Inventory stockpiles at wholesalers grew by the smallest amount this year, increasing a less than expected +.2% MoM (consensus +.4%) in July. In addition, June's growth was revised down to +.3% from +.5%. Factory inventories also rose at +.2% MoM in July. Unfortunately sales also grew at their slowest pace since January at +.1% MoM. Combined, they imply that production is likely to slow on reduced demand. The most recent manufacturing ISM shows growth has slowed to a five month low.
Based on current sales, current inventory should take 1.11 months to turn over, an unchanged pace from June. Wholesale inventories constitute approximately a quarter of all business stockpiles. Over the past year, sales have grown +7.2%, mainly in non-durable good which have risen +10% YoY. Sales excluding petroleum have risen +6.9% YoY.
Inventories of durable goods meant to last many years fell by -.5% MoM (+2.1% YoY) in July, lead by automakers (-1.7% MoM, -5.8% YoY) and metal producers. GM has also stated that they are going to reduce production for the remainder of this year.
Non-durable inventories rose +1.5% MoM (+11.5% YoY) lead by farm products, and their sales growth slowed to +.1% MoM. Higher oil prices increase the value of inventories, and have made this factor extremely variable this year. Wholesale petroleum inventories fell -.1% Mom in July after rising +2.1% MoM in June.
Interest rates have continued to decline since this morning's employment report. Two year Treasury yields are now down 17.5bp. The dollar index has fallen below 80, to trade at its lowest level since 1992!
Friday, September 7, 2007
Negative Employment Growth in August Raises Likelihood of Fed Easing
The U.S. economy unexpectedly lost 4k jobs in August, the first monthly decline since 2003. Consensus had been looking for a 100k increase. Surprisingly, the unemployment rate held steady at 4.6%, where it has hovered for the past year. Hourly earnings and workweek length were both as expected.
The four thousand drop in jobs in August was accompanied by large revisions for the prior few months. Both June and July were revised down to just below 70k each from 92k and 126k previously, a cumulative revision lower of 81k in two months. Over the last three months, monthly growth has averaged 44k new jobs., with private payrolls growing and average 72k per month and the government shrinking by 28k per month (creating an unusual string of three straight months of decline). August and September are often volatile for government education employment because of timing differences in hiring new teachers for the school year. Less hiring this year meant a decline of 32k in August.
Manufacturing jobs fell a large -46k in August, and has lost 215k jobs over the past year. Job losses were widespread across industries. Construction jobs fell -22k in August, mainly in residential construction, and have declined almost 100k versus the peak a year ago. Service jobs only grew by 60k, quite a deceleration from the 202k added in May. Net growth in financial jobs was zero for the month. The government also shed 28k jobs in August. Temporary help demand continues to trend lower, and has fallen 72k year-to-date.
On the plus side, healthcare demand remains strong adding +35k in August and almost 400k over the past year. Leisure and hospitality also remains a strong growth area, adding +24k MoM and +350k YoY. Retail jobs grew +13k in August.
Average hourly and weekly earnings both grew +.3% MoM, and +3.9% YoY, continuing at trend. In hourly pay this worked out to a 5 cent raise to $17.50 average pay per hour, or $591.50 per week. Hours worked held constant at 33.8, with manufacturing hours also holding steady at 41.3 hours per week. Factory overtime eased off to 4.1 hours, the low for the past six months. Net aggregate hours worked was unchanged, but has increased 1.5% when the growth of the past three months is annualized. The net aggregate hours worked in manufacturing fell by +.3% MoM, in conjunction with the fewer hours of overtime.
The pool of available labor fell -62k MoM, and size of the civilian labor force fell by -340k MoM, causing the participation rate to fall to 65.8% from 66.1% in July. Most of this decline was due to teenagers going back to school. The number of people working part-time because they can't find full-time employment has risen about 360k over the past year. The household measure of employment fell -316k in August, a significant increase from the -17k monthly average YTD. The similar size drops in the civilian labor force and household survey are what allowed the unemployment rate to hold steady rather than rise.
Treasuries immediately rallied on this weak employment growth figure, pushing interest rates down. Two year Treasury yields are down 15bp, and ten year yields are down 7.5bp since the 5 o'clock close yesterday. Futures have nudged up the probability of a 50bp cut in the Fed's target rate to 70%. The dollar has also lost considerable ground since the announcement. The dollar index has fallen to test the 80 level again, and gold has rallied another $8 this morning.
This is the first clear indication that the turmoil experienced in the financial markets this summer is beginning to spill into the "real" economy, and not just confidence measures. Odds are increasing that the Fed won't wait till Sept 18th to cut rates.
See attached chart for monthly change in employment growth.
The four thousand drop in jobs in August was accompanied by large revisions for the prior few months. Both June and July were revised down to just below 70k each from 92k and 126k previously, a cumulative revision lower of 81k in two months. Over the last three months, monthly growth has averaged 44k new jobs., with private payrolls growing and average 72k per month and the government shrinking by 28k per month (creating an unusual string of three straight months of decline). August and September are often volatile for government education employment because of timing differences in hiring new teachers for the school year. Less hiring this year meant a decline of 32k in August.
Manufacturing jobs fell a large -46k in August, and has lost 215k jobs over the past year. Job losses were widespread across industries. Construction jobs fell -22k in August, mainly in residential construction, and have declined almost 100k versus the peak a year ago. Service jobs only grew by 60k, quite a deceleration from the 202k added in May. Net growth in financial jobs was zero for the month. The government also shed 28k jobs in August. Temporary help demand continues to trend lower, and has fallen 72k year-to-date.
On the plus side, healthcare demand remains strong adding +35k in August and almost 400k over the past year. Leisure and hospitality also remains a strong growth area, adding +24k MoM and +350k YoY. Retail jobs grew +13k in August.
Average hourly and weekly earnings both grew +.3% MoM, and +3.9% YoY, continuing at trend. In hourly pay this worked out to a 5 cent raise to $17.50 average pay per hour, or $591.50 per week. Hours worked held constant at 33.8, with manufacturing hours also holding steady at 41.3 hours per week. Factory overtime eased off to 4.1 hours, the low for the past six months. Net aggregate hours worked was unchanged, but has increased 1.5% when the growth of the past three months is annualized. The net aggregate hours worked in manufacturing fell by +.3% MoM, in conjunction with the fewer hours of overtime.
The pool of available labor fell -62k MoM, and size of the civilian labor force fell by -340k MoM, causing the participation rate to fall to 65.8% from 66.1% in July. Most of this decline was due to teenagers going back to school. The number of people working part-time because they can't find full-time employment has risen about 360k over the past year. The household measure of employment fell -316k in August, a significant increase from the -17k monthly average YTD. The similar size drops in the civilian labor force and household survey are what allowed the unemployment rate to hold steady rather than rise.
Treasuries immediately rallied on this weak employment growth figure, pushing interest rates down. Two year Treasury yields are down 15bp, and ten year yields are down 7.5bp since the 5 o'clock close yesterday. Futures have nudged up the probability of a 50bp cut in the Fed's target rate to 70%. The dollar has also lost considerable ground since the announcement. The dollar index has fallen to test the 80 level again, and gold has rallied another $8 this morning.
This is the first clear indication that the turmoil experienced in the financial markets this summer is beginning to spill into the "real" economy, and not just confidence measures. Odds are increasing that the Fed won't wait till Sept 18th to cut rates.
See attached chart for monthly change in employment growth.
Thursday, September 6, 2007
Today's Tidbits
Credit Crunch Continues as LIBOR [London Inter-Bank Offered Rate] Rises
From Bloomberg: “The three-month rate banks charge each other for dollars held at a seven-year high, indicating central bank efforts to free up cash in money markets are
misfiring. The overnight rate declined. The three-month London interbank offered rate, or Libor, for dollars was unchanged at 5.72 percent, the highest since January 2001, the British Bankers Association said today. It was at 5.36 percent on July 31. The overnight rate dropped 4 basis points to 5.47 percent… The U.S. benchmark overnight lending rate is 5.25 percent.”
From Merrill Lynch: “We are certainly experiencing extraordinary times in the capital markets when, despite the Federal Reserve's best efforts to provide liquidity to the money markets, the key short-term LIBOR rates keep rising. The unprecedented scope of the credit crunch in the money markets does not bode well for the real economy… Despite the Fed's large injections of liquidity into the money markets and its pledges to do more, the 3-month LIBOR (inter-bank offer rate) rate has risen to 5.85%, up 50bps from early August and the highest level since January 3, 2001, the start of the Fed's previous easing campaign. The LIBOR curve is inverted as 1-month and 3-month rates (5.85%) are higher than 1-year rates (5.30%). The spread of 3-month LIBOR less the targeted Fed funds rate is a wide 60bps, typically such a widening in spread would be associated with Fed tightening, not easing. On average, going back to 1990, the spread between the 3-month LIBOR and the Fed funds rate is just around 16bps. LIBOR, the London Inter-bank Offered Rate, is an important global benchmark rate for everything from large global corporate loans to US mortgages to corporate deals. It is calculated daily based on the interest rates at which banks offer to lend unsecured funds to other banks in the London interbank market for periods as short as overnight and as long as one year. More specifically LIBOR is used in determining the price of variable-rate government and corporate loans and widely used financial derivatives, including interest rate futures, interest rate swaps and Eurodollars, as well as floating rate notes, syndicate loans, and adjustable rate mortgages. Interest rate swaps are reported to be the largest component of the global OTC derivative market, with a notional amount outstanding at a sizeable $230 trillion at the end of 2006. This represents 55% of the entire OTC - over the counter - derivative market. Interest rate swaps are also extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.”
From Dow Jones: “The Federal Reserve added far more reserves to the system than expected, matching similar liquidity injections carried out by overseas central banks.
The Fed supplied a total of $31.25 billion in three separate operations, following several days of more meager injections…“This surge in reserve supplies suggests that the Desk
feels that it is far behind its add-job for the period.” The Fed invited bids backed by Treasurys, agency bonds and mortgage bonds, resorting to the widest scope of acceptable collateral.”
From SunTrust: “The FED announced CP issuance fell by another $54 bln in the last
reporting week, $31 bln of which was ABCP. That brings total CP issuance down
by $298 bln in the last 4 weeks.”
European Central Banks Stopped Tightening
From Bloomberg: “The European Central Bank and Bank of England left their key interest rates unchanged, putting anti- inflation campaigns on hold as policy makers sought to calm markets roiled by the collapse of subprime mortgages in the U.S. Hours before its rate decision today, the ECB pumped 42.25 billion euros ($57.7 billion) into money markets, providing emergency cash to reduce borrowing costs that reached their highest in six years yesterday… Both banks pointed to market turmoil in explaining their decisions. Concern that defaults on U.S. home loans would spread losses through the European banking system pushed up the interest rate on interbank loans the past month, forcing lenders to borrow from the central banks. ``At whatever price, at whatever interest rates, the market has to function,'' Trichet said. ``The functioning of the market - - the money market, the commercial-paper market – is significantly hampered by an absence of confidence.'' The turmoil in credit markets will likely damp economic growth next year, with the U.S. economy suffering the most, International Monetary Fund spokesman… Today's ECB cash injection sent overnight borrowing costs to 3.7 percent from as much as 4.68 percent yesterday.”
Speculators and Flippers Fuel Major Increase in Delinquencies
From CNN: “Defaults in non-owner occupied houses are driving defaults in four of the states with the fastest rising default rates in the nation, according to a report released Thursday by the Mortgage Bankers Association…Several sun-belt states were magnets for real estate speculators during the home-price boom…As of June 30, in Nevada, 32 percent of all prime mortgages in default and 24 percent of subprime defaults were on non-owner occupied properties, according to the MBA. The numbers for Arizona were 26 percent prime and 18 percent subprime. In California, they were 21 percent and 15 percent respectively. The default rates in Florida for non-owner occupied homes were 25 percent for prime loans and 14 percent for subprime ones. In the rest of the nation, non-owners accounted for just 13 percent of prime loan defaults and 11 percent of subprime. "California, Nevada, Arizona and Florida were among the states with the fastest home price appreciation over the last five years. This...attracted both speculators and home builders, a volatile combination that led to an over-supply of homes that was beyond the capacity of the local populations to support,"…"When this over-supply became apparent and prices began to fall, many of these investors simply walked away from their mortgages." In Nevada and Arizona, 29 percent of all the prime mortgage loans written in 2005 were for non-owner occupied home purchases. In California, it was 14 percent and in Florida, a whopping 32 percent, according to the MBA. The subprime figures for non-owner occupied home purchases were 14 percent in Nevada and Arizona, 15 percent in Florida and 7 percent in California.”
From Lehman: “The rate of homes entering the foreclosure process jumped to a record high of 0.65% from 0.58% [the highest rate in the MBA's 55-year history]. On a dismal note, we judge the recent deterioration in mortgage performance to be just the beginning. Delinquencies and foreclosures should continue to rise over the next several quarters, particularly as subprime adjustable-rate mortgages reset to higher rates… As of Q2, 14.82% of subprime loans were delinquent, which is a 1.1bp increase from Q1. The bulk of the rise can be attributed to adjustable-rate mortgage delinquencies.”
Credit Bubble Bigger Than Housing Bubble
From Merrill Lynch: “Since this economic expansion began in late 2001, the aggregate household debt-to-disposable income ratio surged from 100% to a record of 136%. In six
years, the personal sector was able to tack on as much as debt to this ratio as the prior forty years combined. This 6 percentage point run-up per year was triple what was “normal” in other economic up-cycles. Most of this, as we are only now finding out, were loans extended to households who were either dramatically expanding their real estate portfolio or tapping home equity through loans for consumer spending in other areas apart from housing…The housing bubble was never about “consumer resilience”. It was about leverage – unfettered access to credit… According to the Fed’s flow-of-funds data, real estate valuations surged 67% since this economic cycle began in late 2001. But the amount of mortgage debt soared by 86%. The amount of debt taken on in the form of mortgage debt exceeded the extraordinary appreciation in existing homes, the cost of newly built homes and presumably the money spent gold plating and otherwise improving existing homes. Homeowners quite satisfied to stay put were more than willing to extract that rising home equity via mortgage cashouts or other lines of credit… So this was an even bigger credit bubble than it was an asset bubble. Individuals opted to use some portion of their home appreciation for consumption by taking on additional debt and tapped it so extensively that aggregate equity, in that prized retirement asset relative to outstanding real estate values, fell this cycle (since the end of 2001) from nearly 58% to an all-time low of 52.7% today. And now the dramatic appreciation of recent years is receding and threatening to drive the ratio much lower.”
Back to School Retail Sales Better Than Expected
From Bloomberg: “Wal-Mart Stores Inc., Macy's Inc. and retailers catering to teenagers reported August sales that topped analysts' estimates on purchases of clothing and
electronics for the new school year. Wal-Mart, the world's largest retailer, said U.S. sales at stores open at least a year increased 3.1 percent, after forecasting a gain of 1 percent to 2 percent. The chain slashed prices on 16,000 back-to-school items such as notebooks and staplers after customers cut back on visits. Retailers benefited from back-to-school shopping, the industry's second-biggest sales period after the December holidays. Consumers, concerned about lower home values and higher borrowing costs, limited spending on non-necessities and hunted for discounts.”
Employment Growth Likely to Slow
From Goldman Sachs: “We are cutting our forecast for August payroll growth to 75,000 and raising our forecast of the unemployment rate to 4.7%.” [Consensus 100k and 4.6%]
From JP Morgan: “The employment index has plunged 7.1-points over the past two months, the largest two-month decline ever for this series which goes back to July 1997. The index now stands at the lowest level since December 2003. Indeed, the last time the index fell below 50 was in July 2004. Nonfarm payroll growth was only 59,000 that July, compared to the May-September 2004 average of 141,000. And when the employment index has been at levels close to this August’s, nonfarm payrolls have always declined. In contrast, the ISM manufacturing employment index rose to 51.3 from 50.2. But that index is less useful for judging payroll trends.”
From JP Morgan: “We are keeping the forecast for nonfarm payrolls unchanged at 125,000. The ADP report and the ISM employment index both suggest a lower number. Two considerations give us pause in revising down the forecast. First, the risk to the government employment forecast (+30K) is geared to the upside, as the projected 30K gain would still leave the July-August average at a mere +1,000; government employment growth was averaging about 20,000 per month prior to July's drop which was caused by seasonal adjustment problems in teachers' employment. Second, neither the ADP nor the ISM nonmanufacturing employment index correlates well with monthly changes in payrolls, although both can provide reasonable guidance on the trend. That said, the risk to our forecast is clearly on the downside and significantly so. We expect the unemployment rate to hold at 4.6%.”
Is China Reducing Treasury Holdings?
From The Telegraph: “A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable. Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone… "We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance… While the greenback has been resilient over recent weeks - even regaining something of a 'safe-haven' role as banks scrambled to buy the currency to cover dollar debts - most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide… Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a "bargaining chip", words taken as an implicit threat to trigger as US bond crash if provoked. The Chinese government has since put out an official statement clarifying that it has no intention in taking such an irresponsible step, which would in any case backfire by devaluing China's remaining holding… Any evidence that China was pulling out would risk setting off an unstoppable stampede, which is why such a policy would never be announced. It holds the world's biggest pool of reserves, followed by Japan.”
MISC
From Goldman Sachs: “The overall commercial paper market continues to shrink as has declined in size by about $50bn over the last week. Though the market is very large at $1903bn and the pace of decline has slowed, these declines remain substantial. The asset backed market commercial paper market also continues to shrink, falling to $959.0bn vs. $1173.4bn four weeks ago. Seasonally adjusted, the declines appear to be even larger.”
From Bloomberg: “Countrywide Financial Corp. shares dropped below $18, wiping out the $700 million paper profit Bank of America Corp. made when it invested $2 billion in the nation's biggest mortgage lender two weeks ago.”
From Merrill Lynch: “As all of us were taught, but most of us have long since forgotten, economic change occurs at the margin, where the action takes place... individuals who can think on the margin always have an advantage over those who cannot.”
From Goldman Sachs: “Historically, performance of DJI [the Dow Jones Industrial Average] in October in years ending [in]***7 has been poor (-8.4% average since 1907).”
From Bloomberg: “Gold topped $700 an ounce for the first time since May 2006 on speculation that further declines in the dollar will boost the appeal of precious metals as
alternative investments. Silver also gained. Five of the past six bear markets for the U.S. currency pushed gold prices higher. Investment in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, reached a record 528 tons yesterday. Before today, the metal climbed 8.3 percent this year, and the dollar had fallen 3.3 percent against the euro.”
From Dow Jones: “Hedge funds are increasingly positioning themselves as direct lenders to companies that are having trouble borrowing money from banks or through the bond market. These investors aren’t strangers to the world of lending, and they’re preparing to play a bigger role by capitalizing on the wave of risk aversion that has swept global markets this summer. Banks are shying away from lending to riskier corporate clients and struggling to find buyers for hundreds of billions of dollars in debt stemming from the leveraged-buyout boom, opening the door for hedge funds and some private equity firms to fill the void.”
From Bloomberg: “For the first time in recorded history, farming is no longer the world’s dominant occupation, having been surpassed by the service sector, a United Nations Report says…Agriculture accounts for 36 percent of global employment…industry’s share has stagnated at about 22 percent of all jobs…”
End-of-Day Market Update
From Lehman: “…stocks made a small rebound, and treasuries sold off in fairly quiet trading… The yield curve flattened [4bp for 2s30s]… Thursday's yield changes were roughly as follows:2 years:+5.0 bp 5 years:+3.8 bp 10 years:+3.0 bp 18 years:+2.0 bp 30 years:+1.7 bp”
From UBS: “Agencies traded in line with swaps. Mortgages saw only moderate activity, tightening 4 ticks to Treasuries and 2 to swaps.
Dow closing up 58 points at 13,363, and S&P up 6 at 1478.5. Dollar index weakens by .15, falling to 80.47. Yen at 115.4 and euro at 1.369. Oil rallies 65 cents, to close at $76.38, after rallying close to the YTD high of $78 reached in early August.
From Bloomberg: “The three-month rate banks charge each other for dollars held at a seven-year high, indicating central bank efforts to free up cash in money markets are
misfiring. The overnight rate declined. The three-month London interbank offered rate, or Libor, for dollars was unchanged at 5.72 percent, the highest since January 2001, the British Bankers Association said today. It was at 5.36 percent on July 31. The overnight rate dropped 4 basis points to 5.47 percent… The U.S. benchmark overnight lending rate is 5.25 percent.”
From Merrill Lynch: “We are certainly experiencing extraordinary times in the capital markets when, despite the Federal Reserve's best efforts to provide liquidity to the money markets, the key short-term LIBOR rates keep rising. The unprecedented scope of the credit crunch in the money markets does not bode well for the real economy… Despite the Fed's large injections of liquidity into the money markets and its pledges to do more, the 3-month LIBOR (inter-bank offer rate) rate has risen to 5.85%, up 50bps from early August and the highest level since January 3, 2001, the start of the Fed's previous easing campaign. The LIBOR curve is inverted as 1-month and 3-month rates (5.85%) are higher than 1-year rates (5.30%). The spread of 3-month LIBOR less the targeted Fed funds rate is a wide 60bps, typically such a widening in spread would be associated with Fed tightening, not easing. On average, going back to 1990, the spread between the 3-month LIBOR and the Fed funds rate is just around 16bps. LIBOR, the London Inter-bank Offered Rate, is an important global benchmark rate for everything from large global corporate loans to US mortgages to corporate deals. It is calculated daily based on the interest rates at which banks offer to lend unsecured funds to other banks in the London interbank market for periods as short as overnight and as long as one year. More specifically LIBOR is used in determining the price of variable-rate government and corporate loans and widely used financial derivatives, including interest rate futures, interest rate swaps and Eurodollars, as well as floating rate notes, syndicate loans, and adjustable rate mortgages. Interest rate swaps are reported to be the largest component of the global OTC derivative market, with a notional amount outstanding at a sizeable $230 trillion at the end of 2006. This represents 55% of the entire OTC - over the counter - derivative market. Interest rate swaps are also extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.”
From Dow Jones: “The Federal Reserve added far more reserves to the system than expected, matching similar liquidity injections carried out by overseas central banks.
The Fed supplied a total of $31.25 billion in three separate operations, following several days of more meager injections…“This surge in reserve supplies suggests that the Desk
feels that it is far behind its add-job for the period.” The Fed invited bids backed by Treasurys, agency bonds and mortgage bonds, resorting to the widest scope of acceptable collateral.”
From SunTrust: “The FED announced CP issuance fell by another $54 bln in the last
reporting week, $31 bln of which was ABCP. That brings total CP issuance down
by $298 bln in the last 4 weeks.”
European Central Banks Stopped Tightening
From Bloomberg: “The European Central Bank and Bank of England left their key interest rates unchanged, putting anti- inflation campaigns on hold as policy makers sought to calm markets roiled by the collapse of subprime mortgages in the U.S. Hours before its rate decision today, the ECB pumped 42.25 billion euros ($57.7 billion) into money markets, providing emergency cash to reduce borrowing costs that reached their highest in six years yesterday… Both banks pointed to market turmoil in explaining their decisions. Concern that defaults on U.S. home loans would spread losses through the European banking system pushed up the interest rate on interbank loans the past month, forcing lenders to borrow from the central banks. ``At whatever price, at whatever interest rates, the market has to function,'' Trichet said. ``The functioning of the market - - the money market, the commercial-paper market – is significantly hampered by an absence of confidence.'' The turmoil in credit markets will likely damp economic growth next year, with the U.S. economy suffering the most, International Monetary Fund spokesman… Today's ECB cash injection sent overnight borrowing costs to 3.7 percent from as much as 4.68 percent yesterday.”
Speculators and Flippers Fuel Major Increase in Delinquencies
From CNN: “Defaults in non-owner occupied houses are driving defaults in four of the states with the fastest rising default rates in the nation, according to a report released Thursday by the Mortgage Bankers Association…Several sun-belt states were magnets for real estate speculators during the home-price boom…As of June 30, in Nevada, 32 percent of all prime mortgages in default and 24 percent of subprime defaults were on non-owner occupied properties, according to the MBA. The numbers for Arizona were 26 percent prime and 18 percent subprime. In California, they were 21 percent and 15 percent respectively. The default rates in Florida for non-owner occupied homes were 25 percent for prime loans and 14 percent for subprime ones. In the rest of the nation, non-owners accounted for just 13 percent of prime loan defaults and 11 percent of subprime. "California, Nevada, Arizona and Florida were among the states with the fastest home price appreciation over the last five years. This...attracted both speculators and home builders, a volatile combination that led to an over-supply of homes that was beyond the capacity of the local populations to support,"…"When this over-supply became apparent and prices began to fall, many of these investors simply walked away from their mortgages." In Nevada and Arizona, 29 percent of all the prime mortgage loans written in 2005 were for non-owner occupied home purchases. In California, it was 14 percent and in Florida, a whopping 32 percent, according to the MBA. The subprime figures for non-owner occupied home purchases were 14 percent in Nevada and Arizona, 15 percent in Florida and 7 percent in California.”
From Lehman: “The rate of homes entering the foreclosure process jumped to a record high of 0.65% from 0.58% [the highest rate in the MBA's 55-year history]. On a dismal note, we judge the recent deterioration in mortgage performance to be just the beginning. Delinquencies and foreclosures should continue to rise over the next several quarters, particularly as subprime adjustable-rate mortgages reset to higher rates… As of Q2, 14.82% of subprime loans were delinquent, which is a 1.1bp increase from Q1. The bulk of the rise can be attributed to adjustable-rate mortgage delinquencies.”
Credit Bubble Bigger Than Housing Bubble
From Merrill Lynch: “Since this economic expansion began in late 2001, the aggregate household debt-to-disposable income ratio surged from 100% to a record of 136%. In six
years, the personal sector was able to tack on as much as debt to this ratio as the prior forty years combined. This 6 percentage point run-up per year was triple what was “normal” in other economic up-cycles. Most of this, as we are only now finding out, were loans extended to households who were either dramatically expanding their real estate portfolio or tapping home equity through loans for consumer spending in other areas apart from housing…The housing bubble was never about “consumer resilience”. It was about leverage – unfettered access to credit… According to the Fed’s flow-of-funds data, real estate valuations surged 67% since this economic cycle began in late 2001. But the amount of mortgage debt soared by 86%. The amount of debt taken on in the form of mortgage debt exceeded the extraordinary appreciation in existing homes, the cost of newly built homes and presumably the money spent gold plating and otherwise improving existing homes. Homeowners quite satisfied to stay put were more than willing to extract that rising home equity via mortgage cashouts or other lines of credit… So this was an even bigger credit bubble than it was an asset bubble. Individuals opted to use some portion of their home appreciation for consumption by taking on additional debt and tapped it so extensively that aggregate equity, in that prized retirement asset relative to outstanding real estate values, fell this cycle (since the end of 2001) from nearly 58% to an all-time low of 52.7% today. And now the dramatic appreciation of recent years is receding and threatening to drive the ratio much lower.”
Back to School Retail Sales Better Than Expected
From Bloomberg: “Wal-Mart Stores Inc., Macy's Inc. and retailers catering to teenagers reported August sales that topped analysts' estimates on purchases of clothing and
electronics for the new school year. Wal-Mart, the world's largest retailer, said U.S. sales at stores open at least a year increased 3.1 percent, after forecasting a gain of 1 percent to 2 percent. The chain slashed prices on 16,000 back-to-school items such as notebooks and staplers after customers cut back on visits. Retailers benefited from back-to-school shopping, the industry's second-biggest sales period after the December holidays. Consumers, concerned about lower home values and higher borrowing costs, limited spending on non-necessities and hunted for discounts.”
Employment Growth Likely to Slow
From Goldman Sachs: “We are cutting our forecast for August payroll growth to 75,000 and raising our forecast of the unemployment rate to 4.7%.” [Consensus 100k and 4.6%]
From JP Morgan: “The employment index has plunged 7.1-points over the past two months, the largest two-month decline ever for this series which goes back to July 1997. The index now stands at the lowest level since December 2003. Indeed, the last time the index fell below 50 was in July 2004. Nonfarm payroll growth was only 59,000 that July, compared to the May-September 2004 average of 141,000. And when the employment index has been at levels close to this August’s, nonfarm payrolls have always declined. In contrast, the ISM manufacturing employment index rose to 51.3 from 50.2. But that index is less useful for judging payroll trends.”
From JP Morgan: “We are keeping the forecast for nonfarm payrolls unchanged at 125,000. The ADP report and the ISM employment index both suggest a lower number. Two considerations give us pause in revising down the forecast. First, the risk to the government employment forecast (+30K) is geared to the upside, as the projected 30K gain would still leave the July-August average at a mere +1,000; government employment growth was averaging about 20,000 per month prior to July's drop which was caused by seasonal adjustment problems in teachers' employment. Second, neither the ADP nor the ISM nonmanufacturing employment index correlates well with monthly changes in payrolls, although both can provide reasonable guidance on the trend. That said, the risk to our forecast is clearly on the downside and significantly so. We expect the unemployment rate to hold at 4.6%.”
Is China Reducing Treasury Holdings?
From The Telegraph: “A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable. Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone… "We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance… While the greenback has been resilient over recent weeks - even regaining something of a 'safe-haven' role as banks scrambled to buy the currency to cover dollar debts - most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide… Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a "bargaining chip", words taken as an implicit threat to trigger as US bond crash if provoked. The Chinese government has since put out an official statement clarifying that it has no intention in taking such an irresponsible step, which would in any case backfire by devaluing China's remaining holding… Any evidence that China was pulling out would risk setting off an unstoppable stampede, which is why such a policy would never be announced. It holds the world's biggest pool of reserves, followed by Japan.”
MISC
From Goldman Sachs: “The overall commercial paper market continues to shrink as has declined in size by about $50bn over the last week. Though the market is very large at $1903bn and the pace of decline has slowed, these declines remain substantial. The asset backed market commercial paper market also continues to shrink, falling to $959.0bn vs. $1173.4bn four weeks ago. Seasonally adjusted, the declines appear to be even larger.”
From Bloomberg: “Countrywide Financial Corp. shares dropped below $18, wiping out the $700 million paper profit Bank of America Corp. made when it invested $2 billion in the nation's biggest mortgage lender two weeks ago.”
From Merrill Lynch: “As all of us were taught, but most of us have long since forgotten, economic change occurs at the margin, where the action takes place... individuals who can think on the margin always have an advantage over those who cannot.”
From Goldman Sachs: “Historically, performance of DJI [the Dow Jones Industrial Average] in October in years ending [in]***7 has been poor (-8.4% average since 1907).”
From Bloomberg: “Gold topped $700 an ounce for the first time since May 2006 on speculation that further declines in the dollar will boost the appeal of precious metals as
alternative investments. Silver also gained. Five of the past six bear markets for the U.S. currency pushed gold prices higher. Investment in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, reached a record 528 tons yesterday. Before today, the metal climbed 8.3 percent this year, and the dollar had fallen 3.3 percent against the euro.”
From Dow Jones: “Hedge funds are increasingly positioning themselves as direct lenders to companies that are having trouble borrowing money from banks or through the bond market. These investors aren’t strangers to the world of lending, and they’re preparing to play a bigger role by capitalizing on the wave of risk aversion that has swept global markets this summer. Banks are shying away from lending to riskier corporate clients and struggling to find buyers for hundreds of billions of dollars in debt stemming from the leveraged-buyout boom, opening the door for hedge funds and some private equity firms to fill the void.”
From Bloomberg: “For the first time in recorded history, farming is no longer the world’s dominant occupation, having been surpassed by the service sector, a United Nations Report says…Agriculture accounts for 36 percent of global employment…industry’s share has stagnated at about 22 percent of all jobs…”
End-of-Day Market Update
From Lehman: “…stocks made a small rebound, and treasuries sold off in fairly quiet trading… The yield curve flattened [4bp for 2s30s]… Thursday's yield changes were roughly as follows:2 years:+5.0 bp 5 years:+3.8 bp 10 years:+3.0 bp 18 years:+2.0 bp 30 years:+1.7 bp”
From UBS: “Agencies traded in line with swaps. Mortgages saw only moderate activity, tightening 4 ticks to Treasuries and 2 to swaps.
Dow closing up 58 points at 13,363, and S&P up 6 at 1478.5. Dollar index weakens by .15, falling to 80.47. Yen at 115.4 and euro at 1.369. Oil rallies 65 cents, to close at $76.38, after rallying close to the YTD high of $78 reached in early August.
Mixed Reading on Service Economy from Non-Manufacturing ISM
ISM non-manufacturing unexpectedly held steady rather than weakening in August. The headline index remained at 55.8 (consensus 54.5). The ISM non-manufacturing index has indicated expansion for 53 straight months. Readings above 50 indicate expansion in the 88% of the economy comprised of service industries.
This data indicates that the housing and financial market turmoil of the past few months are not significantly impacting the underlying economy. The resilience of the data will be watched carefully as most participants anticipate weakening growth for the remainder of the year. Comments from respondents included "cautious but optimistic", "getting mixed messages on the economy", and "Looks like tight credit is slowing business down". As for employment, comments included "reduction in workforce".
New orders rose a substantial 4.2 points to 57, which is close to the highest level of the year. New export orders rose a point, indicating continued foreign demand growth as the dollar has slowly eroded this year. Most other categories showed declines, including employment and prices paid. The backlog of orders fell 3 points to settle right at 50, with real-estate and rental demand leading the decline.
Ten industries showed growth, including real-estate, and five industries indicated slowing including finance and insurance and construction. Most commodity prices were seen as rising except for fuel and lumber goods. Prices paid has remained above 50 for 51 consecutive months indicating that inflation persists.
Date is obtained from a monthly survey of purchasing and supply managers, with participants weighting based on contribution to GDP. The data is never revised, and is considered a leading indicator of the direction and scope of changes in prevailing views.
This data indicates that the housing and financial market turmoil of the past few months are not significantly impacting the underlying economy. The resilience of the data will be watched carefully as most participants anticipate weakening growth for the remainder of the year. Comments from respondents included "cautious but optimistic", "getting mixed messages on the economy", and "Looks like tight credit is slowing business down". As for employment, comments included "reduction in workforce".
New orders rose a substantial 4.2 points to 57, which is close to the highest level of the year. New export orders rose a point, indicating continued foreign demand growth as the dollar has slowly eroded this year. Most other categories showed declines, including employment and prices paid. The backlog of orders fell 3 points to settle right at 50, with real-estate and rental demand leading the decline.
Ten industries showed growth, including real-estate, and five industries indicated slowing including finance and insurance and construction. Most commodity prices were seen as rising except for fuel and lumber goods. Prices paid has remained above 50 for 51 consecutive months indicating that inflation persists.
Date is obtained from a monthly survey of purchasing and supply managers, with participants weighting based on contribution to GDP. The data is never revised, and is considered a leading indicator of the direction and scope of changes in prevailing views.
Mortgage Delinquencies Rise
The Mortgage Bankers Association shows total mortgage delinquencies rose to 5.12% in the second quarter from 4.84% in the first quarter, and 4.39% in the second quarter of last year, which was the recent low. Delinquencies of 30 days rose to 3.02%, while 90 delinquencies rose to 1.11%.
Prime delinquencies rose to 2.73% from 2.58% in the first quarter. Subprime delinquencies rose to 14.82%, with 90 days rising to 3.83% from 3.35% the previous quarter. Seriously delinquent mortgages rose to 2.47% in the second quarter, with prime running at .98% and subprime jumping almost a percentage point from the first quarter to 9.27%. Seriously delinquent subprime ARM mortgages rose to 12.4%, twice the level of 6.52% a year earlier.
Prime fixed rate mortgage delinquencies rose to 2.25% while subprime rose to 10.99% from 10.25% in the first quarter. FHA fixed rate mortgage delinquencies rose slightly to 10.73%.
Adjustable rate mortgages saw prime delinquencies rising to 4.15% from 2.70% a year earlier. Subprime ARMs rose to 16.95% in the second quarter, an increase of over 1% from the first quarter's level of 15.75%, and an increase of 38% from 12.24% in the second quarter of 2006.
Prime delinquencies rose to 2.73% from 2.58% in the first quarter. Subprime delinquencies rose to 14.82%, with 90 days rising to 3.83% from 3.35% the previous quarter. Seriously delinquent mortgages rose to 2.47% in the second quarter, with prime running at .98% and subprime jumping almost a percentage point from the first quarter to 9.27%. Seriously delinquent subprime ARM mortgages rose to 12.4%, twice the level of 6.52% a year earlier.
Prime fixed rate mortgage delinquencies rose to 2.25% while subprime rose to 10.99% from 10.25% in the first quarter. FHA fixed rate mortgage delinquencies rose slightly to 10.73%.
Adjustable rate mortgages saw prime delinquencies rising to 4.15% from 2.70% a year earlier. Subprime ARMs rose to 16.95% in the second quarter, an increase of over 1% from the first quarter's level of 15.75%, and an increase of 38% from 12.24% in the second quarter of 2006.
As Expected, 2nd Qtr Productivity Revised Higher and ULC Revised Lower
Higher GDP output helped raise non-farm productivity in the second quarter by more than forecast to +2.6% (consensus 2.4% , prior estimate +1.8%). This is the best productivity level in almost two years. Even with this improvement, the five year trend in productivity growth continues to slow. Last year productivity grew at the slowest pace since 1995 at +.9% YoY, down from a high of 4.1% YoY in 2002.
Productivity at manufacturers (12% of economy) rose to +1.8% in the second quarter from the original estimate of +1.6%. Durable goods productivity was +4.7% in the second quarter. Non-financial corporate productivity rebounded to +3.5% in the second quarter, from +.7% in the first quarter, as output rose +4.6% and hours worked rose a slower +1%.
Unit Labor Costs (ULC) also improved more than expected, increasing only +1.4% in the second quarter versus an initial estimate of 2.1% and a consensus of +1.5%. Second quarter hourly compensation gains were revised up only slightly to +4.1% from +3.9% previously. The annual increase in ULC for the second quarter of 2007 was +5.1% YoY, the largest four quarter gain since 1990. Unit labor costs reflect changes in hourly compensation and productivity.
As expected, ULC for the first quarter were revised higher to 5.2% annualized, a substantial increase from the 3% original estimate. Compensation in the first quarter was revised up to 5.9% from 3.7% originally quoted.
The improvements in productivity and ULC are both positive for the economy, showing that worker efficiency improved and inflation pressures have eased.
*************
Jobless claims fell -19k from the previous week to 318k (consensus 330k), but the four week average held steady at 326k. This level indicates moderate job growth, and breaks the steady increase in new claims over the past month.
Productivity at manufacturers (12% of economy) rose to +1.8% in the second quarter from the original estimate of +1.6%. Durable goods productivity was +4.7% in the second quarter. Non-financial corporate productivity rebounded to +3.5% in the second quarter, from +.7% in the first quarter, as output rose +4.6% and hours worked rose a slower +1%.
Unit Labor Costs (ULC) also improved more than expected, increasing only +1.4% in the second quarter versus an initial estimate of 2.1% and a consensus of +1.5%. Second quarter hourly compensation gains were revised up only slightly to +4.1% from +3.9% previously. The annual increase in ULC for the second quarter of 2007 was +5.1% YoY, the largest four quarter gain since 1990. Unit labor costs reflect changes in hourly compensation and productivity.
As expected, ULC for the first quarter were revised higher to 5.2% annualized, a substantial increase from the 3% original estimate. Compensation in the first quarter was revised up to 5.9% from 3.7% originally quoted.
The improvements in productivity and ULC are both positive for the economy, showing that worker efficiency improved and inflation pressures have eased.
*************
Jobless claims fell -19k from the previous week to 318k (consensus 330k), but the four week average held steady at 326k. This level indicates moderate job growth, and breaks the steady increase in new claims over the past month.
Wednesday, September 5, 2007
End-of-Day Market Update
From UBS: "Treasuries rallied as weak housing and employment data hit the newswires, and the 2s30s curve steepened another 6bps on the back of increased expectations for a rate cut this month...swap spreads were mixed on the day, with front end spreads widening again. Agencies saw light flows, and traded in line with swaps for the most part. Mortgages opened up 4 ticks wider to Treasuries, but after a flurry of buying (mainly by those reinvesting paydowns), mortgages ended 3 ticks tighter to Treasuries and 4 tighter to swaps."
From RBSGC: "10-yr yields closing at their lowest yield this year, TY closing at its best level, and 2 yr yields closing at their best level The point here is that we have what looks like the start of a technical breakout -- which we think will force people in as the data, and Fed, unfold...Ten-year notes have traded in an 88 bp range so far this year. Meaningful? Well by historic standards it means this has been a rather dull year and the tightest range since 1965. To be fair, 2005 ranks a close second with its 89 bp range, but the 5-yr average has been 112 bp and the 10-yr average is 145 bp. The point is that for 10s now to extend the range merely to the match the recent average a rally of 24 bp is in order, taking the yield to about 4.23%. 2s have also been less volatile than normal, though not as dramatically as 10s. The range this year at 119 bp is better than some recent history (102 bp in '06, 111 bp in '03) but less than the 5-yr norm at 172 bp and 10-yr average at 129 bp. So to reach merely the recent average would require 2s to reach to about 3.90%."
From Dow Jones: "The dollar lost ground Wednesday and briefly dipped as low as Y115 on signs of weakness in the economy, which also pulled the Dow Jones Industrial Average into the red and perpetuated an unwind in the carry trade. Despite assurances in the Fed’s Beige Book that the economic effects of market turmoil so far have been “limited,” the dollar slunk lower after its release...Stocks took another leg down as interest-rate uncertainty worsened a selloff caused by another grim report from the housing sector earlier in the session...Crude oil futures held steady near a one-month closing high..."
2y Treasury yield -12 at 4.01%
5y Treasury yield -11 at 4.15%
10y Treasury yield -8 at 4.46% 30y Treasury yield -6 at 4.77%
Dow -143 at13,305
S&P -17 at 1472
Dollar index -.26 at 80.61
Yen -1.1 at 115.2
Euro unch at 1.365
Oil +.82 at $75.90
10y Treasury yield Chart
From RBSGC: "10-yr yields closing at their lowest yield this year, TY closing at its best level, and 2 yr yields closing at their best level The point here is that we have what looks like the start of a technical breakout -- which we think will force people in as the data, and Fed, unfold...Ten-year notes have traded in an 88 bp range so far this year. Meaningful? Well by historic standards it means this has been a rather dull year and the tightest range since 1965. To be fair, 2005 ranks a close second with its 89 bp range, but the 5-yr average has been 112 bp and the 10-yr average is 145 bp. The point is that for 10s now to extend the range merely to the match the recent average a rally of 24 bp is in order, taking the yield to about 4.23%. 2s have also been less volatile than normal, though not as dramatically as 10s. The range this year at 119 bp is better than some recent history (102 bp in '06, 111 bp in '03) but less than the 5-yr norm at 172 bp and 10-yr average at 129 bp. So to reach merely the recent average would require 2s to reach to about 3.90%."
From Dow Jones: "The dollar lost ground Wednesday and briefly dipped as low as Y115 on signs of weakness in the economy, which also pulled the Dow Jones Industrial Average into the red and perpetuated an unwind in the carry trade. Despite assurances in the Fed’s Beige Book that the economic effects of market turmoil so far have been “limited,” the dollar slunk lower after its release...Stocks took another leg down as interest-rate uncertainty worsened a selloff caused by another grim report from the housing sector earlier in the session...Crude oil futures held steady near a one-month closing high..."
2y Treasury yield -12 at 4.01%
5y Treasury yield -11 at 4.15%
10y Treasury yield -8 at 4.46% 30y Treasury yield -6 at 4.77%
Dow -143 at13,305
S&P -17 at 1472
Dollar index -.26 at 80.61
Yen -1.1 at 115.2
Euro unch at 1.365
Oil +.82 at $75.90
10y Treasury yield Chart
ADP Job Growth Half What Was Expected in August
The ADP estimate shows only 38k new jobs in August (consensus 80k), the smallest estimated increase in four years. It is important to remember that the ADP report doesn't include government jobs. To make the ADP estimate comparable to the non-farm employment growth figure, add 15-20k government jobs to the ADP figure. The current consensus for Friday's growth in non-farm payrolls is 108k.
The ADP survey showed a decrease of 49k jobs in manufacturing and construction industries while service industries remain the job powerhouse adding 87k workers in August. Goods producing jobs have fallen for nine straight months. Larger employers were shedding jobs last month (-32k) while smaller employers added 70k jobs.
The ADP survey covers 383k businesses and about 23 million workers.
August follows a weak reading for July, of a revised lower 41k new jobs, indicating a deceleration in job creation as the housing and lending issues impact consumers and businesses.
The ADP survey showed a decrease of 49k jobs in manufacturing and construction industries while service industries remain the job powerhouse adding 87k workers in August. Goods producing jobs have fallen for nine straight months. Larger employers were shedding jobs last month (-32k) while smaller employers added 70k jobs.
The ADP survey covers 383k businesses and about 23 million workers.
August follows a weak reading for July, of a revised lower 41k new jobs, indicating a deceleration in job creation as the housing and lending issues impact consumers and businesses.
Tuesday, September 4, 2007
Today's Tidbits
Comments From Jackson Hole Fed Conference
From Lehman: “As expected, Chairman Bernanke did not signal any fundamental change in monetary policy. However, this does not mean the speech was irrelevant. His speech did three things. First, it confirmed that the Fed has a bias to ease. He made clear that the two impediments to easing—inflation and concerns about bailing out risky investors—are now taking a back seat to concerns about growth. The Fed is aware that by adopting an easing bias and reaffirming it in Jackson Hole, it is now under the gun to follow up. Hence, no news is good news: it means the Fed is not trying to dissuade market expectations of rate cuts. Second, Bernanke did a careful rundown of the stresses in capital markets, the Fed's efforts to offset them, and the risks to the economy. This was a "good driver" speech: it shows clearly that the Fed is not asleep at the wheel--it is very aware of the risks and is ready to act as needed. Third, he emphasized that old pre-crisis data are misleading and that the Fed must focus on timely data and anecdotal evidence. It takes time for tighter financial conditions to slow growth, so even August numbers should be considered “old.” We will be keeping a close eye on: jobless claims, a volatile but useful early gauge of the labor market … auto sales, a volatile but useful early gauge of spending on consumer durables...existing home inventories, a leading indicator of both home construction and prices… confidence surveys and business surveys such as the purchasing manager’s index…The bottom line: the Fed has bought some time with its money market interventions and supportive talk, but there are growing downside risks to growth, and the market's recovery is predicated on the idea that the Fed is going to ease. We continue to expect 25 bp eases at each of the next two meetings, and the risk is that the Fed does more rather than less. We believe both the markets and the data will have to be strong in the next few weeks to stop the Fed, and we believe things will have to get much worse to cause either an intermeeting cut or a 50 bp move at the September 18 meeting. Two other themes emerged from the meetings and conversations on the hiking trails. First, there were a lot of bears in Jackson Hole…Even usually optimistic housing experts have thrown in the towel and expect considerable more bad news ahead. Second, the level of uncertainty about both capital markets and the economy is quite high. The spillover effects from housing to consumer and business spending may be small, or they could be considerable. The Fed must have been impressed that people from many disciplines —Wall Street, Main Street, academia, and foreign central banks—were all coming to the same conclusion. Only Marty Feldstein came straight out and suggested rate cuts, but that was the undercurrent in the room.”
From Merrill Lynch: “…Martin Feldstein, who is the head of the National Bureau of Economic Research and as such, is the guy responsible for ultimately determining recessions and expansions, not to mention the fact that he was on the short list two years ago for the Fed chairmanship job, also gave a speech at Jackson Hole over the weekend where he said, in quotes "there is a significant risk of a very serious downturn" and added that "the multiplier effect of home price declines and declines in consumer spending could push the economy into recession". He went on to say "I would be more comfortable if the Fed funds rate was 4-1/4% rather than 5-1/4".”
From Goldman Sachs: “…Governor Mishkin's paper …opens the door to a substantial amount of preemptive monetary easing in response to falling house prices. Using the Fed's model, Mishkin finds that a 20% decline in real house prices requires a 75bp reduction in the funds rate in the standard version of the model, and a 175bp reduction in a version that assumes "magnified" housing transmission channels. He didn't endorse either the 20% house price decline or the magnified housing effects as a baseline forecast, but I thought it was interesting that he presented such large rate cuts as "optimal policy" in a paper that was presumably extensively vetted before publication…John Muellbauer presented a very interesting paper which explicitly modeled the interaction between house prices, credit availability , and spending. He found that the wealth effect has grown sharply in the wake of the recent credit loosening, especially in the US, and that it is now as large as 7 cents on the dollar. Moreover, Muellbauer's results imply that a simultaneous decline in housing wealth and credit availability could have even larger adverse effects on consumption…Meanwhile, the recent data support the view that MEW matters. A standard Fed-style model with equal 3-5 cents/dollar wealth effects for both housing and financial assets implies that consumption should grow more quickly than income as long as the ratio of overall household wealth to disposable income is rising. However, over the last year, real consumer spending has grown 1.3 percentage points more slowly than real disposable income (2.5% vs. 3.8%), despite a rising wealth/income ratio. This supports the idea that, on a per-dollar basis, housing is much more important than financial wealth for spending, probably because of MEW/credit availability channel. Given what's happening to MEW, house prices, and credit availability, the underperformance of consumption is likely to continue…we now expect declines in nominal home prices of 7% in both 2007 and 2008. In such an environment, it is very possible that the Fed will need to ease more than 75bp to keep the economy out of recession.”
Comments on the U.S. Government’s Plans to Help Subprime Borrowers
From Bear Stearns: “The FHAsecure mortgage program is a refinance product targeted exclusively to borrowers that are delinquent because of payment reset. The Bush administration estimates that 240,000 families (representing approximately $53 BB in subprime debt) will be saved from foreclosure by the new program. This program requires no congressional approval and is scheduled for immediate implementation…Based on preliminary specifications released by the FHA, under the new program the FHA will guarantee a first lien mortgage that meets the following requirements: 1.Borrower has a recent clean payment history (probably 12-months) 2. Borrower has at least 3% equity in the home 3.Verification of employment and income (i.e. full documentation) 4.The lender may execute a second mortgage to cover closing costs and arrearages in excess of the 97% LTV limit…If we look at the roughly $450 BB of subprime resets scheduled for Q3 2007 through Q4 2009, we find that 28% ($130 BB) qualify under the preliminary guidelines (<97% LTV, full documentation, 12-month clean pay history). In this group we expect borrowers with LTVs between 85% and 97% to be the heaviest users of this program since they currently have very limited or no refinancing alternatives. This group represents approximately 270,000 borrowers ($55 BB)- a level that is roughly consistent with the Bush administration number. The remaining 384,000 borrowers ($ 75 BB) with LTVs less than or equal to 85% will likely qualify under the expanded approval programs set up by the GSEs or for some other form of financing…From a performance perspective a refinance is much preferred to a loan modification since it cures and removes the loan from the mortgage pool. In contrast, history has shown that a significant percentage of loan modifications still end in default. Thus, if we assume in our previous analysis of loan modifications …that current pay, high LTV loans are refinanced instead of modified we find that our projected cumulative default for the 2006 vintage of 2/28 loans declines by nearly 10% (from 36.5% to 27.8%). Thus, it is clear that the program has the potential to lower losses significantly… Of course the true impact of the program will be determined by how rigorous the underwriting process really is and the path of home prices. Some of these details will be revealed in this week’s FHA Mortgagee Letter. In particular, any relaxation in documentation requirements or payment history requirements could broaden the scope of the program significantly. However, it is clear that the Bush administration must walk a fine line between offering a prudent underwriting alternative for deserving subprime borrowers and a program that could be viewed as a bailout to subprime borrowers.”
From RBSGC: “Even borrowers who are 90+ days delinquent would be eligible to refinance into an FHA loan. Note that the borrower would still have to qualify for the loan under the normal process, which often takes another 90 days or so. The borrower would pay the FHA insurance fees, which are typically 1.5 points up front and 50 bp per annum. The FHA estimates this will add 80,000 borrowers to the program next year, or roughly $13 bn in additional production. This is obviously a pretty small event from a macroeconomic point of view (a small portion of even one major city in the US), but will significantly increase GNMA issuance. Net issuance should go from negative to positive. Gross issuance should increase by roughly 18% to $7 bn per month from $6 bn on average, including GNMA IIs. GNMAs are down significantly versus conventionals this morning, reflecting this already. The maximum loan balance for FHA loans would remain in place, currently $362,790. This issue would exclude wide areas of the country with subprime borrowers, including New York and California, where the average mortgage balance is much higher. Note that GNMA has announced they will accept jumbo VA loans and Congress may push the FHA limit to match the conforming loan limit of $417,000.”
From Bloomberg: “U.S. bank regulators urged mortgage lenders to ease terms on the subprime loans they packaged into bonds, seeking to stem foreclosures that may aggravate what's already the worst housing slump in 16 years. The Federal Reserve and other bank regulators asked lenders to review their authority under pooling and servicing agreements to identify borrowers at risk of default and offer to refinance to help them keep their homes, the agencies said in a joint statement released today in Washington. ``We encourage servicers of securitized mortgages to reach out to financially stressed homeowners,'' Fed Governor Randall Kroszner said in a statement. The regulators' recommendation is part of a broader push by the federal government to stem the growing rate of foreclosures among borrowers with weak credit or high debt and to quell the recent turmoil in the credit markets. Last week, President George W. Bush unveiled his plan to help homeowners avoid foreclosure, including a new initiative that would allow the Federal Housing Administration to help borrowers facing rising mortgage payments stay in their homes. The number of U.S. homes under foreclosure almost doubled in
July from a year earlier as property owners with adjustable-rate mortgages faced larger monthly payments, according to RealtyTrac Inc., the Irvine, California-based seller of foreclosure data. The regulators urged lenders to use their authority under the securitization documents to identify borrowers at risk of delinquency or default, including those facing interest-rate increases on their loans, and contact them to assess their ability to repay. They should consider helping borrowers avoid foreclosure by deferring payments, converting loans to a fixed-rate mortgages and other ways that help homeowners manage payments, the regulators said.”
From Dow Jones: “Federal regulators are encouraging financial institutions to determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk of default. A joint statement was issued Tuesday by the Federal Deposit Insurance Corp., Federal Reserve, the Office of the Comptroller of the Currency, the office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors. The statement is significant because it shows the heightened concern among regulators that problems in subprime markets will likely worsen before improving. “More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable,” Federal Deposit Insurance Corp. Chairman Sheila Bair said. “With declines in housing prices in some areas and tighter credit for subprime loans, it is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset.”
Funding Issues Persist Causing Further Market Dislocations
From Barclays: “In contrast to other assets, the money markets are signaling deepening problems as liquidity is increasingly confined to overnight rates. If the term deposit
market continues to malfunction, a second sell-off in equities and other asset markets is increasingly probable. However, common sense suggests that central banks will eventually find a successful way of returning liquidity to the money markets - and by extension to the interest rate swap and FX forward markets. Longer run, current events may serve to influence the way central banks react to speculative bubbles.”
From Deutsche: “Libor continues to remain the most volatile instrument in US rates as funding pressures continue to cause 3mL to press higher [5.70% this morning]. The term markets continue to remain dysfunctional and expectations for increased demand for short term funding (CP rolls over the next few weeks) has moved spot Libor up nearly 20bps since last week. This phenomenon is unique to Libor as Fed Funds effective
continues to remain low due to expectations for a 25bp cut - the result is that FedFunds / Libor basis continues to blow out.”
From Bloomberg: “The Federal Home Loan Bank system, the cooperatives chartered by Congress to promote home ownership, said its lending rose 14 percent in August to $769 billion as other sources of financing for mortgages dwindled…The 12 Federal Home Loan banks lend money to 8,100 thrifts, credit unions, insurance companies and commercial banks at below- market rates in order to finance their holdings of mortgages. The banks in the system, which was formed 75 years ago, also buy and hold mortgage-related assets themselves. They're owned by their borrowers, and raise money as a group in the so-called agency bond market, like government-chartered mortgage companies Fannie Mae and Freddie Mac. The system's borrowing rose by $110 billion in August to $1.087 trillion. Discount notes increased by $82 billion to $249 billion; longer-term bonds rose $28 billion to $838 billion.”
From Citi: “Swap players having real issues dealing with resets, and this impacting bank players in general. Also, between the Libor resets and effective Fed Funds continuing to trade well below the official rate, it makes trying to gauge what the market really anticipates or hedge what the Fed may or may not do extremely difficult.”
From Dow Jones: “Daily issuance volumes of asset-backed commercial paper hit a new high in the week to Friday, according to Federal Reserve data, a sign that the rush to sell ever-shorter-term maturity debt amid the current credit crisis has yet to diminish. The Fed’s data showed that in the week to Friday, asset-backed commercial paper sold averaged a daily $90.6 billion, up from $88.6 billion the prior week. By way of comparison, an average of around $70 billion was sold in June and July, while average daily issuance last year was just $51.2 billion. More than three-quarters of the total issued was concentrated in the maturity range of one to four days, with only $938 million issued in the 81-plus-days category. The numbers reflect all sales of asset-backed commercial paper to investors by dealers or direct issuers, but they exclude secondary issues and repurchase agreement and financing issuance of commercial paper. Last week’s numbers were the highest since the Fed started keeping records on commercial paper in 2000. The commercial paper market, which is where companies and banks go to fund short-term financing needs, has been at the heart of the recent credit crunch. Asset-backed commercial paper was one of the most popular funding instruments for purchases
of higher-yielding, longer-term mortgage products. When mortgage products started to hit trouble earlier in the summer, asset-backed commercial paper rates spiked as issuers
found it increasingly hard to borrow. With some issuers being forced out of the market, the amount of outstanding commercial paper has dropped sharply in recent weeks, with total volumes falling by 11% in the three weeks to Wednesday, while the outstanding amount of asset-backed CP has declined by more than 15%. However, even while the total outstanding has declined, the daily volume of commercial paper - and asset-backed CP in particular - has jumped. That’s because issuers are having to sell increasingly
short-term paper and roll it over much more frequently. That’s led to a massive pile-up in commercial paper which matures over a very short time period.”
MISC
From Bloomberg: “While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts. ``The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''
From Merrill Lynch: “…jobless claims…a key economic barometer to watch for several reasons. First, it is a weekly, and therefore timely, statistic. Second, it is an official leading indicator of the economy and of employment. Third, we thought that employment would be the key to the seriousness of the housing problems because people generally tend not to give back the keys to their homes so long as they are employed… jobless claims have now risen for 5 straight …Significant increases in jobless claims would surely signal that the front end of the US economy (and the global economy for that matter) are starting to weaken more than has been anticipated. Our five investment themes (high quality bonds, large cap stocks, defensive sectors, developed markets, and high quality dividends and income) are likely to gain wide acceptance if these data show more weakness.”
From Dow Jones: “U.S. auto makers, battered by economic headwinds, posted mixed August U.S. sales with General Motors Corp. reporting a surprising increase. Meanwhile, Ford Motor Co. posted a 14% skid in sales for the month and said it sees higher fourth-quarter production. Toyota Motor Corp. posted a 2.8% sales drop. GM said its U.S. sales of cars and light trucks for August rose 6.1% from a year ago, but the company lowered its third-quarter production forecast and sees lower fourth-quarter output.”
From Bloomberg: “Wheat rose the maximum allowed by the CBOT on rising
purchases by India, the second-biggest consumer, and forecasts that global supplies will drop to their lowest in 26 years. Prices have doubled in the past year in Chicago and reached a record high last month.”
From FTN: “Despite the turmoil of the past several weeks, the WSJ reports $71.6bn in investment grade corporate bond issuance in August, the most ever in August and the sixth most in any month ever. Many companies issued bonds rather than commercial paper…”
From The Rutland Herald: “A strong human working hard all day can put out roughly 100 watts of power. Working hard 12 hours per day, six days per year, 50 weeks per year, a human can produce about 1 million BTUs of energy — the amount of energy contained in eight gallons of gasoline.” [Based on per capita oil consumption, this equates to 150 people working full-time on manual labor per person in the U.S.]
From Bloomberg: “…the cheapest stock market in almost 12 years…Software makers in the Standard & Poor's 500 Index are valued at an average 20.8 times estimated profit, the lowest since at least 1995, according to data compiled by Bloomberg. Industrial companies trade at 18.4 times earnings, lower than their average of 23.4 this decade… The S&P 500 Diversified Financials Index last month was valued at 10.6 times earnings, the cheapest since at least 1995, according to Bloomberg data.”
From Dow Jones: “CME Group Inc. posted a 78% increase in trading volume last month, benefiting from a surge in market volatility amid investors’ jitters about deepening problems in the subprime mortgage market and tightening credit conditions.”
End-of-Day Market Update
As of 3:45, ten year Treasury yields are up 2bp to 4.55%. The Dow has rallied 103 points to its highest level in almost a month. The dollar index is up .08 to 80.90, but gold has rallied $10 to $682.7 (its highest level since July). Oil is up over at dollar to $75.08 – its highest level in exactly a month. (Report out early as going into a meeting from 4-5.)
From Lehman: “As expected, Chairman Bernanke did not signal any fundamental change in monetary policy. However, this does not mean the speech was irrelevant. His speech did three things. First, it confirmed that the Fed has a bias to ease. He made clear that the two impediments to easing—inflation and concerns about bailing out risky investors—are now taking a back seat to concerns about growth. The Fed is aware that by adopting an easing bias and reaffirming it in Jackson Hole, it is now under the gun to follow up. Hence, no news is good news: it means the Fed is not trying to dissuade market expectations of rate cuts. Second, Bernanke did a careful rundown of the stresses in capital markets, the Fed's efforts to offset them, and the risks to the economy. This was a "good driver" speech: it shows clearly that the Fed is not asleep at the wheel--it is very aware of the risks and is ready to act as needed. Third, he emphasized that old pre-crisis data are misleading and that the Fed must focus on timely data and anecdotal evidence. It takes time for tighter financial conditions to slow growth, so even August numbers should be considered “old.” We will be keeping a close eye on: jobless claims, a volatile but useful early gauge of the labor market … auto sales, a volatile but useful early gauge of spending on consumer durables...existing home inventories, a leading indicator of both home construction and prices… confidence surveys and business surveys such as the purchasing manager’s index…The bottom line: the Fed has bought some time with its money market interventions and supportive talk, but there are growing downside risks to growth, and the market's recovery is predicated on the idea that the Fed is going to ease. We continue to expect 25 bp eases at each of the next two meetings, and the risk is that the Fed does more rather than less. We believe both the markets and the data will have to be strong in the next few weeks to stop the Fed, and we believe things will have to get much worse to cause either an intermeeting cut or a 50 bp move at the September 18 meeting. Two other themes emerged from the meetings and conversations on the hiking trails. First, there were a lot of bears in Jackson Hole…Even usually optimistic housing experts have thrown in the towel and expect considerable more bad news ahead. Second, the level of uncertainty about both capital markets and the economy is quite high. The spillover effects from housing to consumer and business spending may be small, or they could be considerable. The Fed must have been impressed that people from many disciplines —Wall Street, Main Street, academia, and foreign central banks—were all coming to the same conclusion. Only Marty Feldstein came straight out and suggested rate cuts, but that was the undercurrent in the room.”
From Merrill Lynch: “…Martin Feldstein, who is the head of the National Bureau of Economic Research and as such, is the guy responsible for ultimately determining recessions and expansions, not to mention the fact that he was on the short list two years ago for the Fed chairmanship job, also gave a speech at Jackson Hole over the weekend where he said, in quotes "there is a significant risk of a very serious downturn" and added that "the multiplier effect of home price declines and declines in consumer spending could push the economy into recession". He went on to say "I would be more comfortable if the Fed funds rate was 4-1/4% rather than 5-1/4".”
From Goldman Sachs: “…Governor Mishkin's paper …opens the door to a substantial amount of preemptive monetary easing in response to falling house prices. Using the Fed's model, Mishkin finds that a 20% decline in real house prices requires a 75bp reduction in the funds rate in the standard version of the model, and a 175bp reduction in a version that assumes "magnified" housing transmission channels. He didn't endorse either the 20% house price decline or the magnified housing effects as a baseline forecast, but I thought it was interesting that he presented such large rate cuts as "optimal policy" in a paper that was presumably extensively vetted before publication…John Muellbauer presented a very interesting paper which explicitly modeled the interaction between house prices, credit availability , and spending. He found that the wealth effect has grown sharply in the wake of the recent credit loosening, especially in the US, and that it is now as large as 7 cents on the dollar. Moreover, Muellbauer's results imply that a simultaneous decline in housing wealth and credit availability could have even larger adverse effects on consumption…Meanwhile, the recent data support the view that MEW matters. A standard Fed-style model with equal 3-5 cents/dollar wealth effects for both housing and financial assets implies that consumption should grow more quickly than income as long as the ratio of overall household wealth to disposable income is rising. However, over the last year, real consumer spending has grown 1.3 percentage points more slowly than real disposable income (2.5% vs. 3.8%), despite a rising wealth/income ratio. This supports the idea that, on a per-dollar basis, housing is much more important than financial wealth for spending, probably because of MEW/credit availability channel. Given what's happening to MEW, house prices, and credit availability, the underperformance of consumption is likely to continue…we now expect declines in nominal home prices of 7% in both 2007 and 2008. In such an environment, it is very possible that the Fed will need to ease more than 75bp to keep the economy out of recession.”
Comments on the U.S. Government’s Plans to Help Subprime Borrowers
From Bear Stearns: “The FHAsecure mortgage program is a refinance product targeted exclusively to borrowers that are delinquent because of payment reset. The Bush administration estimates that 240,000 families (representing approximately $53 BB in subprime debt) will be saved from foreclosure by the new program. This program requires no congressional approval and is scheduled for immediate implementation…Based on preliminary specifications released by the FHA, under the new program the FHA will guarantee a first lien mortgage that meets the following requirements: 1.Borrower has a recent clean payment history (probably 12-months) 2. Borrower has at least 3% equity in the home 3.Verification of employment and income (i.e. full documentation) 4.The lender may execute a second mortgage to cover closing costs and arrearages in excess of the 97% LTV limit…If we look at the roughly $450 BB of subprime resets scheduled for Q3 2007 through Q4 2009, we find that 28% ($130 BB) qualify under the preliminary guidelines (<97% LTV, full documentation, 12-month clean pay history). In this group we expect borrowers with LTVs between 85% and 97% to be the heaviest users of this program since they currently have very limited or no refinancing alternatives. This group represents approximately 270,000 borrowers ($55 BB)- a level that is roughly consistent with the Bush administration number. The remaining 384,000 borrowers ($ 75 BB) with LTVs less than or equal to 85% will likely qualify under the expanded approval programs set up by the GSEs or for some other form of financing…From a performance perspective a refinance is much preferred to a loan modification since it cures and removes the loan from the mortgage pool. In contrast, history has shown that a significant percentage of loan modifications still end in default. Thus, if we assume in our previous analysis of loan modifications …that current pay, high LTV loans are refinanced instead of modified we find that our projected cumulative default for the 2006 vintage of 2/28 loans declines by nearly 10% (from 36.5% to 27.8%). Thus, it is clear that the program has the potential to lower losses significantly… Of course the true impact of the program will be determined by how rigorous the underwriting process really is and the path of home prices. Some of these details will be revealed in this week’s FHA Mortgagee Letter. In particular, any relaxation in documentation requirements or payment history requirements could broaden the scope of the program significantly. However, it is clear that the Bush administration must walk a fine line between offering a prudent underwriting alternative for deserving subprime borrowers and a program that could be viewed as a bailout to subprime borrowers.”
From RBSGC: “Even borrowers who are 90+ days delinquent would be eligible to refinance into an FHA loan. Note that the borrower would still have to qualify for the loan under the normal process, which often takes another 90 days or so. The borrower would pay the FHA insurance fees, which are typically 1.5 points up front and 50 bp per annum. The FHA estimates this will add 80,000 borrowers to the program next year, or roughly $13 bn in additional production. This is obviously a pretty small event from a macroeconomic point of view (a small portion of even one major city in the US), but will significantly increase GNMA issuance. Net issuance should go from negative to positive. Gross issuance should increase by roughly 18% to $7 bn per month from $6 bn on average, including GNMA IIs. GNMAs are down significantly versus conventionals this morning, reflecting this already. The maximum loan balance for FHA loans would remain in place, currently $362,790. This issue would exclude wide areas of the country with subprime borrowers, including New York and California, where the average mortgage balance is much higher. Note that GNMA has announced they will accept jumbo VA loans and Congress may push the FHA limit to match the conforming loan limit of $417,000.”
From Bloomberg: “U.S. bank regulators urged mortgage lenders to ease terms on the subprime loans they packaged into bonds, seeking to stem foreclosures that may aggravate what's already the worst housing slump in 16 years. The Federal Reserve and other bank regulators asked lenders to review their authority under pooling and servicing agreements to identify borrowers at risk of default and offer to refinance to help them keep their homes, the agencies said in a joint statement released today in Washington. ``We encourage servicers of securitized mortgages to reach out to financially stressed homeowners,'' Fed Governor Randall Kroszner said in a statement. The regulators' recommendation is part of a broader push by the federal government to stem the growing rate of foreclosures among borrowers with weak credit or high debt and to quell the recent turmoil in the credit markets. Last week, President George W. Bush unveiled his plan to help homeowners avoid foreclosure, including a new initiative that would allow the Federal Housing Administration to help borrowers facing rising mortgage payments stay in their homes. The number of U.S. homes under foreclosure almost doubled in
July from a year earlier as property owners with adjustable-rate mortgages faced larger monthly payments, according to RealtyTrac Inc., the Irvine, California-based seller of foreclosure data. The regulators urged lenders to use their authority under the securitization documents to identify borrowers at risk of delinquency or default, including those facing interest-rate increases on their loans, and contact them to assess their ability to repay. They should consider helping borrowers avoid foreclosure by deferring payments, converting loans to a fixed-rate mortgages and other ways that help homeowners manage payments, the regulators said.”
From Dow Jones: “Federal regulators are encouraging financial institutions to determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk of default. A joint statement was issued Tuesday by the Federal Deposit Insurance Corp., Federal Reserve, the Office of the Comptroller of the Currency, the office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors. The statement is significant because it shows the heightened concern among regulators that problems in subprime markets will likely worsen before improving. “More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable,” Federal Deposit Insurance Corp. Chairman Sheila Bair said. “With declines in housing prices in some areas and tighter credit for subprime loans, it is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset.”
Funding Issues Persist Causing Further Market Dislocations
From Barclays: “In contrast to other assets, the money markets are signaling deepening problems as liquidity is increasingly confined to overnight rates. If the term deposit
market continues to malfunction, a second sell-off in equities and other asset markets is increasingly probable. However, common sense suggests that central banks will eventually find a successful way of returning liquidity to the money markets - and by extension to the interest rate swap and FX forward markets. Longer run, current events may serve to influence the way central banks react to speculative bubbles.”
From Deutsche: “Libor continues to remain the most volatile instrument in US rates as funding pressures continue to cause 3mL to press higher [5.70% this morning]. The term markets continue to remain dysfunctional and expectations for increased demand for short term funding (CP rolls over the next few weeks) has moved spot Libor up nearly 20bps since last week. This phenomenon is unique to Libor as Fed Funds effective
continues to remain low due to expectations for a 25bp cut - the result is that FedFunds / Libor basis continues to blow out.”
From Bloomberg: “The Federal Home Loan Bank system, the cooperatives chartered by Congress to promote home ownership, said its lending rose 14 percent in August to $769 billion as other sources of financing for mortgages dwindled…The 12 Federal Home Loan banks lend money to 8,100 thrifts, credit unions, insurance companies and commercial banks at below- market rates in order to finance their holdings of mortgages. The banks in the system, which was formed 75 years ago, also buy and hold mortgage-related assets themselves. They're owned by their borrowers, and raise money as a group in the so-called agency bond market, like government-chartered mortgage companies Fannie Mae and Freddie Mac. The system's borrowing rose by $110 billion in August to $1.087 trillion. Discount notes increased by $82 billion to $249 billion; longer-term bonds rose $28 billion to $838 billion.”
From Citi: “Swap players having real issues dealing with resets, and this impacting bank players in general. Also, between the Libor resets and effective Fed Funds continuing to trade well below the official rate, it makes trying to gauge what the market really anticipates or hedge what the Fed may or may not do extremely difficult.”
From Dow Jones: “Daily issuance volumes of asset-backed commercial paper hit a new high in the week to Friday, according to Federal Reserve data, a sign that the rush to sell ever-shorter-term maturity debt amid the current credit crisis has yet to diminish. The Fed’s data showed that in the week to Friday, asset-backed commercial paper sold averaged a daily $90.6 billion, up from $88.6 billion the prior week. By way of comparison, an average of around $70 billion was sold in June and July, while average daily issuance last year was just $51.2 billion. More than three-quarters of the total issued was concentrated in the maturity range of one to four days, with only $938 million issued in the 81-plus-days category. The numbers reflect all sales of asset-backed commercial paper to investors by dealers or direct issuers, but they exclude secondary issues and repurchase agreement and financing issuance of commercial paper. Last week’s numbers were the highest since the Fed started keeping records on commercial paper in 2000. The commercial paper market, which is where companies and banks go to fund short-term financing needs, has been at the heart of the recent credit crunch. Asset-backed commercial paper was one of the most popular funding instruments for purchases
of higher-yielding, longer-term mortgage products. When mortgage products started to hit trouble earlier in the summer, asset-backed commercial paper rates spiked as issuers
found it increasingly hard to borrow. With some issuers being forced out of the market, the amount of outstanding commercial paper has dropped sharply in recent weeks, with total volumes falling by 11% in the three weeks to Wednesday, while the outstanding amount of asset-backed CP has declined by more than 15%. However, even while the total outstanding has declined, the daily volume of commercial paper - and asset-backed CP in particular - has jumped. That’s because issuers are having to sell increasingly
short-term paper and roll it over much more frequently. That’s led to a massive pile-up in commercial paper which matures over a very short time period.”
MISC
From Bloomberg: “While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts. ``The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''
From Merrill Lynch: “…jobless claims…a key economic barometer to watch for several reasons. First, it is a weekly, and therefore timely, statistic. Second, it is an official leading indicator of the economy and of employment. Third, we thought that employment would be the key to the seriousness of the housing problems because people generally tend not to give back the keys to their homes so long as they are employed… jobless claims have now risen for 5 straight …Significant increases in jobless claims would surely signal that the front end of the US economy (and the global economy for that matter) are starting to weaken more than has been anticipated. Our five investment themes (high quality bonds, large cap stocks, defensive sectors, developed markets, and high quality dividends and income) are likely to gain wide acceptance if these data show more weakness.”
From Dow Jones: “U.S. auto makers, battered by economic headwinds, posted mixed August U.S. sales with General Motors Corp. reporting a surprising increase. Meanwhile, Ford Motor Co. posted a 14% skid in sales for the month and said it sees higher fourth-quarter production. Toyota Motor Corp. posted a 2.8% sales drop. GM said its U.S. sales of cars and light trucks for August rose 6.1% from a year ago, but the company lowered its third-quarter production forecast and sees lower fourth-quarter output.”
From Bloomberg: “Wheat rose the maximum allowed by the CBOT on rising
purchases by India, the second-biggest consumer, and forecasts that global supplies will drop to their lowest in 26 years. Prices have doubled in the past year in Chicago and reached a record high last month.”
From FTN: “Despite the turmoil of the past several weeks, the WSJ reports $71.6bn in investment grade corporate bond issuance in August, the most ever in August and the sixth most in any month ever. Many companies issued bonds rather than commercial paper…”
From The Rutland Herald: “A strong human working hard all day can put out roughly 100 watts of power. Working hard 12 hours per day, six days per year, 50 weeks per year, a human can produce about 1 million BTUs of energy — the amount of energy contained in eight gallons of gasoline.” [Based on per capita oil consumption, this equates to 150 people working full-time on manual labor per person in the U.S.]
From Bloomberg: “…the cheapest stock market in almost 12 years…Software makers in the Standard & Poor's 500 Index are valued at an average 20.8 times estimated profit, the lowest since at least 1995, according to data compiled by Bloomberg. Industrial companies trade at 18.4 times earnings, lower than their average of 23.4 this decade… The S&P 500 Diversified Financials Index last month was valued at 10.6 times earnings, the cheapest since at least 1995, according to Bloomberg data.”
From Dow Jones: “CME Group Inc. posted a 78% increase in trading volume last month, benefiting from a surge in market volatility amid investors’ jitters about deepening problems in the subprime mortgage market and tightening credit conditions.”
End-of-Day Market Update
As of 3:45, ten year Treasury yields are up 2bp to 4.55%. The Dow has rallied 103 points to its highest level in almost a month. The dollar index is up .08 to 80.90, but gold has rallied $10 to $682.7 (its highest level since July). Oil is up over at dollar to $75.08 – its highest level in exactly a month. (Report out early as going into a meeting from 4-5.)
August Manufacturing ISM Slightly Weaker Than Expected
The manufacturing ISM fell to 52.9 (consensus 53) from 53.9 in July. This is the lowest level for the index since March when it read 50.9. The Institute for Supply Management's index's decline suggests that manufacturers are trimming production and orders in expectation of softening sales due to the credit crunch. But with a reading of over 50, it indicates that manufacturing output continues to grow for the seventh month in a row. Growth was negative in January. A positive for inflation is that prices paid fell to 63, the lowest level since February, and the fourth month in a row of declines.
Production, employment, and new export orders showed growth, all other categories showed lower readings with most declining by around 2 points. New orders and order backlogs are both at their lowest levels since March.
These figures show deterioration from the second quarter, with negative implications for GDP growth in the third quarter.
Production, employment, and new export orders showed growth, all other categories showed lower readings with most declining by around 2 points. New orders and order backlogs are both at their lowest levels since March.
These figures show deterioration from the second quarter, with negative implications for GDP growth in the third quarter.
Construction Spending Slowing Due to Housing Slump
Construction spending unexpectedly fell in July. But June's decline was revised higher to help offset the unexpected weakness. July construction spending fell -.4% MoM, the largest monthly drop since January, but July's figure was revised up to +.1% MoM from an originally announced decline of -.3% MoM.
Since July of last year, construction has fallen -2% YoY. All of the decline this past year is due to residential construction falling -15.6% YoY while non-residential (office, hospital, govt) has expanded +13.9% YoY.
Last month residential construction fell the most since January, falling -1.4% MoM. Non-residential, which has been offsetting the weakness of residential construction most of this year, was only able to grow +.6% MoM, offsetting less than half the decline in housing, as homebuilders slow new home starts in an effort to decrease the inventory of unsold homes. Private residential construction fell 1.4% MoM in July, the 17th straight monthly decline.
Public construction grew +.7% MoM in July due to increased spending on schools and hospitals, mainly at the local government level.
Construction is starting off the third quarter as a drag on GDP growth.
Since July of last year, construction has fallen -2% YoY. All of the decline this past year is due to residential construction falling -15.6% YoY while non-residential (office, hospital, govt) has expanded +13.9% YoY.
Last month residential construction fell the most since January, falling -1.4% MoM. Non-residential, which has been offsetting the weakness of residential construction most of this year, was only able to grow +.6% MoM, offsetting less than half the decline in housing, as homebuilders slow new home starts in an effort to decrease the inventory of unsold homes. Private residential construction fell 1.4% MoM in July, the 17th straight monthly decline.
Public construction grew +.7% MoM in July due to increased spending on schools and hospitals, mainly at the local government level.
Construction is starting off the third quarter as a drag on GDP growth.
Subscribe to:
Posts (Atom)