Foreclosures Could Reach 2 Million - As the Debate Rages On
This is an interesting article from Yahoo concerning the debate about where the real estate market is headed. You may want to go to the original to catch all the links.
A second study forecasting millions of foreclosures sweeping the nation in the next few years, says it won't matter what the Feds do to fix the problem.
"Foreclosures Will Affect 2 Million Homeowners," by upstart housing market researcher HomePredictor.com says subprime mortgages are the culprit.
Among the independent researcher's findings:
· More than 2 million homeowners will face foreclosure in next two and a half years, due largely to loans written that shouldn't have been.
· Most, 76 percent of recent foreclosures resulted from high-interest rate subprime loans made to borrowers who could not otherwise qualify for a loan.
· Another 15 percent of the failed loans were made with conventional mortgages, but many contained risky low- or no-down payment terms.
· The remaining 9 percent of foreclosed loans studied included no- and low-documentation loans that get approved with little if any verification of income.
· More than 50 percent of all home mortgages made in 2006 were written with 5 percent or less down.
. . . . Colpitts says the study is based on a survey of 100 real estate market's public records and interviews conducted by researchers.
Similar results were found with a study by the Center for Responsible Lending in a report entitled "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners" .
Rebutting the Losing Ground study, "U.S. Mortgage Borrowing: Providing Americans with Opportunity, or Imposing Excessive Risk?" a study by the four-year old Center for Statistical Research (CSR) says stiffer rules could push from 580,000 to 1.1 million borrowers out of the market and leave as much as $188 billion in mortgage money in the bank. . . .
I love "dueling" statistical reports, because it boils down to the quality of the data and analysis.
. . . . "There is some evidence that if the Fed doesn't drop rates by the end of the year, we'll be in a crisis," Colpitts said.
The die is already cast on this issue.
The Fed is busy with regulatory matters.
· The Federal Reserve Board has set June 14 for fifth public hearing on the Home Ownership and Equity Protection Act (HOEPA) frequently called upon to curb abusive lending practices.
· The hearings come after months of related testimony before Congress from industry and government officials, as well as consumer advocates.
· Also making the rounds, is the "Proposed Statement on Subprime Mortgage Lending" by the same group of federal monetary regulators that rewrote the rules on nontraditional home loans and equity loans.
· Those rules, "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" were years in the making and some lenders not federally regulated slipped under the radar.
Less regulated state level lenders are, in part, why there's more regulatory action to attempt to manage the mortgage morass.
Colpitts says it won't matter if stiffer rules are written or if no rules are written.
I agree with Colpitts on this one. No need to close the barn door now the horses are already gone.
"The consensus among economists is that the Feds just haven't acted fast enough to do anything. If they do anything, it will be too little too late," he says, comparing the current home loan landscape with the savings and loan scandal of the late 1980s and early 1990s.
. . . . Today, by and large, the soaring rate of foreclosures is more directly associated with poorly underwritten loans.
According to "An Examination of the Banking Crises of the 1980s and Early 1990s" by the Federal Deposit Insurance Corporation, which was spawned of another era of bank failures, during the bailout, layers upon layers of bad investing and poor banking habits were exacerbated by true real estate depressions in the Southwest, California, Florida and the Northeast.
And, with the current administration and U.S. Congress preoccupied with a national election, immigration and a war potentially costing the economy more than $2 trillion, failing lenders will be hard fought to find anotherhalf trillion dollar bailout cache -- the estimated cost of the bailout.
Monday, June 11, 2007
Equity in Homes Hits an All-Time Low
The recent press release by CEPR is disturbing at a number of levels. The inability to keep borrowing against the value of consumer’s homes could hurt personal consumption going forward, which will cause problems with continued economic growth. In the longer term if much of one’s personal net worth is tied up in the value of their home, their net worth is declining. How will this effect their consumption patterns in the long term, especially about 25% of the population that is close to retirement in the next decade.
The quarterly Flow of Funds data from the Federal Reserve Board show that homeowners are still taking on mortgage debt at a healthy pace even as their homes have largely stopped appreciating in value. Homeowners increased their mortgage debt at a 5.4 percent annual rate in the first quarter, adding debt at an annual rate of $510 billion. This is rate of borrowing is down from the 9.3 percent growth rate in 2006, but it is considerably more rapid than the 2.0 percent rate of house appreciation reported for the first quarter.
As a result, the ratio of equity to home value continued to fall. At the end of the first quarter of 2007, the ratio of equity to home value stood at 52.7 percent, another record low. This ratio stood at 54.3 percent at the end of 2005. It had been at 57.9 percent as recently as 2000, and was close to 70 percent until the nineties. This drop in the ratio of equity to value is especially disconcerting given the country's demographics. With much of the baby boom cohort at the edge of retirement, it would be expected that the ratio of equity to value would be near record highs.
There is reason to believe that the ratio of equity to value will continue to decline for the foreseeable future. The inventory of unsold new and existing homes both stand at record highs. The 4,200,000 stock of unsold existing homes is more than a year's supply at the pre-bubble sales rates of the mid-nineties. (my emphasis) Furthermore, the surge in foreclosures ensures that a large additional supply will be entering the market well into 2008. This will put substantial downward pressure on prices, which are already falling in many areas. With slowing productivity growth and rising material prices putting upward pressure on inflation, mortgage rates are also moving higher, which is yet another negative for the housing market.
Falling house prices are likely already curtailing many homeowners' ability to borrow, which undoubtedly explains the slower pace of borrowing in the first quarter of 2007. Tighter lending standards in all segments of the mortgage market, but especially the sub-prime market, are also likely having an impact on borrowing. However, this effect will be felt more in later quarters, since this process just began in the first quarter.
Even with a slower rate of borrowing it is virtually certain that the ratio of equity to value will continue to decline, primarily because of weak house prices. With even a modest drop in house prices, the ratio of equity to value is likely fall below 50 percent for the first time ever before the end of 2008 and quite possibly before the end of 2007. . . .
. . . . The continuing drop in the ratio of home equity to value shown in this report implies both serious short-term and long-term problems for the economy. The short-term problem is that the home equity financed consumption boom, which has supported the economy since the recession is likely to be coming to an end. The long-term problem is that tens of millions of baby boomers are approaching retirement with relatively little equity in their homes and almost no assets outside of their homes. Their retirement income will be almost entirely dependent on Social Security.
The recent press release by CEPR is disturbing at a number of levels. The inability to keep borrowing against the value of consumer’s homes could hurt personal consumption going forward, which will cause problems with continued economic growth. In the longer term if much of one’s personal net worth is tied up in the value of their home, their net worth is declining. How will this effect their consumption patterns in the long term, especially about 25% of the population that is close to retirement in the next decade.
The quarterly Flow of Funds data from the Federal Reserve Board show that homeowners are still taking on mortgage debt at a healthy pace even as their homes have largely stopped appreciating in value. Homeowners increased their mortgage debt at a 5.4 percent annual rate in the first quarter, adding debt at an annual rate of $510 billion. This is rate of borrowing is down from the 9.3 percent growth rate in 2006, but it is considerably more rapid than the 2.0 percent rate of house appreciation reported for the first quarter.
As a result, the ratio of equity to home value continued to fall. At the end of the first quarter of 2007, the ratio of equity to home value stood at 52.7 percent, another record low. This ratio stood at 54.3 percent at the end of 2005. It had been at 57.9 percent as recently as 2000, and was close to 70 percent until the nineties. This drop in the ratio of equity to value is especially disconcerting given the country's demographics. With much of the baby boom cohort at the edge of retirement, it would be expected that the ratio of equity to value would be near record highs.
There is reason to believe that the ratio of equity to value will continue to decline for the foreseeable future. The inventory of unsold new and existing homes both stand at record highs. The 4,200,000 stock of unsold existing homes is more than a year's supply at the pre-bubble sales rates of the mid-nineties. (my emphasis) Furthermore, the surge in foreclosures ensures that a large additional supply will be entering the market well into 2008. This will put substantial downward pressure on prices, which are already falling in many areas. With slowing productivity growth and rising material prices putting upward pressure on inflation, mortgage rates are also moving higher, which is yet another negative for the housing market.
Falling house prices are likely already curtailing many homeowners' ability to borrow, which undoubtedly explains the slower pace of borrowing in the first quarter of 2007. Tighter lending standards in all segments of the mortgage market, but especially the sub-prime market, are also likely having an impact on borrowing. However, this effect will be felt more in later quarters, since this process just began in the first quarter.
Even with a slower rate of borrowing it is virtually certain that the ratio of equity to value will continue to decline, primarily because of weak house prices. With even a modest drop in house prices, the ratio of equity to value is likely fall below 50 percent for the first time ever before the end of 2008 and quite possibly before the end of 2007. . . .
. . . . The continuing drop in the ratio of home equity to value shown in this report implies both serious short-term and long-term problems for the economy. The short-term problem is that the home equity financed consumption boom, which has supported the economy since the recession is likely to be coming to an end. The long-term problem is that tens of millions of baby boomers are approaching retirement with relatively little equity in their homes and almost no assets outside of their homes. Their retirement income will be almost entirely dependent on Social Security.
Sunday, June 10, 2007
The Knowledge Gap in Mortgage Lending and Borrowing – What is the Fed to do?
The article in the Wall Street Journal illustrates something I have been watching for the better part of 3 decades. According to the Wall Street Journal article, Chairman Greenspan ignored a suggestion in 2000 to more closely scrutinize the sub-prime mortgage industry. One of the consequences of this action is that a large number of “exotic” mortgages (neg-ams, interest-only, ARMs, etc.) were obtained by borrowers that did not fully understand the ramifications (risks) of how they were financing the purchase of their home.
I am all for less regulation as opposed to more regulation. Further, I prefer all the different mortgage types in the market place, because mortgages are not one size fits all instruments. However, there is a considerable knowledge gap between the borrowers and the lenders concerning all the mortgage insruments. Every time this type of gap exists the least informed group has a good chance of ending up on the short end of the stick. Or if you prefer – when an inexperienced group with money (or good credit) deals with a group with a lot of experience, the experienced group ends up with all the money and the inexperienced group has had quite an experience.
The question is – how do you close this knowledge gap? Have the potential borrower take a 2-hour course on all the different mortgage types. How much can you learn about risk in 2 hours, when in fact risk is something that is learned over time with experience?
How about more disclosure from the lenders? What is going to keep this disclosure from being one more thing to check off on the process list. This of course makes the assumption that the person “selling” the mortgage knows what they are talking about.
There is no alternative except for the consumer to become more knowledgeable about borrowing. Watching this process for almost 30 years leads me to the conclusion that how closing this gap is accomplished is a mystery to me.
. . . . A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed's broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. . . .
Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.
"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.
"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.
Mr. Greenspan, in an interview, says he doesn't recall a specific discussion of the idea but confirmed his opposition to it.
There is "a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong," says Mr. Greenspan, who retired in February last year. "For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits."
Ben Bernanke, Mr. Greenspan's successor, told Congress in March that he has asked his staff for "a complete review of our powers and practices" in examining holding-company units. A Fed spokesman this past week said "that review is under way." The Fed Thursday will conduct a public meeting on steps it could take to strengthen laws governing subprime lending.
The article in the Wall Street Journal illustrates something I have been watching for the better part of 3 decades. According to the Wall Street Journal article, Chairman Greenspan ignored a suggestion in 2000 to more closely scrutinize the sub-prime mortgage industry. One of the consequences of this action is that a large number of “exotic” mortgages (neg-ams, interest-only, ARMs, etc.) were obtained by borrowers that did not fully understand the ramifications (risks) of how they were financing the purchase of their home.
I am all for less regulation as opposed to more regulation. Further, I prefer all the different mortgage types in the market place, because mortgages are not one size fits all instruments. However, there is a considerable knowledge gap between the borrowers and the lenders concerning all the mortgage insruments. Every time this type of gap exists the least informed group has a good chance of ending up on the short end of the stick. Or if you prefer – when an inexperienced group with money (or good credit) deals with a group with a lot of experience, the experienced group ends up with all the money and the inexperienced group has had quite an experience.
The question is – how do you close this knowledge gap? Have the potential borrower take a 2-hour course on all the different mortgage types. How much can you learn about risk in 2 hours, when in fact risk is something that is learned over time with experience?
How about more disclosure from the lenders? What is going to keep this disclosure from being one more thing to check off on the process list. This of course makes the assumption that the person “selling” the mortgage knows what they are talking about.
There is no alternative except for the consumer to become more knowledgeable about borrowing. Watching this process for almost 30 years leads me to the conclusion that how closing this gap is accomplished is a mystery to me.
. . . . A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed's broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. . . .
Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.
"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.
"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.
Mr. Greenspan, in an interview, says he doesn't recall a specific discussion of the idea but confirmed his opposition to it.
There is "a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong," says Mr. Greenspan, who retired in February last year. "For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits."
Ben Bernanke, Mr. Greenspan's successor, told Congress in March that he has asked his staff for "a complete review of our powers and practices" in examining holding-company units. A Fed spokesman this past week said "that review is under way." The Fed Thursday will conduct a public meeting on steps it could take to strengthen laws governing subprime lending.
Something to Contemplate on the Weekend
Weekends are for contemplation, reflection, hiking, football, or just plain relaxing. This is an interesting article from the Op/Ed page of the Wall Street Journal that you may want to think over. Below is just the beginning.
Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture -- but none of that stuff had much effect on the quality of people's lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.
Then -- just a couple of hundred years ago, maybe 10 generations -- people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world . . . .
Weekends are for contemplation, reflection, hiking, football, or just plain relaxing. This is an interesting article from the Op/Ed page of the Wall Street Journal that you may want to think over. Below is just the beginning.
Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture -- but none of that stuff had much effect on the quality of people's lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.
Then -- just a couple of hundred years ago, maybe 10 generations -- people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world . . . .
Friday, June 8, 2007
Consumer Debt Fell in April
In an article published in today’s Wall Street Journal consumer debt moderated in April. The issue that many analysts are struggling with concerning the effects of consumer debt and its effects on consumer spending is that consumer debt ratios are running at all time highs. Consumer debt has grown by 25% - 30% as measured by the consumer debt service ratio since the 1980s and there is some question as to when the consumer is saturated with debt and how they will react if to higher gas prices, lower housing prices, higher unemployment, etc. This is basically un-chartered territory for most organizations so at this point there are a lot of opinions, but little else.
The latest data from the Federal Reserve show that American consumers are cutting back on borrowing and pulling less money out of their homes, moves that could signal a slowdown in spending.
The total amount the nation's consumers owe on credit cards, auto loans and other kinds of nonmortgage debt grew a smaller-than-expected $2.6 billion in April to $2.429 trillion, after jumping $14 billion in March, the Fed reported yesterday.
The slowdown stemmed largely from a decline in credit-card debt, which fell by about $400 million to $887.2 billion, suggesting that people might be giving their plastic a break.
Other Fed data showed that people are taking less money out of their houses through cash-out mortgage refinancings and home-equity loans, sources of funds some economists believe have provided a significant boost to spending in recent years.
Using the Fed data, J.P. Morgan Chase economist Michael Feroli estimated that so-called mortgage-equity withdrawal fell to an annualized $178 billion in the first quarter from $248 billion in the previous quarter. At the peak of the housing boom in 2005, the figure was $709 billion.
In an article published in today’s Wall Street Journal consumer debt moderated in April. The issue that many analysts are struggling with concerning the effects of consumer debt and its effects on consumer spending is that consumer debt ratios are running at all time highs. Consumer debt has grown by 25% - 30% as measured by the consumer debt service ratio since the 1980s and there is some question as to when the consumer is saturated with debt and how they will react if to higher gas prices, lower housing prices, higher unemployment, etc. This is basically un-chartered territory for most organizations so at this point there are a lot of opinions, but little else.
The latest data from the Federal Reserve show that American consumers are cutting back on borrowing and pulling less money out of their homes, moves that could signal a slowdown in spending.
The total amount the nation's consumers owe on credit cards, auto loans and other kinds of nonmortgage debt grew a smaller-than-expected $2.6 billion in April to $2.429 trillion, after jumping $14 billion in March, the Fed reported yesterday.
The slowdown stemmed largely from a decline in credit-card debt, which fell by about $400 million to $887.2 billion, suggesting that people might be giving their plastic a break.
Other Fed data showed that people are taking less money out of their houses through cash-out mortgage refinancings and home-equity loans, sources of funds some economists believe have provided a significant boost to spending in recent years.
Using the Fed data, J.P. Morgan Chase economist Michael Feroli estimated that so-called mortgage-equity withdrawal fell to an annualized $178 billion in the first quarter from $248 billion in the previous quarter. At the peak of the housing boom in 2005, the figure was $709 billion.
Weak Retail Sales, Although Better Than April, Are Still Weak in May
Retail spending in May continued to be week, although not as bad as April according to the Wall Street Journal.
The industry's same-store sales, or sales at stores open at least a year, increased 2.5% last month, according to an index of 50 major chains compiled by the International Council of Shopping Centers. That is an improvement from April's 1.9% decline, but it falls well short of the 4.5% gain retailers recorded in May 2006 . . . ."Year to date, we've seen a modest pace of spending relative to last year, the year before that, or the year before that," Mr. Niemira said. "We have a consumer slowdown -- it's real, it's continuing and largely driven by the slowdown in housing."
If inflation in the past year was about 2.5%, then real retail sales are flat for the past year and much of the weakness has occurred since January.
. . . . persistent sluggishness in home sales and construction will continue to damp consumer spending overall, said Carl Steidtmann, chief economist at Deliotte Research. Economists debate how much influence the housing market has on spending. But Mr. Steidtmann says he is pessimistic about the outlook for a broad swath of home-related goods -- from furniture to garden tools.
Wal-Mart, the No. 1 retailer in terms of sales, reported a 1.1% gain in May same-store sales, at the lower end of its 1% to 2% forecast . . . . Sam's Clubs, same-store sales at its namesake chain rose just 0.3% amid persistent weakness in apparel and home-related goods. Wal-Mart, which has blamed weak sales on high gasoline prices and financial worries among its lower-income customers . . . . Wal-Mart was cautious about its outlook for June, projecting same-store sales will be flat to up as much as 2%.
Target., Minneapolis, posted a 5.8% increase in same-store sales and forecasts a 3% to 5% increase for June. The discounter is outperforming its giant rival Wal-Mart partly because its shoppers, who average household incomes around $50,000 a year, are less vulnerable to gasoline prices than Wal-Mart's, who average closer to $35,000, said Arun Daniel, an analyst at ING Investment Management Inc.
As in April the high-end retailers such as Nordstrom, Saks, etc. have done well with retail sales adjusted for inflation clearly in the positive category. Most other retailers, especially those specializing in apparel, have weak sales in May.
Retail spending in May continued to be week, although not as bad as April according to the Wall Street Journal.
The industry's same-store sales, or sales at stores open at least a year, increased 2.5% last month, according to an index of 50 major chains compiled by the International Council of Shopping Centers. That is an improvement from April's 1.9% decline, but it falls well short of the 4.5% gain retailers recorded in May 2006 . . . ."Year to date, we've seen a modest pace of spending relative to last year, the year before that, or the year before that," Mr. Niemira said. "We have a consumer slowdown -- it's real, it's continuing and largely driven by the slowdown in housing."
If inflation in the past year was about 2.5%, then real retail sales are flat for the past year and much of the weakness has occurred since January.
. . . . persistent sluggishness in home sales and construction will continue to damp consumer spending overall, said Carl Steidtmann, chief economist at Deliotte Research. Economists debate how much influence the housing market has on spending. But Mr. Steidtmann says he is pessimistic about the outlook for a broad swath of home-related goods -- from furniture to garden tools.
Wal-Mart, the No. 1 retailer in terms of sales, reported a 1.1% gain in May same-store sales, at the lower end of its 1% to 2% forecast . . . . Sam's Clubs, same-store sales at its namesake chain rose just 0.3% amid persistent weakness in apparel and home-related goods. Wal-Mart, which has blamed weak sales on high gasoline prices and financial worries among its lower-income customers . . . . Wal-Mart was cautious about its outlook for June, projecting same-store sales will be flat to up as much as 2%.
Target., Minneapolis, posted a 5.8% increase in same-store sales and forecasts a 3% to 5% increase for June. The discounter is outperforming its giant rival Wal-Mart partly because its shoppers, who average household incomes around $50,000 a year, are less vulnerable to gasoline prices than Wal-Mart's, who average closer to $35,000, said Arun Daniel, an analyst at ING Investment Management Inc.
As in April the high-end retailers such as Nordstrom, Saks, etc. have done well with retail sales adjusted for inflation clearly in the positive category. Most other retailers, especially those specializing in apparel, have weak sales in May.
The Effects of Higher Interest Rates
The following is from Bloomberg and addresses some of the effects of realization by the market that rates could go up. The effect of this that still has not surfaced is the potential effect on the housing market. At this point the Fed has made it clear that its top priority from a monetary policy perspective is inflation and not housing.
The benchmark 10-year note extended declines after slumping yesterday by the most in more than three years. Debt markets in the U.S., Europe and Asia have been sliding since New Zealand unexpectedly raised borrowing costs yesterday, stoking concern other central banks will follow.
``It'd be dangerous to get in now,'' said Christian Zima, a fixed-income fund manager in Vienna at Raiffeisen KAG, which oversees the equivalent of $24 billion of bonds. ``The yield levels are starting to look attractive but sentiment is bad. There are further rate hikes getting priced in.''
Traders now assign a 44 percent chance the Fed will raise rates by 25 basis points by December, compared zero percent a month ago, according to options on Fed funds futures.
What a difference 5 days make, this was 41% just a few days ago.
The Federal Reserve has kept its overnight lending rate between banks at 5.25 percent at its last seven meetings. Policy makers will next decide on interest rates on June 28.
Bonds may be supported as stock markets in the U.S., Asia and Europe slumped on the expectations of higher rates, making yields on debt securities more attractive for some investors.
The spread between two- and 10-year note yields widened to 17 basis points, from 10 points yesterday. The yield on the two- year security climbed 1 basis point today to 5.04 percent.
It looks like the Fed may be forcing a more normal yield curve as opposed to the inverted to flat yield curve we have had for some time.
The following is from Bloomberg and addresses some of the effects of realization by the market that rates could go up. The effect of this that still has not surfaced is the potential effect on the housing market. At this point the Fed has made it clear that its top priority from a monetary policy perspective is inflation and not housing.
The benchmark 10-year note extended declines after slumping yesterday by the most in more than three years. Debt markets in the U.S., Europe and Asia have been sliding since New Zealand unexpectedly raised borrowing costs yesterday, stoking concern other central banks will follow.
``It'd be dangerous to get in now,'' said Christian Zima, a fixed-income fund manager in Vienna at Raiffeisen KAG, which oversees the equivalent of $24 billion of bonds. ``The yield levels are starting to look attractive but sentiment is bad. There are further rate hikes getting priced in.''
Traders now assign a 44 percent chance the Fed will raise rates by 25 basis points by December, compared zero percent a month ago, according to options on Fed funds futures.
What a difference 5 days make, this was 41% just a few days ago.
The Federal Reserve has kept its overnight lending rate between banks at 5.25 percent at its last seven meetings. Policy makers will next decide on interest rates on June 28.
Bonds may be supported as stock markets in the U.S., Asia and Europe slumped on the expectations of higher rates, making yields on debt securities more attractive for some investors.
The spread between two- and 10-year note yields widened to 17 basis points, from 10 points yesterday. The yield on the two- year security climbed 1 basis point today to 5.04 percent.
It looks like the Fed may be forcing a more normal yield curve as opposed to the inverted to flat yield curve we have had for some time.
Gold Market #4 –
A little more from Bloomberg on how gold prices are affected by interest rates.
Bond yields climbed around the world after the Reserve Bank of New Zealand unexpectedly raised rates today. The European Central Bank yesterday raised a benchmark rate to the highest in six years. Holding gold becomes less attractive when rates rise because the metal has no fixed returns.
``As interest rates go higher and higher, it makes the purchase of any commodities, which never pay interest or have yield, a poor judgment,'' said Leonard Kaplan, president of Prospector Asset Management, a money-management company in Evanston, Illinois.
A little more from Bloomberg on how gold prices are affected by interest rates.
Bond yields climbed around the world after the Reserve Bank of New Zealand unexpectedly raised rates today. The European Central Bank yesterday raised a benchmark rate to the highest in six years. Holding gold becomes less attractive when rates rise because the metal has no fixed returns.
``As interest rates go higher and higher, it makes the purchase of any commodities, which never pay interest or have yield, a poor judgment,'' said Leonard Kaplan, president of Prospector Asset Management, a money-management company in Evanston, Illinois.
Thursday, June 7, 2007
WHOA! Not So Fast with the Happy News
I think there is another way to interpret the “optimistic” data recently discussed in a Reuters article.
Data #1 – Number of Jobless Claims
Fewer U.S. workers signed up for unemployment aid last week, according to the Labor Department. The number of U.S. workers filing initial claims for jobless benefits slipped by 1,000 to 309,000, the department said on Thursday.
Give me a break, a difference of 1,000 may not be statistically significant.
For several weeks now the number of workers seeking an initial week of jobless aid has held steady around 300,000, a level economists say indicates a stable labor market.
Data #2 - Inventories
A separate report from the Commerce Department on Thursday showed inventories at U.S. wholesalers rose 0.3 percent in April as stocks of nondurable goods saw the biggest percentage increase in five months.
After working hard to whittle down bloated inventories, economists said U.S. businesses now appeared to be restocking. A report last week from the Institute for Supply Management showed factory activity picked up last month as a result.
Wait a minute, if you are trying to work off bloated inventories and now inventories are on their way back up, this is not proof of re-stocking. Maybe it indicates that the retailers are not finished working off the inventories.
Data #3 - Retail Sales
U.S. retail chains on Thursday reported moderate May sales increases as warmer weather fueled demand for seasonal items, like gardening and other outdoor goods, helping retailers rebound from a dismal April.
But several specialty apparel chains posted disappointing results, due in part to weak sales of women's clothes and increased competition from department stores trying to lure fashionable shoppers.
Toting up the results, the International Council of Shopping Centers said chain store sales rose 2.5 percent from a year earlier.
Inflation in the last year was 2.5%, so it appears that retail sales are flat.
The inventories-to-sales ratio, a measure of how quickly stocks would be depleted at the current sales pace, fell for the fourth straight month, dropping to 1.12 months from 1.13 months in March.
This is inconsistent with the restocking comments above.
Am I missing something?
I think there is another way to interpret the “optimistic” data recently discussed in a Reuters article.
Data #1 – Number of Jobless Claims
Fewer U.S. workers signed up for unemployment aid last week, according to the Labor Department. The number of U.S. workers filing initial claims for jobless benefits slipped by 1,000 to 309,000, the department said on Thursday.
Give me a break, a difference of 1,000 may not be statistically significant.
For several weeks now the number of workers seeking an initial week of jobless aid has held steady around 300,000, a level economists say indicates a stable labor market.
Data #2 - Inventories
A separate report from the Commerce Department on Thursday showed inventories at U.S. wholesalers rose 0.3 percent in April as stocks of nondurable goods saw the biggest percentage increase in five months.
After working hard to whittle down bloated inventories, economists said U.S. businesses now appeared to be restocking. A report last week from the Institute for Supply Management showed factory activity picked up last month as a result.
Wait a minute, if you are trying to work off bloated inventories and now inventories are on their way back up, this is not proof of re-stocking. Maybe it indicates that the retailers are not finished working off the inventories.
Data #3 - Retail Sales
U.S. retail chains on Thursday reported moderate May sales increases as warmer weather fueled demand for seasonal items, like gardening and other outdoor goods, helping retailers rebound from a dismal April.
But several specialty apparel chains posted disappointing results, due in part to weak sales of women's clothes and increased competition from department stores trying to lure fashionable shoppers.
Toting up the results, the International Council of Shopping Centers said chain store sales rose 2.5 percent from a year earlier.
Inflation in the last year was 2.5%, so it appears that retail sales are flat.
The inventories-to-sales ratio, a measure of how quickly stocks would be depleted at the current sales pace, fell for the fourth straight month, dropping to 1.12 months from 1.13 months in March.
This is inconsistent with the restocking comments above.
Am I missing something?
More On Real Inflation
Definitely worth a read from the Big Picture:
For April 2006, the monthly food cost is $995.40 for average family of four. Ergo y/y food inflation is 4.963% according to the USDA.
The BLS has ‘food’ inflation (urban) at only 3.7% y/y (unadjusted) for April 2007. Ergo, there is a 34% discrepancy in food inflation reporting between US Government Agencies – the USDA and BLS.
Definitely worth a read from the Big Picture:
For April 2006, the monthly food cost is $995.40 for average family of four. Ergo y/y food inflation is 4.963% according to the USDA.
The BLS has ‘food’ inflation (urban) at only 3.7% y/y (unadjusted) for April 2007. Ergo, there is a 34% discrepancy in food inflation reporting between US Government Agencies – the USDA and BLS.
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