Monday, 9/17
September Empire Manufacturing Consensus: 18.5 Prior: 25.1
The NY index has remained very resilient, holding above 25 for last three months, but is expected to soften this month
Tuesday, 9/18
August Producer Price Index
MoM Consensus: -.2% Prior: +.6%
YoY Consensus: +3.2% Prior: +4%
PPI Ex-Food and Energy
MoM Consensus: +.1% Prior: +.1%
YoY Consensus: +2.2% Prior: +2.3%
Substantial decline anticipated for headline inflation both MoM and YoY due to lower energy prices (gasoline fell 6% in August)
Food prices paid to farmers fell slightly last month
Core inflation expected to ease marginally on lower vehicle costs
Recent gains have been muted for both consumer and capital goods
Core crude and intermediate goods prices expected to decline YoY
July Total Net TIC Flows Consensus: $60B Prior: $58.8B
Net Long-Term TIC Flows Consensus:$100B Prior: $120.9B
May and June both saw record demand of over $120B in long-term flows
Central bank Treasury buying rebounded in June, totaling more than prior 5months combined ($32B vs $3B)
September National Homebuilders Index Consensus: 20 Prior: 22
Expected to drop again to a new low for this cycle
In early 90s downturn, index remained below 25 for three months
September is likely to be the 3rd month below 25 for this cycle
FOMC Meeting
Fed Target Rate Consensus: 5% Prior: 5.25%
Most uncertainty in a while - Range from unchanged to down 50 bp
Wednesday, 9/19
August Consumer Price Index
MoM Consensus: Unch Prior: +.1%
YoY Consensus: +2.2% Prior: +2.4%
CPI Ex-Food and Energy
MoM Consensus: +.2% Prior: +.2%
YoY Consensus: +2.2% Prior: +2.2%
Core and headline inflation rates expected to converge at 2.2% YoY as total inflation growth subsides
Steeply lower gasoline prices should more than offset food price gains
Low headline reading not expected to persist as gasoline prices head higher
Hotel price gains expected to give back some of the 7% gain in past 5m
OER and tenant rent both expected to grow +.2%
Autos and furniture are in YoY price declines
August Housing Starts Consensus: 1350k Prior: 1381k
2.2% drop expected
Building permits hit cycle low in July of 1389k
Homebuilders remain pessimistic
Demand was soft even before recent tightening and turmoil
August Building Permits Consensus: 1340k Prior: 1373k
2.4% decline anticipated
Fell to a ten year low last month
Thursday, 9/20
Initial Jobless Claims Prior: 319k
Continuing Jobless Claims Prior: 2585k
August Leading Indicators Consensus: -0.1% Prior: +.4%
September Philadelphia Fed Consensus: +2.8 Prior: Unch
Weakest regional survey last month
Fed Chairman Bernanke Testifies to U.S. House on the Mortgage Market and the Government’s Plans to Ease Foreclosures. Treasury Secretary Paulson, HUD Secretary Jackson, and Dan Mudd are also speaking.
Friday, 9/21
No Data
Philadelphia Fed President Plosser Speaks
Friday, September 14, 2007
University Of Michigan Confidence Remains Near Low of Year in September / Business Inventories Rising
The preliminary September U. of Michigan consumer confidence survey improved very marginally to 83.8 from 83.4 the prior month, which was also the low for the past year. Future expectation rose slightly to 74.4 from 73.7, but perceptions of current conditions weakened to 98.3 from 98.4. Inflation expectations softened to 3.1% over the next year from 3.2% last month, but five year inflation expectations rose to 3% from 2.9%.
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Business inventories rose more than expected, increasing +.5% MoM (consensus +.3%) in July, following a +.4% rise in June. Higher stockpiles indicate reduced need for new production, especially with retail sales slowing.
Retail inventories, which represent about a third of all business inventories, jumped 1% MoM. Auto dealer inventories rose +2.9% MoM, their largest surge in over a year. Furniture and grocery stores also showed rising inventories, while only general merchandisers indicated a decline.
The inventory to sales ratio fell to 1.26 totally due to a decline in the manufacturing inventory to sales ratio. The I/S ratio for retailers and wholesalers held steady from last month.
***************
Business inventories rose more than expected, increasing +.5% MoM (consensus +.3%) in July, following a +.4% rise in June. Higher stockpiles indicate reduced need for new production, especially with retail sales slowing.
Retail inventories, which represent about a third of all business inventories, jumped 1% MoM. Auto dealer inventories rose +2.9% MoM, their largest surge in over a year. Furniture and grocery stores also showed rising inventories, while only general merchandisers indicated a decline.
The inventory to sales ratio fell to 1.26 totally due to a decline in the manufacturing inventory to sales ratio. The I/S ratio for retailers and wholesalers held steady from last month.
Industrial Production Growth Slowed in August as Caution Increases Regarding Economic Slowdown
Industrial production in August grew slightly slower than expected, rising +.2% MoM (consensus +.3%). But, July's figure was revised higher to +.5% MoM from the previously reported gain of +.3%. In addition, capacity utilization held steady at 82.2% (consensus 82%) after being revised higher last month from an originally reported level of 81.9%. Over the last thirty years, capacity utilization has averaged around 81%.
Economists have been expecting companies to begin scaling back production in anticipation of slowing sales due to the housing market declines, and anticipated retrenchment by consumers. The recent tightening of credit in the CP markets may also cause companies to desire to reduce inventory positions they need to fund with short-term borrowings. Nationwide, factory output fell -.3% MoM in August after rising +.7% MoM in July, with consumer durable goods production falling 1% MoM. Motor vehicle production fell -3.7% MoM in August as manufacturers announced further production cuts for the remainder of 2007. Utility production rose on the warmer than normal weather.
Economists have been expecting companies to begin scaling back production in anticipation of slowing sales due to the housing market declines, and anticipated retrenchment by consumers. The recent tightening of credit in the CP markets may also cause companies to desire to reduce inventory positions they need to fund with short-term borrowings. Nationwide, factory output fell -.3% MoM in August after rising +.7% MoM in July, with consumer durable goods production falling 1% MoM. Motor vehicle production fell -3.7% MoM in August as manufacturers announced further production cuts for the remainder of 2007. Utility production rose on the warmer than normal weather.
Lower Energy Prices Give Temporary Relief to Import Price Increases
Import prices dipped -.3% MoM (consensus +.2%) in August, as energy prices dropped. This marks the first monthly decline in import prices since January. Unfortunately, this improvement is likely to be short lived, based on the recent record oil prices and rapidly deteriorating dollar. July's gain was also revised down to +1.3% from the originally reported +1.5% MoM gain. On a year-over-year basis, import prices eased substantially to +1.9% in August from +2.8% in July. When oil products are excluded, import prices rose +2.3% YoY.
Both petroleum and natural gas costs fell in August. Excluding oil and natural gas price declines, import prices rose +.2% MoM, showing the general impact of the weaker dollar. Natural gas prices saw their largest monthly decline since January, falling -13% MoM. Food prices continue to rise, increasing +.7% MoM (+8% YoY). Imported capital goods prices have risen for four straight months, and have increased +.4% YoY. Imported auto prices rose +.2% MoM for the largest gain in almost a year.
The decline in the dollar is not all negative, it is making U.S. goods more competitive in international markets, which increases export demand. But, the combined impact is inflationary for the U.S.
Import prices from Canada fell -.5% MoM due to the lower energy prices, but were unchanged with Japan, and rose +.3% MoM with China. Price increases from China have been strong for many months, causing the annual increase to rise to +1.1% YoY. Rising import prices from Asia are larger than those seen with Europe and Latin America.
U.S. export prices rose +.2% MoM due to a 1% rise in farm export prices, as the shortage of grain stockpiles raises worldwide demand for foodstocks.
Both petroleum and natural gas costs fell in August. Excluding oil and natural gas price declines, import prices rose +.2% MoM, showing the general impact of the weaker dollar. Natural gas prices saw their largest monthly decline since January, falling -13% MoM. Food prices continue to rise, increasing +.7% MoM (+8% YoY). Imported capital goods prices have risen for four straight months, and have increased +.4% YoY. Imported auto prices rose +.2% MoM for the largest gain in almost a year.
The decline in the dollar is not all negative, it is making U.S. goods more competitive in international markets, which increases export demand. But, the combined impact is inflationary for the U.S.
Import prices from Canada fell -.5% MoM due to the lower energy prices, but were unchanged with Japan, and rose +.3% MoM with China. Price increases from China have been strong for many months, causing the annual increase to rise to +1.1% YoY. Rising import prices from Asia are larger than those seen with Europe and Latin America.
U.S. export prices rose +.2% MoM due to a 1% rise in farm export prices, as the shortage of grain stockpiles raises worldwide demand for foodstocks.
Consumer Spending Slows, But Remains Positive
August retail sales growth was weaker than expected, rising +.3% MoM (consensus +.5%). Excluding autos, which rebounded slightly last month, sales were even weaker than expected, falling -.4% MoM ( consensus +.2%). The saving grace is that retail sales were revised higher for July rising to +.5% MoM from a previously reported gain of +.3% MoM, and ex-autos being revised up to +.7% from +.4%, as originally reported. Retail sales account for almost half of all consumer spending.
Auto sales rose 2.8% last month for the largest gain in a year. Sales in the housing area were mixed with demand rising for furniture (+.5% MoM, +2.8% YoY) but declining for building supplies (-1% MoM, -1% YoY). Clothing stores (-.1% MoM, +7.1% YoY) and gas stations (-2.4% MoM, -1.5% YoY) also saw declines. Service stations were expected to show reduced sales, as the price of gasoline dropped in August, but clothing demand had looked strong in the back-to-school period. General merchandise sales rose +.3% MoM, and have risen +7.1% YoY, while department store sales softened, falling -.2% MoM. Sales at non-store retailers fell -1% MoM. Food sales at both the grocery store and the restaurant level were flat in August.
Excluding autos and gasoline sales, retail sales fell -.1% MoM in August, the first decline since April. The government uses retail sales excluding autos, gasoline and building materials as an input to GDP. This category saw its smallest rise since April, increasing +.1% MoM. The government uses other sources for the excluded data in calculating GDP.
Consumer spending has been an important component in the economy's growth since the last recession. But their resilience is likely to be tested if employment growth slows further, and the housing market continues to deteriorate. The slowdown in spending is likely to help spur the Fed toward an easing next week.
Auto sales rose 2.8% last month for the largest gain in a year. Sales in the housing area were mixed with demand rising for furniture (+.5% MoM, +2.8% YoY) but declining for building supplies (-1% MoM, -1% YoY). Clothing stores (-.1% MoM, +7.1% YoY) and gas stations (-2.4% MoM, -1.5% YoY) also saw declines. Service stations were expected to show reduced sales, as the price of gasoline dropped in August, but clothing demand had looked strong in the back-to-school period. General merchandise sales rose +.3% MoM, and have risen +7.1% YoY, while department store sales softened, falling -.2% MoM. Sales at non-store retailers fell -1% MoM. Food sales at both the grocery store and the restaurant level were flat in August.
Excluding autos and gasoline sales, retail sales fell -.1% MoM in August, the first decline since April. The government uses retail sales excluding autos, gasoline and building materials as an input to GDP. This category saw its smallest rise since April, increasing +.1% MoM. The government uses other sources for the excluded data in calculating GDP.
Consumer spending has been an important component in the economy's growth since the last recession. But their resilience is likely to be tested if employment growth slows further, and the housing market continues to deteriorate. The slowdown in spending is likely to help spur the Fed toward an easing next week.
Wednesday, September 12, 2007
Good Update by Martin Feldstein On The Economy (WSJ)
Liquidity Now!
By MARTIN FELDSTEIN
September 12, 2007; Page A19
The time has come for the Federal Reserve to cut the federal funds interest rate substantially, starting on a path from the current 5.25% to 4.25% and possibly even less. Without such a policy shift, the U.S. economy faces the risk of a significant economic downturn.
Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable incomes.
The current credit market crisis was started by widespread defaults on subprime mortgages. Borrowers with poor credit histories and uncertain incomes had bought homes with adjustable-rate mortgages characterized by high loan-to-value ratios and very low initial "teaser" interest rates. The mortgage brokers who originated those risky loans sold them quickly to sophisticated buyers who bundled them into large pools and then sold participation in those pools to other investors, typically in the form of tranches with different estimated degrees of risk. Many of the buyers then used these to enhance yields in structured bonds or even money market funds.
Many subprime borrowers eventually had difficulty making their monthly payments, especially when teaser rates rose to market levels. The resulting defaults exceeded what investors in the mortgage pools had expected.
Credit risk in financial markets had been underpriced for years, with low credit spreads on risky bonds and inexpensive credit insurance derivatives provided by investors seeking to raise their portfolio returns. With such underpricing of risk, hedge funds and private equity firms substantially increased their leverage.
The subprime mortgage defaults have triggered a widespread flight from risky assets, with a substantial widening of all credit spreads, and a general freezing of credit markets. Official credit ratings came under suspicion. Investors and lenders became concerned that they did not know how to value complex risky assets.
In some recent weeks credit became unavailable. Loans to support private equity deals could not be syndicated, forcing the banks to hold those loans on their own books. Banks are also being forced to honor credit guarantees to previously off-balance-sheet conduits and other back-up credit lines, further reducing the banks' capital available to support credit of all types.
The Federal Reserve correctly stressed its role as the lender of last resort, willing to lend against good collateral at a discount rate that exceeds the federal funds rate. The Fed also encouraged member banks to lend to other financial institutions against suitable collateral that could then be rediscounted at the Fed. It is not clear whether this will succeed since much of the credit market problem reflects not just a plain vanilla lack of liquidity but also a lack of trust, an inability to value securities, and a concern about counterparty risks.
The inability of credit markets to function properly will weaken the overall economy in the coming months. And even when the credit market crisis has passed, the wider credit spreads and increased risk aversion will be a damper on economic activity.
In addition to these general credit market problems, the decline of house prices and home building will be a growing drag on the economy. Home building has collapsed, down 20% from a year ago to the lowest level in a decade. House prices are beginning to decline, falling 3.4% from 12 months ago and at an estimated 9% annual rate in the most recent month for which data are available. Since house prices adjusted for inflation had surged an unprecedented 70% relative to rents and construction costs between 2000 and 2006, house prices could now fall substantially further.
Falling house prices would not only cause further declines in home building but would also shrink household wealth and thus consumer spending. A 20% cumulative fall in house prices would cut wealth by some $4 trillion, implying a decline in annual consumer spending by about $200 billion or about 1.5% of GDP -- enough to push the economy into recession.
A 20% national decline in house prices would involve smaller declines in some places and larger declines in others. Some homeowners could find themselves with loans that substantially exceed the value of their homes. Since mortgages are non-recourse loans, borrowers can walk away with no burden on future incomes. Although experience shows that most homeowners continued to service their mortgages even when their loan balances slightly exceeded the value of their homes, they are more likely to default when the difference is substantially greater.
If defaults become widespread, the process could snowball, putting more homes on the market and driving prices down further. Banks and other holders of mortgages might see their highly leveraged portfolios greatly impaired. Problems of illiquidity of financial institutions could become problems of insolvency.
The negative impact of falling household wealth on consumer spending would be magnified by a decline in mortgage refinancing and the associated withdrawals of spendable cash. Such mortgage equity withdrawals totaled more than $9 trillion in the decade through 2006, a cumulative amount equal to nearly 90% of disposable personal income in 2006. While there is uncertainty about just how much of this was used to finance additional consumer spending, my own belief is that mortgage refinancing was responsible for a substantial part of the recent sharp decline in household saving and the corresponding increase in consumer outlays. The decline in house prices and rise in interest rates will shrink the future volume of mortgage equity withdrawals, causing consumer spending to decline. While the resulting rise in the saving rate would clearly be good in the long term, permitting increased investment in plant and equipment and reduced dependence on capital from abroad, a rapid rise in the saving rate could push the economy into recession.
Fed action to lower interest rates cannot solve the credit market problems, but it would help the economy: by stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages.
A reduction of the federal funds rate would not be a bailout for individual borrowers and lenders who are suffering from their past mistakes. Any such targeted bailout would be wrong, encouraging more reckless behavior in the future. But it would also be a mistake to resist an interest rate cut and risk a serious economic downturn merely to avoid the indirect effect of helping those market participants.
The Federal Reserve faces a difficult decision because inflation remains a problem. Slowing productivity growth and rising money wages raised unit labor costs by 4.9% over the past year. That plus the falling dollar and rising food prices caused market-based consumer prices to rise by 4.6% in the most recent quarter.
Although the extent of the possible decline in economic activity is uncertain, the economy could suffer a very serious downturn if the triple threat from the credit market, housing construction, and consumer spending materializes with full force. A sharp reduction in the interest rate would attenuate that very bad outcome. Today's 5.25% federal funds rate is relatively tight in comparison to the historic average of a 2% real rate.
Setting the federal funds rate requires a balancing of risks. If the economy would have continued to expand in the absence of a large rate cut, Fed easing now would produce an unwanted rise in inflation, an unwelcome outcome but the lesser of two evils. If that happens, the Fed would have to engineer a longer period of slow growth to achieve price stability. The economic cost of reducing that inflation would depend on the Fed's ability to persuade the market that easing under current conditions is an appropriate risk-based strategy and not an abrogation of its fundamental duty to pursue price stability.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
By MARTIN FELDSTEIN
September 12, 2007; Page A19
The time has come for the Federal Reserve to cut the federal funds interest rate substantially, starting on a path from the current 5.25% to 4.25% and possibly even less. Without such a policy shift, the U.S. economy faces the risk of a significant economic downturn.
Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable incomes.
The current credit market crisis was started by widespread defaults on subprime mortgages. Borrowers with poor credit histories and uncertain incomes had bought homes with adjustable-rate mortgages characterized by high loan-to-value ratios and very low initial "teaser" interest rates. The mortgage brokers who originated those risky loans sold them quickly to sophisticated buyers who bundled them into large pools and then sold participation in those pools to other investors, typically in the form of tranches with different estimated degrees of risk. Many of the buyers then used these to enhance yields in structured bonds or even money market funds.
Many subprime borrowers eventually had difficulty making their monthly payments, especially when teaser rates rose to market levels. The resulting defaults exceeded what investors in the mortgage pools had expected.
Credit risk in financial markets had been underpriced for years, with low credit spreads on risky bonds and inexpensive credit insurance derivatives provided by investors seeking to raise their portfolio returns. With such underpricing of risk, hedge funds and private equity firms substantially increased their leverage.
The subprime mortgage defaults have triggered a widespread flight from risky assets, with a substantial widening of all credit spreads, and a general freezing of credit markets. Official credit ratings came under suspicion. Investors and lenders became concerned that they did not know how to value complex risky assets.
In some recent weeks credit became unavailable. Loans to support private equity deals could not be syndicated, forcing the banks to hold those loans on their own books. Banks are also being forced to honor credit guarantees to previously off-balance-sheet conduits and other back-up credit lines, further reducing the banks' capital available to support credit of all types.
The Federal Reserve correctly stressed its role as the lender of last resort, willing to lend against good collateral at a discount rate that exceeds the federal funds rate. The Fed also encouraged member banks to lend to other financial institutions against suitable collateral that could then be rediscounted at the Fed. It is not clear whether this will succeed since much of the credit market problem reflects not just a plain vanilla lack of liquidity but also a lack of trust, an inability to value securities, and a concern about counterparty risks.
The inability of credit markets to function properly will weaken the overall economy in the coming months. And even when the credit market crisis has passed, the wider credit spreads and increased risk aversion will be a damper on economic activity.
In addition to these general credit market problems, the decline of house prices and home building will be a growing drag on the economy. Home building has collapsed, down 20% from a year ago to the lowest level in a decade. House prices are beginning to decline, falling 3.4% from 12 months ago and at an estimated 9% annual rate in the most recent month for which data are available. Since house prices adjusted for inflation had surged an unprecedented 70% relative to rents and construction costs between 2000 and 2006, house prices could now fall substantially further.
Falling house prices would not only cause further declines in home building but would also shrink household wealth and thus consumer spending. A 20% cumulative fall in house prices would cut wealth by some $4 trillion, implying a decline in annual consumer spending by about $200 billion or about 1.5% of GDP -- enough to push the economy into recession.
A 20% national decline in house prices would involve smaller declines in some places and larger declines in others. Some homeowners could find themselves with loans that substantially exceed the value of their homes. Since mortgages are non-recourse loans, borrowers can walk away with no burden on future incomes. Although experience shows that most homeowners continued to service their mortgages even when their loan balances slightly exceeded the value of their homes, they are more likely to default when the difference is substantially greater.
If defaults become widespread, the process could snowball, putting more homes on the market and driving prices down further. Banks and other holders of mortgages might see their highly leveraged portfolios greatly impaired. Problems of illiquidity of financial institutions could become problems of insolvency.
The negative impact of falling household wealth on consumer spending would be magnified by a decline in mortgage refinancing and the associated withdrawals of spendable cash. Such mortgage equity withdrawals totaled more than $9 trillion in the decade through 2006, a cumulative amount equal to nearly 90% of disposable personal income in 2006. While there is uncertainty about just how much of this was used to finance additional consumer spending, my own belief is that mortgage refinancing was responsible for a substantial part of the recent sharp decline in household saving and the corresponding increase in consumer outlays. The decline in house prices and rise in interest rates will shrink the future volume of mortgage equity withdrawals, causing consumer spending to decline. While the resulting rise in the saving rate would clearly be good in the long term, permitting increased investment in plant and equipment and reduced dependence on capital from abroad, a rapid rise in the saving rate could push the economy into recession.
Fed action to lower interest rates cannot solve the credit market problems, but it would help the economy: by stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages.
A reduction of the federal funds rate would not be a bailout for individual borrowers and lenders who are suffering from their past mistakes. Any such targeted bailout would be wrong, encouraging more reckless behavior in the future. But it would also be a mistake to resist an interest rate cut and risk a serious economic downturn merely to avoid the indirect effect of helping those market participants.
The Federal Reserve faces a difficult decision because inflation remains a problem. Slowing productivity growth and rising money wages raised unit labor costs by 4.9% over the past year. That plus the falling dollar and rising food prices caused market-based consumer prices to rise by 4.6% in the most recent quarter.
Although the extent of the possible decline in economic activity is uncertain, the economy could suffer a very serious downturn if the triple threat from the credit market, housing construction, and consumer spending materializes with full force. A sharp reduction in the interest rate would attenuate that very bad outcome. Today's 5.25% federal funds rate is relatively tight in comparison to the historic average of a 2% real rate.
Setting the federal funds rate requires a balancing of risks. If the economy would have continued to expand in the absence of a large rate cut, Fed easing now would produce an unwanted rise in inflation, an unwelcome outcome but the lesser of two evils. If that happens, the Fed would have to engineer a longer period of slow growth to achieve price stability. The economic cost of reducing that inflation would depend on the Fed's ability to persuade the market that easing under current conditions is an appropriate risk-based strategy and not an abrogation of its fundamental duty to pursue price stability.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
Today's Tidbits
From Dow Jones: “If it seemed that things couldn’t get much worse for home builders, think again: Stocks in the sector are setting fresh annual lows this week as the housing market endures even more bad news...The Dow Jones U.S. Home Construction Index, a basket of home-builder stocks, is off nearly 50% so far this year.”
From Morgan Stanley: “…it’s noteworthy that the prime mortgage delinquency rate is at its highest level in least a decade when unemployment is low and the average mortgage rate is at generational lows. This fits with my view that the American household sector has reached the limit of its debt-carrying capacity. It also suggests that if employment starts to weaken then the situation will get far worse. Falling house prices, now evident in some price series, would worsen this situation.”
From Lehman: [Lehman survey of 135 portfolio managers] “Expectations are firmly concentrated around a 25 basis point Fed funds rate cut coupled with a 50 basis point discount window cut.”
From Deutsche Bank: “When one looks around the system, the argument for a dramatic 50 bp cut is ambiguous. Heavy corporate investment grade issuance shows that the credit crunch is not systemwide, but isolated to specific securitized product sectors, as well as the leveraged loan markets.”
From CITI: “Frenectic trading of the curve has been the story of the day;steeper then
flatter then steeper ... all in 2s to 5s, but flatter in the long-end. Stocks are holding, but commodities very fierce here. It should make folks doubt or at least worry about the imminent multiple 25 eases.”
From Dow Jones: “Whenever the economy slows and rates seem headed down,
money market funds move to longer maturities to lock in current rates for as long as possible. Not this time around. Interest rate futures markets fully reflect traders’ expectations that the Federal Reserve will ease its key interest rate by one whole percentage point by year end. Two-year Treasury notes, the most sensitive to official rate changes, are yielding 3.94% - some 1.30 percentage points less than the fed-funds target rate of 5.25%. Yet money market fund managers aren’t budging. Many are keeping their powder dry, holding investments with maturities of 30 days and less, and as a result foregoing higher returns. They look at the financial markets and see a certain measure of calm returning after August’s turmoil. And they have listened to what Fed speakers have been saying – from the chairman to several regional presidents - and concluded that policy makers may not cut rates as drastically as markets are currently priced for despite the weakest payroll report in four years and warnings that the risk of recession has increased sharply. What’s more, by keeping a major portion of their investments in very short-term securities, fund managers are also maintaining liquidity for any contingency, such as renewed market disruptions or redemptions by shareholders….For sure, the situation in money markets at the moment remains far from normal. While overnight and very short-term markets are seeing some activity, helped in part by massive liquidity injections by central banks, there is very little action in the longer-dated markets. Lending rates, such as three-month London interbank offered rates - a key benchmark for all types of floating-rate debt - remain stuck at unusually high levels. Commercial paper volumes outstanding are shrinking, particularly in the asset-backed segment of this market, used by banks and companies to fund short-term financing needs. The commercial paper market has borne the brunt of the recent credit crunch as investors turned risk averse and refused to lend for more than the shortest periods.”
From Market News: “…there are tentative signs in the ABS and loan markets that the gulf between buyers and sellers created by the recent volatility is beginning to narrow. ABS deals are said to be back in the pipeline, looking to be priced at "current market" levels and in the leverage loan market, recent tightening up of deal terms/covenants by banks is said to be also helping improve investor confidence about the pipeline.”
From Morgan Stanley: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%. Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.”
From Merrill Lynch: “…two popular myths that continue to make the rounds in the marketplace need to be addressed: The first myth is that the current backdrop is similar to the financial spasms of 1987, 1995 and 1998. The second myth is that recessions require back-to-back quarters of negative real GDP growth. In prior financial market spasms the economy was strong First, as bad as it was in October 1987, the reason why the stock market crash was brief was because the economy was strong; so, there were no second or third round feedback effects. Real GDP growth in the fourth quarter of 1987 was over 7%. Recession was nowhere in sight. In 1995, the manufacturing and export sectors were soft because of the turmoil in Mexico, but consumer spending in the very same quarter that the Fed cut rates was 3-1/2% and again recession was nowhere in sight and market turbulence was contained. Fast forward to the third quarter of 1998, and again there was financial turmoil brought about by Long Term Capital Management and the Russian debt default. This proved to not even be a two-month financial event because the economy had an extremely firm underpinning - GDP growth in the quarter when all the stuff hit the fan was an amazing 4.7% annual rate.”
From Dow Jones: “The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast. Strong growth in exports and business investment should be enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management. “The decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters,” beginning in the fourth quarter, the quarterly report said. The economy won’t return to stronger growth around 3% until 2009. The UCLA Anderson Forecast was one of the few to predict the 2001 recession.”
From Bloomberg: “Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 employees, a quarter of its U.S. workforce, after orders plunged last quarter…. hiring workers in India to replace more-expensive U.S. employees and revive profit. ``Employees that were at the forefront of IT service provision 20 years ago don't have the same skill sets they need today,'' … ``Increasingly, you can find those around the world.''
From Merrill Lynch: “The CBO estimates that more than $9 billion per month is the current price tag for fighting the war in Iraq - an amount equivalent to almost 20% of the rise in the level of GDP so far this year. Thus the ongoing war in Iraq continues to be a significant contributor to GDP and a large source of stimulus that is funneled into defense-related companies.”
From Bloomberg: “Crude oil rose to a record $80 a barrel in New York …Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand….Crude oil for October delivery rose $1.60, or 2.1 percent…Futures touched the highest price since trading began in 1983. The previous record of $78.77 was reached on Aug. 1. Prices are up 25 percent from a year ago… The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year in a monthly report. Consumption will increase 2.1 million barrels a day to 88 million in 2008.”
From Merrill Lynch: “Clearly the fall in the US dollar is helping commodity prices simply because commodities are denominated in dollars…Commodity prices measured in Euros have been flat to down for more than a year regardless of the index used to measure them. For example, the CRB Index is down more than 20% from its 2006 high when measured in Euros, and the Merrill Lynch Commodity Index is down about 11%.”
From UBS: “Wheat futures touched $9 a bushel this morning as Wheat global stockpiles have fallen to 26yr lows. Drought in Australia, a fall in Canadian output and a switch to Corn have teamed up to send this critical crop to the moon. AT SOME POINT higher headline inflation numbers will pressure the back end of the US curve and we see the combined effects of higher headline inflation and credit & housing stress as leading the curve to a far steeper slope than even the forwards have prices in.”
From Barclays: “On the inflation side, crude and EUR/USD both hit close highs,
and gold has been rising, as well. These all indicate that despite some signs of slower growth, external inflation pressures remain.”
From Dow Jones: “The Senate Finance Committee approved legislation that would increase the U.S. federal debt limit by $850 billion to $9.815 trillion. Under budget plans advanced by Congress and the White House this year, Treasury would not likely have to seek another debt limit increase until 2009, said Committee Chairman Max Baucus, D-Mont. Baucus said that if Congress were to try to consider a debt limit increase next year, in advance of federal elections in November, “it would probably become a political football.” Baucus noted that since 2001 the federal debt limit has been increased by $3 trillion, or about 50%.”
From Merrill Lynch: “Consumer confidence in Japan…fell to a 3-year low.”
From Market News: “China created 8.46 mln new jobs in urban areas in the first eight months, equivalent to 94 pct of the full-year target set at the beginning of the year, the Ministry of Labor and Social Security said. China plans to create at least 9 mln new jobs in urban areas this year while setting an urban jobless target of under 4.6 pct.”
From JP Morgan: “China continues to report strong August activity data, today in the form of retail sales and money supply and bank lending.”
From Goldman Sachs: “…economic activity in the BRICs and other EM remains strong. We have recently revised up Chinese, Indian and Russian GDP growth.”
End-of-Day Market Update
From Lehman: “Treasuries yields rose for the second straight day, and it was selling of
intermediates that drove the market lower. For a change, the yield curve actually steepened in a selloff, as today's move seemed less about the fed, and more flow-related… Wednesday's yield changes were roughly as follows: 2 years:+1.9 bp 5 years:+4.1 bp 10 years:+4.3 bp 30 years:+3.7 bp”
From Morgan Stanley: “It was an essentially news free day, with no economic data, no Fed speakers, and nothing much else of note going on. So as on Monday and Tuesday, the market largely just tracked stocks again… TIPS had another strong day, with the benchmark 5-year and 10-year inflation breakevens each up 3 bp to 1.98% and 2.24%, both highs in about a month. It’s interesting to note that even as the 5-year and 10-year spreads have collapsed in the recent market rally, the 5-year/5-year forward has hardly moved, holding in narrow range near the 2.51% level it ended Wednesday…. Even though the recently improved tone in the CP market continued, the money markets seemed to be back in a bit of flight to safety mode, as short bills rallied back after Tuesday’s losses, with the 4-week bill’s yield down 12 bp to 4.00% and the 3-month 9 bp to 4.025%. In the Libor market, 1-month and 3-month fixings were unchanged at 5.80% and 5.70%, but overnight was down 12 bp to 5.18%, moving further towards a more normal spread over actual fed funds, which continued to trade near 5% through most of the day as it has all month, and 1-week fell 20 bp to 5.43%. There’s now a rather bizarre 29 bp spread between 2-week Libor at 5.51% and 1-month at 5.80%, so it would appear that banks may have significant concerns about liquidity needs at the looming quarter end that falls between those two terms.”
Equities closed down slightly. The Dow settled down 17 at 13,292. The dollar index weakened again to a new 15 year low of 79.38 (-.32) as the euro made another new record high versus the dollar to finish at 1.39 dollars to the euro. Oil traded to a new record high today of over $80 a barrel, and closed up $1.36 (2.2%) at $79.59.
From Morgan Stanley: “…it’s noteworthy that the prime mortgage delinquency rate is at its highest level in least a decade when unemployment is low and the average mortgage rate is at generational lows. This fits with my view that the American household sector has reached the limit of its debt-carrying capacity. It also suggests that if employment starts to weaken then the situation will get far worse. Falling house prices, now evident in some price series, would worsen this situation.”
From Lehman: [Lehman survey of 135 portfolio managers] “Expectations are firmly concentrated around a 25 basis point Fed funds rate cut coupled with a 50 basis point discount window cut.”
From Deutsche Bank: “When one looks around the system, the argument for a dramatic 50 bp cut is ambiguous. Heavy corporate investment grade issuance shows that the credit crunch is not systemwide, but isolated to specific securitized product sectors, as well as the leveraged loan markets.”
From CITI: “Frenectic trading of the curve has been the story of the day;steeper then
flatter then steeper ... all in 2s to 5s, but flatter in the long-end. Stocks are holding, but commodities very fierce here. It should make folks doubt or at least worry about the imminent multiple 25 eases.”
From Dow Jones: “Whenever the economy slows and rates seem headed down,
money market funds move to longer maturities to lock in current rates for as long as possible. Not this time around. Interest rate futures markets fully reflect traders’ expectations that the Federal Reserve will ease its key interest rate by one whole percentage point by year end. Two-year Treasury notes, the most sensitive to official rate changes, are yielding 3.94% - some 1.30 percentage points less than the fed-funds target rate of 5.25%. Yet money market fund managers aren’t budging. Many are keeping their powder dry, holding investments with maturities of 30 days and less, and as a result foregoing higher returns. They look at the financial markets and see a certain measure of calm returning after August’s turmoil. And they have listened to what Fed speakers have been saying – from the chairman to several regional presidents - and concluded that policy makers may not cut rates as drastically as markets are currently priced for despite the weakest payroll report in four years and warnings that the risk of recession has increased sharply. What’s more, by keeping a major portion of their investments in very short-term securities, fund managers are also maintaining liquidity for any contingency, such as renewed market disruptions or redemptions by shareholders….For sure, the situation in money markets at the moment remains far from normal. While overnight and very short-term markets are seeing some activity, helped in part by massive liquidity injections by central banks, there is very little action in the longer-dated markets. Lending rates, such as three-month London interbank offered rates - a key benchmark for all types of floating-rate debt - remain stuck at unusually high levels. Commercial paper volumes outstanding are shrinking, particularly in the asset-backed segment of this market, used by banks and companies to fund short-term financing needs. The commercial paper market has borne the brunt of the recent credit crunch as investors turned risk averse and refused to lend for more than the shortest periods.”
From Market News: “…there are tentative signs in the ABS and loan markets that the gulf between buyers and sellers created by the recent volatility is beginning to narrow. ABS deals are said to be back in the pipeline, looking to be priced at "current market" levels and in the leverage loan market, recent tightening up of deal terms/covenants by banks is said to be also helping improve investor confidence about the pipeline.”
From Morgan Stanley: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%. Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.”
From Merrill Lynch: “…two popular myths that continue to make the rounds in the marketplace need to be addressed: The first myth is that the current backdrop is similar to the financial spasms of 1987, 1995 and 1998. The second myth is that recessions require back-to-back quarters of negative real GDP growth. In prior financial market spasms the economy was strong First, as bad as it was in October 1987, the reason why the stock market crash was brief was because the economy was strong; so, there were no second or third round feedback effects. Real GDP growth in the fourth quarter of 1987 was over 7%. Recession was nowhere in sight. In 1995, the manufacturing and export sectors were soft because of the turmoil in Mexico, but consumer spending in the very same quarter that the Fed cut rates was 3-1/2% and again recession was nowhere in sight and market turbulence was contained. Fast forward to the third quarter of 1998, and again there was financial turmoil brought about by Long Term Capital Management and the Russian debt default. This proved to not even be a two-month financial event because the economy had an extremely firm underpinning - GDP growth in the quarter when all the stuff hit the fan was an amazing 4.7% annual rate.”
From Dow Jones: “The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast. Strong growth in exports and business investment should be enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management. “The decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters,” beginning in the fourth quarter, the quarterly report said. The economy won’t return to stronger growth around 3% until 2009. The UCLA Anderson Forecast was one of the few to predict the 2001 recession.”
From Bloomberg: “Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 employees, a quarter of its U.S. workforce, after orders plunged last quarter…. hiring workers in India to replace more-expensive U.S. employees and revive profit. ``Employees that were at the forefront of IT service provision 20 years ago don't have the same skill sets they need today,'' … ``Increasingly, you can find those around the world.''
From Merrill Lynch: “The CBO estimates that more than $9 billion per month is the current price tag for fighting the war in Iraq - an amount equivalent to almost 20% of the rise in the level of GDP so far this year. Thus the ongoing war in Iraq continues to be a significant contributor to GDP and a large source of stimulus that is funneled into defense-related companies.”
From Bloomberg: “Crude oil rose to a record $80 a barrel in New York …Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand….Crude oil for October delivery rose $1.60, or 2.1 percent…Futures touched the highest price since trading began in 1983. The previous record of $78.77 was reached on Aug. 1. Prices are up 25 percent from a year ago… The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year in a monthly report. Consumption will increase 2.1 million barrels a day to 88 million in 2008.”
From Merrill Lynch: “Clearly the fall in the US dollar is helping commodity prices simply because commodities are denominated in dollars…Commodity prices measured in Euros have been flat to down for more than a year regardless of the index used to measure them. For example, the CRB Index is down more than 20% from its 2006 high when measured in Euros, and the Merrill Lynch Commodity Index is down about 11%.”
From UBS: “Wheat futures touched $9 a bushel this morning as Wheat global stockpiles have fallen to 26yr lows. Drought in Australia, a fall in Canadian output and a switch to Corn have teamed up to send this critical crop to the moon. AT SOME POINT higher headline inflation numbers will pressure the back end of the US curve and we see the combined effects of higher headline inflation and credit & housing stress as leading the curve to a far steeper slope than even the forwards have prices in.”
From Barclays: “On the inflation side, crude and EUR/USD both hit close highs,
and gold has been rising, as well. These all indicate that despite some signs of slower growth, external inflation pressures remain.”
From Dow Jones: “The Senate Finance Committee approved legislation that would increase the U.S. federal debt limit by $850 billion to $9.815 trillion. Under budget plans advanced by Congress and the White House this year, Treasury would not likely have to seek another debt limit increase until 2009, said Committee Chairman Max Baucus, D-Mont. Baucus said that if Congress were to try to consider a debt limit increase next year, in advance of federal elections in November, “it would probably become a political football.” Baucus noted that since 2001 the federal debt limit has been increased by $3 trillion, or about 50%.”
From Merrill Lynch: “Consumer confidence in Japan…fell to a 3-year low.”
From Market News: “China created 8.46 mln new jobs in urban areas in the first eight months, equivalent to 94 pct of the full-year target set at the beginning of the year, the Ministry of Labor and Social Security said. China plans to create at least 9 mln new jobs in urban areas this year while setting an urban jobless target of under 4.6 pct.”
From JP Morgan: “China continues to report strong August activity data, today in the form of retail sales and money supply and bank lending.”
From Goldman Sachs: “…economic activity in the BRICs and other EM remains strong. We have recently revised up Chinese, Indian and Russian GDP growth.”
End-of-Day Market Update
From Lehman: “Treasuries yields rose for the second straight day, and it was selling of
intermediates that drove the market lower. For a change, the yield curve actually steepened in a selloff, as today's move seemed less about the fed, and more flow-related… Wednesday's yield changes were roughly as follows: 2 years:+1.9 bp 5 years:+4.1 bp 10 years:+4.3 bp 30 years:+3.7 bp”
From Morgan Stanley: “It was an essentially news free day, with no economic data, no Fed speakers, and nothing much else of note going on. So as on Monday and Tuesday, the market largely just tracked stocks again… TIPS had another strong day, with the benchmark 5-year and 10-year inflation breakevens each up 3 bp to 1.98% and 2.24%, both highs in about a month. It’s interesting to note that even as the 5-year and 10-year spreads have collapsed in the recent market rally, the 5-year/5-year forward has hardly moved, holding in narrow range near the 2.51% level it ended Wednesday…. Even though the recently improved tone in the CP market continued, the money markets seemed to be back in a bit of flight to safety mode, as short bills rallied back after Tuesday’s losses, with the 4-week bill’s yield down 12 bp to 4.00% and the 3-month 9 bp to 4.025%. In the Libor market, 1-month and 3-month fixings were unchanged at 5.80% and 5.70%, but overnight was down 12 bp to 5.18%, moving further towards a more normal spread over actual fed funds, which continued to trade near 5% through most of the day as it has all month, and 1-week fell 20 bp to 5.43%. There’s now a rather bizarre 29 bp spread between 2-week Libor at 5.51% and 1-month at 5.80%, so it would appear that banks may have significant concerns about liquidity needs at the looming quarter end that falls between those two terms.”
Equities closed down slightly. The Dow settled down 17 at 13,292. The dollar index weakened again to a new 15 year low of 79.38 (-.32) as the euro made another new record high versus the dollar to finish at 1.39 dollars to the euro. Oil traded to a new record high today of over $80 a barrel, and closed up $1.36 (2.2%) at $79.59.
Today's Tidbits
September 12, 2007 TIDBITS
From Dow Jones: “If it seemed that things couldn’t get much worse for home builders, think again: Stocks in the sector are setting fresh annual lows this week as the housing market endures even more bad news...The Dow Jones U.S. Home Construction Index, a basket of home-builder stocks, is off nearly 50% so far this year.”
From Morgan Stanley: “…it’s noteworthy that the prime mortgage delinquency rate is at its highest level in least a decade when unemployment is low and the average mortgage rate is at generational lows. This fits with my view that the American household sector has reached the limit of its debt-carrying capacity. It also suggests that if employment starts to weaken then the situation will get far worse. Falling house prices, now evident in some price series, would worsen this situation.”
From Lehman: [Lehman survey of 135 portfolio managers] “Expectations are firmly concentrated around a 25 basis point Fed funds rate cut coupled with a 50 basis point discount window cut.”
From Deutsche Bank: “When one looks around the system, the argument for a dramatic 50 bp cut is ambiguous. Heavy corporate investment grade issuance shows that the credit crunch is not systemwide, but isolated to specific securitized product sectors, as well as the leveraged loan markets.”
From CITI: “Frenectic trading of the curve has been the story of the day;steeper then
flatter then steeper ... all in 2s to 5s, but flatter in the long-end. Stocks
are holding, but commodities very fierce here. It should make folks doubt or at
least worry about the imminent multiple 25 eases.”
From Dow Jones: “Whenever the economy slows and rates seem headed down,
money market funds move to longer maturities to lock in current rates for as long as possible. Not this time around. Interest rate futures markets fully reflect traders’ expectations that the Federal Reserve will ease its key interest rate by one whole percentage point by year end. Two-year Treasury notes, the most sensitive to official rate
changes, are yielding 3.94% - some 1.30 percentage points less than the fed-funds target rate of 5.25%. Yet money market fund managers aren’t budging. Many are keeping their powder dry, holding investments with maturities of 30 days and less, and as a result foregoing higher returns. They look at the financial markets and see a certain measure of calm returning after August’s turmoil. And they have listened to what Fed speakers have been saying – from the chairman to several regional presidents - and concluded that policy makers may not cut rates as drastically as markets are currently priced for despite the weakest payroll report in four years and warnings that the risk of recession has increased sharply. What’s more, by keeping a major portion of their investments in very short-term securities, fund managers are also maintaining liquidity for any contingency, such as renewed market disruptions or redemptions by shareholders….For sure, the situation in money markets at the moment remains far from normal. While overnight and very short-term markets are seeing some activity, helped in part by massive liquidity injections by central banks, there is very little action in the longer-dated markets. Lending rates, such as three-month London interbank offered rates - a key benchmark for all types of floating-rate debt - remain stuck at unusually high levels. Commercial paper volumes outstanding are shrinking, particularly in the asset-backed segment of this market, used by banks and companies to fund short-term financing needs. The commercial paper market has borne the brunt of the recent credit crunch as investors turned risk averse and refused to lend for more than the shortest periods.”
From Market News: “…there are tentative signs in the ABS and loan markets that the gulf between buyers and sellers created by the recent volatility is beginning to narrow. ABS deals are said to be back in the pipeline, looking to be priced at "current market" levels and in the leverage loan market, recent tightening up of deal terms/covenants by banks is said to be also helping improve investor confidence about the pipeline.”
From Morgan Stanley: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%. Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.”
From Merrill Lynch: “…two popular myths that continue to make the rounds in the marketplace need to be addressed: The first myth is that the current backdrop is similar to the financial spasms of 1987, 1995 and 1998. The second myth is that recessions require back-to-back quarters of negative real GDP growth. In prior financial market spasms the economy was strong First, as bad as it was in October 1987, the reason why the stock market crash was brief was because the economy was strong; so, there were no second or third round feedback effects. Real GDP growth in the fourth quarter of 1987 was over 7%. Recession was nowhere in sight. In 1995, the manufacturing and export sectors were soft because of the turmoil in Mexico, but consumer spending in the very same quarter that the Fed cut rates was 3-1/2% and again recession was nowhere in sight and market turbulence was contained. Fast forward to the third quarter of 1998, and again there was financial turmoil brought about by Long Term Capital Management and the Russian debt default. This proved to not even be a two-month financial event because the economy had an extremely firm underpinning - GDP growth in the quarter when all the stuff hit the fan was an amazing 4.7% annual rate.”
From Dow Jones: “The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast. Strong growth in exports and business investment should be
enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management. “The decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters,” beginning in the fourth quarter, the quarterly report said. The economy won’t return to stronger growth around 3% until 2009. The UCLA Anderson Forecast was one of the few to predict the 2001 recession.”
From Bloomberg: “Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 employees, a quarter of its U.S. workforce, after orders plunged last quarter…. hiring workers in India to replace more-expensive U.S. employees and revive profit. ``Employees that were at the forefront of IT service provision 20 years ago don't have the same skill sets they need today,'' … ``Increasingly, you can find those around the world.''
From Merrill Lynch: “The CBO estimates that more than $9 billion per month is the current price tag for fighting the war in Iraq - an amount equivalent to almost 20% of the rise in the level of GDP so far this year. Thus the ongoing war in Iraq continues to be a significant contributor to GDP and a large source of stimulus that is funneled into defense-related companies.”
From Bloomberg: “Crude oil rose to a record $80 a barrel in New York …Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand….Crude oil for October delivery rose $1.60, or 2.1 percent…Futures touched the highest price since trading began
in 1983. The previous record of $78.77 was reached on Aug. 1. Prices are up 25 percent from a year ago… The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year in a monthly report. Consumption will increase 2.1 million barrels a day to 88 million in 2008.”
From Merrill Lynch: “Clearly the fall in the US dollar is helping commodity prices simply because commodities are denominated in dollars…Commodity prices measured in Euros have been flat to down for more than a year regardless of the index used to measure them. For example, the CRB Index is down more than 20% from its 2006 high when measured in Euros, and the Merrill Lynch Commodity Index is down about 11%.”
From UBS: “Wheat futures touched $9 a bushel this morning as Wheat global stockpiles have fallen to 26yr lows. Drought in Australia, a fall in Canadian output and a switch to Corn have teamed up to send this critical crop to the moon. AT SOME POINT higher headline inflation numbers will pressure the back end of the US curve and we see the combined effects of higher headline inflation and credit & housing stress as leading the curve to a far steeper slope than even the forwards have prices in.”
From Barclays: “On the inflation side, crude and EUR/USD both hit close highs,
and gold has been rising, as well. These all indicate that despite some signs of slower growth, external inflation pressures remain.”
From Dow Jones: “The Senate Finance Committee approved legislation that would increase the U.S. federal debt limit by $850 billion to $9.815 trillion. Under budget plans advanced by Congress and the White House this year, Treasury would not likely have to seek another debt limit increase until 2009, said Committee Chairman Max Baucus, D-Mont. Baucus said that if Congress were to try to consider a debt limit increase next year, in advance of federal elections in November, “it would probably become a political football.” Baucus noted that since 2001 the federal debt limit has been increased by $3 trillion, or about 50%.”
From Merrill Lynch: “Consumer confidence in Japan…fell to a 3-year low.”
From Market News: “China created 8.46 mln new jobs in urban areas in the first eight months, equivalent to 94 pct of the full-year target set at the beginning of the year, the Ministry of Labor and Social Security said. China plans to create at least 9 mln new jobs in urban areas this year while setting an urban jobless target of under 4.6 pct.”
From JP Morgan: “China continues to report strong August activity data, today in the form of retail sales and money supply and bank lending.”
From Goldman Sachs: “…economic activity in the BRICs and other EM remains strong. We have recently revised up Chinese, Indian and Russian GDP growth.”
End-of-Day Market Update
From Lehman: “Treasuries yields rose for the second straight day, and it was selling of
intermediates that drove the market lower. For a change, the yield curve actually steepened in a selloff, as today's move seemed less about the fed, and more flow-related… Wednesday's yield changes were roughly as follows: 2 years:+1.9 bp 5 years:+4.1 bp 10 years:+4.3 bp 30 years:+3.7 bp”
From Morgan Stanley: “It was an essentially news free day, with no economic data, no Fed speakers, and nothing much else of note going on. So as on Monday and Tuesday, the market largely just tracked stocks again… TIPS had another strong day, with the benchmark 5-year and 10-year inflation breakevens each up 3 bp to 1.98% and 2.24%, both highs in about a month. It’s interesting to note that even as the 5-year and 10-year spreads have collapsed in the recent market rally, the 5-year/5-year forward has hardly moved, holding in narrow range near the 2.51% level it ended Wednesday…. Even though the recently improved tone in the CP market continued, the money markets seemed to be back in a bit of flight to safety mode, as short bills rallied back after Tuesday’s losses, with the 4-week bill’s yield down 12 bp to 4.00% and the 3-month 9 bp to 4.025%. In the Libor market, 1-month and 3-month fixings were unchanged at 5.80% and 5.70%, but overnight was down 12 bp to 5.18%, moving further towards a more normal spread over actual fed funds, which continued to trade near 5% through most of the day as it has all month, and 1-week fell 20 bp to 5.43%. There’s now a rather bizarre 29 bp spread between 2-week Libor at 5.51% and 1-month at 5.80%, so it would appear that banks may have significant concerns about liquidity needs at the looming quarter end that falls between those two terms.”
Equities closed down slightly. The Dow settled down 17 at 13,292. The dollar index weakened again to a new 15 year low of 79.38 (-.32) as the euro made another new record high versus the dollar to finish at 1.39 dollars to the euro. Oil traded to a new record high today of over $80 a barrel, and closed up $1.36 (2.2%) at $79.59.
From Dow Jones: “If it seemed that things couldn’t get much worse for home builders, think again: Stocks in the sector are setting fresh annual lows this week as the housing market endures even more bad news...The Dow Jones U.S. Home Construction Index, a basket of home-builder stocks, is off nearly 50% so far this year.”
From Morgan Stanley: “…it’s noteworthy that the prime mortgage delinquency rate is at its highest level in least a decade when unemployment is low and the average mortgage rate is at generational lows. This fits with my view that the American household sector has reached the limit of its debt-carrying capacity. It also suggests that if employment starts to weaken then the situation will get far worse. Falling house prices, now evident in some price series, would worsen this situation.”
From Lehman: [Lehman survey of 135 portfolio managers] “Expectations are firmly concentrated around a 25 basis point Fed funds rate cut coupled with a 50 basis point discount window cut.”
From Deutsche Bank: “When one looks around the system, the argument for a dramatic 50 bp cut is ambiguous. Heavy corporate investment grade issuance shows that the credit crunch is not systemwide, but isolated to specific securitized product sectors, as well as the leveraged loan markets.”
From CITI: “Frenectic trading of the curve has been the story of the day;steeper then
flatter then steeper ... all in 2s to 5s, but flatter in the long-end. Stocks
are holding, but commodities very fierce here. It should make folks doubt or at
least worry about the imminent multiple 25 eases.”
From Dow Jones: “Whenever the economy slows and rates seem headed down,
money market funds move to longer maturities to lock in current rates for as long as possible. Not this time around. Interest rate futures markets fully reflect traders’ expectations that the Federal Reserve will ease its key interest rate by one whole percentage point by year end. Two-year Treasury notes, the most sensitive to official rate
changes, are yielding 3.94% - some 1.30 percentage points less than the fed-funds target rate of 5.25%. Yet money market fund managers aren’t budging. Many are keeping their powder dry, holding investments with maturities of 30 days and less, and as a result foregoing higher returns. They look at the financial markets and see a certain measure of calm returning after August’s turmoil. And they have listened to what Fed speakers have been saying – from the chairman to several regional presidents - and concluded that policy makers may not cut rates as drastically as markets are currently priced for despite the weakest payroll report in four years and warnings that the risk of recession has increased sharply. What’s more, by keeping a major portion of their investments in very short-term securities, fund managers are also maintaining liquidity for any contingency, such as renewed market disruptions or redemptions by shareholders….For sure, the situation in money markets at the moment remains far from normal. While overnight and very short-term markets are seeing some activity, helped in part by massive liquidity injections by central banks, there is very little action in the longer-dated markets. Lending rates, such as three-month London interbank offered rates - a key benchmark for all types of floating-rate debt - remain stuck at unusually high levels. Commercial paper volumes outstanding are shrinking, particularly in the asset-backed segment of this market, used by banks and companies to fund short-term financing needs. The commercial paper market has borne the brunt of the recent credit crunch as investors turned risk averse and refused to lend for more than the shortest periods.”
From Market News: “…there are tentative signs in the ABS and loan markets that the gulf between buyers and sellers created by the recent volatility is beginning to narrow. ABS deals are said to be back in the pipeline, looking to be priced at "current market" levels and in the leverage loan market, recent tightening up of deal terms/covenants by banks is said to be also helping improve investor confidence about the pipeline.”
From Morgan Stanley: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%. Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.”
From Merrill Lynch: “…two popular myths that continue to make the rounds in the marketplace need to be addressed: The first myth is that the current backdrop is similar to the financial spasms of 1987, 1995 and 1998. The second myth is that recessions require back-to-back quarters of negative real GDP growth. In prior financial market spasms the economy was strong First, as bad as it was in October 1987, the reason why the stock market crash was brief was because the economy was strong; so, there were no second or third round feedback effects. Real GDP growth in the fourth quarter of 1987 was over 7%. Recession was nowhere in sight. In 1995, the manufacturing and export sectors were soft because of the turmoil in Mexico, but consumer spending in the very same quarter that the Fed cut rates was 3-1/2% and again recession was nowhere in sight and market turbulence was contained. Fast forward to the third quarter of 1998, and again there was financial turmoil brought about by Long Term Capital Management and the Russian debt default. This proved to not even be a two-month financial event because the economy had an extremely firm underpinning - GDP growth in the quarter when all the stuff hit the fan was an amazing 4.7% annual rate.”
From Dow Jones: “The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast. Strong growth in exports and business investment should be
enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management. “The decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters,” beginning in the fourth quarter, the quarterly report said. The economy won’t return to stronger growth around 3% until 2009. The UCLA Anderson Forecast was one of the few to predict the 2001 recession.”
From Bloomberg: “Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 employees, a quarter of its U.S. workforce, after orders plunged last quarter…. hiring workers in India to replace more-expensive U.S. employees and revive profit. ``Employees that were at the forefront of IT service provision 20 years ago don't have the same skill sets they need today,'' … ``Increasingly, you can find those around the world.''
From Merrill Lynch: “The CBO estimates that more than $9 billion per month is the current price tag for fighting the war in Iraq - an amount equivalent to almost 20% of the rise in the level of GDP so far this year. Thus the ongoing war in Iraq continues to be a significant contributor to GDP and a large source of stimulus that is funneled into defense-related companies.”
From Bloomberg: “Crude oil rose to a record $80 a barrel in New York …Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand….Crude oil for October delivery rose $1.60, or 2.1 percent…Futures touched the highest price since trading began
in 1983. The previous record of $78.77 was reached on Aug. 1. Prices are up 25 percent from a year ago… The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year in a monthly report. Consumption will increase 2.1 million barrels a day to 88 million in 2008.”
From Merrill Lynch: “Clearly the fall in the US dollar is helping commodity prices simply because commodities are denominated in dollars…Commodity prices measured in Euros have been flat to down for more than a year regardless of the index used to measure them. For example, the CRB Index is down more than 20% from its 2006 high when measured in Euros, and the Merrill Lynch Commodity Index is down about 11%.”
From UBS: “Wheat futures touched $9 a bushel this morning as Wheat global stockpiles have fallen to 26yr lows. Drought in Australia, a fall in Canadian output and a switch to Corn have teamed up to send this critical crop to the moon. AT SOME POINT higher headline inflation numbers will pressure the back end of the US curve and we see the combined effects of higher headline inflation and credit & housing stress as leading the curve to a far steeper slope than even the forwards have prices in.”
From Barclays: “On the inflation side, crude and EUR/USD both hit close highs,
and gold has been rising, as well. These all indicate that despite some signs of slower growth, external inflation pressures remain.”
From Dow Jones: “The Senate Finance Committee approved legislation that would increase the U.S. federal debt limit by $850 billion to $9.815 trillion. Under budget plans advanced by Congress and the White House this year, Treasury would not likely have to seek another debt limit increase until 2009, said Committee Chairman Max Baucus, D-Mont. Baucus said that if Congress were to try to consider a debt limit increase next year, in advance of federal elections in November, “it would probably become a political football.” Baucus noted that since 2001 the federal debt limit has been increased by $3 trillion, or about 50%.”
From Merrill Lynch: “Consumer confidence in Japan…fell to a 3-year low.”
From Market News: “China created 8.46 mln new jobs in urban areas in the first eight months, equivalent to 94 pct of the full-year target set at the beginning of the year, the Ministry of Labor and Social Security said. China plans to create at least 9 mln new jobs in urban areas this year while setting an urban jobless target of under 4.6 pct.”
From JP Morgan: “China continues to report strong August activity data, today in the form of retail sales and money supply and bank lending.”
From Goldman Sachs: “…economic activity in the BRICs and other EM remains strong. We have recently revised up Chinese, Indian and Russian GDP growth.”
End-of-Day Market Update
From Lehman: “Treasuries yields rose for the second straight day, and it was selling of
intermediates that drove the market lower. For a change, the yield curve actually steepened in a selloff, as today's move seemed less about the fed, and more flow-related… Wednesday's yield changes were roughly as follows: 2 years:+1.9 bp 5 years:+4.1 bp 10 years:+4.3 bp 30 years:+3.7 bp”
From Morgan Stanley: “It was an essentially news free day, with no economic data, no Fed speakers, and nothing much else of note going on. So as on Monday and Tuesday, the market largely just tracked stocks again… TIPS had another strong day, with the benchmark 5-year and 10-year inflation breakevens each up 3 bp to 1.98% and 2.24%, both highs in about a month. It’s interesting to note that even as the 5-year and 10-year spreads have collapsed in the recent market rally, the 5-year/5-year forward has hardly moved, holding in narrow range near the 2.51% level it ended Wednesday…. Even though the recently improved tone in the CP market continued, the money markets seemed to be back in a bit of flight to safety mode, as short bills rallied back after Tuesday’s losses, with the 4-week bill’s yield down 12 bp to 4.00% and the 3-month 9 bp to 4.025%. In the Libor market, 1-month and 3-month fixings were unchanged at 5.80% and 5.70%, but overnight was down 12 bp to 5.18%, moving further towards a more normal spread over actual fed funds, which continued to trade near 5% through most of the day as it has all month, and 1-week fell 20 bp to 5.43%. There’s now a rather bizarre 29 bp spread between 2-week Libor at 5.51% and 1-month at 5.80%, so it would appear that banks may have significant concerns about liquidity needs at the looming quarter end that falls between those two terms.”
Equities closed down slightly. The Dow settled down 17 at 13,292. The dollar index weakened again to a new 15 year low of 79.38 (-.32) as the euro made another new record high versus the dollar to finish at 1.39 dollars to the euro. Oil traded to a new record high today of over $80 a barrel, and closed up $1.36 (2.2%) at $79.59.
Monday, September 10, 2007
Today's Tidbits
Foreign Investors in U.S. Treasuries See Dollar Profits Wiped-Out by FX Losses
From Bloomberg: “Treasury investors basking in the biggest rally in four years have reason to fear for their profits: The largest owners of U.S. government debt are heading
for the exit. Two-year Treasuries returned 1.09 percent in August, the best monthly performance since 2003, according to indexes compiled by Merrill Lynch & Co. At the same time, holdings of U.S. bonds by governments and central banks at the Federal Reserve fell 3.8 percent, the steepest decline since 1992. The dollar's slump to a 15-year low against six of its most actively traded peers is turning the gains into losses for international bondholders, prompting China, Japan and Taiwan to sell. Overseas investors own more than half of the $4.4 trillion in marketable U.S. government debt outstanding, up from a third in 2001, according to data compiled by the Treasury Department. `The support that Asia has shown in buying U.S. Treasuries has been a major supporter of keeping long-term interest rates lower than where they probably would be,”…U.S. long-term interest rates would be about 90 basis points, or 0.90 percentage point, higher without foreign government and central bank buyers, according to a 2006 study for the Fed by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville … Treasuries returned 5 percent in the past two months …The dollar fell 8 percent against the yen in the past two months, causing losses for Japanese funds that own Treasuries…Government and central bank holdings of U.S. government debt at the Fed fell by $46.1 billion from the week ended July 25 to the week ended Sept. 5. They climbed to a record $1.25 trillion in July from $574 billion in June 2001. Japanese investors, who held $612 billion as of June 30, are on course to cut for a third year, according to the Treasury. China trimmed its U.S. debt by 3.4 percent in the second quarter to $405 billion, the first reduction in three years. Taiwan pared by 10 percent in the past year to $57.5 billion, while South Korea slashed holdings 25 percent this year to $50 billion…Merrill Lynch's main index of U.S. government securities returned 3.3 percent for July and August. For investors in Japan, the biggest holders outside the U.S., the index lost 3.1 percent after accounting for changes in the currency.”
Estimates of ARM Borrowers Able to Refinance into Various FHA Loan Options
From Lehman: “Upwards of $100 billion ARMs per quarter are slated for reset through the end of 2009, the vast majority of which are subprime…Only 8% of the total at-risk reset population falls within the $362,000-$417,000 bucket and just a fraction of these borrowers meet the FHA current underwriting …raising the loan limits (while keeping other underwriting criteria constant) results in just $1 billion of additional at-risk borrower eligibility in all of 2008…Even if there were no loan limit constraints, just $4.1 billion of additional at-risk borrower loans could be refinanced into FHA loans…Of the $207 billion at-risk ARMs resetting in 2008, we estimate that $24 billion qualify under existing standards… Roughly 30%-40% of troubled subprime borrowers could potentially refinance into an FHA loan if DTI and documentation constraints were also relaxed…if the FHA were to expand eligibility to borrowers with CLTV > 97 but held all other constraints constant, it would only facilitate refinancing for an incremental $3-$4 billion per year of at-risk subprime loans…at most approximately $90 billion of troubled
subprime borrowers scheduled to reset in 2008 would qualify for an FHA loan…a more realistic assumption is a maximum of $55-$65 billion…”
MISC
From Bloomberg: “Borrowers are paying the highest costs in six years for commercial paper, IOUs maturing in 270 days or less, because of losses from assets related to subprime mortgages. The yield in the U.S. has soared to 6.33 percent for 30-day debt from 5.48 percent on Aug. 9.”
From Bloomberg: “Eleven metropolitan areas have median home prices of more than $417,000, the limit for mortgages guaranteed by government- chartered agencies Fannie Mae and Freddie Mac. The markets are San Jose, San Francisco, San Diego, Los Angeles and Orange County, California; New York City; parts of northern New Jersey; southern Connecticut; Long Island; the Washington metropolitan area and Honolulu.”
From Goldman Sachs: “India: It’s raining growth—increasing our GDP forecasts for FY2008 and FY2009… We are increasing our GDP growth forecasts for FY2008 to 8.7% from 8% and for FY2009 to 8% from 7.8%...”
From Reuters: “The average retail price of a gallon of gasoline in the United States cost about 6.5 cents more last week, rising for the first time since early July on the back of higher crude oil prices… Gasoline prices are up about 15 cents from a year ago, but remain about 37 cents per gallon below the all-time U.S. average high of $3.1827 on May 18…”
From Bloomberg: “U.S. consumers borrowed less in July than a month earlier as Americans took our fewer auto loans. Consumer credit increased $7.5 billion during the month to $2.46 trillion, the Federal Reserve said…In June, credit rose $11.9 billion, less than previously reported. The figures don't include mortgage debt. Auto sales slumped to a two-year low in July, capping the weakest quarter of consumer spending since the last three months of 2005. Slumping home values and stricter lending standards have made it harder for Americans to borrow against their homes for extra cash, suggesting more and more will turn to credit cards to finance spending. ``Credit cards continue to perform fairly well,'' Chris Low, chief economist at FTN Financial in New York, said before the report. ``Car loans are another story altogether. Repossessions are rising, and sales are slowing.''
End of Day Market Update
From RBSGC: “The bond market got a bid from...we'll we're really not quit sure what sparked the bid. To be frank, the technical breakout after the fundamental breakdown on the jobs front (we refer, of course, to NFP) serves as a solid foundation. But specific to Monday we really didn't have new information per se to drive 10-yr notes, albeit briefly, under 4.30%. Ideas that come to mind include, 1) a sharp drop in stocks, 2) 1 month LIBOR as a proxy for liquidity remaining elevated near 5.80%, 3) convexity buying -- though we saw more of that Friday, yields are in our perceived zone, 4) somewhat less adamant Fedspeak -- less about the market dictating to the Fed and more about the risks and the NFP report warranting concern, and 5) the weekend press striking a nerve with reference to the NFP report and bandying about the word 'recession' rather freely. Flows were another thing. Volume was tame…”
From Barclays: “Treasury yields are at their lowest levels in more than two years. At 140 bp through Funds, 2 yr Treasuries are pricing in an aggressive and sustained easing cycle by the Fed. In comparison, 2s rallied only about 110 bp through the target rate before easing commenced in September 1998.”
From UBS: “Treasuries rallied out of the gate, and yields fell 4-5bps across the curve as last Friday's shock drop in employment lingered…In a speech nearly identical to his remarks last Thursday, Atlanta Fed President Lockhart said that there are no conclusive signs of weakness in the broader economy as a result of housing, but acknowledged that employment has been weakening since June. Yellen, on the other hand, sees significant risk when housing prices fall in the context of rising unemployment. Meanwhile, Dallas Fed President Fisher expressed relative optimism about the state of the economy. We'd LOVE to be a fly on the wall for the upcoming FOMC meeting…Swaps saw good receiving in the belly (some further convexity receiving), and spreads were mixed on the day. Agencies saw very little flow, with some buying in the front end but nothing out of the ordinary. Mortgages also were quiet today, with small duration buying by servicers. MBS finished 1-2 ticks wider to Treasuries and swaps.”
Dow closed up 14, Dollar Index down .12 to 79.84, and oil rallied 79 cents to $77.49.
From Bloomberg: “Treasury investors basking in the biggest rally in four years have reason to fear for their profits: The largest owners of U.S. government debt are heading
for the exit. Two-year Treasuries returned 1.09 percent in August, the best monthly performance since 2003, according to indexes compiled by Merrill Lynch & Co. At the same time, holdings of U.S. bonds by governments and central banks at the Federal Reserve fell 3.8 percent, the steepest decline since 1992. The dollar's slump to a 15-year low against six of its most actively traded peers is turning the gains into losses for international bondholders, prompting China, Japan and Taiwan to sell. Overseas investors own more than half of the $4.4 trillion in marketable U.S. government debt outstanding, up from a third in 2001, according to data compiled by the Treasury Department. `The support that Asia has shown in buying U.S. Treasuries has been a major supporter of keeping long-term interest rates lower than where they probably would be,”…U.S. long-term interest rates would be about 90 basis points, or 0.90 percentage point, higher without foreign government and central bank buyers, according to a 2006 study for the Fed by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville … Treasuries returned 5 percent in the past two months …The dollar fell 8 percent against the yen in the past two months, causing losses for Japanese funds that own Treasuries…Government and central bank holdings of U.S. government debt at the Fed fell by $46.1 billion from the week ended July 25 to the week ended Sept. 5. They climbed to a record $1.25 trillion in July from $574 billion in June 2001. Japanese investors, who held $612 billion as of June 30, are on course to cut for a third year, according to the Treasury. China trimmed its U.S. debt by 3.4 percent in the second quarter to $405 billion, the first reduction in three years. Taiwan pared by 10 percent in the past year to $57.5 billion, while South Korea slashed holdings 25 percent this year to $50 billion…Merrill Lynch's main index of U.S. government securities returned 3.3 percent for July and August. For investors in Japan, the biggest holders outside the U.S., the index lost 3.1 percent after accounting for changes in the currency.”
Estimates of ARM Borrowers Able to Refinance into Various FHA Loan Options
From Lehman: “Upwards of $100 billion ARMs per quarter are slated for reset through the end of 2009, the vast majority of which are subprime…Only 8% of the total at-risk reset population falls within the $362,000-$417,000 bucket and just a fraction of these borrowers meet the FHA current underwriting …raising the loan limits (while keeping other underwriting criteria constant) results in just $1 billion of additional at-risk borrower eligibility in all of 2008…Even if there were no loan limit constraints, just $4.1 billion of additional at-risk borrower loans could be refinanced into FHA loans…Of the $207 billion at-risk ARMs resetting in 2008, we estimate that $24 billion qualify under existing standards… Roughly 30%-40% of troubled subprime borrowers could potentially refinance into an FHA loan if DTI and documentation constraints were also relaxed…if the FHA were to expand eligibility to borrowers with CLTV > 97 but held all other constraints constant, it would only facilitate refinancing for an incremental $3-$4 billion per year of at-risk subprime loans…at most approximately $90 billion of troubled
subprime borrowers scheduled to reset in 2008 would qualify for an FHA loan…a more realistic assumption is a maximum of $55-$65 billion…”
MISC
From Bloomberg: “Borrowers are paying the highest costs in six years for commercial paper, IOUs maturing in 270 days or less, because of losses from assets related to subprime mortgages. The yield in the U.S. has soared to 6.33 percent for 30-day debt from 5.48 percent on Aug. 9.”
From Bloomberg: “Eleven metropolitan areas have median home prices of more than $417,000, the limit for mortgages guaranteed by government- chartered agencies Fannie Mae and Freddie Mac. The markets are San Jose, San Francisco, San Diego, Los Angeles and Orange County, California; New York City; parts of northern New Jersey; southern Connecticut; Long Island; the Washington metropolitan area and Honolulu.”
From Goldman Sachs: “India: It’s raining growth—increasing our GDP forecasts for FY2008 and FY2009… We are increasing our GDP growth forecasts for FY2008 to 8.7% from 8% and for FY2009 to 8% from 7.8%...”
From Reuters: “The average retail price of a gallon of gasoline in the United States cost about 6.5 cents more last week, rising for the first time since early July on the back of higher crude oil prices… Gasoline prices are up about 15 cents from a year ago, but remain about 37 cents per gallon below the all-time U.S. average high of $3.1827 on May 18…”
From Bloomberg: “U.S. consumers borrowed less in July than a month earlier as Americans took our fewer auto loans. Consumer credit increased $7.5 billion during the month to $2.46 trillion, the Federal Reserve said…In June, credit rose $11.9 billion, less than previously reported. The figures don't include mortgage debt. Auto sales slumped to a two-year low in July, capping the weakest quarter of consumer spending since the last three months of 2005. Slumping home values and stricter lending standards have made it harder for Americans to borrow against their homes for extra cash, suggesting more and more will turn to credit cards to finance spending. ``Credit cards continue to perform fairly well,'' Chris Low, chief economist at FTN Financial in New York, said before the report. ``Car loans are another story altogether. Repossessions are rising, and sales are slowing.''
End of Day Market Update
From RBSGC: “The bond market got a bid from...we'll we're really not quit sure what sparked the bid. To be frank, the technical breakout after the fundamental breakdown on the jobs front (we refer, of course, to NFP) serves as a solid foundation. But specific to Monday we really didn't have new information per se to drive 10-yr notes, albeit briefly, under 4.30%. Ideas that come to mind include, 1) a sharp drop in stocks, 2) 1 month LIBOR as a proxy for liquidity remaining elevated near 5.80%, 3) convexity buying -- though we saw more of that Friday, yields are in our perceived zone, 4) somewhat less adamant Fedspeak -- less about the market dictating to the Fed and more about the risks and the NFP report warranting concern, and 5) the weekend press striking a nerve with reference to the NFP report and bandying about the word 'recession' rather freely. Flows were another thing. Volume was tame…”
From Barclays: “Treasury yields are at their lowest levels in more than two years. At 140 bp through Funds, 2 yr Treasuries are pricing in an aggressive and sustained easing cycle by the Fed. In comparison, 2s rallied only about 110 bp through the target rate before easing commenced in September 1998.”
From UBS: “Treasuries rallied out of the gate, and yields fell 4-5bps across the curve as last Friday's shock drop in employment lingered…In a speech nearly identical to his remarks last Thursday, Atlanta Fed President Lockhart said that there are no conclusive signs of weakness in the broader economy as a result of housing, but acknowledged that employment has been weakening since June. Yellen, on the other hand, sees significant risk when housing prices fall in the context of rising unemployment. Meanwhile, Dallas Fed President Fisher expressed relative optimism about the state of the economy. We'd LOVE to be a fly on the wall for the upcoming FOMC meeting…Swaps saw good receiving in the belly (some further convexity receiving), and spreads were mixed on the day. Agencies saw very little flow, with some buying in the front end but nothing out of the ordinary. Mortgages also were quiet today, with small duration buying by servicers. MBS finished 1-2 ticks wider to Treasuries and swaps.”
Dow closed up 14, Dollar Index down .12 to 79.84, and oil rallied 79 cents to $77.49.
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