April S&P/Case-Shiller Index: Down 18.1%

The April S&P/Case-Shiller figures were released this morning. They showed home prices in 20 top metropolitan areas down 18.1% from a year earlier. That was better than the forecast for a reading of -18.6% and an improvement from the previous month's -18.7% reading. Prices fell in all 20 cities tracked by the research organization, with Phoenix performing the worst (-35.3%) and Denver doing the best (-4.9%). The monthly decline came in at -0.6%, an improvement from -2.2% in March and the smallest drop since last June. Prices rose in 8 of 20 cities on a monthly basis.

What happens when drivers of foreclosures are different

Today, the Wall Street Journal elucidated a point I have made repeatedly in many venues. Heading off a potential foreclosure tied to the STRUCTURE of a mortgage is a lot easier than avoiding a foreclosure related to broader ECONOMIC trends (falling house prices, rising unemployment, etc.). This is one reason the foreclosure problem cannot be easily fixed, despite all the PR about modifications coming from the administration and the industry.

"Rising unemployment is complicating the Obama administration's effort to reduce foreclosures and stabilize the housing market.

"The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.

"The Obama foreclosure-prevention plan was "built around the subprime crisis model, not the unemployment crisis model," said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

"The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.

"But many borrowers don't have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years."

Another good auction, this time of 7-year Notes

Got to hand it to the Treasury, they pulled off a pretty good batch of auctions this week. The $27 billion of 7-year notes went off at a yield of 3.329%. That was better than pre-auction talk of 3.36%. The bid-to-cover ratio was 2.82, up from 2.26 in the last auction and the highest since the Treasury started selling this maturity again in February. Indirect bidders took down 67.2% of the notes sold, more than double the 33% in the last auction and also the highest yet.

Fed keeps rates unchanged, doesn't change debt purchase targets, gives no clarity on "exit strategy"

The Federal Open Market Committee left its interest rate target unchanged at 0% to 0.25%. Also, the Fed left its targets for purchases of Treasury debt, GSE debt, and mortgage backed securities unchanged. The complete statement is as follows:

"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

"The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen."

My take? The Fed essentially punted, striking out the middle ground. Policymakers said the economy is improving, but they gave no hint they would throttle back on monetary stimulus. They threw a bone to the inflationists with a comment about rising commodity prices, but then said those worrywarts should essentially be ignored. They referenced their extraordinary programs to purchase Treasuries, mortgage backed securities and agency debt, but provided no clarity or details about an exit strategy.

I can't help but think of that old Magic 8-Ball response: "Reply hazy, try again." The Fed isn't offering much clarity about what it will do next because it doesn't seem to know.

The market reaction: Long-term bonds are getting whacked, with the bond futures down about 15/32 at last count. The dollar index is at its high of the day, up 70 bps to 80.54. Stocks are giving up early gains, while gold is fading somewhat.

Five-year note auction pretty strong

The 5-year Treasury Note auction (of $37 billion in securities) just wrapped up and it was pretty good. The notes sold at a yield of 2.7%, compared with pre-auction talk of 2.724%. Indirect bidding was strong at 62.8%, and the bid-to-cover ratio came in at 2.58. Those were the highest figures since December 2004 and October 2007, respectively. Still, those metrics were slightly worse than the 2-year auction. That fits with the pattern that the further out on the yield curve you go, the weaker the demand tends to get.

New home sales fall 0.6% in May

The new home sales figures for May were released this morning. Here's a recap ...

* New home sales dipped 0.6% to a seasonally adjusted annual rate of 342,000 from 344,000 in April. The numbers are a disappointment, considering economists were expecting sales of 360,000. Results for the past few months were also downwardly revised by 32,000 units.

* Regionally, sales jumped 28.6% in the Northeast and 18.6% in the Midwest. They inched up 1.3% in the west, but fell 8.5% in the South, the nation's largest new home market (184,000 units sold at a seasonally adjusted annual rate vs. 80,000 in the West ... 51,000 in the Midwest ... and 27,000 in the Northeast).

* The raw number of homes for sale continued to decline, falling to 292,000 from 299,000 in April. That's the lowest reading going back to March 2001. The months supply at current sales pace indicator of inventory dipped to 10.2 from 10.4.

* The median price of a new home rose 4.2% last month to $221,600 from $212,600 in April. On a year-over-year basis, prices were down 3.4%, the best YOY showing since December.

Digging into the May new home sales figures, you see that sales rose in three out of four regions of the country. But they declined sharply in the South, the country's biggest new home market, so overall sales were a disappointment. On the other hand, for-sale inventory continues to decline -- a definite plus. And the year-over-year rate of home price depreciation eased markedly.

Overall, the story remains the same: The housing market is gradually stabilizing, but showing no sign whatsoever of a vigorous rebound. The biggest issues going forward remain unemployment and interest rates. The supply of new homes for sale is back in line with the long-term historical average. But if potential buyers are losing their jobs, and financing costs are going up, builders are going to have a tough time moving product.

Two-year Note auction strong

Demand at the front end of the Treasury curve remains strong, as evidenced by the just-completed 2-year Treasury Note auction. Market players polled by Bloomberg expected the $40 billion of notes to sell at a yield of 1.202%. Instead, they sold at 1.151%. A whopping 68.7% of the notes sold went to indirect bidders, a group that includes foreign central banks. That's the highest since at least 2003. The bid-to-cover ratio was also strong at 3.19, the highest since September 2007.

The problem isn't really demand for shorter-term debt, however. The question is whether longer-term bonds will continue to find buyers.

May existing home sales climb 2.4% in May

The existing home sales report for May just came out. Here's what the figures showed ...

* Existing home sales gained 2.4% to a seasonally adjusted annual rate of 4.77 million units from 4.66 million in April. That was slightly below forecasts for a reading of 4.82 million and down 3.6% from 4.95 million a year earlier.

* Single-family sales climbed 1.9%, while condo and cooperative sales rose 6.1%. Regionally, sales were mixed. They rose 3.9% in the Northeast and 9% in the Midwest. But transaction volume was unchanged in the South and down 0.9% in the West.

* The raw number of homes for sale fell 3.5% to 3.798 million units from 3.937 million in April. That was also down 15.3% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 9.6 from 10.1, with single family inventory falling to 9 from 9.5 and condo inventory slipping to 15 from 15.4.

* The median price of an existing home rose 3.8% to $173,000 from $166,600 in April. That was down 16.8% from $207,900 in the year-ago period.

We saw another month of modest improvement in the housing sector in May. Existing home sales rose, led by the Midwest region. Sales were particularly strong in the condo sector, while the supply of homes on the market dipped. The biggest fly in the ointment continues to be pricing. It remains weak, with yet another double-digit decline from year-earlier levels showing up in the data.

Stepping back for a moment and looking at the big picture, it's clear that the housing sector is no longer in freefall. But neither is it rebounding strongly. We're seeing modest declines in inventory, modest improvement in sales, and some tentative signs of stabilization in pricing. But that's it. And that should come as no surprise. We just experienced the longest, largest housing bubble in U.S. history. As a result, the recovery process will be a long, drawn-out affair.

Another thing to keep an eye on: Mortgage rates. They didn't begin to rise significantly until late May. Since the existing home sales figures are based on contract closings, rather than contract signings, the impact of higher rates wasn't captured in this report. We'll likely see housing demand trail off as we head deeper into the summer unless financing costs ease back.

Tsunami of Treasury issuance next week

The Treasury Department just announced how much debt it's going to sell next week. Get a load of these figures: $61 billion in T-bills. $40 billion of 2-year T-notes. $37 billion of 5-year Notes. And $27 billion of 7-year notes. That's good for a record $165 billion of debt, the most sold in any week ever, driven by increased sales of five-year and seven-year debt. Long bond futures are off about 1 23/32 right now, with 10-year note yields up 11 basis points to 3.8%.

Muddled market; LEI/Philly surprises

It seems like we've got a muddled market for now. Stocks, bonds, currencies -- they're all taking breathers from their recent trends. Jobless claims are hovering in the low 600s without making much progress either way. Industrial production was down 1.1% in May, while housing starts were up. The only clear trend: The refinance boom is dead and buried. Refi apps have plunged 73% from their January high, according to the Mortgage Bankers Association.

UPDATE: Leading Economic Indicators surged 1.2% in May, the biggest increase in any month going back to March 2004. The Philadelphia Fed index was also much better than expected at -2.2 vs. a forecast of -17. The new orders subindex jumped to -4.8 from -25.9, while the employment subindex increased more modestly to -21.8 from -26.8. The look-ahead index (which measures expectations for growth six months out) hit 60.1, the highest since September 2003. Before that, you won't find a higher reading since February 1993.

Securitization changes coming down the pike

We won't get the Obama administration's full "blueprint" on financial regulatory reform until tomorrow. But some elements have been leaking out. Here is how the securitization market might be affected, according to a story in the Washington Post:

"Lenders would be required to retain at least 5 percent of the risk of losses on each package of loan pieces, known as an asset-backed security.

"The employees and contractors who originate loans would be paid gradually, and they could get less if borrowers started to default.

"The proposal also takes aim at ratings agencies such as Moody's and Standard and Poor's, which investors rely upon to evaluate the quality of asset-backed securities. Those agencies would be required to make clear to investors that the securities are riskier than traditional investments such as corporate bonds.

"These changes address the market at the heart of the financial crisis, but they make up only a small piece of the administration's blueprint. The plan would give the Federal Reserve new powers to restrict the risks taken by large financial firms. It would create a new authority to dismantle firms that fall into trouble and a separate agency to protect consumers of financial products such as mortgages and credit cards."

Housing starts surge 17.2% in May; Permits rise

We just got the housing starts and permits figures for the month of May. Here's what they showed ...

* Total housing starts rose 17.2% to a seasonally adjusted annual rate of 532,000 from 454,000 in April. Building permits gained 4% to 518,000 from 498,000. Economists were expecting 485,000 starts and 508,000 permits.

* By property type, single family starts rose 7.5% to 401,000 units. Multifamily starts soared 61.7% to 131,000. Single family permits popped 7.9% to 408,000, while multifamily permits dipped 8.3% to 110,000.

* As far as the regional breakdown is concerned, starts gained across the board. They inched up by 2% in the Northeast, rose 11.1% in the Midwest, climbed 16.8% in the South, and surged 28.6% in the West. In the permits world, activity was up 2.3% in the South, up 3.8% in the West, up 5.7% in the Northeast, and up up 8.9% in the Midwest.

Housing starts continue to show extraordinary volatility, with large double-digit moves month in and month out becoming the norm. The biggest swings continue to be found in the multifamily market. If you can believe the data, MF starts plunged 49.4% two months ago only to soar 61.7% in May. Hmmm.

What I find more interesting is that we've had three straight months of gains in the less-volatile single-family arena. In fact, the 7.5% monthly increase in May was the biggest rise since January 2006. This adds to evidence that the housing market is no longer falling apart. Instead, much lower home prices are helping to stabilize demand and bring down inventories in some of the hardest-hit regions of the country. That, in turn, is bringing some builders out of the bunker.

Still, anyone expecting a rip-roaring rebound in the housing sector is going to be disappointed. Tighter lending standards, rising mortgage rates, and a dismal employment market will all combine to drag out the turnaround timeline, and ensure the recovery remains a muted one.

They're from the government and they're here to help

I'm back from my trip, but still getting caught up on a lot of stuff. So I'm not up to 100% posting speed just yet. Still, I couldn't miss the chance to comment on this Wall Street Journal story. It really does a good job of summing up how the government's "Bailout Nation" approach is impacting various companies and sectors of the economy. And despite all the protesting from policymakers, the reality is that the government IS creating winners and losers through its actions. That will have profound long-term implications for the U.S. economy. More below ...

"Government spending as a share of the economy has climbed to levels not seen since World War II. The geyser of money has turned Washington into an essential destination for more and more businesses. Spending on lobbying is up, as are luxury hotel bookings in the capital.

"President Barack Obama has vowed to reduce the government's role in the private sector as soon as possible. Federal Reserve Chairman Ben Bernanke says most of the central bank's emergency programs will be unwound within a few years. But a recent Wall Street Journal poll of economists found that only 16% believed the federal government would be able to meet its goal of ending rescue programs soon without fundamentally altering the competitive landscape of the private sector.

"The intervention helped stabilize the economy, but could slow growth in the long-run. Some economists and business leaders worry the intervention will result in rules that hamstring the way some businesses operate, and that it will sustain unproductive zombie firms and burden the next generation with debt or inflation."

In New York this week ...

In case you're wondering, I didn't drop off the face of the Earth. I just happen to be in New York this week for business. I'll only be making limited posts as most of my time is accounted for. As far as the markets are concerned, I'm continuing to keep a close eye on the bonds and the dollar, because that's where the real action is. We're now seeing shorter-term rates start to move higher, following the long end of the curve. Meanwhile, the dollar's recent bounce petered out today, helping push oil prices through $70 a barrel. Aiiieeee!

More on labor, the deficit, and the dollar

Jobless claims just hit, and they were essentially in line with expectations. Initial claims dipped from a revised 625,000 to 621,000 in the most recent week. Forecasts called for a reading of 620,000. However, the upward trend in continuing claims actually moderated for a change. They declined from 6.75 million to 6.735 million, the first time we haven't set a fresh record in several weeks. That was also below the forecast of 6.855 million.

Meanwhile, yesterday was a day of revenge for the dollar bulls. The dollar took off and gold fell after Fed Chairman Ben Bernanke said all the right things in an appearance before Congress. He talked a lot about the risk of rising deficits, and the need for fiscal and monetary restraint at some point. But if you believe that this "Helicopter Ben" Fed, the administration, and Congress will actually DO anything (rather than just TALK about these risks), you -- dear reader -- are far more optimistic and trusting than I am.

Or as Pimco Chief Investment Officer Bill Gross put it in his most recent monthly outlook this week:

"While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat."

ADP, Challenger reports show tepid labor market

This is employment week in the markets, with several data points coming out on the labor market. This morning, Challenger, Gray & Christmas released its layoff report, which showed job cut announcements declining 21,408 on the month. This is the fourth month in a row of declines. Layoffs are still up 7.4% from a year earlier, but that is a much more moderate pace of increase than we've seen recently (47.3% YOY in April, for instance, or 180.7% in March).

Meanwhile, the ADP employment report showed the economy shedding 532,000 jobs in May. That was ever-so-slightly worse than the -525,000 forecast of economists polled by Bloomberg. April's reading was revised higher to -545,000 from -491,000. The May decline was the smallest since November.

Bottom line: The labor market still looks tepid/lukewarm, but it's not getting worse.

Currency traders "selling Geithner"

Lo and behold, it's another free-fall in the dollar in the wake of the "Geithner Goes To China to Beg for Creditor Mercy" trip. DXY now down 81 bps to 78.34, the low of they day. Gold up $6 and change. Crude oil back to positive after trading down most of the day. And the beat goes on. The president of Russia, Dmitry Medvedev, is openly talking about a multi-national currency that would reduce dollar risk. Everything from the Brazilian real to the British pound is gaining ground against the buck.

Pending home sales surge 6.7% in April

We just got the latest pending home sales figures from the National Association of Realtors. Here's what they showed:

* Pending sales jumped 6.7% in April. That compared with forecasts for a 0.5% gain and it comes on the heels of a 3.2% rise in March. In fact, it's the biggest monthly gain since October 2001.

* The pending sales index, at 90.3, is the highest since September 2008 (90.9). It gained 3.2% year-over-year.

* Regionally, pending sales rose in three out of four areas. They gained 1.8% in the West, 9.8% in the Midwest and a hefty 32.6% in the Northeast. Sales dipped 0.2% in the South.

Pending sales of existing homes turned in a very respectable performance this April. The monthly gain was the single-largest in more than seven years, led by a hefty 33% pop in the Northeast. What's going on? Some buyers latched on to lower home prices, lower mortgage rates, and tax breaks as reasons to get to work again in the housing market.

Still, the large pop in pending sales of used homes contrasts sharply with the lackluster 0.3% rise in new home sales. That suggests deeply discounted used homes are providing stiff competition for home builders, and gaining market share at their expense. More importantly, mortgage rates are now starting to rise sharply. This could put a damper on sales as we head into the summer. Bottom line: Conditions have improved in the housing market, but it's certainly not all smooth sailing ahead.

The embarassing state of Sino-U.S. affairs

How sad is it that Treasury Secretary Timothy Geithner has to spend a few days grovelling before our Chinese creditors to try to stop the ongoing meltdown in the Treasury and currency markets? Am I the only one who thinks this is a truly sad state of affairs? Am I the only one who wishes our government would start taking steps to change things -- rather than just spout a bunch of meaningless blather about bringing down deficits and debt levels while enacting policies that have precisely the OPPOSITE impact?

Anyway, if you're interested in hearing China lecture the U.S. about its fiscal policies, take a crack at this Bloomberg story ...

"Yu Yongding, a former central bank adviser who acted as the interviewer for the China Daily newspaper, told Geithner: “I worry about details. We will be watching you very carefully.”

Or how about these gems from the Washington Post, which notes that despite Geithner's happy talk, China is not pleased with the way events are unfolding:

"Geithner's remarks stand in sharp contrast to the commentary in China's official propaganda papers.

"An editorial in the English-language China Daily said it will be "regrettable if [Geithner] underestimates and shuts his ears to voices from China's civil society," noting that there are worries that "Washington's mushrooming deficit, generated by massive government borrowing to fuel its economic recovery plan . . . will undermine both the dollar and U.S. bonds."

"The Global Times, which is affiliated with the Communist Party, said an online poll found that 87 percent of respondents believe China's dollar-assets are unsafe. The paper concluded, "Ordinary Chinese people are discontent with the declining value of China's huge foreign exchange reserves denominated in U.S. dollars."

"And the Economic Information Daily, which is part of the official New China News Agency and affiliated with the State Council, in a headline demanded to know of Geithner: "How do you propose implementing fiscal discipline? How will you maintain the stability of the dollar after the crisis?"

Today will be an interesting day. The dollar attempted to stabilize yesterday, rallying off its lows. But the Dollar Index is now getting pasted again -- down 42 bps to 78.74 as I write. Gold is up about $7 an ounce, but still below yesterday's high.