Interest Rate Roundup

Friday, October 31, 2008

September income up, spending down; Chicago PMI takes a header

Personal income and spending figures for the month of September were just released. Income was a bit stronger than expected: +0.2% vs. a forecast for +0.1%. Spending was a bit weaker than expected: -0.3% vs. a forecast for -0.2%.

Meanwhile, the October numbers continue to look horrific. Take the Halloween-day release of the latest Chicago PMI report. It showed the index plunged to 37.8 from 56.7 in September. That was far below the 48 reading that economists were anticipating and the worst reading since May 2001. The new orders subindex dropped to 32.5 from 53.9, the production index plunged by more than half to 30.9 from 71.4, and the employment index slipped to 41.5 from 49.1.

Thursday, October 30, 2008

Will anyone in Washington have the courage to stand up and say "Enough is enough?"

That's what I'm left wondering when I read stories like this one, entitled "Bailout scope limited to ... virtually anything." Here's an excerpt ...

"As the list of ailing companies seeking government help grows, it is anybody's guess where the Treasury Department's largesse will stop.

"The $700 billion bailout bill is so vague that virtually any U.S. company could be eligible for government help.

"While the capital infusions announced this month will be directed only to banks, Treasury spokeswoman Brookly McLaughlin confirmed the law allows the department to create other rescue programs "open to a broader set of financial institutions."

"As the bill is written, "financial institutions" don't have to be banks or financial entities. In theory, any company could declare itself a financial institution and ask Treasury to grant it temporary aid if its rescue is deemed "necessary to promote financial market stability."

Critics said Congress should have set a clearer definition for the kinds of companies that could be rescued.

"Talk about the barn doors being left open — it's like they left off the walls and roof, too," said Bert Ely, an independent banking consultant. He suggested that under the bill, an airline could transfer future revenue streams into a subsidiary and ask the government to buy shares in that new "financial institution."

"The only limit to what Treasury could do, Ely said, is the bill's $700 billion ceiling.

"Representatives of the auto, insurance and other industries are already seeking government help, indicating they think they qualify because of their financing units. But McLaughlin's statement suggests that even companies without financing operations could qualify as well.

"No company outside of banking, insurance or auto manufacturing has yet said it will ask for aid from the bailout. But airlines and home builders are lobbying for government help to prop them up through the economic downturn — either under the bailout bill or some other legislation.

"And if insurance and auto lobbyists succeed in their efforts to tap the bailout money, experts said other industries would probably follow."

Frankly, this is getting patently ridiculous, as I warned that it might. The resources of this country are not unlimited. Capitalism only works when you allow failures to occur. Flushing hundreds of billions of dollars down the toilet to support every Johnny Come Lately bank, insurer, investment bank, auto maker, home builder, investor, and foreign country that made bad decisions just doesn't make sense.

I'm not even talking about the outrageous fact that our taxpayer money is going in the front doors at the nation's banks, then right out the back to shareholders as dividends. Or that our taxpayer dollars are supporting Wall Street firms that are simultaneously poised to pay out billions and billions of dollars in bonuses. I'm talking about the extremely troubling notion that core economic principles in this country are being thrown out the window.

GDP worst in seven years; Jobless claims remain elevated

We got another batch of economic data today, and the picture was (predictably) rather glum -- but not disastrous. GDP came in at-0.3% for the third quarter. That compares with a growth rate of 2.8% in the prior quarter and forecasts for a reading of -0.5%. It was the worst reading since the third quarter of 2001. Consumer spending fell 3.1% at an annual pace. That was the first drop since 1991 and the largest going all the way back to 1980.

Meanwhile, initial jobless claims came in at 479,000, unchanged from the prior week. Continuing claims slipped a bit to 3.715 million from 3.727 million a week earlier. These are right around seven-year and five-year highs, respectively.

Wednesday, October 29, 2008

Fed cuts the funds rate by 50 bps to 1%; More swap lines opened

The Federal Reserve just announced its latest move -- a cut in the federal funds rate of 50 basis points to 1%. That matches the modern day low set by former Fed Chief Alan Greenspan in his anti-deflation, rate-cutting crusade (which, of course, helped cause the housing bubble). Here is the text of the post-meeting statement:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

"Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

"In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco."

UPDATE: Meanwhile, the Fed is giving several emerging market economies access to dollars via ANOTHER $120 billion in swap lines. The announcement of this additional action follows:

"Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.

"In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.

"These reciprocal currency arrangements have been authorized through April 30, 2009.

"The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.

"Separately, the Federal Reserve welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF's role in helping countries address and resolve their ongoing economic and financial difficulties."

All about the yen

Yesterday's large stock market rally occurred in tandem with a massive rally in the U.S. dollar against the Japanese yen. The dollar rose from around 94 yen in the early morning hours of the New York session to an early morning high of 99.70 today. That was essentially the biggest rally in the dollar against the yen in 34 years.

It has the scent of coordinated central bank intervention (or at least Bank of Japan intervention) all over it, though we just don't know for sure. News leaked late yesterday that the BOJ might cut its interest rate target to 0.25% from the current 0.5% as well. That added some gasoline to the buck's rally.

All of this precedes today's U.S. Fed meeting on interest rates. Policymakers are widely expected to cut the federal funds rate by 50 basis points to 1% -- the same 1% policy rate that got us into the housing mess in the first place. There is an outside chance the Fed goes 75 basis points, but I'm not banking on it.

Tuesday, October 28, 2008

Consumer confidence hits lowest level in U.S. history

Now THAT was ugly -- The Conference Board's consumer confidence index plunged to 38 in October from a revised 61.4 in September. Not only was that far worse than the 52 reading economists were looking for, it was also the worst reading in the history of the indicator, which was first published as a monthly indicator in 1967.

Other details: The present situation index fell to 41.9 from 61.1 and the expectations index dropped to 35.5 from 61.5. The percentage of respondents saying job are hard to get jumped to 37.2 from 32.2, while the percentage of those who said employment opportunities are plentiful dropped to 8.9 from 12.6. A slightly higher percentage of respondents said they would buy a home (2.7% vs. 2.3% in September). But buying plans for autos (to 4.4% from 4.9%) and major appliances (to 25.9% from 29%) fell.

S&P/Case-Shiller: Home prices down 16.6% YOY in August

We just got the latest housing market figures (PDF link) from S&P/Case-Shiller for the month of August. They showed ... surprise, surprise, that house prices are continuing to fall. Specifically ...

* Prices in 20 top U.S. metropolitan areas fell 1.03% between July and August. That compared with a 0.88% fall in July. It was also the biggest monthly decline since April (-1.28%)

* The year-over-year decline in the index came in at -16.6%. That was worse than the 16.3% drop in July and the worst fall on record.

* Every market in the 20-city index showed a YOY drop in prices, ranging from -30.7% in Phoenix to -2.66% in Dallas. On monthly basis, two markets showed a gain -- Cleveland at +1.07% and Boston at +0.1%. San Francisco notched the biggest loss at -3.48%.

Monday, October 27, 2008

Fannie, Freddie debt costs up; Mortgage rates rising

There's some interesting action in the agency part of the bond market today. Specifically, the spreads, or differences, in yields on Fannie Mae and Freddie Mac corporate debt over Treasuries are widening yet again today. Take, for instance, the spread between Fannie Mae's 10 year debt and 10-year U.S. Treasuries. It's up about 13 basis points to 128 bps right now -- a new cycle high (and well above the Bear Stearns-related peak of 104 bps in March).

Yields on agency Mortgage Backed Securities are also rising sharply, recently up about 18 bps. The spread between MBS yields and 10-year T-note yields is nearing the panic highs seen in March (about 216 bps in spread now vs. a peak of 238 bps on March 6, 2008). That will translate into higher mortgage costs for borrowers seeking conventional, conforming home loans.

More from Bloomberg:

"Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds rose to the highest in two months relative to government notes, boosting home-loan rates.

"The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries climbed about 4 basis points to 207 basis points as of 11:35 a.m. in New York, compared with about 162 basis points on Oct. 20, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

"Agency mortgage-bond spreads have expanded since plunging a week ago by the most since their record drops on Sept. 8 after the U.S. seized Fannie and Freddie. Over the past two months, spreads have narrowed when investors heed a government pledge to support the market to lower home-loan rates, then widened when concern mounts that demand will fall from buyers such as banks and hedge funds who rely on borrowed money."

and ...

"The increase in mortgage-bond spreads has come as the debt costs for Fannie and Freddie, the two largest owners of their own securities, rose to records after the companies' regulator sowed confusion over their level of federal support.

"The spread on the companies' $1.7 trillion of corporate borrowing first set records two weeks ago when the U.S. announced plans to insure bank debt, offering competing government-backed investments. The increase has affected prices for the $4.2 trillion in mortgage securities guaranteed by Fannie and Freddie, though the companies' buying may continue amid higher funding costs, according to the JPMorgan analysts.

Incidentally, if you're wondering exactly what these "current coupon" indices are, here's some more detail from the Bloomberg story ...

"Bloomberg current-coupon indexes represent the average of yields for the two groups of mortgage bonds with prices just above and below face value, the ones lenders typically package new loans into. The spread helps determine the rates offered to homeowners on new prime mortgages of $417,000 or less in most areas, and up to $729,500 in high-cost counties."

Taxpayer money raining down on the banking sector

The mega-banks and brokers have already gotten their share of taxpayer dollars, courtesy of Treasury Secretary Henry Paulson. Now, smaller regional and super-regional banks are getting their share of the take. From Bloomberg today ...

"Fourteen regional U.S. banks, including SunTrust Banks Inc. and Capital One Financial Corp., accepted at least $31 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

"Treasury Secretary Henry Paulson is doling out cash to recapitalize struggling lenders and jump-start takeovers in an industry suffering from the worst housing crisis since the Great Depression. SunTrust, Capital One, KeyCorp and PNC Financial Services Group Inc. are among regional lenders that have taken cash so far by selling preferred shares to the government.

"This is just unprecedented,'' said BMO Capital Markets analyst Peter Winter. "What the government has said is that you can't let the financial system fail, and if this doesn't work they'll come up with another plan."

"The U.S. capital infusions come as governments worldwide do all they can to ensure the stability of banks. Kuwait's central bank said it will guarantee deposits at Gulf Bank KSC, which remains solvent after clients defaulted on currency derivatives contracts, the state-run Kuwait News Agency reported. Paulson already gave $125 billion to nine of the biggest U.S. lenders.

"Some banks are raising money on their own. Mitsubishi UFJ Financial Group Inc., the Japanese bank investing $9 billion in Morgan Stanley, said it will sell as much as 990 million yen ($10.7 billion) of stock to replenish its capital. Japan's biggest bank may sell as much as 600 billion yen of common shares in the 12 months starting Nov. 4.

The latest U.S. banks to benefit from the government's Troubled Asset Relief Program, or TARP, spanned the nation, ranging from City National Corp., in Beverly Hills, California, to First Niagara Financial Group Inc., based in upstate New York near Niagara Falls. The banks were joined by State Street Corp., the world's largest money manager for institutions, which is selling a $2 billion stake. Northern Trust Corp., a custody bank that oversees $3.53 trillion, plans to sell the government a $1.5 billion stake.

"We're happy to do our part to support the financial and economic stability of the U.S.,'' Capital One spokeswoman Tatiana Stead said in an e-mailed statement. The McLean, Virginia-based bank is raising $3.6 billion."

Meanwhile -- as bankruptcy fears swirl -- General Motors and Chrysler have their hands out, looking for some aid in their rumored merger transaction. From the Wall Street Journal:

"The auto makers and Michigan political delegations have proposed at least three plans in recent weeks to unlock federal cash for a merged GM-Chrysler, including seeking an equity investment from the government or unlocking funds from its Troubled Asset Relief Program, or TARP.

"GM and Chrysler estimate that a combined entity would need $10 billion in new equity to lay off workers, close plants, integrate the two companies and provide liquidity, according to several people involved in the talks or briefed on them.

"Without external intervention, from consolidation or government assistance, we expect GM to reach its minimum cash position in under 12 months," Deutsche Bank auto analyst Rod Lache wrote last week. In an interview, Mr. Lache added that Chrysler is also running dangerously low on funds. "We believe Chrysler is in the same position. It's either August 2009 or December 2009 they run out. Both have a limited runway."

and ...

"Several people involved in the GM-Chrysler merger discussions say the companies have talked to federal officials about their proposed transaction. But there are no specifics yet about what role the government could, or will, play. There is no indication that Treasury, which oversees the TARP program, is currently considering proposals for anything but financial institutions.

"GM and Chrysler, through a network of 10,000 dealers, have combined U.S. sales of between $110 billion and $130 billion, a figure that approaches 1% of the U.S. gross domestic product. They employ an estimated 145,000 people in the U.S. at more than 110 assembly, stamping and parts plants. An additional 600,000 retirees depend on the two car makers for health care and pensions.

"GM and Chrysler "are basically waiting on the government," said one person involved in the merger talks. "The three choices are bankruptcy, a big intervention from the government or some big deal like this that has massive cost-cutting possibilities," this person said. "That's it. And even the big deal may require government help."

New home sales climb 2.7% in September; Outlook not so good

The latest new home sales figures for September have been released. Here is what they showed:

* New home sales rose 2.7% to a seasonally adjusted annual rate of 464,000 from a downwardly revised pace of 452,000 in August (originally reported as 460,000). That was better than the forecast for a reading of 450,000.

* The supply of homes for sale continues to decline due to aggressive cutbacks in home construction. It shrank 7.3% to 394,000 from 425,000 in August. That was good for 10.4 months of supply at the current sales pace, down from 11.4 months a month earlier.

* The median price of a new home dropped 9.1% from a year ago -- to $218,400 from $240,300. That's the second-largest decline in new home prices of this cycle (-12.7% was the biggest YOY drop; it was seen in March).

Housing market conditions improved somewhat in September, with new home sales climbing off their multi-year lows and existing home sales rising as well. We continue to see substantial improvement in the new home inventory situation, too. The supply of homes for sale is declining rapidly due to the combination of aggressive construction cutbacks and a pickup in sales prompted by price reductions and aggressive incentives.

The outlook is a bit cloudier, however. The credit markets ran off the rails in October, and the broader economy is clearly decelerating. If unemployment continues to rise and confidence continues to fall, the late summer buying spree could easily falter. Indications suggest that may be happening already. In October, purchase mortgage applications fell to a seven-year low and a key gauge of home builder sentiment dropped to its lowest on record.

Friday, October 24, 2008

Bank Failure Friday gets started early

Usually these announcements don't hit until later in the evening. Guess things really are getting busier at the FDIC! Anyway, Alpha Bank and Trust of Alpharetta, Georgia just failed, with Stearns Bank N.A. of St. Cloud, Minnesota assuming Alpha's insured deposits. Alpha only has two branches, but it did have total assets of $354.1 million and total deposits of $346.2 million -- not huge, but not peanuts either.

There were just over $3 million in uninsured deposits at Alpha, according to the FDIC, which is maintaining a large chunk of Alpha's assets in this transaction (Stearns is only buying $38.9 million of the $354 million total). The FDIC estimates total resolution costs will come to $151.8 million. Alpha is the 16th failed institution this year.

Reports: Insurers, emerging markets next in line for bailout money?

The credit virus just keeps spreading, and with each new outbreak of disease, various government agencies are forced to respond. The government is now talking about allowing insurance companies to get their hands on billions in bailout money. Here's an excerpt from the Washington Post:

"The Treasury Department is working on ways to broaden its $700 billion bank rescue program to help insurance companies that are a critical backstop to a wide range of deals, bond issues and leasing arrangements, sources familiar with the matter said.

"Treasury is worried that insurance companies, many of which report earnings next week, could face similar fates as American International Group as the credit crisis worsens, triggering a new wave of problems for the financial markets. AIG nearly collapsed last month when it was overwhelmed by losses from real estate investments and derivatives, requiring massive government loans of more than $123 billion. It has already burned three-quarters of that money.

"Treasury officials said today that insurance companies organized as thrift holding companies are eligible to receive money from the government because they are regulated by the Office of Thrift Supervision. Treasury has formed a team to specifically examine mounting trouble within the insurance industry.

"But industry sources said that Treasury is also looking at ways to aid insurance companies that have no federal regulator. Many of these companies are subject to oversight by state authorities."

And it doesn't stop there, according to the New York Times. The IMF is looking into potential bailouts of emerging market countries hit hard by the credit crisis. An excerpt:

"With the financial crisis engulfing developing countries from Latin America to Central Europe, raising the specter of market panic and even social unrest, Western officials are weighing coordinated action to try to stabilize these economies.

"The International Monetary Fund, which is in negotiations with several countries to provide emergency loans, is also working to arrange a huge credit line that would allow other countries desperate for foreign capital to borrow dollars, according to several officials.

"The list of countries under threat is growing by the day, and now includes such emerging-market stalwarts as Brazil, South Africa and Turkey. They have become collateral damage in a crisis that began in the American subprime housing market.

"The fast-growing economies of the developing world depend on money from Western banks to build factories, buy machinery and export goods to the United States and Europe. When those banks stop lending and the money dries up, as it has in recent weeks, investor confidence vanishes and the countries suddenly find themselves in crisis.

"Details of the arrangement are still being worked out, but it could be supported by Japan and several oil-producing countries, a fund official said. The fund has not yet approached the Federal Reserve, according to officials, although the Treasury Department has expressed interest.

"Two weeks ago, the Fed set up unlimited swap agreements with the European Central Bank, the Bank of England and other central banks to ease the severe credit turmoil in Western Europe.

"This time, the focus would be on emerging markets, with good economic records, which are having trouble borrowing dollars."

Existing home sales rise 5.5% in September, prices fall to lowest since early 2004

There are a heck of a lot of things going on in the market today, but that doesn't mean fundamental economic data goes completely out the window. We just got existing home sales data for September, for instance, and it showed ...

* Sales rose 5.5% to 5.18 million units (at a seasonally adjusted annual rate) from 4.91 million in August. That was also up from 5.11 million units a year earlier.

* The inventory of homes for sale dipped 1.6% to 4.266 million units from 4.335 million. The combination of a decline in raw homes for sale and a pickup in sales helped lower the "months supply at current sales pace" indicator of inventory to 9.9 months from 10.6 a month earlier.

* Home prices fell sharply, with the median price of an existing home dropping 9% from a year earlier to $191,600 from $210,500. It was also down 5.7% from August's $203,100. Home prices are now at their lowest level since April 2004 ($186,500).

Just when you thought it couldn't get any worse ...

Or just when you thought it was safe to go back in the water ... things get worse. As I stare at my Bloomberg screen here, I see ...

Hong Kong's Hang Seng down 8.3% overnight

Japan's Nikkei 225 down 9.6%

France's CAC 40 down 8.3%

The U.K.'s FTSE 100 down 7.3%

Germany's DAX down 8.3%

Long bond futures up 1 17/32

The Japanese currency soaring by roughly 5 yen against the dollar

The broader Dollar Index up by 104 bps to 86.40

U.S. stock futures locked "limit down" -- meaning they have stopped trading and won't reopen until the regular market opens at 9:30.

Need I go on? It is ugly out there this morning, very ugly.

Wednesday, October 22, 2008

Trial by Octobox

There's nothing like trying to get your voice heard when you're just one of eight in an "Octobox" on TV. But if you're interested, I shared some thoughts on the housing market today in just such a segment earlier on CNBC. Here's the link.

Forint follies ... Argentine angst ... and more on mortgages

Every day, it seems like events in some far corner of the world come back to haunt the markets. Many of us here in the U.S. may not pay attention to these events, but we should. I talked about Iceland a while back, and how that country's currency, stock, and banking crises would have repercussions here in the U.S. And boy did they ever. Now, we have fresh crises rearing their heads in both Hungary and Argentina.

In Hungary, the currency (called the forint) has been plunging for weeks on end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint is trading at 214 against the dollar, a huge decline from the 143 level back in July (In other words, 1 U.S. dollar buys many more forints than it did a few months ago). The Magyar Nemzeti Bank, Hungary's central bank, has responded by jacking up the nation's benchmark rate to 11.5% -- an increase of three percentage points. Higher rates are designed to stem the flight of capital.

Meanwhile, in Argentina, the country is planning to seize $29 billion of private pension funds. This caused bond yields in the country to surge, and the Merval stock index to plunge 11% (It is down more than 51% on the year). The government last raided pension fund investments to service its debt in 2001 -- and then defaulted in a move that sent shockwaves through the global capital markets.

While some credit indicators are improving (LIBOR, swap rates, and so on), these events are reminders that we're still in a crisis atmosphere worldwide. Money is fleeing higher-risk economies and flowing into the dollar as a result.

One last minor thing: If you didn't see the latest Mortgage Bankers Association figures on home loan applications, you should check them out. The MBA's combined index (refis + purchases) plunged 17% to 408.1 in the week of October 17, the lowest level since December 2000. The purchase index came in at 279.3, the worst since October 2001.

Monday, October 20, 2008

More Bernanke talk

Fed Chairman Ben Bernanke, along with Treasury Secretary Henry Paulson, have been speaking so often and in so many venues, that prepared testimony isn't as big a deal as in the past. (An aside: Why can't I get this song out of my head?) But if you're a glutton for punishment, here is Bernanke's latest commentary on the credit markets and the economy, delivered before the House Budget Committee today.

If there is something new in the testimony, it's the part focused on any potential fiscal stimulus package. Here is what Bernanke had to say on that front:

"I understand that the Congress is evaluating the desirability of a second fiscal package. Any fiscal action inevitably involves tradeoffs, not only among current needs and objectives but also -- because commitments of resources today can burden future generations and constrain future policy options -- between the present and the future. Such tradeoffs inevitably involve value judgments that can properly be made only by our elected officials. Moreover, with the outlook exceptionally uncertain, the optimal timing, scale, and composition of any fiscal package are unclear. All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.

"Should the Congress choose to undertake fiscal action, certain design principles may be helpful. To best achieve its goals, any fiscal package should be structured so that its peak effects on aggregate spending and economic activity are felt when they are most needed, namely, during the period in which economic activity would otherwise be expected to be weak. Any fiscal package should be well-targeted, in the sense of attempting to maximize the beneficial effects on spending and activity per dollar of increased federal expenditure or lost revenue; at the same time, it should go without saying that the Congress must be vigilant in ensuring that any allocated funds are used effectively and responsibly. Any program should be designed, to the extent possible, to limit longer-term effects on the federal government's structural budget deficit.

"Finally, in the ideal case, a fiscal package would not only boost overall spending and economic activity but would also be aimed at redressing specific factors that have the potential to extend or deepen the economic slowdown. As I discussed earlier, the extraordinary tightening in credit conditions has played a central role in the slowdown thus far and could be an important factor delaying the recovery. If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses, and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation."

By the way, it's worth noting that certain credit stress indicators -- LIBOR rates, the TED spread, swap spreads, etc. -- have calmed down a bit in the past few days. We'll have to see if that improvement turns out to be longer-lasting, or just another temporary turnaround that fails to stick.

New York Times: Budget Deficit? Who cares!

The New York Times has a good story today about how the U.S. is on track to run up the biggest budget deficit in history this year. Yet no one in Congress -- or large swaths of the private sector -- cares. America is largely betting that foreign investors will continue to be content with lending us hundreds of billions of dollars of cheap money at rock-bottom Treasury rates. Only time will tell whether that turns out to be a good bet. More below ...

"The Congressional Budget Office estimates that the deficit in the current fiscal year, which started this month, will reach roughly $700 billion, up more than 50 percent from the previous year. Measured as a percentage of all the nation’s economic activity, the deficit, at 5 percent, would rival those of the early 1980s, when a severe recession combined with stepped-up federal spending and Reagan-era tax cuts resulted in huge budget shortfalls.

"Resorting to credit has long been the American solution for dealing with expensive crises — as long as the solution has wide public support. Fighting World War II certainly had that support. Even now many Americans tolerate running up the deficit to pay for the wars in Iraq and Afghanistan, which cost $11 billion a month combined. And so far there is wide support for an initial outlay of at least $250 billion for a rescue of the financial system, if that will stabilize banks and prevent a calamitous recession.

“There are extreme circumstances when a larger national debt is accepted as the lesser of two evils,” said Robert J. Barbera, chief economist at the Investment Technology Group, a research and trading firm.

"There are also assumptions that help to make America’s deficits tolerable, even logical. One is that people all over the world are willing, even eager, to lend to the United States, confident that the world’s most powerful nation will always repay on time, whatever its current difficulties.

“So far the market is showing that it is quite willing to finance our needs,” said Stephen S. McMillin, deputy director of the White House Office of Management and Budget.

"Lenders are accepting interest rates of 4 percent or less, often much less, to buy what they consider super-safe American debt in the form of Treasury securities. The 4 percent rate means that the annual cost of borrowing an extra $1 trillion is $40 billion, a modest sum in a nearly $14 trillion economy, helping to explain why the current growing deficit has encountered little political resistance so far.

"But if recent history repeats itself, the deficit is likely to be an issue again when the economy recovers.

"Interest rates typically rise during a recovery, so the low cost of servicing the nation’s debt will not last — unless a recession set off by the banking crisis endures, repeating the Japanese experience in the 1990s and perhaps even stripping the United States and the dollar of their pre-eminent status.

"The assumption is that will not happen, and as the economy recovers, the private sector will step up its demand for credit, making interest rates rise.

"Higher rates in turn would increase the cost of financing the deficit, and there would probably be more pressure to reduce it through cuts in spending. That happened in the late 1980s, as Congress and the White House coped with the swollen Reagan deficits. The Gramm-Rudman-Hollings Act, with its attempt to put a ceiling on deficits, came out of this period."

Friday, October 17, 2008

Housing starts, building permits slump in September; SFH construction slowest since 1982

September data on housing starts and building permit issuance was just released. Here's what the numbers looked like ...

* Overall housing starts came in at a seasonally adjusted annual rate of 817,000 last month, down 6.3% from 872,000 in August. Starts were down 31.1% from 1.185 million in September 2007 and well below forecasts for a reading of 872,000. That brings the total peak-to-trough decline in starts to a whopping 64%. The peak reading for starts was 2.27 million units in January 2006.

* Building permit issuance fell 8.3% to 786,000 units from 857,000 in August. That's down 38.4% from the year-earlier reading of 1.277 million, well below forecasts for a number of 840,000, and the lowest reading since November 1981. Permit issuance is down 65.3% from the September 2005 peak of 2.263 million units.

* Breaking it down by property type, single-family starts plunged 12% to 544,000 - the lowest level going all the way back to February 1982. Multifamily starts rose 7.5% to 273,000. Single-family permitting activity dropped 3.8% to 532,000, while multifamily permitting dropped 16.5% to 254,000.

* Regionally, starts fell 20.1% in the Northeast and 16.8% in the West. They inched up 0.5% in the South and rose 5.6% in the Midwest.

Thursday, October 16, 2008

Home builder sentiment drops to record low

The NAHB just released its latest Housing Market Index report. The news was dismal, as the following details show:

* The overall index dropped to 14 in October from 17 in September. That was well below the reading of 17 that economists were expecting and the worst in the history of the index, which dates back to 1985

* The subindex for current single family home sales dropped to 14 from 17 ... the subindex that measures expectations about future sales plunged to 19 from 28 ... and the subindex measuring buyer traffic slipped to 12 from 14.

* Regionally, the index fell to 17 from 21 in the Northeast, slipped to 14 from 15 in the Midwest, dropped to 16 from 20 in the South, and slumped to 10 from 13 in the West.

Forget April. October has been the cruelest month for the housing industry. The latest NAHB report showed widespread deterioration in market conditions, with all three subindices falling and all four regional sentiment indicators slumping.

The readings aren't exactly a surprise, given what we know about credit market and economic conditions. But they are nonetheless a sobering reminder of the challenges facing the U.S. housing market. They also underscore my belief that a lasting recovery in construction activity, sales, and home prices remains well over the horizon.

Economic data confirms it's ugly out there

A lot of economic data hit the tape today, and it all tells the same story: It's ugly out there. While initial jobless claims dipped to 461,000 from 477,000 a week earlier, continuing claims rose to 3.711 million from 3.671 million, the most since June 2003. Net inflows into U.S. assets also came in at just $14 billion in August, well below forecasts for a reading of $30 billion.

Meanwhile, industrial production tanked 2.8% in September, much worse than the 0.8% decline that was expected and the single-worst reading in ANY month going back to 1974. And the Philadelphia Fed index plunged to -37.5 from 3.8 a month earlier. That was well below the -10 reading that was forecast and the worst reading since October 1990.

Wednesday, October 15, 2008

Historic bailout, huge efforts to make home loans cheaper drive mortgage rates ... UP?

Amidst all the $250 billion bailout hoopla, and the previous news that the government will buy up both whole loans and Mortgage Backed Securities, in an effort to drive financing costs DOWN, something interesting is going on -- and I don't see many people talking about it. Home mortgage rates aren’t falling. They're going UP.

The average rate on a 30-year fixed mortgage jumped to 6.47% in the week of October 10, according to the Mortgage Bankers Association. That was up from 5.98% a week earlier and just shy of the August high (6.58%, itself the highest in more than a year).

How can rates be going up when the economy is tanking and the government is throwing everything it can at the banking sector and credit markets? Because bond investors are dumping bonds – and when bond PRICES fall, bond YIELDS (interest rates) rise.

Why are those investors selling? Well, we just learned that the budget deficit soared to $454.8 billion in fiscal 2008, which ended September 30. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country. Thanks to all the fresh bailout programs, the deficit will likely surge by a few hundred billion MORE dollars in fiscal 2009.

But no one in Washington has shown any willingness to raise taxes to pay for these bailout programs. And there’s no a pile of money just sitting around in the U.S. Treasury to fund them, either. We’re a net debtor nation. We’re going to have to borrow hundreds of billions of dollars to make good on all of our promises.

That means a mammoth flood of Treasury debt is going to wash over the market in the coming year or two. Bond traders know that all of that bond supply will overwhelm bond demand. So they’re not sticking around. They’re selling bonds NOW, driving prices down and rates up.

Long bond futures have plunged from an intraday high of 124 23/32 in mid-September to 113-and-change now – a whopping 11-point decline. Ten-year Treasury yields have jumped from 3.39% to around 4.10%.

Bottom line: The government would like everyone to think it can just waive a magic wand, drive mortgage rates down, save the banking sector, and return us to the happy-go-lucky, reckless lending days of 2005. But it can’t. There is no free lunch. Indeed, instead of driving financing costs down, the bailout announcements are actually helping drive key financing rates (like 30-year mortgages) up!

If there is a bright side out there, it's that LIBOR rates are nudging lower. Three-month LIBOR was fixed at 4.55% this morning, for instance, vs. an October 10 high of 4.82%. Overnight LIBOR is much closer to the federal funds rate as well -- 2.14% vs. a FF target of 1.5% (a spread of 64 basis points). That compares to a spread of 488 basis points as of September 30.

Monday, October 13, 2008

Global coordinated action to ease the credit crunch

As has been the case for the past several days, I am very busy today. And of course, this past weekend was another busy one for governments around the world. Political leaders and top economic policymakers gathered first in Washington and later in Paris to come up with plans to stem the bleeding in the global credit and stock markets.

The result of the weekend powwows?

* The U.K. is committing roughly $64 billion of its taxpayers’ dollars to prop up the leading banks in that country. Royal Bank of Scotland, HBOS, and Lloyds TSB get the cash infusions; the U.K. government gets board representation, the right to halt dividend payouts, and the ability to limit executive bonuses. Two of the three CEOs involved are being shown the door.

* Germany’s government is offering $681 billion in loan guarantees and capital infusions to institutions there. Spain is planning to guarantee bank debt of up to $136 billion, and setting up a fund that would buy as much as $68 billion in assets from financial institutions. Other countries in Eastern Europe are working on their own crisis management plans.

* Australia is guaranteeing all bank deposits there for the next three years. New Zealand is expanding a securities lending program it has in place. Last but not least, the U.S. Fed, the Bank of England, the European Central Bank, and the central bank in Switzerland are going to offer unlimited dollar loans in a series of special auctions.

Here in the U.S., officials from Treasury provided a bit more detail about how the TARP and other programs will be implemented. From the Washington Post:

"The Treasury also is defining the limitations on executive pay required by Congress. Those requirements will not affect all of the financial institutions that the government helps, however.

"Under the legislation, the most stringent executive pay regulations affect a financial institution only when the government makes a direct purchase of a troubled asset from that institution and acquires in return an equity or debt position.

"No executive pay rules are called for when the government merely insures a troubled asset.

"When the government buys "troubled assets" from a financial institution through an auction, the law only requires that no new "golden parachute" contracts be offered to executives.

"There would be different standards for each" type of government assistance, he said.

"Kashkari's remarks provided new details about how the bailout package will be put into practice. Along with purchasing from banks the larger and more complex assets known as mortgage-backed securities -- many of which are troubled because of homeowner defaults on the underlying mortgages -- Kashkari said that regional banks may need help through the purchase of individual mortgages.

"Regional banks are particularly clogged with whole residential mortgage loans," Kashkari said.

"A team at Treasury is working to set terms for how to identify, price and purchase such loans from those institutions. A new program to insure troubled assets is also being developed. The effort would allow banks to rehabilitate some troubled assets with the confidence that they are ensured against losses."

Friday, October 10, 2008

G7 "Plan of Action" is out

From the Treasury Department this evening:

"The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:

"1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

"2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

"3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

"4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

"5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary."

You can read more comments from Treasury Secretary Henry Paulson here, assuming you have nothing better to do on a Friday night! And of course, the real test of the adequacy of the statement and any other government actions will be how the markets react, beginning Sunday night.

Back by popular demand: Bank Failure Friday

We've had a break from Bank Failure Friday for a little while, but it's back again this week. Two institutions failed today, bringing the total for 2008 to 15. More details ...

The first failure is Main Street Bank of Northville, Michigan. Monroe Bank & Trust of Monroe, Michigan will be assuming all of the bank's deposits, including the uninsured ones. This is a tiny failure -- Main Street had just two offices and total assets of $98 million. The FDIC estimates the failure will cost only $33 million to $39 million.

The second failure was Meridian Bank of Eldred, Illinois. National Bank of Hillsboro, Illinois will assume all of its deposits and its four offices. Meridian is even smaller, with total assets of just $39.2 million. The FDIC put a preliminary resolution cost at just $13 million to $14.5 million.

Too busy to blog

Sorry for the lack of posts here. In case you hadn't noticed, the market has been having some very minor (cough) problems the past few days. So I've been busy elsewhere. Suffice it to say, the credit crisis we've been dealing with is still impacting the stock market -- and policymakers will be very busy this weekend. G-7 leaders are meeting in Washington, and they are clearly trying to come up with ways to solve this crisis.

By the way, Floyd Norris at the Times has some solid insights in this article today, which talks about a "Plan B" to help the financial system.

Thursday, October 09, 2008

The latest plan to save the world: Direct equity investments in banks

According to several media sources, the latest government plan to save the financial world is to inject money directly into the banking system by exchanging equity for shares in weak banks. This is similar to the plan recently proposed in the U.K. and it makes a good deal of sense. More details ...

From CNNMoney:

"The Treasury Department is "actively" looking at buying equity stakes in some of the nation's banks, according to White House spokesperson Dana Perino.

"At a White House briefing on Thursday, Perino confirmed reports that the United States could soon join the United Kingdom, Iceland and Italy in announcing a plan to inject capital directly into their troubled banking systems.

"These capital injections are something that Secretary Paulson is actively considering," said Perino. She said she couldn't comment on the timing or extent of such investments.

"The move would be made under the $700 billion Wall Street bailout law enacted on Friday.

"The focus of the bailout was a plan to have Treasury buying damaged mortgage-backed securities from banks and financial firms. The aim is to help firms improve their balance sheets and profit prospects and attract capital from the private sector. But the administration is now arguing that direct investment is part of the powers under the act.

"Treasury Secretary Henry Paulson first hinted of such a move Wednesday in a speech about the bailout. He said increasing capital investment in the nation's banking system is one of Treasury's goals, and he seemed to suggest that such capital could come directly from taxpayers.

"The new law gives "broad flexible authorities for Treasury to buy or insure troubled assets, provide guarantees, and inject capital," Paulson said.

"Paulson vowed to "use all of the tools we've been given ... including strengthening the capitalization of financial institutions of every size."

And from the New York Times:

"Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

"Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

"The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

"The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

"The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

"This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

"In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.

"The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

"Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent."

Wednesday, October 08, 2008

Pending home sales jump 7.4% in August

The National Association of Realtors just came out with its August pending home sales data. Pending sales rose 7.4%, putting the index at 93.4. That was far better than expectations for a 1.3% decline, and up 8.8% from August 2007. Regionally, the pending sales index jumped 18.4% in the West, 8.4% in the Northeast, 3.6% in the Midwest, and 2.3% in the South.

Normally, I'd take this as surprisingly good news. It appears that some of the government efforts to drive mortgage rates lower, plus lower home prices in many markets, are encouraging some buyers to step up and bottom fish.

The only problem is that many of these "pending" sales won't turn into "closed" sales as long as the credit markets remain locked up. Buyers just won't be able to get the financing they need, even if they want to purchase a home. We've also seen the economy deteriorate in the past several weeks, potentially setting the stage for weaker numbers going forward.

Global rate cut pushed through; Fed funds dropping 0.5%

Leading global central banks (in the U.K., Europe, Canada, Sweden, Switzerland) just announced they will cut interest rates. Here in the U.S., the cut is 50 basis points, or 0.5%, to 1.5%. More from the Fed's release:

"Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

"Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

"Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

"The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

"The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

"In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston."

Current policy rates, via Bloomberg, are now:

"The Fed's decision brought its benchmark rate to 1.5 percent. The ECB's main rate is now 3.75 percent; Canada's fell to 2.5 percent; the U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent."

Meanwhile, the U.K. announced a massive new program to shore up its banking system.

Tuesday, October 07, 2008

Consumer credit plunges most in history

We've seen a lot of shocking reports from a lot of sources in the past several months. But the latest consumer credit report from the Fed really takes the cake. Consumer credit outstanding (auto loans, credit cards, etc.) dropped $7.9 billion in August. That is the single biggest monthly decline in the 65 years the Fed has been collecting the data. More from Bloomberg below:

"Borrowing by U.S. consumers unexpectedly fell in August by the most on record as banks shut off access to loans, a report from the Federal Reserve showed.

"Consumer credit fell by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion, the Fed said today in Washington. In July, credit rose by $5.2 billion, previously reported as a $4.6 billion gain. The Fed's report doesn't cover borrowing secured by real estate.

"Consumer spending, the biggest part of the economy, is likely to keep faltering as banks hoard cash, job losses mount and property values drop. The decline in borrowing underscores why Fed policy makers today announced they will create a special fund to purchase commercial paper in a bid to open the flow of credit to the nation's businesses.

"This is what happens when consumers are fearful and banks tighten lending standards to all applicants," said Richard Yamarone, chief economist at Argus Research in New York. "No one borrows, no one lends. It's a classic example of a frozen credit channel."

"Economists forecast an increase of $5 billion in consumer credit during August, according to the median of 29 estimates in a survey conducted by Bloomberg News.

"According to the Fed, total consumer borrowing dropped at a 4.3 percent annual rate in August, the most since January 1998, during the Asian financial crisis.

"Revolving debt such as credit cards decreased by $612 million during August and non-revolving debt, including auto loans, dropped by $7.3 billion."

Bernanke speech focuses on economic weakness, opens door to rate cut

Fed Chairman Ben Bernanke is giving a speech before the National Association for Business Economics (NABE). His speech focuses largely on economic weakness. This clearly opens the door to a further interest rate cut, though a natural question to ask is "So what?" If loaning Treasuries and cash against hundreds of billions of dollars in lousy commercial and residential mortgage securities and other paper hasn't worked ... if agreeing to buy an unlimited amount of commercial paper hasn't done much ... if lending tens of billion of dollars to AIG hasn't stopped the market from worrying about the health of other insurers ... and if cutting the funds rate ALREADY -- from 5.25% to 2% -- hasn't worked, you have to wonder what cutting the funds rate even further toward zero would accomplish.

We'll see how markets react over the next several hours. And here's a brief excerpt from Bernanke's speech to keep you busy as you watch the ticker go by:

"As you know, financial systems in the United States and in much of the rest of the world are under extraordinary stress, particularly the credit and money markets. The losses suffered by many banks and nonbank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them. Great uncertainty about the values of financial assets, particularly more complex and opaque assets, has made investors extremely reluctant to bear credit risk, resulting in further declines in asset prices and a drying up of liquidity in a number of funding markets. Even secured funding has become expensive and difficult to obtain, as lenders worry about their ability to sell collateral in illiquid markets in the event of default. In addition, many securitization markets, such as the secondary market for private-label mortgage-backed securities, remain closed or impaired.

"Considerable experience in both industrialized and emerging economies has shown that severe financial instability, together with the associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked. For this reason, the Federal Reserve, the Treasury, and other agencies are committed to restoring market stability and are working assiduously to ensure that the financial system is able to perform its critical economic functions. Recent actions by the Congress have given the Treasury new tools and resources to address the stressed conditions of our financial markets and institutions. The Federal Reserve has also been granted a new authority, the ability to pay interest on bank reserves, which will allow us to expand our lending as needed to support the system while better managing the federal funds rate. These tools will provide important additional support for the government's efforts to strengthen financial markets and the economy."

This is the quote that hints at a possible rate cut, incidentally:

"Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."

More Fed acronyms: Behold the CPFF!

As was rumored, the Federal Reserve just announced a new program to support the commercial paper market. That's where corporations and financial institutions borrow money for short periods of time. Here's the full text of the Fed's announcement, which introduced this program, known as the "TAF" ... no wait, the PDCF ... I mean TARP ... no, that's not it, it's the TSLF ... er, no, it's the CPFF. That's the ticket!:

"The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households.

"By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households."

The latest on LIBOR, rate cuts, and other efforts to fight the credit crisis

It's a busy day on the global markets front. So let's get right to the news ...

* U.S. dollar LIBOR rates generally rose again, with 3-month LIBOR up 3 basis points to 4.32%. That is just shy of last Friday's cycle high of 4.33%. Overnight LIBOR jumped to 3.94% from 2.37%, though that is still below the cycle peak of 6.88% on 9/30. 6-month LIBOR, for its part, dipped to 4.02% from 4.05%. The TED spread, another indicator of credit market stress, is slightly below its recent peak -- 3.72% as I write versus a 10/3 high of 3.87%. Two-year swap spreads are down to 136 bps or so, versus a recent peak of 167 on 10/2.

* In the overseas markets, Australia's central bank lopped a full percentage point off its benchmark short-term interest rate. The Reserve Bank of Australia's cash rate target dropped to 6% from 7%, the biggest cut since 1992. In the U.K., the Bank of England announced it will hold dollar loan auctions to help ease market stress. Policymakers there are also discussing injecting $79 billion into leading U.K. banks. Meanwhile, in Europe, the European Central Bank lent a whopping $339 billion to banks in its latest weekly auction, the most since December 2007.

* And of course, the speculation here is that the Federal Reserve will come riding to the rescue with another big interest rate cut. The funds rate target is currently 2%, down from 5.25% last summer before the credit crisis got underway. It might come too late for Iceland, where the government is trying to get more than $5 billion in loans from Russia to save itself ... and where the government just had to seize Landsbanki Islands hf, the country's second-largest bank.

Monday, October 06, 2008

Global markets take another header

The hits just keep on coming. The U.S. Dow is down about 480 points as I write, while European and Asian markets got pasted in the overnight session. From Bloomberg:

"European stocks tumbled, sending the Dow Jones Stoxx 600 Index to its steepest drop since 1987, as the yearlong credit market seizure caused bank bailouts to spread and crude's slump dragged down commodities producers.

"BHP Billiton Ltd. slid 9.9 percent and UBS AG lost 13 percent, as raw-material companies and financial firms declined the most in the Stoxx 600. Hypo Real Estate Holding AG sank 37 percent after the German government and state banks were forced to pledge $68 billion to rescue the commercial-property lender. BNP Paribas SA slipped 5.4 percent after saying said it will take control of Fortis in Belgium and Luxembourg.

"The Stoxx 600 sank 7.2 percent to 242.52 at 4:40 p.m. in London, the largest retreat since October 1987. Europe's plunge helped erase about $2.5 trillion from global equities as investors disregarded the U.S. Treasury plan to revive credit markets with a $700 billion bank bailout.

"So far it's been a like a fire-fighting operation,'' said Robert Talbut, chief investment officer at Royal London Asset Management, which oversees about $63 billion. "Markets are reacting to the fact that this whole credit and banking crisis is escalating. Policy makers need to understand that they don't have weeks to make up their minds, they have days or even hours.''

"The SXXP 600 tumbled 33 percent this year as bailouts of financial companies worldwide accelerated and bank credit losses and writedowns approached $600 billion. The index trades at 10.2 times earnings, the lowest since at least 2002."

UPDATE: There was a late day rally that took us from down 800 or so on the Dow to down 370. Scuttlebutt is that global central banks will band together and cut interest rates. I wouldn't be surprised in the least of that did happen. The question is whether it will really matter. The funds rate has been slashed three percentage points in the past year and it doesn't seem to have done much, at least for the stock market.

Fed opens the liquidity spigot even further, to pay interest on reserves

More news out of the Federal Reserve this morning -- a morning where global markets are struggling mightily due to more chaos in the European banking sector. Here's the latest from the Fed:

"The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions' required and excess reserve balances. The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee.

"Consistent with this increased scope, the Federal Reserve also announced today additional actions to strengthen its support of term lending markets. Specifically, the Federal Reserve is substantially increasing the size of the Term Auction Facility (TAF) auctions, beginning with today’s auction of 84-day funds. These auctions allow depository institutions to borrow from the Federal Reserve for a fixed term against the same collateral that is accepted at the discount window; the rate is established in the auction, subject to a minimum set by the Federal Reserve.

"In addition, the Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets.

"Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit. The Federal Reserve stands ready to take additional measures as necessary to foster liquid money market conditions.

"The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

"Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances).

"The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period less 10 basis points. Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector.

"The rate paid on excess balances will be set initially as the lowest targeted federal funds rate for each reserve maintenance period less 75 basis points. Paying interest on excess balances should help to establish a lower bound on the federal funds rate. The formula for the interest rate on excess balances may be adjusted subsequently in light of experience and evolving market conditions. The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.

"The Board also approved other related revisions to Regulation D to prescribe the treatment of balances maintained by pass-through correspondents under the new rule and to eliminate transitional adjustments for reserve requirements in the event of a merger or consolidation. In addition, the Board approved associated minor changes to the method for calculating earnings credits under its clearing balance policy and the method for recovering float costs.

"The revisions to Regulation D and the other changes will take effect on Thursday, October 9, 2008. The Board recognizes that depository institutions may choose to adjust their typical liquidity management practices in light of the payment of interest on required reserve balances and excess balances; the primary credit program and other Federal Reserve liquidity facilities are available to help institutions meet temporary funding requirements.

"The Board’s notice of its actions regarding the amendments to Regulation D and associated changes is attached. While the action is effective immediately, the Board will accept public comments until November 21, 2008, and the proposal will be published in the Federal Register shortly. The Board will adjust the rule as appropriate in light of comments.

"The sizes of both 28-day and 84-day Term Auction Facility (TAF) auctions will be boosted to $150 billion each, effective with the 84-day auction to be conducted Monday. These increases will eventually bring the amounts outstanding under the regular TAF program to 600 billion. In addition, the sizes of the two forward TAF auctions to be conducted in November to extend credit over year end have been increased to $150 billion each, so that $900 billion of TAF credit will potentially be outstanding over year end.

"The Board on Monday published a letter granting a request by a depository institution for an exemption from the limits on transactions with affiliates under section 23A of the Federal Reserve Act and the Board’s Regulation W to allow the institution to purchase assets from affiliated money market mutual funds under certain circumstances. The Board is open to considering similar requests from depository institutions under similar circumstances."

Friday, October 03, 2008

Bailout bill passes the House; Market tanks anyway

As expected, the $700 billion bailout bill has passed the House of Representatives in its second go-around. The vote was 263 "for" to 171 "against."

The Federal Reserve, for its part, is "applauding" the move. Here is the statement it just released:

"I applaud the action taken by the Congress. It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses.

"The Federal Reserve will continue to work closely with the Treasury as it undertakes these new initiatives. We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy."

Treasury Secretary Henry Paulson has chimed in as well, saying:

"By acting this week, Congress has proven that our Nation's leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans."

If policymakers were expecting this bill to lead to a huge rally, they got a dose of cold reality in the afternoon. A 310-point rally (at the intraday high) in the Dow turned into a 157-point loss at the close.

Even California could need a bailout

You know things are getting serious when even U.S. states are saying they may need a bailout. Yikes! Here's an item on how California is having trouble raising money, and may need $7 billion from the feds ...

"California may need an emergency loan of up to $7 billion from the federal government within weeks, the Los Angeles Times on Friday quoted Gov. Arnold Schwarzenegger as saying in a letter to U.S. Treasury Secretary Henry Paulson.

"In the letter dated Oct. 2, Schwarzenegger called for the passage of the $700 billion financial industry bailout plan which the U.S. House of Representatives is expected to vote on on Friday, the Times said.

"Absent a clear resolution to this financial crisis, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing," Schwarzenegger wrote in the letter, according to the paper.

"A top Schwarzenegger aide followed up the letter with a call to the Treasury secretary on Thursday night, the paper said."

September jobs report: -159,000 jobs

The September jobs report just hit the tape and the news wasn't good. A quick summary:

* The economy shed 159,000 jobs in September, up from a reading of -73,000 in August and the worst decline since March 2003 (-212,000). The separate household employment survey showed a loss of 222,000 jobs, compared with a reading of -342,000 in August.

* The unemployment rate held at 6.1%, the highest reading since September 2003.

* Average hourly earnings rose 0.2%, down from an increase of 0.4% in August and the smallest gain since April of this year.

* The diffusion index, which measures how many industries are cutting jobs against how many are raising them, worsened. The private nonfarm diffusion index sank to 38.1 from 44.7 in August. That's the worst reading since June 2003.

* Manufacturing lost 51,000 jobs, construction lost 35,000 jobs, and the service sector shed 82,000 jobs. Losses were widespread in retail, trade, transport, and the financial sector. Job growth in former stalwart sectors like government (to +9,000 from +31,000) and education and health slowed (to +25,000 from +59,000 a month earlier)

All the fear gauges (bond prices, stock prices, swap spreads, and so on) retreated after the news. In other words, bonds gave up gains, stocks spiked and swap spreads came in, probably on some combination of "well, it wasn't as awful as it could have been" and "phew, this means the Fed can cut rates." We'll see if it sticks.

Thursday, October 02, 2008

It could be worse; We could be Iceland!

If you think our credit market conditions are tight, get a load of what's happening in Iceland. This chart shows the exchange rate of the Iceland krona against the U.S. dollar. It's inverted, meaning a rise in this chart shows a decline in the value of the krona. Each dollar now buys about 113 krona, up from 58 back at the recent low in November 2007. The krona has plunged 22% this week alone to the lowest level against the buck since at least 1992.

What's going on? A full-fledged capital exodus/credit crunch/flight from risk. The government had to step in and purchase 75% of the country's third-largest bank Glitnir Bank a few days ago after its short-term funding went "poof." S&P and Fitch have cut the country's sovereign debt ratings, triggering a massive run on the country's bonds and currency.

So before you freak out about paying more for a jumbo mortgage or auto loan, just be glad you're not trying to buy a car in Reykjavik.

2-year swap spreads are blowing out again today, recently up about 10 bps to 166.25. The intrday peak eclipsed the high from 9/24. Translation: Credit fears are still high and worries about counterparty risk are elevated.

Bailout passes Senate; Insurance concerns pop up

Sorry I'm a bit behind with posting today. It's been a busy, busy morning. As you probably know by now, the bailout bill passed the Senate by a vote of 74 to 25 last night. Now, it's off to the House, which may vote on the revised bill tomorrow. Here's an update from the Washington Post:

"The Senate last night easily approved a massive plan to shore up the U.S. financial system, but the measure faces a tougher test tomorrow in the House, where leaders will try to reverse the stunning defeat the legislation suffered earlier this week.

"As the Bush administration issued fresh warnings that Congress's failure to act would have dire consequences for the economy, the Senate revived the package the House defeated Monday and voted to approve it, 74 to 25.

"The proposal -- which calls for spending up to $700 billion to buy bad assets from faltering financial institutions -- was heavily revised to attract wider support. The bill passed last night would extend an array of tax breaks worth $108 billion to businesses and families next year. It would also temporarily increase the limit on federal insurance for bank deposits to $250,000 from $100,000."

Meanwhile, the other thing I'm watching is the carnage in the insurance sector. Several of the stocks are coming under fire amid concerns they'll be the next to suffer investment losses. One firm -- Zurich Financial Services -- came out and warned of investment losses tied to a SIV that's dying on the vine and Lehman Brothers. Here's an excerpt from Reuters:

"Zurich Financial Services is writing down $615 million worth of investments related to Sigma Finance Corp, Lehman Brothers and Washington Mutual, the Swiss insurer said on Thursday.

"Zurich will write down $275 million due to the notice of default of Sigma Finance, a limited purpose finance company which announced this week it will cease trading as a result of financial-market turmoil.

"Zurich also said it was taking an impairment of $295 million on its previously announced exposure to Lehman Brothers and a further $45 million related to Washington Mutual's debt instruments."

Site Meter