Interest Rate Roundup

Tuesday, September 29, 2009

July S&P/Case-Shiller: Prices down 13.3% YOY

The latest data on home prices from S&P/Case-Shiller was just released. It showed prices down 13.3% in July from a year earlier in the 20 metropolitan areas tracked by the group. That was a smaller rate of decline than the market was looking for (-14.2%) and a smaller decline than we saw in June (-15.4%). On a monthly basis, prices rose 1.61%. That was the third gain in a row after a multi-month string of losses.

Friday, September 25, 2009

New home sales miss expectations in August

August new home sales figures inched higher, but only because of revisions. The raw number of sales missed forecasts. Details below ...

* New home sales rose 0.7% to a seasonally adjusted annual rate of 429,000. But the "increase" stemmed from a downward revision to July's number (to 426,000 from 433,000). Sales missed the average forecast of economists polled by Bloomberg (440,000). At the same time, May and June sales figures were revised higher (by 5,000 and 9,000 units, respectively). Confused yet?

* Regionally it was a mixed bag. Sales fell 5.8% in the Midwest and dropped 16.3% in the Northeast. They were flat in the South and up 12.2% in the West.

* The raw number of homes for sale continues to decline. It dropped to 262,000 from 270,000 in July. That's the lowest reading since November 1992 (a tie). You have to go all the way back to February 1983 to find a lower number. The months supply at current sales pace indicator of inventory fell to 7.3 from 7.6, the lowest since January 2007.

* The median price of a new home dropped 9.5% to $195,200 from $215,600. That's the lowest level since October 2003. On a year-over-year basis, prices fell 11.7%, the second-worst decline for this cycle.

New home sales continue to stabilize, but at extremely depressed levels. And it's taking significant price cuts to move product off the lot, so to speak. The median price of a new home plunged by almost 12% last month, the second-biggest year-over-year drop of the cycle. That leaves new homes at the cheapest level in almost six years.

The good news? Those price cuts and dramatic cutbacks in home construction are clearing out inventory in a big way. We now have the fewest new homes for sale in this country since November 1992. That month was a tie, by the way. We haven't seen a lower reading since Ronald Reagan's first term as president. The existing home market remains oversupplied, but even there, inventories appear to have peaked. This will lead to a gradual stabilization in construction and sales, followed by pricing (with a lag).

Thursday, September 24, 2009

Existing home sales dipped 2.7% in August

The August existing home sales figures were just released. Here's what the numbers looked like:

* Existing home sales fell 2.7% to a seasonally adjusted annual rate of 5.1 million units from 5.24 million in July. That was below the 5.35 million units that economists were expecting.

* Single-family sales dropped 2.8%, while condo and cooperative sales fell 1.6%. By region, sales fell in most parts of the country. They were down 3.1% in the South, 2.2% in the Northeast, and 6.6% in the Midwest. Sales gained 2.7% in the West.

* The raw number of homes for sale dropped 10.8% to 3.622 million units from 4.062 million in July. Supply was off 16.4% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 8.5 from 9.3. Single family inventory fell to 8.2 from 8.5, while condo inventory slipped to 12 from 14.5.

* The median price of an existing home dropped 2.1% to $177,700 from $181,500 in July. That was down 12.5% from $203,200 in the year-ago period.

The existing home market hit a speed bump in August. Sales fell for both condos and single family homes, and in three out of four regions the country. It shouldn't be much of a surprise to see sales take a breather after four straight gains, including the biggest monthly rise ever in July.

There was also some encouraging news on the inventory front. The raw number of homes for sale dropped more than 16% year-on-year, while the month supply at current sales pace indicator fell to its lowest level since April 2007. So yes, the August figures are somewhat disappointing. But no, they don't derail the overall recovery thesis.

Wednesday, September 23, 2009

Fed to markets: Party on!

The latest Fed meeting just wrapped up. And as I expected, policymakers decided to keep the liquor flowing and the music playing as loud as possible!

Specifically, the Fed kept its interest rate target unchanged at 0% to 0.25%. It also signaled that it planned to maintain “exceptionally low levels of the federal funds rate for an extended period.” That’s as close as the Fed comes to yelling “Party on!”

As a result, we’ll likely see the dollar continue to fall ... commodities continue to rise ... and all asset classes inflate. The Fed is effectively printing money out of thin air and handing it to speculators the world over. That’s driving down the value of the dollar and driving up the nominal price of assets.

This is the same garbage policymaking that helped inflate the tech bubble and the housing bubble. But you know what? The Fed never learns! It just keeps going back to the old playbook. We don't have to like it, but we do have to accept it, at least as long as Ben Bernanke is in the driver's seat.

Fed fueling new carry trades

There are some good stories at the Washington Post today about how the Fed is fueling fresh carry trades/bubbles by keeping interest rates pegged around zero. I covered this exact same topic a few days ago. The Fed seems to have no other solution for burst bubbles than easy money ... which then fuels new bubbles in other parts of the asset markets.

Here's more from one of the WaPo pieces:

"It turns out that all those bold and necessary steps by the Federal Reserve to prevent the financial system from collapsing wound up creating so much liquidity that it has now spawned another financial bubble.

"Let's start with the $1.45 trillion that the Fed has committed to propping up the mortgage market -- money that, for the most part, was simply printed. Effectively, most of that has been used to buy up bonds issued by Fannie Mae and Freddie Mac from investors, who turned around and used the proceeds to buy "safer" U.S. Treasury bonds. At the same time, the Fed used an additional $300 billion to buy Treasurys directly. With all that money pouring into the market, you begin to understand why it is that Treasury prices have risen and interest rates fallen, even at a time when the government is borrowing record amounts of new money.

"As it was printing all that money, the Fed was also lowering the interest rate at which banks borrow from the Fed and each other, to pretty close to zero. What didn't change was the interest rate banks charged everyone else. As a result, "spreads" between what banks pay for money and what they charge are near record highs.

"So who is borrowing? By and large, it's not households and businesses, which are reluctant to borrow during a recession. Rather, it's hedge funds and other investors, who have been using the money to buy stocks, corporate bonds and commodities, driving prices to levels unsupported by the business and economic fundamentals.

"The excess liquidity is even being used to finance a new "carry trade" in which global investors borrow at U.S. rates and buy government bonds in places like Australia, where prevailing rates are higher. Because the carry trade involves exchanging dollars for foreign currencies, it has been a major contributor to the recent decline in the dollar."

Thursday, September 17, 2009

Housing starts inch higher in August

We just got the latest data on home construction. Here's a recap of what they showed:

* Overall housing starts climbed 1.5% to a nine-month high of 598,000 in August from 589,000 in July. That was exactly in line with the average forecast of economists. Building permit activity rose 2.7% to a seasonally adjusted annual rate of 579,000 from 564,000. Expectations were for a reading of 583,000.

* By property type, single family construction activity fell 3%. Multifamily construction surged 25.3%. Single family permits dipped 0.2%, while multifamily permits rose 15.8%.

* Regionally, starts were mixed. They fell 2.4% in the South and remained unchanged in the West. Starts jumped 23.8% in the Northeast and inched up by 0.9% in the Midwest. Building permits were also a mixed bag. Starts rose 7.2% in the South and 14.3% in the Northeast. But they dropped 5.6% in the West and fell 5.7% in the Midwest.

Housing starts rose to the highest level in nine months in August. But in a shift from the recent trend, the improvement was driven by the multifamily sector. Core single-family starts and permitting activity both dipped. The regional breakdown was a mixed bag, with strength in some areas and weakness in others.

We've come a long way in a short period of time, with single-family starts up 34% in a span of just six months. So it's no surprise to see builders take a breather. There may be some nervousness about the upcoming expiration of the first-time buyer tax credit, and we clearly have some lingering reluctance among bankers to fund construction projects. The trend toward improvement in the housing data over the longer-term, however, remains intact.

Wednesday, September 16, 2009

NAHB index climbs to 19 in September

The National Association of Home Builders released its latest batch of data on housing market conditions this afternoon ...

* The overall index rose to 19 in September from 18 in August. That matched the average forecast of economists polled by Bloomberg. It was the highest this index has been since May 2008.

* What about the subindices in the report? The index measuring current sales rose to 18 from 16, while the index measuring prospective buyer traffic inched up to 17 from 16. The index measuring builder's expectations about future sales dipped to 29 from 30.

* The regional breakdown was positive across the board. The Northeast index rose to 24 from 22, the Midwest index climbed to 19 from 16, the South index increased to 19 from 17, and the West index inched up to 18 from 17.

The housing market data continues to take on a more positive tone. We saw strength in current sales and buyer traffic in August, and broad gains across all regions of the country. Builders are naturally somewhat concerned about what the future will hold, should the first time buyer tax credit be allowed to expire by Congress. But I believe the tax credit is the icing on the cake of this housing market recovery, not the cake itself.

What do I mean? The credit is helping around the edges. But the REAL reason home sales are picking up is that home prices have collapsed. That collapse has made housing affordable once again in many markets, using traditional valuation ratios (home price to median income, monthly ownership cost vs. monthly rental cost, etc). In other words, as I have said numerous times, falling home prices were NEVER part of the problem. They were ALWAYS the solution to the housing bust.

"Just in Time" Fed NOW going to regulate subprime lenders

You can't make this stuff up. NOW that the entire industry has essentially gone out of business, the Fed is going to more closely regulate the subprime lending arms of bank holding companies. Another example of our proactive policymakers keeping their eye on the ball! From the Washington Post ...

"The Federal Reserve announced Tuesday that it will extend its regulatory umbrella to cover a group of lenders that includes several major originators of subprime loans, policing whether they follow federal laws that protect consumers of mortgages, credit cards and other financial products.

"Federal banking regulators already oversee companies that own banks, known as holding companies, along with the banks themselves. Under the new policy, the Fed will extend the same oversight to other businesses owned by those holding companies, such as units that make home-equity loans.

"The policy places subprime lenders such as CitiFinancial, an arm of Citigroup, and Wells Fargo Financial, an arm of Wells Fargo, under Fed oversight for the first time. The same laws protect all borrowers, but until now, no federal agency watched to make sure non-bank subsidiaries followed the law.

"The decision reflects a basic shift at the Fed, which is charged by Congress with protecting consumers from abuses during financial transactions. After leaving its power largely unused during the housing boom, the Fed has lately begun to assert itself, for example imposing new restrictions on mortgage and credit card lenders."

CPI rises, current account balance $98.8 billion

The latest batch of economic data just hit the tape. It showed the Consumer Price Index rising 0.4% in August. That was up from a flat reading in July and slightly hotter than the 0.3% rise that was expected. Core CPI was up 0.1%, in line with forecasts. A large increase in the price of fuel (gasoline) drove the gains in the headline number. The current account deficit registered $98.8 billion in the second quarter, down from a revised $104.5 billion in Q1 but worse than the $92 billion average forecast of economists. We're not seeing much movement in the markets in the wake of this news yet.

Dollar getting vaporized again

The motto these days seems to be: "Is the market open? Then sell dollars!" I say that because the dollar was weak again in the overnight session. The Dollar Index is currently down 12 bps to 76.40, its lowest level going all the way back to last September. The Japanese yen keeps banging away at the 90-and-change area, while gold is up about $9 to $1,016 in response. Nothing like watching Bernanke and crew vaporize the value of our currency. Whee!

Tuesday, September 15, 2009

Inflation hot, sales strong, NY-area manufacturing improves

We just got a trifecta of economic reports and they all suggest the economy is recovering (and that the inflation picture is somewhat less benign). To wit:

* Retail sales surged 2.7% in August. That was much stronger than the 1.9% gain that was expected and the biggest rise in three years. But even if you exclude autos (where sales were boosted by the "Cash for Clunkers" program), you still get an increase of 1.1%, much hotter than the 0.4% rise that economists were looking for. That was the biggest rise in six months.

* The Empire Manufacturing index of New York-area activity rose to 18.9 in September from 12.1 in August. That was hotter than the 15 reading people were looking for and the highest reading in almost two years. The "prices paid" subindex jumped to 20.2 from 13.8, while the new orders subindex climbed to 19.8 from 13.4.

* The Producer Price Index surged 1.7% in August. That was more than double the 0.8% gain that was expected and a big swing from the -0.9% reading in July. The "core" PPI, which excludes food and energy, rose 0.2% against a forecast for 0.1%.

The aftermath? Stock futures are popping, while bond futures are down two-thirds of a point. The dollar is picking up a bit.

Friday, September 11, 2009

Import prices spike amid falling dollar

The import price index came in hot in August, up 2% against expectations for a rise of 1% and a decline of 0.7% in July. The ex-fuels reading, which excludes the impact of oil and gas prices, was up 0.4%. Food and beverage costs were up 1.7%, industrial supply prices were up 6.1%, while both capital goods and autos and parts were up. Only consumer goods showed a decline (of 0.2%). Inflation is not a HUGE issue right now. But the continued fall in the dollar could continue to drive commodity prices higher -- and that's going to result in pricing pressures at some point down the road.

Wednesday, September 09, 2009

Dollar debasement keeps on keeping on

The dollar's collapse is gathering steam in early trading today. The broad-based Dollar Index is down 38 ticks to 76.95 as I write. It has taken out technical support dating back all the way to December. Certain individual currencies, like the Aussie dollar, are trading at the higest level against the buck in more than a year.

What's going on? I'm going to cut through the B.S. and lay it out as follows ...

First, the U.S. government has adopted an unofficial policy of U.S. dollar debasement or, at best, an official policy of not-so-benign neglect.

Second, despite a U.S. federal deficit that’s at least three times larger than the worst in history, there’s no reasonable plan to bring it under control.

Third, the U.S. Federal Reserve is monetizing the debt with printed money, a classic cause of rising gold, rising commodity prices, and a declining currency.

Concern about the dollar is rising sharply in places like China, and for good reason. The country has a $2 trillion-plus hoard of reserves. Experts believe that portfolio is overly concentrated in dollar assets – to the tune of roughly 75%. The problem? If the dollar keeps tanking, the value of those Treasuries, corporate bonds, equities, and other holdings will decline.

Cheng Siwei, the former vice chairman of China’s Standing Committee, warned in the London Telegraph newspaper that concern is rising, and rising fast. He said:

“If [the Fed] keeps printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.”

No less an authority than the United Nations also said that dollar risk is on the rise. The UN’s Conference on Trade and Development said in a report this week that a new supra-national currency may be needed to reduce countries’ dependence on the slumping dollar.

Is this all just talk? Maybe not. China’s Ministry of Finance just announced that it would sell 6 billion yuan worth of government bonds in Hong Kong soon. That’s less than $900 million at current exchange rates, a pittance compared to the $100 billion-plus in U.S. Treasury debt that we’re selling every few weeks. But it’s noteworthy because this is the first issue of Chinese government debt targeted at global investors.

The G-20 failed miserably this weekend to halt the dollar bonfire. Fed officials act like they just don't care. So the question becomes, what's going to stop the rout? Anyone? Anyone? Beuller?

Friday, September 04, 2009

Unemployment rises to 9.7%, jobs -216k

The Labor Department just released its latest statistics on the job market. Here's a look at the August numbers:

* The economy shed 216,000 jobs last month. That was slightly below the -230,000 estimate of economists surveyed by Bloomberg. However, July's number was revised upward to -276,000 from -247,000. June's job loss figure was also revised up by 20,000.

* The unemployment rate jumped to 9.7% from 9.4% a month earlier. That handily topped estimates for a reading of 9.5%.

* Average hourly earnings rose 0.3%, a bigger gain than the 0.1% rise that was expecting. Average weekly hours held steady at 33.1.

* Among sectors, construction lost 65,000, down from -73,000 a month prior. Manufacturing lost 63,000, up from -43,000 in July. Retail and transport jobs shrunk by 28,000, down from -85,000. The only sector to show job growth among the major categories was education/health at +52,000, up from +21,000 a month earlier.

Market reaction, as usual, is volatile. Stock futures initially tanked, and bond prices rose off their lows. Now, bond prices are dropping and stock futures are jumping. You gotta love employment report Friday!

Tuesday, September 01, 2009

Construction spending weak, ISM strong

There's more economic data than you can shake a stick at today. So forgive me for being a bit behind in updating.

Besides pending home sales, we learned that construction spending dropped 0.2% in July. That missed expectations for a flat reading; moreover, June's number was revised down to +0.1% from +0.3%. Private residential spending rose 2.3%, but private nonresidential spending dropped 1.2%. This fits with other evidence that residential real estate is stabilizing, while commercial isn't.

The ISM Manufacturing index, on the other hand, topped forecasts. It came in at 52.9 in August compared with 48.9 in July and expectations for a reading of 50.5. The new orders subindex vaulted to 64.9 from 55.3, while the production subindex climbed to 61.9 from 57.9. The prices paid indicator of inflation also came in hot -- at 65 vs. 55 a month earlier. The employment index inched up to 46.4 from 45.6.

Net/net, the market index is a bit of a rise in stocks and a sharp drop in bonds. Long bond futures were recently down 28/32, in fact.

Pending home sales climb 3.2% in July

The National Association of Realtors released its data on pending home sales today. Here's what the numbers looked like ...

* Pending home sales climbed 3.2% in July. That was more than double the 1.5% gain that economists were expecting.

* On a year-over-year basis, the pending sales index was up 12.1% to 97.6 from 87.1. That's the highest index value since June 2007.

* Regionally, pendings were a mixed bag. They rose 3.1% in the South and ramped 12.1% in the West. Sales dipped 2% in the Midwest and fell 3% in the Northeast.

We continue to see noted improvement in home sales. Pendings climbed twice as much as the market was expecting, with strength concentrated in the key South and West regions. This fits with other reports on new home sales, builder confidence, and pricing, which all indicate an improved tone to the housing market after four years of misery.

The looming expiration of the home buyer tax credit may take some of the wind out of the market's sails this fall. And the influx of distressed property into the market promises to keep supply levels elevated over the next 12 to 18 months. But the overall trend toward stabilization is undeniable at this point.

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