Interest Rate Roundup

Tuesday, October 27, 2009

August S&P/Case-Shiller Index: Down 11.3% YOY

The latest S&P/Case-Shiller home price index figures were just released. On a month-over-month basis, prices were up 1.2% in 20 top metropolitan areas in August. That marked the fourth consecutive monthly gain. On a year-over-year basis, home prices were down 11.3%. That was better than the 11.9% decline economists were expecting and an improvement from the 13.3% drop in July. All 20 cities are still showing YOY declines, but the rate of depreciation is moderating. The best market? Dallas at -1.2%. The worst? Las Vegas at -29.9%.

Friday, October 23, 2009

Existing home sales surge 9.4% in September

The September existing home sales figures recently hit the tape. Here's what the numbers looked like:

* Existing home sales jumped 9.4% to a seasonally adjusted annual rate of 5.57 million units from 5.09 million in August. That was twice the gain that was expected and the rate of sales was the highest since July 2007.

* Single-family sales gained 9.4%, while condo and cooperative sales rose 9.7%. By region, sales climbed across the board. They were up 4.4% in the Northeast, 9% in the South, 9.6% in the Midwest, and 13% in the West.

* The raw number of homes for sale dropped 7.5% to 3.63 million units from 3.924 million in August. Supply was off 15% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 7.8 from 9.3. Single family inventory dropped to 7.6 from 9, while condo inventory fell to 11 from 12.1.

* The median price of an existing home fell 1.4% to $174,900 from $177,300 in August. That was off 8.5% from $191,400 in the year-ago period.

September was a blockbuster month for existing home sales. The looming expiration of the tax credit, combined with stabilization in the broader economy and cheap home prices, drove sales to the highest level we've seen in a couple of years. The supply of used homes for sale is also steadily declining, an encouraging trend considering that new home inventory has already dropped like a rock.

If there's a fly in the ointment, it's concern about the "pull forward" effect. Clearly, some buyers purchased a home this summer because of the tax credit and the tax credit alone. Unless that credit is extended or expanded, we'll see "give back" in the coming couple of months. I don't think it derails the overall recovery. That's being driven by true, fundamental forces, such as the dramatic improvement in housing affordability. But it will be noticeable nonetheless.

Bernanke blathers about banking ... FT tackles Fed statement language

Fed Chairman Ben Bernanke is currently blathering on about banking regulation. His speech appears to contain nothing new on the economic analysis/interest rate front. In the Financial Times, however, there is a story that talks about the possibility of the Fed removing language that pre-commits the Fed to keeping rates low for an "extended period." This is the first time such an idea has been floated and it appears to be giving the dollar a bit of a bid. More below:

"The US central bank has stuck with the “extended period” phrase – indicating policymakers see little likelihood that interest rates will rise over a time frame that has never been defined, but some see as at least six months.

"But now senior officials are starting to mull changing the statement in a way that would soften this guidance. That would be a natural step in the slow glide- path towards eventual policy normalisation.

"Importantly, however, it would also give the central bank greater flexibility to respond to inflation risks if they escalate in a way the Fed does not expect but cannot rule out."

Wednesday, October 21, 2009

Dollar shouts: "Help, I've fallen and I can't get up!"

Policymakers around the globe tried their best to stop the dollar's relentless march toward the cliff ... and it did no good. DXY just hit a new intraday and cycle low. Why can't I get that old 1980s commercial out of my head? LOL

Tuesday, October 20, 2009

Canada, Europe, Brazil, Australia ratcheting up currency warnings

Our "What me, Worry?" Fed Chairman Ben Bernanke may not care about the falling dollar. But foreign central banks are getting seriously peeved about the strength in their currencies against the ever-depreciating dollar ...

* The Bank of Canada released a statement today saying that "heightened volatility and persistent strength in the Canadian dollar are working to slow growth ... the current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July."

* European Central Bank President Jean-Claude Trichet warned again about "excessive volatility" in exchange rates, while a French economic advisor said the current EURUSD exchange rate is a "disaster for the European economy."

* In Brazil, the carry trade (borrow cheap dollars, invest the money in higher-risk, higher-yield assets) is so out of control the government just slapped a tax on foreign investors in Brazilian assets. A 2% levy will apply to foreign purchases of Brazilian fixed-income securities and stocks, effective immediately.

* Minutes of the latest Reserve Bank of Australia meeting showed that officials were very concerned about the side effects of recklessly easy money. The minutes suggested that a "very expansionary setting of policy was no longer necessary, and possibly imprudent." The RBA surprised the world recently by becoming the first Group of 20 central bank to raise rates, albeit by a quarter point to 3.25%.

Bottom line: Washington doesn't care about letting the dollar circle the drain. The Fed may want to keep U.S. rates at effectively zero until the next millennium. But Canada doesn't much like the surging loonie, the ECB hates the euro surge, Brazil isn't thrilled about the exploding real, and Australian officials are clearly firing a shot across Bernanke's bow.

September housing starts, permits stable

We just got the latest data on housing starts and permits. Here's what the numbers showed:

* September housing starts inched up by 0.5% to a seasonally adjusted annual rate of 590,000 from a downwardly revised 587,000 in August. Single family starts rose 3.9%, while multifamily starts dropped 15.2%. Starts are still down 28.2% from year-earlier levels, but that's a smaller decline than the 40%+ YOY drops we were seeing in the spring.

* Building permits dipped 1.2% to 573,000 from 580,000 a month earlier. Single family permits dropped 3% ... the first decline since March ... while multifamily permits gained 6%.

* On a regional basis, starts dropped in 3 out of 4 regions, with the West down 8.8%, the Northeast off 5.5% and the Midwest down 1.8%. Starts rose 7.1% in the South. Permitting activity fell in 2 out of four regions (-1.7% in the South and West), while holding stable in the Northeast and Midwest.

After a steady upward march, the housing market appears to be stopping to catch its breath. Housing starts have leveled off, while single family permits showed their first dip in six months. Builders are growing more hesitant for a few reasons: The "Cash for Cottages" tax credit is about to expire ... job growth is MIA ... and consumer confidence is cooling a bit.

This doesn't mean the recovery is over. The sum total of the indicators I follow still suggest the worst of the downturn is behind us (with the exception of home prices -- those will likely continue to fall over the next year, albeit at a more gradual pace). But the recovery will be far from vigorous. Rather, it will be a gentle, halting, drawn out affair. Think three steps forward, two steps back here.

Monday, October 19, 2009

NAHB index falls in October

The latest National Association of Home Builders index was just released. The index fell to 18 in October from 19 in September. The subindex tracking present sales fell to 17 from 18, the subindex tracking expectations about future sales dropped to 27 from 29, and the subindex measuring prospective buyer traffic slumped to 14 from 17.

Regionally speaking, we saw weakness in three out of four parts of the country. The index that tracks activity in the West fell the most -- to 14 from 18 -- while the index that tracks activity in the Northeast was the lone bright spot, rising to 25 from 24. Both the Midwest and South indices dipped to 18 from 19.

We saw auto sales slump after the "Cash for Clunkers" program expired. Now we're seeing a similar hangover in housing thanks to the looming expiration of the "Cash for Cottages" tax credit. Specifically, all three subindices in the NAHB report declined, as did three out of four regional indices.

The overall housing recovery remains on track, with new home inventories falling substantially and low home prices helping to bring some buyers off the sidelines. But these latest figures underscore my belief the recovery will be a drawn out, gradual affair as opposed to a vigorous "V-shaped" rebound.

The Bernanke-nator

Just a thought, but maybe we should call our Federal Reserve Chairman the "Bernanke-nator." As Kyle Reese said in the original Terminator movie ... "Listen, and understand. That terminator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until your dollars are worthless."

Okay, the last part of that quote was ACTUALLY "until you are dead." But you get the idea. Ha-ha!

Bernanke speaks, ignores dollar and signals no policy shift

Okay, so that's not the headline you're going to read on the wires. But really, his speech at the Conference on Asia and the Global Financial Crisis in Santa Barbara, California is very academic. It's focused on longer-term trade and growth issues, and frankly, I don't see any explicit or implicit comments directed at the markets besides the following summary paragraph. And even that paragraph basically just restates the "on the one hand, on the other hand" view about stimulus -- without giving any indication as to whether Bernanke is migrating toward one camp or the other:

"Despite the initial successes of Asian economic policies, risks remain. As in the advanced economies, unwinding the stimulative policies introduced during the crisis will require careful judgment. Policymakers will have to balance the risks of withdrawing policy support too early, which might cut short a nascent recovery, against the risks of leaving expansionary policies in place for too long, which could overheat the economy or worsen longer-term fiscal imbalances. In Asia, as in the rest of the world, the provision of adequate short-term stimulus must not be allowed to detract from longer-term goals, such as the amelioration of excessive global imbalances or ongoing structural reforms to increase productivity and support balanced and sustainable growth."

Bottom line: I doubt these comments will do much for the beleaguered dollar, which was weakening into the release of Bernanke's remarks at 11 a.m. Indeed, I believe Bernanke's silence on the greenback speaks volume about how much he cares (read: not at all, as I spelled out last week).

Friday, October 16, 2009

Latest thoughts on the Fed

If you haven't already seen it, I recommend checking out my latest piece on the Federal Reserve. At the risk of stealing my own thunder, I'll sum up my view: This Fed has neither the will nor the inclination to pre-emptively tighten policy. They will keep the pedal to the metal until they drive us over the cliff ... again. My two cents anyway.

Thursday, October 15, 2009

The most ridiculous headline I've read all day

Courtesy of Bloomberg: "Goldman Sachs Doesn't Have Government Guarantee, Viniar says." HAHHAHAHA. GS CFO David Viniar sure has a good sense of humor.

Wednesday, October 14, 2009

Unbelievably dovish FOMC minutes

You have to love it: The just released Fed minutes from the September 22-23 meeting are looking unbelievably dovish. Some Fed members were reportedly even open to INCREASING the size of MBS purchases. This from a Fed whose quantitative easing policies are driving the dollar into the crapper. Seriously? Meanwhile, the Fed minutes note that "with the significant under-utilization of resources expected to persist through 2011, the staff forecast core inflation to slow somewhat further over the next two years from the pace of the first half of 2009."

In other words, if you think this Fed is going to tighten rates anytime soon, you have to be nuts!

Steven Pearlstein is my hero

Okay that's a bit of an overstatement. But the Washington Post columnist absolutely "gets" it when it comes to this economy and the Fed's response. Here's the "money section" from his latest piece:

"What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. But unless they move now to begin sopping up that liquidity, the central bankers run a serious risk of reinflating many of the same bubbles that got us into this mess in the first place.

"Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. By one calculation, the appropriate federal funds rate today would be something like negative 5 percent. Since that's impossible, the Fed has signaled that it would not only stick by its zero-interest-rate policy for the indefinite future, but also will continue to inject additional money into the financial system by using freshly printed dollars to buy up the debt issued by government-owned Fannie Mae and Freddie Mac.

"The problem is that because we didn't get into this recession in the normal way, the normal analysis and remedies are not appropriate. Slow growth and high unemployment are indeed going to be a big problem over the next several years, but they aren't going to be solved by pumping out lots of cheap money that is used to speculate in stocks, bonds and commodities rather than be invested in the real economy. And if all this speculation has the effect of driving up the price of commodities and driving down the value of the dollars we use for imports, then it is perfectly possible to wind up with high inflation and high unemployment at the same time -- as happened in the late 1970s."

Retail sales okay, import prices mixed

We're getting some more U.S. economic data and the tone overall is okay. Retail sales dropped 1.5% in September as the Cash for Clunkers program expired (Auto sales plunged 10.4% on the month). But that was actually better than the -2.1% reading that was expected. If you take out autos and gas, sales were actually up 0.4%, double the 0.2% economists were looking for.

Import prices rose 0.1% in September, slightly below the 0.2% rise that was expected. If you strip out all oil, you get a 0.4% rise in import prices. That's the biggest increase since July 2008.

Interesting to watch how the dollar behaves here. The Dollar Index is plumbing new depths, after another clubbing in the Asian session. But the yen is trying to reverse to the downside here. I wouldn't be surprised if it turns out the Japanese are intervening. But they're fighting a losing battle in my view. Fed Vice Chairman Donald Kohn reiterated the "Free money now and forever" view in a speech yesterday, giving traders carte blanche to dump the dollar.

Friday, October 09, 2009

FHA next in line for a bailout?

There's an interesting debate going on in D.C. right now over the FHA loan program. FHA was a non-player during the housing boom because private lenders were falling all over themselves to offer crappy loans to crappy borrowers. Now they're out of the business ... and all those crappy borrowers are going to FHA instead. FHA volumes are surging, and questions are being raised about whether FHA has the reserves to cover the rise in defaults resulting from its easy money lending.

Will a bailout be required down the road? Only time will tell. But my opinion is that FHA is taking on too much risk given our recent disastrous experience with low down payment lending to borrowers with questionable credit. So the chances are better than even we will. More from a Washington Post story below:

"A former Fannie Mae executive warned a House panel Thursday that the Federal Housing Administration is destined for a multibillion-dollar taxpayer bailout in 24 to 36 months, an analysis that the agency's top official immediately dismissed as "completely unfounded."

"At a hearing before a House Financial Services panel, Edward J. Pinto predicted that the FHA will suffer $40 billion in losses, leaving it unable to cover its bad loans without taxpayer help. Pinto, a real estate finance consultant who served as Fannie Mae's chief credit officer from 1987 to 1989, said he testified so lawmakers would "not be able to say that no one told them of the magnitude of the impending losses."

"His testimony came at a sensitive time for the FHA, which faces increased scrutiny now that it has backed nearly a quarter of all loans made this year. The loans it insures are the sole source of financing for most people who lack good credit or cannot make hefty down payments. But its defaults have been climbing, raising concerns that taxpayers may be forced to kick in if bad loans overwhelm the FHA.

"The agency recently said that a soon-to-be-released audit will show that its reserve fund has fallen below the level required by law, meaning it will not be enough to cover 2 percent of all outstanding FHA mortgages.

"But absent a catastrophic decline in home prices, "we will not need a bailout," FHA Commissioner David H. Stevens told the panel."

Thursday, October 08, 2009

Dallas Fed to markets: Party on Dude!

Dallas Fed President Richard Fisher tells Wall Street Journal readers (and investors) "Party On Dude!" No word on whether we need to be excellent to each other as well. Here's the quote of note ...

Q: Your benchmark for tightening is when you see the recovery gaining traction. Do you think we’ve seen convincing signs that it is gaining traction?

Fisher: We’re not there yet. You know that I’m a hawk. We’re going to move when we have to move. But it’s not now. Things are fragile but they’re moving in the right direction. If you step back, it is going to take a long time to heal from the kind of severe shock we had, the severe correction we had. There is more confidence but it is not anywhere near robust in the job creating private sector.

Quelle suprise! In response, the DXY just hit an intraday low and gold just hit a fresh all-time high.

UPDATE: I wrote a couple weeks ago that the Fed could give a you-know-what about the dollar, and I spelled out what the ramifications would be of its refusal to EVER do pre-emptive tightening. If you're interested, you can check the piece out here.

Fleckenstein on the dollar

This is a nice read from money manager Bill Fleckenstein on the dollar. Worth a read as the buck melts again despite an attempt at "dollar defense" from ECB President Jean-Claude Trichet. The money quote (if you'll pardon the pun) from Fleck?

"Fed money-printing in the last year -- to create its own bailout and finance other government bailouts -- is the functional equivalent of the government saying that you can take the Monopoly game out of the closet, grab all the colored pieces of paper, put three or four zeroes on the end of each bill, then go out and spend it."

Tuesday, October 06, 2009

Dollar getting hammered, gold flying on RBA move, oil chatter

What a morning for the U.S. dollar ... a bad one, that is. It's getting hammered against all the major currencies, with the Australian dollar leading the way, thanks to a semi-surprise rate hike by the Reserve Bank of Australia. Unlike our "all easy money, all the time" Federal Reserve, the RBA is joining minor countries like Israel in taking baby steps toward higher rates. The RBA raised its cash rate target by 25 basis points to 3.25%.

Meanwhile, the commodities market is in an uproar over a report in the Independent newspaper in the U.K. It suggests foreign countries -- especially oil producers in the Gulf region -- are trying to hedge out dollar risk by selling their goods in a basket of currencies, rather than just greenbacks. Gold prices have soared to a fresh all-time record high this morning on the news, while oil is also popping and the dollar is getting clubbed. More from that story below:

"In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

"Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

"The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years."

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