Friday, August 17, 2007
University of Michigan Consumer Confidence drops to lowest level in a year
The August preliminary University of Michigan Confidence number, which is the first survey of consumer confidence following the stock market rout and recent turmoil in the markets, indicates that confidence has been shaken. Confidence plunged to 83.3 in early August, the lowest level in a year. The consensus had been for a drop to 88 from 91.4 in July. Both current conditions and future expectations slipped. Inflation expectations also dropped by .2%, to 3.2% for the next year and 2.9% over the next five years.
U.S. Fed's Cuts Discount Rate; Fed Board Statement (Text)
U.S. Fed's Cuts Discount Rate; Fed Board Statement (Text)
2007-08-17 08:15 (New York)
By Alex Tanzi
Aug. 17 (Bloomberg) -- The following is the text from the
Federal Reserve's Open Market Committee and the Federal Reserve
Board.
Federal Reserve's Open Market Committee
Financial market conditions have deteriorated, and tighter credit
conditions and increased uncertainty have the potential to
restrain economic growth going forward. In these circumstances,
although recent data suggest that the economy has continued to
expand at a moderate pace, the Federal Open Market Committee
judges that the downside risks to growth have increased
appreciably. The Committee is monitoring the situation and is
prepared to act as needed to mitigate the adverse effects on the
economy arising from the disruptions in financial markets.
Voting in favor of the policy announcement were: Ben S.
Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W.
Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin
M. Warsh.
Federal Reserve Board
To promote the restoration of orderly conditions in financial
markets, the Federal Reserve Board approved temporary changes to
its primary credit discount window facility. The Board approved
a 50 basis point reduction in the primary credit rate to 5-3/4
percent, to narrow the spread between the primary credit rate and
the Federal Open Market Committee's target federal funds rate to
50 basis points. The Board is also announcing a change to the
Reserve Banks' usual practices to allow the provision of term
financing for as long as 30 days, renewable by the borrower.
These changes will remain in place until the Federal Reserve
determines that market liquidity has improved materially. These
changes are designed to provide depositories with greater
assurance about the cost and availability of funding. The
Federal Reserve will continue to accept a broad range of
collateral for discount window loans, including home mortgages
and related assets. Existing collateral margins will be
maintained. In taking this action, the Board approved the
requests submitted by the Boards of Directors of the Federal
Reserve Banks of New York and San Francisco.
--Editors: Barrett
2007-08-17 08:15 (New York)
By Alex Tanzi
Aug. 17 (Bloomberg) -- The following is the text from the
Federal Reserve's Open Market Committee and the Federal Reserve
Board.
Federal Reserve's Open Market Committee
Financial market conditions have deteriorated, and tighter credit
conditions and increased uncertainty have the potential to
restrain economic growth going forward. In these circumstances,
although recent data suggest that the economy has continued to
expand at a moderate pace, the Federal Open Market Committee
judges that the downside risks to growth have increased
appreciably. The Committee is monitoring the situation and is
prepared to act as needed to mitigate the adverse effects on the
economy arising from the disruptions in financial markets.
Voting in favor of the policy announcement were: Ben S.
Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W.
Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin
M. Warsh.
Federal Reserve Board
To promote the restoration of orderly conditions in financial
markets, the Federal Reserve Board approved temporary changes to
its primary credit discount window facility. The Board approved
a 50 basis point reduction in the primary credit rate to 5-3/4
percent, to narrow the spread between the primary credit rate and
the Federal Open Market Committee's target federal funds rate to
50 basis points. The Board is also announcing a change to the
Reserve Banks' usual practices to allow the provision of term
financing for as long as 30 days, renewable by the borrower.
These changes will remain in place until the Federal Reserve
determines that market liquidity has improved materially. These
changes are designed to provide depositories with greater
assurance about the cost and availability of funding. The
Federal Reserve will continue to accept a broad range of
collateral for discount window loans, including home mortgages
and related assets. Existing collateral margins will be
maintained. In taking this action, the Board approved the
requests submitted by the Boards of Directors of the Federal
Reserve Banks of New York and San Francisco.
--Editors: Barrett
Economic Calendar - August 20 – 24, 2007
Consensus Prior
Monday, 8/20
July Leading Indicators +.4% -.3%
Not likely to get much attention as data will feel stale
Boost expected from ISM supplier deliveries, higher stock prices, lower initial jobless claims
Tuesday, 8/21
No Data
Richmond Fed President Lacker speaks at Risk Management Conference
w/ Q&A
Wednesday, 8/22
No Data
Thursday, 8/23
Initial Jobless Claims 315k 322k
Have risen for past three weeks
Four week average 312.5k
Friday, 8/24
July Durable Goods +1% 1.3%
Ex-Transportation +.6% -1%
Modest slowdown in growth anticipated
Computers and metals expected to rebound
Boeing aircraft orders rose by 12% from the previous month
ISM new orders slipped to a 4m low, but remain fairly strong
July New Home Sales 825k 834k
Expected to continue falling by -1.1% in July to a new cyclical low
Dropped by -6.6% in June
Home builders index fell in July
Monday, 8/20
July Leading Indicators +.4% -.3%
Not likely to get much attention as data will feel stale
Boost expected from ISM supplier deliveries, higher stock prices, lower initial jobless claims
Tuesday, 8/21
No Data
Richmond Fed President Lacker speaks at Risk Management Conference
w/ Q&A
Wednesday, 8/22
No Data
Thursday, 8/23
Initial Jobless Claims 315k 322k
Have risen for past three weeks
Four week average 312.5k
Friday, 8/24
July Durable Goods +1% 1.3%
Ex-Transportation +.6% -1%
Modest slowdown in growth anticipated
Computers and metals expected to rebound
Boeing aircraft orders rose by 12% from the previous month
ISM new orders slipped to a 4m low, but remain fairly strong
July New Home Sales 825k 834k
Expected to continue falling by -1.1% in July to a new cyclical low
Dropped by -6.6% in June
Home builders index fell in July
Thursday, August 16, 2007
Today's Tidbits
Record Drop in Commercial Paper Outstanding as Liquidity Shrinks
From Bank of America: “Huge drop in ABCP in the week ending Aug 15-- $48.4 bln, or 4.1% of the market (old record decline had been $19.5 bln in the week of 9/11). In addition, there was a large drop in finanical CP outstanding that pushed overall CP down $91.1 bln, or 4.1% of outstandings (another record-- previous decline was $60.9 bn in the 9/11 week). It is not a surprise that CP outstandings are down, but the size of the decline is surprising-- we are seeing a much more rapid transition from financing in the
CP market to financing elsewhere (repo, bank credit lines, collateral sales,
etc) than we saw in past disruptions in the CP market.”
From Bloomberg: “Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt. The yield on the three-month Treasury bill fell 0.72 percentage point today to 3.38 percent, the lowest since July 2005 and the biggest drop in yield since the stock market crashed on Oct. 20, 1987. Lenders are so concerned about the fallout from rising
delinquencies on subprime mortgages that rates on commercial paper have shot up to 5.90 percent from 5.36 percent a month ago, data compiled by the Federal Reserve show. Commercial paper is debt due in nine months or less and is bought by money-market
funds… Money funds that had been buying corporate commercial paper ``have all switched to the safe side,'' …``I'm sure their managers have all given them a Treasury-
only mandate, at least until the dust settles.''”
Fed Adding Liquidity to Help Reduce Short-Term Funding Problems
From Barclays: “This morning's 8:20 operation is a direct signal by the Fed that they will continue to provide abundant liquidity to the market. This operation is a 14 day operation and should address the concern by many that the Fed had been providing o/n liquidity but that term liquidity was hard to come by.”
From Deutsche Bank: “The Fed is likely to continue to oversupply reserves to the overnight borrowing market, which will have the effect of keeping the funds rate soft relative to target. For instance, the last four days the Fed effective rate has been well under 5%, representing in some sense a de facto (albeit temporary) easing of policy. This may continue into the new reserve maintenance period which begins today. Additionally, the Fed could conceivably build confidence as a liquidity provider in the Fed funds market by extending the length of term repos as it did back in 1999 ahead of Y2K when the maximum maturity of repos was extended from 60 to 90 days. (Longer dated repos may cause financial intermediaries to be more willing, at the margin, to extend credit beyond the very short term.) It has just now announced a $5B 14-day repo operation. But the NY Fed also explicitly emphasized that its operating objective is a 5.25% funds rate. Unfortunately, to this point the added liquidity the Fed has provided has not helped other parts of the money markets, such as asset-backed commercial paper. It is highly unlikely the Fed would change the types of collateral it accepts in open market operations. Nonetheless, to the extent the Fed can come up with innovative ways to provide liquidity to the markets, this would minimize in the short term the need to cut interest rates.
The likelihood of a rate cut by the September FOMC meeting has risen markedly-the market is currently pricing one in-but not sufficiently for us to change our Fed call. Despite severe dislocations in various parts of the financial markets, the Fed does not want to be perceived as bailing out Wall Street unless there is systemic risk from a major financial institution failure, or economic growth slows. As such, the Countrywide situation - this morning it announced that it is tapping an $11.5 bn bank credit line - bears monitoring. The exit out of the commercial paper by money market funds has caused a squeeze in the Treasury bill market. This is likely to continue, as the money markets are in a crisis mode. There is also the possibility that repo liquidity will dry up, so relative value relationships could start to move out of line.”
Likelihood of a Fed Ease
From RBSGC: “The market continues to price in a Fed ease (4.87% October Fed Funds), but I would point out that the market view is quite binary, with some investors thinking the Fed will cut 50 bp before the September meeting and others thinking no rate cuts will happen in 2007. The Fed's apparent position, from Poole's comments, is that so far the credit crunch has not impacted business or consumer spending, and thus any slowdown in economic growth will be minor. They do not want to appear to be bailing out investors (rather than the economy) by lowering interest rates. They are looking for a "calamity", such as a major financial failure, before they step in to lower interest rates.”
From Citi: “The rapid deterioration in financial conditions in recent days is tilting the balance of risks decisively toward economic weakness. We think these developments will prompt the FOMC to cut rates no later than the September 18 FOMC meeting. While officials would no doubt prefer to monitor developments and act on the regular policy cycle, events may compel them to move more urgently over the next few days or weeks. The unprecedented aspects of the current situation may make it difficult for the Committee to reach consensus on a course of action. But it also complicates market participants’ abilities to anticipate what they will do. Nonetheless, in the context of a subpar economy with tentative easing in price pressures, a sharp turn toward restrictive financial conditions and disruptive markets would be undesirable. Moreover, in judging the potential cost of no action, policymakers must weigh the fact that forward markets see a compelling case to move. As a result, we would anticipate an initial reduction of 25 basis points coupled with a statement acknowledging the shift in risk assessments and a readiness to do more. The breadth and depth of tightening in financial conditions is reaching a critical stage that warrants policy action. In just a few days the erosion has spread across the globe and across a wide array of financial instruments. The most basic market making in even modest size and among a range of standard products appears to be breaking down, while liquidity preference and the associated withdrawal from risk taking even over short horizons introduces serious questions about financial stability that could undermine economic activity. The fact that the effective funds rate averaged just 4.79% in the latest statement week suggests officials are sensitive to the risks.”[target is 5.25%]
From RBSGC: “…this is not the Greenspan Fed and we expect they're still concerned with inflation-fighting credibility and so will prove more reluctant to ease than perhaps the Greenspan Fed might have been. And, in any event, we're not sure what a single, say 25 bp, ease would do at the moment that other liquidity provisions are doing. Steepen the curve, yes. Affirm the rates rally, yes. Get investors to move down the credit curve? No. The credit risk premium is a story of restoration and the Fed can perhaps smooth the process, but not reverse it. It's the process that we think will generate deeper repercussions as time goes on, putting eases off for a little while.”
Countrywide
From Bloomberg: “… yesterday … Merrill Lynch … lowered its rating on … Countrywide Financial Corp., the biggest U.S. mortgage lender, to ``sell'' from ``buy'' and raised the possibility of bankruptcy. That would happen if creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, New York-based Merrill Lynch said. Rates for Countrywide's overnight corporate commercial paper were quoted yesterday at 6 percent and 6.5 percent for 30 days…Countrywide tapped an $11.5 billion credit line today to shore up its available cash. The unsecured credit line is with a group of 40 of the world's largest banks, Countrywide said …Last week, Countrywide said it had access to about $187 billion in credit… The perceived risk of owning Countrywide's bonds increased yesterday, according to prices of credit-default swaps. Credit-default swaps on Countrywide soared as much as 425 basis points to 1,025 basis points before rebounding to 705…”
From Morgan Stanley (at 3pm): “CFC Countrwide 5y CDS 600 off the wides..Traded 1050 this a.m, and is currently offered @ 500...”
From LEHC: “In addition to reporting that it had drawn on the “entire amount” of an $11.5 billion credit facility, Countrywide also noted in its press release today that (1) “the Company's primary strategy going forward is to fund its production through Countrywide Bank, FSB. We are already originating in excess of 70 percent of our total origination volume through the Bank, and expect to accelerate our strategy so that nearly all of our volume will be originated in our Bank by the end of September”; and that (2) “Countrywide has materially tightened its underwriting standards for (non-GSE-eligible) loans, and, we now expect that 90 percent of the loans we originate will be GSE-eligible or will meet our Bank's investment criteria.””
From Citi: “…Moody's cut its ratings by three notches…”[to lowest investment grade rating of Baa3]
Consumer Borrowing Correction Overdue
From Merrill Lynch: “The debt binge was never sustainable As Bob Farrell (former dean of Merrill Lynch research) put it in his "Market Rules to Remember", "Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways". Just in case you are into picking the bottom, rule #4 should not be ruled out. Bob also said (Rule #10) that "Bull markets are more fun than bear markets". How true. I know we've developed the reputation of being perma-bears. But we're not. We have a well developed and heartily enforced ethic about being bullish on America. We embrace the history. But, at the same time, we need to preserve the Merrill Lynch edge, if at all possible. We want to make sure that our clients' interests are always well served and at times this has meant telling people "stuff" they didn't want to hear - what we are seeing above the surface today has been building for a year if not more. The amount of leverage, especially geared to the consumer sector, that was being added relative to the income required to service the debt had become increasingly untenable - the debt binge was never sustainable, in our opinion, and it ultimately took the payment shock following 17 Fed rate hikes and corroding real estate values as inventory excess gathered apace, to generate a period of rising delinquencies, defaults and foreclosures.”
Unwind of Carry Trade Pushes Yen to One Year High
From Bloomberg: “The yen advanced the most against the dollar since 1998 as a global rout of stocks and credit markets pushed investors to sell riskier assets funded by loans in Japan. The yen is the strongest most-actively traded currency today as the carry trades unwound. Global stocks tumbled and companies from Australia to Canada sought emergency funds as they were unable to refinance debt. The last time the carry trade crashed was in 1998 after Russia's debt default in August. The yen gained 20 percent in less than two months… The Japanese currency advanced 3.9 percent [today]”
MISC
From RBSGC: “We are now approaching "panic" levels in mortgage pass-throughs, about +190/UST for the current coupon now, the widest print since October 2004. We reached +245/UST in August 2003 briefly as a large commercial bank sold a large stake in 30Y conventional 5s.”
From RBSGC: “We would argue that credit is in the process of getting squeezed even for "good" credits. This will almost eliminate any Mortgage Equity Withdrawal we have seen over the past few years. More importantly, with stocks and home prices falling simultaneously (for the first time in decades), there will be a very negative wealth effect on the consumer. That may take a while to show up in the data.”
From Wachovia: “…foreign holdings of U.S. securities totaled a bit more than $9 trillion. Consequently, foreigners own about 20% of the roughly $43 trillion of U.S. fixed-income securities and corporate equities outstanding. However, foreign holdings as a percentage of total holdings vary widely by type of security. Foreigners currently own about 45% of outstanding Treasury securities, but only 18% and 15% of agency securities and corporate equities, respectively.1 Foreign holdings of corporate bonds and miscellaneous bonds constitute 28% of the total.2 ...1 The percentage for Treasury securities includes the holding of the Federal Reserve System. If only marketable Treasury debt is considered, foreign holdings account for 50% of the total. 2 Not only are debt securities issued by corporations included in the category of “corporate bonds”, but so also are privately originated mortgage-backed securities and other types of asset-backed securities.”
From The Wall Street Journal: “…First American CoreLogic, a housing and mortgage data supplier…recently found that 7% of 32 million U.S. households studied as of December owed more than their homes were worth, based on computer estimates of the property values. An additional 4% had home equity of 55 or less. Since then, house prices have edged down in much of the country, erasing more home equity.”
From The Wall Street Journal: “U.S. lenders originated about $600 billion of subprime home loans in 2006, or 20% of all home mortgages, according to Inside Mortgage Finance…About 56% of those subprime loans were 2/28 mortgages...”
From Bloomberg: “Manufacturing in the Philadelphia region stalled in August, as orders and sales cooled. The Federal Reserve Bank of Philadelphia's general economic
index dropped to zero in August, the dividing line between expansion and contraction, from 9.2 in July…” (consensus was +8.6)
From Bloomberg: “First Magnus Financial Corp., the second-largest privately held U.S. mortgage lender, will stop funding new mortgages, according to a recorded message on a
customer-service line…First Magnus was the 16th-largest U.S. home lender in the
first half of this year, making $17.1 billion in loans…”
From Citi: “Amazing intraday volatility. The high low for 2 months of this year in UST 2Y was 20bps. We moved that and back again in the span of 2 hours this afternoon.”
From Dow Jones: “Analysts at Moody’s Investors Service warned that the credit crunch roiling global markets has the potential to cause the collapse of a major hedge fund that could further disrupt markets. As investors try to unload illiquid investments such as collateralized debt obligations, hedge funds that are unable to exit their positions could run into trouble, Chris Mahoney, vice chairman of Moody’s, said during a conference call with investors. The result could be the “failure and disorderly liquidation of a hedge fund of sufficient size to disrupt markets as (Long Term Capital Management) threatened to do,” he said during the call. Mahoney said the risk of such hedge fund failures will exist
for the next three to six months.”
End-of-Day Market Update
From Suntrust [at 3pm]: “If today doesn't fit Fed's Poole's definition of "calamity", woe be it unto the markets when calamity hits. Markets around the globe are haywire on the unwind of levered trades. The yen is almost 4 figures higher against the dollar and other currencies today from reversals in yen carry trades, where investors borrow the yen and invest in higher yielding assets. The unwind has hit commodities too. The slump in housing starts kicked lumber down $7 at one point. Gold is down $21 (3%), copper almost 7%, oil over
3%. Equities were lower by over 300 points, but have recovered some. Large liquidations were rumored in the 30 yr MBS sector today. Spreads blew out 20-25 bp, then narrowed back in by 10 or so. 2 yr notes traded at 3.96 before talk of a large curve steepener unwind pushed the yield back to 4.08. Rumors of a seller of $1 bln 2's to buy 10 yr notes along with a huge seller of 2's to buy MBS were around. Then the "FED is holding an emergency meeting" rumor swirled, but to no avail. Perhaps capitulation is here and the dust can settle long enough to at least pick up a few pieces.”
From RBSGC [at 4pm]: “More importantly was the pounding in stocks and widening of credit spreads and Fed's recognition of the liquidity crisis with a 12 bn overnight repo, 17 bn in 14-day system repo, and Funds trading at 5 1/16% (i.e. under target). The front end took aggressive action with 2s at one point testing 3.97% and challenging the Fed in the process. The violent action was panicky -- 2s at one point were 31 bp below the day's high -- and rather a 'leveraged' reaction to activity in other markets. There are a few things going on here. First, there is quarter end for a few large financial houses in two weeks which is likely to keep liquidity at a premium and risk appetites lows -- this should keep the market bid, albeit volatility. Second, month end will generate a big Tsy index extension…”
Yesterday’s Today’s Change
Close Low High Close
Dow 12861 12518 12885 12846 -15.7
S&P 1407 1371 1416 1411 +4.6
2y T 4.288 3.97 4.287 4.212 -7.6
5y T 4.451 4.184 4.451 4.348 -10.2
10y T 4.724 4.565 4.724 4.653 -7.1
30y T 5.026 4.911 5.026 4.956 -7
Swap spreads widened 1.5 to 3bp as of 4pm
Yen 116.6 112 116.75 114.4 -2.25
$Index 81.82 81.63 82.13 81.74 -.08
Oil 73.33 70.10 73.14 71.28 -2.05
Gold 667.6 642.3 668.2 653 -14.6
FNM 61.45 59.5 66.1 65.15 +3.7
From Bank of America: “Huge drop in ABCP in the week ending Aug 15-- $48.4 bln, or 4.1% of the market (old record decline had been $19.5 bln in the week of 9/11). In addition, there was a large drop in finanical CP outstanding that pushed overall CP down $91.1 bln, or 4.1% of outstandings (another record-- previous decline was $60.9 bn in the 9/11 week). It is not a surprise that CP outstandings are down, but the size of the decline is surprising-- we are seeing a much more rapid transition from financing in the
CP market to financing elsewhere (repo, bank credit lines, collateral sales,
etc) than we saw in past disruptions in the CP market.”
From Bloomberg: “Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt. The yield on the three-month Treasury bill fell 0.72 percentage point today to 3.38 percent, the lowest since July 2005 and the biggest drop in yield since the stock market crashed on Oct. 20, 1987. Lenders are so concerned about the fallout from rising
delinquencies on subprime mortgages that rates on commercial paper have shot up to 5.90 percent from 5.36 percent a month ago, data compiled by the Federal Reserve show. Commercial paper is debt due in nine months or less and is bought by money-market
funds… Money funds that had been buying corporate commercial paper ``have all switched to the safe side,'' …``I'm sure their managers have all given them a Treasury-
only mandate, at least until the dust settles.''”
Fed Adding Liquidity to Help Reduce Short-Term Funding Problems
From Barclays: “This morning's 8:20 operation is a direct signal by the Fed that they will continue to provide abundant liquidity to the market. This operation is a 14 day operation and should address the concern by many that the Fed had been providing o/n liquidity but that term liquidity was hard to come by.”
From Deutsche Bank: “The Fed is likely to continue to oversupply reserves to the overnight borrowing market, which will have the effect of keeping the funds rate soft relative to target. For instance, the last four days the Fed effective rate has been well under 5%, representing in some sense a de facto (albeit temporary) easing of policy. This may continue into the new reserve maintenance period which begins today. Additionally, the Fed could conceivably build confidence as a liquidity provider in the Fed funds market by extending the length of term repos as it did back in 1999 ahead of Y2K when the maximum maturity of repos was extended from 60 to 90 days. (Longer dated repos may cause financial intermediaries to be more willing, at the margin, to extend credit beyond the very short term.) It has just now announced a $5B 14-day repo operation. But the NY Fed also explicitly emphasized that its operating objective is a 5.25% funds rate. Unfortunately, to this point the added liquidity the Fed has provided has not helped other parts of the money markets, such as asset-backed commercial paper. It is highly unlikely the Fed would change the types of collateral it accepts in open market operations. Nonetheless, to the extent the Fed can come up with innovative ways to provide liquidity to the markets, this would minimize in the short term the need to cut interest rates.
The likelihood of a rate cut by the September FOMC meeting has risen markedly-the market is currently pricing one in-but not sufficiently for us to change our Fed call. Despite severe dislocations in various parts of the financial markets, the Fed does not want to be perceived as bailing out Wall Street unless there is systemic risk from a major financial institution failure, or economic growth slows. As such, the Countrywide situation - this morning it announced that it is tapping an $11.5 bn bank credit line - bears monitoring. The exit out of the commercial paper by money market funds has caused a squeeze in the Treasury bill market. This is likely to continue, as the money markets are in a crisis mode. There is also the possibility that repo liquidity will dry up, so relative value relationships could start to move out of line.”
Likelihood of a Fed Ease
From RBSGC: “The market continues to price in a Fed ease (4.87% October Fed Funds), but I would point out that the market view is quite binary, with some investors thinking the Fed will cut 50 bp before the September meeting and others thinking no rate cuts will happen in 2007. The Fed's apparent position, from Poole's comments, is that so far the credit crunch has not impacted business or consumer spending, and thus any slowdown in economic growth will be minor. They do not want to appear to be bailing out investors (rather than the economy) by lowering interest rates. They are looking for a "calamity", such as a major financial failure, before they step in to lower interest rates.”
From Citi: “The rapid deterioration in financial conditions in recent days is tilting the balance of risks decisively toward economic weakness. We think these developments will prompt the FOMC to cut rates no later than the September 18 FOMC meeting. While officials would no doubt prefer to monitor developments and act on the regular policy cycle, events may compel them to move more urgently over the next few days or weeks. The unprecedented aspects of the current situation may make it difficult for the Committee to reach consensus on a course of action. But it also complicates market participants’ abilities to anticipate what they will do. Nonetheless, in the context of a subpar economy with tentative easing in price pressures, a sharp turn toward restrictive financial conditions and disruptive markets would be undesirable. Moreover, in judging the potential cost of no action, policymakers must weigh the fact that forward markets see a compelling case to move. As a result, we would anticipate an initial reduction of 25 basis points coupled with a statement acknowledging the shift in risk assessments and a readiness to do more. The breadth and depth of tightening in financial conditions is reaching a critical stage that warrants policy action. In just a few days the erosion has spread across the globe and across a wide array of financial instruments. The most basic market making in even modest size and among a range of standard products appears to be breaking down, while liquidity preference and the associated withdrawal from risk taking even over short horizons introduces serious questions about financial stability that could undermine economic activity. The fact that the effective funds rate averaged just 4.79% in the latest statement week suggests officials are sensitive to the risks.”[target is 5.25%]
From RBSGC: “…this is not the Greenspan Fed and we expect they're still concerned with inflation-fighting credibility and so will prove more reluctant to ease than perhaps the Greenspan Fed might have been. And, in any event, we're not sure what a single, say 25 bp, ease would do at the moment that other liquidity provisions are doing. Steepen the curve, yes. Affirm the rates rally, yes. Get investors to move down the credit curve? No. The credit risk premium is a story of restoration and the Fed can perhaps smooth the process, but not reverse it. It's the process that we think will generate deeper repercussions as time goes on, putting eases off for a little while.”
Countrywide
From Bloomberg: “… yesterday … Merrill Lynch … lowered its rating on … Countrywide Financial Corp., the biggest U.S. mortgage lender, to ``sell'' from ``buy'' and raised the possibility of bankruptcy. That would happen if creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, New York-based Merrill Lynch said. Rates for Countrywide's overnight corporate commercial paper were quoted yesterday at 6 percent and 6.5 percent for 30 days…Countrywide tapped an $11.5 billion credit line today to shore up its available cash. The unsecured credit line is with a group of 40 of the world's largest banks, Countrywide said …Last week, Countrywide said it had access to about $187 billion in credit… The perceived risk of owning Countrywide's bonds increased yesterday, according to prices of credit-default swaps. Credit-default swaps on Countrywide soared as much as 425 basis points to 1,025 basis points before rebounding to 705…”
From Morgan Stanley (at 3pm): “CFC Countrwide 5y CDS 600 off the wides..Traded 1050 this a.m, and is currently offered @ 500...”
From LEHC: “In addition to reporting that it had drawn on the “entire amount” of an $11.5 billion credit facility, Countrywide also noted in its press release today that (1) “the Company's primary strategy going forward is to fund its production through Countrywide Bank, FSB. We are already originating in excess of 70 percent of our total origination volume through the Bank, and expect to accelerate our strategy so that nearly all of our volume will be originated in our Bank by the end of September”; and that (2) “Countrywide has materially tightened its underwriting standards for (non-GSE-eligible) loans, and, we now expect that 90 percent of the loans we originate will be GSE-eligible or will meet our Bank's investment criteria.””
From Citi: “…Moody's cut its ratings by three notches…”[to lowest investment grade rating of Baa3]
Consumer Borrowing Correction Overdue
From Merrill Lynch: “The debt binge was never sustainable As Bob Farrell (former dean of Merrill Lynch research) put it in his "Market Rules to Remember", "Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways". Just in case you are into picking the bottom, rule #4 should not be ruled out. Bob also said (Rule #10) that "Bull markets are more fun than bear markets". How true. I know we've developed the reputation of being perma-bears. But we're not. We have a well developed and heartily enforced ethic about being bullish on America. We embrace the history. But, at the same time, we need to preserve the Merrill Lynch edge, if at all possible. We want to make sure that our clients' interests are always well served and at times this has meant telling people "stuff" they didn't want to hear - what we are seeing above the surface today has been building for a year if not more. The amount of leverage, especially geared to the consumer sector, that was being added relative to the income required to service the debt had become increasingly untenable - the debt binge was never sustainable, in our opinion, and it ultimately took the payment shock following 17 Fed rate hikes and corroding real estate values as inventory excess gathered apace, to generate a period of rising delinquencies, defaults and foreclosures.”
Unwind of Carry Trade Pushes Yen to One Year High
From Bloomberg: “The yen advanced the most against the dollar since 1998 as a global rout of stocks and credit markets pushed investors to sell riskier assets funded by loans in Japan. The yen is the strongest most-actively traded currency today as the carry trades unwound. Global stocks tumbled and companies from Australia to Canada sought emergency funds as they were unable to refinance debt. The last time the carry trade crashed was in 1998 after Russia's debt default in August. The yen gained 20 percent in less than two months… The Japanese currency advanced 3.9 percent [today]”
MISC
From RBSGC: “We are now approaching "panic" levels in mortgage pass-throughs, about +190/UST for the current coupon now, the widest print since October 2004. We reached +245/UST in August 2003 briefly as a large commercial bank sold a large stake in 30Y conventional 5s.”
From RBSGC: “We would argue that credit is in the process of getting squeezed even for "good" credits. This will almost eliminate any Mortgage Equity Withdrawal we have seen over the past few years. More importantly, with stocks and home prices falling simultaneously (for the first time in decades), there will be a very negative wealth effect on the consumer. That may take a while to show up in the data.”
From Wachovia: “…foreign holdings of U.S. securities totaled a bit more than $9 trillion. Consequently, foreigners own about 20% of the roughly $43 trillion of U.S. fixed-income securities and corporate equities outstanding. However, foreign holdings as a percentage of total holdings vary widely by type of security. Foreigners currently own about 45% of outstanding Treasury securities, but only 18% and 15% of agency securities and corporate equities, respectively.1 Foreign holdings of corporate bonds and miscellaneous bonds constitute 28% of the total.2 ...1 The percentage for Treasury securities includes the holding of the Federal Reserve System. If only marketable Treasury debt is considered, foreign holdings account for 50% of the total. 2 Not only are debt securities issued by corporations included in the category of “corporate bonds”, but so also are privately originated mortgage-backed securities and other types of asset-backed securities.”
From The Wall Street Journal: “…First American CoreLogic, a housing and mortgage data supplier…recently found that 7% of 32 million U.S. households studied as of December owed more than their homes were worth, based on computer estimates of the property values. An additional 4% had home equity of 55 or less. Since then, house prices have edged down in much of the country, erasing more home equity.”
From The Wall Street Journal: “U.S. lenders originated about $600 billion of subprime home loans in 2006, or 20% of all home mortgages, according to Inside Mortgage Finance…About 56% of those subprime loans were 2/28 mortgages...”
From Bloomberg: “Manufacturing in the Philadelphia region stalled in August, as orders and sales cooled. The Federal Reserve Bank of Philadelphia's general economic
index dropped to zero in August, the dividing line between expansion and contraction, from 9.2 in July…” (consensus was +8.6)
From Bloomberg: “First Magnus Financial Corp., the second-largest privately held U.S. mortgage lender, will stop funding new mortgages, according to a recorded message on a
customer-service line…First Magnus was the 16th-largest U.S. home lender in the
first half of this year, making $17.1 billion in loans…”
From Citi: “Amazing intraday volatility. The high low for 2 months of this year in UST 2Y was 20bps. We moved that and back again in the span of 2 hours this afternoon.”
From Dow Jones: “Analysts at Moody’s Investors Service warned that the credit crunch roiling global markets has the potential to cause the collapse of a major hedge fund that could further disrupt markets. As investors try to unload illiquid investments such as collateralized debt obligations, hedge funds that are unable to exit their positions could run into trouble, Chris Mahoney, vice chairman of Moody’s, said during a conference call with investors. The result could be the “failure and disorderly liquidation of a hedge fund of sufficient size to disrupt markets as (Long Term Capital Management) threatened to do,” he said during the call. Mahoney said the risk of such hedge fund failures will exist
for the next three to six months.”
End-of-Day Market Update
From Suntrust [at 3pm]: “If today doesn't fit Fed's Poole's definition of "calamity", woe be it unto the markets when calamity hits. Markets around the globe are haywire on the unwind of levered trades. The yen is almost 4 figures higher against the dollar and other currencies today from reversals in yen carry trades, where investors borrow the yen and invest in higher yielding assets. The unwind has hit commodities too. The slump in housing starts kicked lumber down $7 at one point. Gold is down $21 (3%), copper almost 7%, oil over
3%. Equities were lower by over 300 points, but have recovered some. Large liquidations were rumored in the 30 yr MBS sector today. Spreads blew out 20-25 bp, then narrowed back in by 10 or so. 2 yr notes traded at 3.96 before talk of a large curve steepener unwind pushed the yield back to 4.08. Rumors of a seller of $1 bln 2's to buy 10 yr notes along with a huge seller of 2's to buy MBS were around. Then the "FED is holding an emergency meeting" rumor swirled, but to no avail. Perhaps capitulation is here and the dust can settle long enough to at least pick up a few pieces.”
From RBSGC [at 4pm]: “More importantly was the pounding in stocks and widening of credit spreads and Fed's recognition of the liquidity crisis with a 12 bn overnight repo, 17 bn in 14-day system repo, and Funds trading at 5 1/16% (i.e. under target). The front end took aggressive action with 2s at one point testing 3.97% and challenging the Fed in the process. The violent action was panicky -- 2s at one point were 31 bp below the day's high -- and rather a 'leveraged' reaction to activity in other markets. There are a few things going on here. First, there is quarter end for a few large financial houses in two weeks which is likely to keep liquidity at a premium and risk appetites lows -- this should keep the market bid, albeit volatility. Second, month end will generate a big Tsy index extension…”
Yesterday’s Today’s Change
Close Low High Close
Dow 12861 12518 12885 12846 -15.7
S&P 1407 1371 1416 1411 +4.6
2y T 4.288 3.97 4.287 4.212 -7.6
5y T 4.451 4.184 4.451 4.348 -10.2
10y T 4.724 4.565 4.724 4.653 -7.1
30y T 5.026 4.911 5.026 4.956 -7
Swap spreads widened 1.5 to 3bp as of 4pm
Yen 116.6 112 116.75 114.4 -2.25
$Index 81.82 81.63 82.13 81.74 -.08
Oil 73.33 70.10 73.14 71.28 -2.05
Gold 667.6 642.3 668.2 653 -14.6
FNM 61.45 59.5 66.1 65.15 +3.7
New Home Construction Falls to a Ten Year Low in July
New home starts fell to a ten year low in July, falling 6.1% MoM (consensus -4.5%). Over the past three months, housing starts have fallen 14.5% annualized, and over the past year they have fallen -21.5% YoY. Permits fell a more modest -2.8% MoM (-22.1% YoY), also more than expected and the lowest level since 1996.
Single family housing starts fell -7.3% MoM in July while multi-family fell a more modest -1.6% MoM. Single family home starts have fallen -26% YoY while multi family have only fallen -1.3% YoY. The decline in housing permits was just the opposite with single family homes declining -1.6% MoM (-24.3% YoY) and multi falling -6.1% MoM (-15.5% YoY). Homes under construction continue to decline, falling -1.6% MoM (-16.2% YoY).
Regionally, the South led the decline falling -11% MoM, followed by the West at -3.7% MoM, then the Northeast at -1.3% MoM. Only the Midwest saw a gain of +2.6% MoM. Over the past year, housing starts have risen +4.4% YoY in the Northeast, but have fallen -14.6% YoY in the Midwest, -19.2% YoY in the West, and -27.6% YoY in the South.
The tightening credit conditions are hitting builders both on their funding side as well as their customer demand. Most builders are clearly not inclined to begin new projects now as the National Association of Homebuilders Index fell to the lowest level since the early '90s in July.
*************
Initial jobless claims rose more than expected to 322k (consensus 315k). This is the third week in a row that claims have risen, and the four week moving average has moved back up to 312.5K.
Single family housing starts fell -7.3% MoM in July while multi-family fell a more modest -1.6% MoM. Single family home starts have fallen -26% YoY while multi family have only fallen -1.3% YoY. The decline in housing permits was just the opposite with single family homes declining -1.6% MoM (-24.3% YoY) and multi falling -6.1% MoM (-15.5% YoY). Homes under construction continue to decline, falling -1.6% MoM (-16.2% YoY).
Regionally, the South led the decline falling -11% MoM, followed by the West at -3.7% MoM, then the Northeast at -1.3% MoM. Only the Midwest saw a gain of +2.6% MoM. Over the past year, housing starts have risen +4.4% YoY in the Northeast, but have fallen -14.6% YoY in the Midwest, -19.2% YoY in the West, and -27.6% YoY in the South.
The tightening credit conditions are hitting builders both on their funding side as well as their customer demand. Most builders are clearly not inclined to begin new projects now as the National Association of Homebuilders Index fell to the lowest level since the early '90s in July.
*************
Initial jobless claims rose more than expected to 322k (consensus 315k). This is the third week in a row that claims have risen, and the four week moving average has moved back up to 312.5K.
Wednesday, August 15, 2007
Foreign Demand for U.S. Assets Remained Strong in June
Foreign demand for U.S. assets was much stronger than expected in June. Net long-term TIC flows were +$120.9 billion, twice the consensus $62.5 billion expectation, and only slightly below May's record $126 billion level. Long-term assets includes U.S. Treasury Notes and Bonds, corporate debt, agency debt, and stocks. Total flows (long and short-term) were worse than expected, falling to $58.8 billion from a revised higher $107.3 billion the prior month. Short-term flows add in Treasury Bills and other debt maturing in less than a year. By category, foreign official purchases rose substantially, growing almost $54B in June versus only $11B in May. Private purchases slowed notably, falling to $96B in June versus $152B in May.
Corporate bond holdings fell to a third of the demand from the prior month as private investors pulled back purchases. Private demand for equities also fell, but more slowly, only by a third. Demand for agency debt grew in both the private and public sectors to a total of almost $40 billion in June.
Even though China and Japan sold Treasuries in June, total demand from foreign official sources such as central banks, doubled from the prior month. The reduction in Chinese holdings indicates they have begun actively diversifying their holdings of foreign exchange reserve assets away from safe, but low-yielding U.S. government debt. China still holds $405 billion in U.S. Treasury debt while Japan has an ongoing investment of $612 billion, and together they remain the first and second largest holder of U.S. Treasury debt outside the U.S. Brazil increased its holdings by $12 billion last month to $94 billion. Oil exporters were also small net buyers.
This data indicates that the U.S. continues to have no problem funding its large trade and current account deficits with foreign money. Ten year Treasuries are currently unchanged on the day, after trading higher earlier.
Corporate bond holdings fell to a third of the demand from the prior month as private investors pulled back purchases. Private demand for equities also fell, but more slowly, only by a third. Demand for agency debt grew in both the private and public sectors to a total of almost $40 billion in June.
Even though China and Japan sold Treasuries in June, total demand from foreign official sources such as central banks, doubled from the prior month. The reduction in Chinese holdings indicates they have begun actively diversifying their holdings of foreign exchange reserve assets away from safe, but low-yielding U.S. government debt. China still holds $405 billion in U.S. Treasury debt while Japan has an ongoing investment of $612 billion, and together they remain the first and second largest holder of U.S. Treasury debt outside the U.S. Brazil increased its holdings by $12 billion last month to $94 billion. Oil exporters were also small net buyers.
This data indicates that the U.S. continues to have no problem funding its large trade and current account deficits with foreign money. Ten year Treasuries are currently unchanged on the day, after trading higher earlier.
Industrial Production Slows, as Expected
Industrial Production slowed to +.3% MoM in July, as expected, down from a revised gain of +.6% MoM in June. Capacity utilization unexpectedly popped higher to 81.9%, the highest level in 10 months.
Manufacturing output held a steady growth pace at +.6% MoM as machinery production jumped up to +1.1% MoM from unchanged the prior month. Auto production and computer/electronics also saw smaller increases. The only negative was utility demand, which fell -2.1% MoM due to cooler temperatures. Most market groups were higher, or only down marginally. The only category seeing larger than a -.1% decline in demand was business supplies at -.3% MoM. Strength was seen in business equipment at +.9% MoM and defense at +.6% MoM.
High tech industries and utilities saw a decline in capacity utilization, but all other categories improved. Manufacturing and mining are both at their highest levels of the past six months.
Manufacturing output held a steady growth pace at +.6% MoM as machinery production jumped up to +1.1% MoM from unchanged the prior month. Auto production and computer/electronics also saw smaller increases. The only negative was utility demand, which fell -2.1% MoM due to cooler temperatures. Most market groups were higher, or only down marginally. The only category seeing larger than a -.1% decline in demand was business supplies at -.3% MoM. Strength was seen in business equipment at +.9% MoM and defense at +.6% MoM.
High tech industries and utilities saw a decline in capacity utilization, but all other categories improved. Manufacturing and mining are both at their highest levels of the past six months.
Empire Manufacturing Stronger Than Expected
The NY state manufacturing index unexpectedly held on to most of its surprise jump last month to its highest level in more than a year. Last month it rose to 26.5, and this month it softened back to 25.1 (consensus 18). This indicates the area is experiencing continued expansion in manufacturing output and demand. New orders and shipments fell. Inventories rose from a five year low, as the outlook improved. Both prices paid and received slipped in July, indicating that inflation pressures may be abating.
CPI Data as Expected
Headline CPI. which includes goods and services, rose +.1% MoM in July, the smallest gain in eight months. Over the past year, headline CPI fell to 2.4% YoY from 2.7% last month. Core prices, excluding food and energy, rose +.2% MoM, the same pace as June, and the annual pace also held steady at +2.2% YoY, the lowest level of the last year. It appears that a slowing economy is helping keep inflationary pressures in check.
Energy prices fell 1% MoM, the largest drop since January. Gasoline prices fell an even larger -1.8% YoY. In contrast, food prices continued to rise, but at a slower pace, growing +.3% MoM in July. As expected tenant rents and owners' equivalent rent both increased +.2% MoM. Medical costs recovered from their brief slump and are again growing faster at overall inflation, rising +.6% MoM. Auto prices were unchanged on the month, and apparel prices rose +.4%.
Year-to-date headline inflation has risen +4.5% annualized, a notable increase from the 2.5% gain for all of 2006. Energy has been the main driver, rising 21.3% YTD, followed by food which has risen +5.7% annualized YTD.
Energy prices fell 1% MoM, the largest drop since January. Gasoline prices fell an even larger -1.8% YoY. In contrast, food prices continued to rise, but at a slower pace, growing +.3% MoM in July. As expected tenant rents and owners' equivalent rent both increased +.2% MoM. Medical costs recovered from their brief slump and are again growing faster at overall inflation, rising +.6% MoM. Auto prices were unchanged on the month, and apparel prices rose +.4%.
Year-to-date headline inflation has risen +4.5% annualized, a notable increase from the 2.5% gain for all of 2006. Energy has been the main driver, rising 21.3% YTD, followed by food which has risen +5.7% annualized YTD.
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