”
Moody’s Doesn’t Believe Major Investment Banks at Risk Due To Subprime
From Lehman: “…Moody's conf call affirmed ratings of the large investment banks. Moody's said sub-prime and related risk to Big 5 investment banks (Lehman, Merrill, Goldman, Morgan, and Bear) is "modest". Moody's said financial ramifications of subprime fallout will be manageable and Moody's expects to make no rating changes… Moody's said: 1) banks retain sound liquidity profiles; 2) hung bridge loans are an earnings, not funding, issue. 3) potential for a wider contagion exists, but the firms have likely stress tested and accounted for such a contingency; 4) as to comparisons with 1998, each of biggest banks' earnings are stronger and more diversified than in 1998; 5) in terms of liquidity, commercial banks are in even better shape than the investment banks.”
Jumbo Loans Becoming Relatively More Expensive Than Conforming Mortgages
From The Wall Street Journal: “Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless
they couldn't delay a home purchase…”
From Morgan Stanley: “As highlighted in a front page article in today's WSJ, banks have been jacking up rates for prime jumbo borrowers in recent days. For example, a search of web sites that we conducted yesterday indicated that so-called conforming loans (for amounts of $417,000 or less which can be purchased and securitized by Fannie and Freddie) for 30-year fixed rate mortgages were widely available at rates of 6% to 6.50%. However, while some lenders were still offering rates of 6.50% to 7% for a $1 million 30-year fixed rate loan, a number of very large originators -- such as, Bank of America and E-LOAN -- had hiked their rates to 7.50% to 8%. … well in excess of the traditional spread of 25 bps or so to conforming loans. The problem appears to stem from a breakdown in the securitization pipeline for jumbo mortgages and, if sustained, could do damage to an already quite weak housing market… jumbo mortgages account for about 17% of all mortgage debt outstanding. But, the bulk of these types of loans are not securitized and thus we expect the breakdown in this segment of the market to be relatively short-lived. It seems highly likely that some institutions will step in and start adding these loans to their own books at risk-adjusted spreads that appear very attractive. Indeed, we just rechecked the web sites that we had looked at yesterday and found that some lenders -- such as Bank of America -- had brought their rates back down to levels that appear to be more in line with historic norms.”
Unit Labor Costs Rising Over 4% YoY Indicate End of Business Cycle
From Merrill Lynch: “…unit labor costs are a lagging indicator of the business cycle. In fact, the six-month trend in manufacturing ULC is one of the components that make up the Conference Board's official index of lagging economic indicators. Go back to 4Q2000 and you will see that the y/y trend in ULC accelerated to a 4.3% year-on-year rate. The recession started the very next quarter and the Fed was in major rate-cutting mode. Then go back to 2Q1990, and ULC moved up to 4.0% y/y. Again, recession followed the very next quarter and the Fed was easing policy in a very major way…Lesson: when ULC grips a 4-handle, the historical record tells us that the business cycle is on its last legs and, contrary to popular opinion, the Fed's next move is to cut rates.”
MISC
From Merrill Lynch: “…the CRB Index is down about 11% in the last 12 months, whereas the S&P 500 is up about 12%, and Long Term Treasuries are up about 1-2% (all measured on a price return basis, not total return basis).”
End-of-Day Market Update
Treasuries sold off after the FOMC announcement. The curve flattened as the two year yield settled at 4.55% and the ten year finished at 4.76% (4:45 levels).
Equities rallied after the FOMC announcement and are closing higher on the day. The Dow is +35 and the S&P is +9.
The dollar improved steadily during the day, and the dollar index is closing up +.27 at 80.53.
Oil continued to weaken overnight, but recovered in US hours and is closing up 35 cents.
From Lehman: “Nothing in this report suggests that the Fed is entertaining cutting
rates anytime soon and supports our view that things would have to get significantly worse for the Fed to respond via a rate cut.”
From Goldman Sachs: “…the inflation bias remains and the majority of the FOMC still sees rate hikes as more likely than rate cuts.”
From FTN: “…the liquidity crisis is a sideshow, irrelevant to the health of the economy.”
From Morgan Stanley: “Fed policymakers may be signaling that they believe we are still in the midst of a needed repricing of risk, as opposed to an outright credit crunch. Moreover, the Fed believes – as we do – that the direct economic loss associated with the subprime problem is relatively modest (on the order of $50 to $100 billion). While volatility, delveraging, and a loss of investor confidence are clearly triggering a significant degree of stress in the financial system at present, such a situation is unlikely to persist since the underlying problem is of a manageable size. The shake-out could end badly for some market players, but in the Fed’s view, it might be more dangerous to risk reinflating the credit bubble by hinting that the Bernanke put is alive and well. In our view, the Fed will certainly act at some point should the situation continue to deteriorate, but the first line of defense might well be something other than a cut in the fed funds rate.”
Moody’s Doesn’t Believe Major Investment Banks at Risk Due To Subprime
From Lehman: “…Moody's conf call affirmed ratings of the large investment banks. Moody's said sub-prime and related risk to Big 5 investment banks (Lehman, Merrill, Goldman, Morgan, and Bear) is "modest". Moody's said financial ramifications of subprime fallout will be manageable and Moody's expects to make no rating changes… Moody's said: 1) banks retain sound liquidity profiles; 2) hung bridge loans are an earnings, not funding, issue. 3) potential for a wider contagion exists, but the firms have likely stress tested and accounted for such a contingency; 4) as to comparisons with 1998, each of biggest banks' earnings are stronger and more diversified than in 1998; 5) in terms of liquidity, commercial banks are in even better shape than the investment banks.”
Jumbo Loans Becoming Relatively More Expensive Than Conforming Mortgages
From The Wall Street Journal: “Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless
they couldn't delay a home purchase…”
From Morgan Stanley: “As highlighted in a front page article in today's WSJ, banks have been jacking up rates for prime jumbo borrowers in recent days. For example, a search of web sites that we conducted yesterday indicated that so-called conforming loans (for amounts of $417,000 or less which can be purchased and securitized by Fannie and Freddie) for 30-year fixed rate mortgages were widely available at rates of 6% to 6.50%. However, while some lenders were still offering rates of 6.50% to 7% for a $1 million 30-year fixed rate loan, a number of very large originators -- such as, Bank of America and E-LOAN -- had hiked their rates to 7.50% to 8%. … well in excess of the traditional spread of 25 bps or so to conforming loans. The problem appears to stem from a breakdown in the securitization pipeline for jumbo mortgages and, if sustained, could do damage to an already quite weak housing market… jumbo mortgages account for about 17% of all mortgage debt outstanding. But, the bulk of these types of loans are not securitized and thus we expect the breakdown in this segment of the market to be relatively short-lived. It seems highly likely that some institutions will step in and start adding these loans to their own books at risk-adjusted spreads that appear very attractive. Indeed, we just rechecked the web sites that we had looked at yesterday and found that some lenders -- such as Bank of America -- had brought their rates back down to levels that appear to be more in line with historic norms.”
Unit Labor Costs Rising Over 4% YoY Indicate End of Business Cycle
From Merrill Lynch: “…unit labor costs are a lagging indicator of the business cycle. In fact, the six-month trend in manufacturing ULC is one of the components that make up the Conference Board's official index of lagging economic indicators. Go back to 4Q2000 and you will see that the y/y trend in ULC accelerated to a 4.3% year-on-year rate. The recession started the very next quarter and the Fed was in major rate-cutting mode. Then go back to 2Q1990, and ULC moved up to 4.0% y/y. Again, recession followed the very next quarter and the Fed was easing policy in a very major way…Lesson: when ULC grips a 4-handle, the historical record tells us that the business cycle is on its last legs and, contrary to popular opinion, the Fed's next move is to cut rates.”
MISC
From Merrill Lynch: “…the CRB Index is down about 11% in the last 12 months, whereas the S&P 500 is up about 12%, and Long Term Treasuries are up about 1-2% (all measured on a price return basis, not total return basis).”
End-of-Day Market Update
Treasuries sold off after the FOMC announcement. The curve flattened as the two year yield settled at 4.55% and the ten year finished at 4.76% (4:45 levels).
Equities rallied after the FOMC announcement and are closing higher on the day. The Dow is +35 and the S&P is +9.
The dollar improved steadily during the day, and the dollar index is closing up +.27 at 80.53.
Oil continued to weaken overnight, but recovered in US hours and is closing up 35 cents.
Fed Text
U.S. Federal Open Market Committee Statement: Text2007-08-07 14:14 (New York)
Aug. 7 (Bloomberg) -- The following is the full text of the statement released today by the Federal Reserve:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5 1/4 percent.
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
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.
Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by 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; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh.
--Washington newsroom +1-202-624-1820
Aug. 7 (Bloomberg) -- The following is the full text of the statement released today by the Federal Reserve:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5 1/4 percent.
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
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.
Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by 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; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh.
--Washington newsroom +1-202-624-1820
Productivity and Unit Labor Costs Show Deteriorating Trends
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.
Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.
Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.
Monday, August 6, 2007
End-of-Day Market Update
Treasuries are closing on their lows of the day. Yields are higher across the curve, and the curve has flattenend. Two year Treasury yields are up 8.25bp to 4.50%; ten year Treasury yields are up 5bp to 4.74% vs Friday’s closes, which were near month lows in yields.
Swap spreads opened wider, but are now 2-3bp narrower (tighter) on the day.
After closing at new three month lows on Friday, and below 50, and often 200 day moving averages, depending on the index, equities rallied strongly today. The Dow recovered all of Friday’s decline, and is closing up 287 points at 13,469. The S&P rallied almost 35 points, but didn’t quite recover al of Friday’s losses, but it did move back above its 200 day moving average. The VIX index has retreated from its high of over 25 on Friday to close at 23. This indicator of future equity market volatility (or fear) sat below 15 for most of April and May.
After making a new 15 year low overnight, falling briefly below 80, the dollar index closed very modestly stronger at 80.25, up .08. Most of the improvement was versus the yen rather than the euro. The dollar traded at a new 4 month low versus the yen overnight of 117.2 before recovering to close at 118.9.
Oil had its biggest slide in 2.5 years, losing almost $3.50 in price, or 5% of its value, on concerns about the health of the US economy as credit becomes more expensive and harder to obtain. This follows a move to all-time highs in nominal prices for oil last week. Over the past week WTI futures in NY have traded between a high of $78.77 on August first to a low of $71.60 late this afternoon.
Note all info is based on Bloomberg pricing and indications.
Swap spreads opened wider, but are now 2-3bp narrower (tighter) on the day.
After closing at new three month lows on Friday, and below 50, and often 200 day moving averages, depending on the index, equities rallied strongly today. The Dow recovered all of Friday’s decline, and is closing up 287 points at 13,469. The S&P rallied almost 35 points, but didn’t quite recover al of Friday’s losses, but it did move back above its 200 day moving average. The VIX index has retreated from its high of over 25 on Friday to close at 23. This indicator of future equity market volatility (or fear) sat below 15 for most of April and May.
After making a new 15 year low overnight, falling briefly below 80, the dollar index closed very modestly stronger at 80.25, up .08. Most of the improvement was versus the yen rather than the euro. The dollar traded at a new 4 month low versus the yen overnight of 117.2 before recovering to close at 118.9.
Oil had its biggest slide in 2.5 years, losing almost $3.50 in price, or 5% of its value, on concerns about the health of the US economy as credit becomes more expensive and harder to obtain. This follows a move to all-time highs in nominal prices for oil last week. Over the past week WTI futures in NY have traded between a high of $78.77 on August first to a low of $71.60 late this afternoon.
Note all info is based on Bloomberg pricing and indications.
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