Friday, July 31, 2015
Capital Markets Update
Premier Mortgage Group July 31, 2015
Mortgage interest rates improved slightly this week as growth is slowing oversees. Economic data in the U.S. was mixed. Data stronger than expected included existing home sales from June that were the highest since February of 2007, oil inventories rising by 2.5 million barrels and jobless claims with a steep decline of 26,000 initial claims. The 4-week average on jobless claims shows a much smaller decline that is little changed from last month, and the PMI manufacturing index was in line with expectations, albeit a soft rate of growth. The one major surprise came in new home sales which dropped by a steep 6.8% while the median price only increased by half of a percent. Latin America and China both showed signs of weakness as companies exporting to these regions posted earnings that did not meet expectations.
The Dow Jones Industrial Average is currently at 17,568, down over 500 points on the week. The crude oil spot price is currently at $48.13 per barrel, down over $2 per barrel on the week. The Dollar weakened versus the Yen and Euro on the week.
Next week look toward Monday’s durable goods orders, Wednesday’s FOMC meeting announcement and Thursday’s GDP and jobless claims.
Mortgage interest rates improved slightly this week as growth is slowing oversees. Economic data in the U.S. was mixed. Data stronger than expected included existing home sales from June that were the highest since February of 2007, oil inventories rising by 2.5 million barrels and jobless claims with a steep decline of 26,000 initial claims. The 4-week average on jobless claims shows a much smaller decline that is little changed from last month, and the PMI manufacturing index was in line with expectations, albeit a soft rate of growth. The one major surprise came in new home sales which dropped by a steep 6.8% while the median price only increased by half of a percent. Latin America and China both showed signs of weakness as companies exporting to these regions posted earnings that did not meet expectations.
The Dow Jones Industrial Average is currently at 17,568, down over 500 points on the week. The crude oil spot price is currently at $48.13 per barrel, down over $2 per barrel on the week. The Dollar weakened versus the Yen and Euro on the week.
Next week look toward Monday’s durable goods orders, Wednesday’s FOMC meeting announcement and Thursday’s GDP and jobless claims.
Friday, July 24, 2015
Capital Markets Update
By Louis S. Barnes Friday, July 24th, 2015
We have a large and widening divide between US economic data and the rest of the world, and to spice things up we have no experience with a situation like this — “we” being the Fed, other central banks, all governments, and certainly analysts.
Experienced or not, markets are moving, and recent trading is at odds with most of the expectations of everyone on the list of players, above. The US is growing at a reasonable pace, but not accelerating; the rest of the world is slipping close to recession despite fantastic stimulus in Europe, Japan, and China.
We do have experience with US divergence from the rest, most recently 1997-1998, when the Fed was so concerned that it cut the cost of money, hoping the US locomotive would pull the rest of the world. Those cuts came despite a roaring US stock market and good GDP growth in place. Going farther back, the 1980s widespread defaults in Latin America exposed foolishness at US banks which had to be papered over, but was never a serious economic threat here.
Even farther back, this cliché: “When the US sneezes, the rest of the world catches cold.” But US strength in the last century was so great that the rest of the world could catch pneumonia and we wouldn’t feel a thing.
That old world was convenient for our Fed. It had occasionally to manage the inevitable post-WW II decline in the dollar, but otherwise reacted only to domestic data.
Now? Holy smokes. The Fed’s normal duty is to lean against acceleration to intercept future inflation. The only aspect of the US economy anywhere near capacity is the theoretical rate of unemployment — a tender spot for future inflation prospects, but inflation is not a problem anywhere on Earth. Incipient deflation shouts from today’s markets. Gold is in free-fall, and so is the entire industrial metals complex, copper at 2009 levels (not a good year anywhere). Oil has broken $50 again going down. The currencies of commodity-producing “emerging nations” (an absurd misnomer for many — Brazil is as established an economy as any) are falling fast. In the last year the Aussie dollar has dropped from long-term near parity with the US buck to $0.72 today.
It’s reasonable for the Fed to want to get above zero just as a preliminary move away from QE. And it has a related agenda, to which Chair Yellen has repeatedly alluded: to raise rates slowly now, so not rapidly at some future moment. But there is no reason for a “rapid” rise, so what is she worried about? A crucial aspect of QE was the intentional boost of asset prices, directly stocks and bonds, and indirectly houses. Since we have never entered QE before, we hardly know how to leave it, and the Fed has reason to fear any sudden pulling of the rug from under assets. So begin ever-so-gently, and learn from the reaction to each step.
Two years ago Perfesser Bernanke triggered a rate spike and chaos just by saying the Fed would taper QE. We got over that, in part because the US economy has underperformed every Fed forecast. Almost a year ago the Fed began its “liftoff” warnings. Even though our economy is still underperforming, the outside world took the warning seriously.
Currencies are the means of transmission. If we propose to raise our interest rates while others are cutting theirs, dollar up, others down.
Then this sequence. Japan has been a wreck for 25 years, but only in the last 18 months begun unimaginable QE devaluing the yen, which has forced all other Asian exporters into devaluing, or trouble, or both. Europe joined the QE party just six months ago, stimulus and devaluing, but hopelessly speared by the euro.
Now China. For reasons of pride it has refused to devalue the yuan, hurting its competitive position just as its credit-based stimulus clearly has run out the chain. Newest data extracted from earnings reports of US exporters to China, and other independent sources suggest no growth there at all.
Dear Fed… you want to tighten into THAT? The bond market says “Uh-uh.” Here’s an irresponsible thought: the rate highs of 2015 may have passed.
Friday, July 17, 2015
Capital Market Updates
Premier Mortgage Group July 17, 2015
Mortgage interest rates improved slightly this past week as Greece approved the austerity measures required by the EU to release additional bailout funds. There are still concerns though that Greece will not be able to service its debt without restructuring the debt. Economic data in the U.S. was mixed. Economic data stronger than expected included May Business Inventories, the July Empire State Manufacturing Index, June Industrial Production, June Capacity Utilization, the NAHB Housing Market Index, June Housing Starts, and June Building Permits. The Housing Market Index reached its highest level since November of 2005. Economic data weaker than expected included June Retail Sales, June Export and Import Prices, the July Philadelphia Fed Business Index, and the July University of Michigan Consumer Sentiment Index. Regarding inflation, the June Producer Price Index (PPI) increased slightly more than expected and the June Consumer Price Index (CPI) was in line with expectations. Fed Chair Yellen indicated in testimony to Congress that she still expects a rate increase this year but that it will be data dependent.
The Dow Jones Industrial Average is currently at 18,040, up almost 300 points on the week. The crude oil spot price is currently at $50.22 per barrel, down over $2 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Wednesday’s Existing Home Sales and FHFA House Price Index, Thursday’s Jobless Claims, and Friday’s New Home Sales as potential market moving events.
Mortgage interest rates improved slightly this past week as Greece approved the austerity measures required by the EU to release additional bailout funds. There are still concerns though that Greece will not be able to service its debt without restructuring the debt. Economic data in the U.S. was mixed. Economic data stronger than expected included May Business Inventories, the July Empire State Manufacturing Index, June Industrial Production, June Capacity Utilization, the NAHB Housing Market Index, June Housing Starts, and June Building Permits. The Housing Market Index reached its highest level since November of 2005. Economic data weaker than expected included June Retail Sales, June Export and Import Prices, the July Philadelphia Fed Business Index, and the July University of Michigan Consumer Sentiment Index. Regarding inflation, the June Producer Price Index (PPI) increased slightly more than expected and the June Consumer Price Index (CPI) was in line with expectations. Fed Chair Yellen indicated in testimony to Congress that she still expects a rate increase this year but that it will be data dependent.
The Dow Jones Industrial Average is currently at 18,040, up almost 300 points on the week. The crude oil spot price is currently at $50.22 per barrel, down over $2 per barrel on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Wednesday’s Existing Home Sales and FHFA House Price Index, Thursday’s Jobless Claims, and Friday’s New Home Sales as potential market moving events.
Friday, July 10, 2015
Capital Markets Update
By Louis S. Barnes Friday, July 10, 2015
What a week. “Silly Season” is August, when nothing happens and headlines say “Man Bites Dog.” It’s come early this year. Here in Boulder a road-rage incident this week concluded with one participant throwing a pecan pie at the other’s car.
Markets have been upset by China’s stock crash and Grexit, but now are happily rebounding at news of solutions certain to fail. “Fail” depending on how much time you’ve got. Put those two pie fights aside for Chair Yellen this morning:
“…This initial increase in the federal funds rate, whenever it occurs, will by itself have only a very small effect on the overall level of monetary accommodation… I currently anticipate that… normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time.”
The Fed is coming with the first .25%, and unless the US economy face-plants soon, in September. I do not know one single person in the bond market who thinks it will have “very small effect.” Tightening is tightening. And it’s opposite to every other central bank on the planet. And long-term rates are already up a half-percent, and are likely to go haywire at the prospect of “normalization” toward 3.75% at any pace.
Follow the pie fight, full circle….
The most astounding account of Grexit came yesterday from the London Telegraph’s Ambrose Evans-Pritchard, who claims Tsipras called last Sunday’s plebiscite expecting to lose, and resign. The “No” surprise meant Grexit on his watch, consequences his fault. The Germans in style developed since Bismarck have stood on Greece’s air hose for the last two weeks, expecting closed banks and a shut-down economy would clarify Greek minds. And so Tsipras has belly-crawled back to the Germans asking for a worse deal (and economy) than he could have had two weeks ago.
But all of these “deals” are ridiculous, just fig leafs to protect German leadership from accountability, years ago loaning the Greeks impossible sums to protect German banks. This new can, probably kicked this weekend, won’t last its three year term. Maybe not three months. Even the IMF has advised a massive write-off of Greek debt.
China’s stock market crash of course involves a great deal more money, something like half of China’s GDP gone pfft in two weeks, and greater hazard to the world. But the silliest stories of the week involve questioning China’s ability to stop the crash. China? Flood banks with cash, freeze the sale of half the listed issues, have the People’s Daily say it’s safe to buy, and patriotic besides, and anyone who still wants to sell stock can spend the next few years in re-education camp.
China’s markets will stay frozen (or slightly up-tilted) for however long it takes to un-freeze. And add at least $3 trillion to the unsustainable pile of China debt which it was trying to reduce by opening its stock market and then talking it up. Oops.
Circle back to the Fed, and the all-time policy pie-fight here and a lot of places.
Most of us believe in the role of central banks as fire-fighters. “Lenders of last resort” to frozen markets. Interventions heroic in proportion to the disaster at hand. A minority found on the political right and in markets think that these interventions are market-distorting mistakes. The central banks may get lucky, but otherwise just buy time before a conclusion worse than it otherwise would have been.
I believe to my shoes that the anti-interventionists practice Creationist history, twisting the actual record to support their opposition, and forget altogether what economic life was like before central banks.
But. This time, the global central bank interventions are so huge, and the nations saved so deeply resistant to the reforms necessary to lift interventions and prevent recurrence… just let this sentence trail off. The US has done the best job of reform, especially banks and markets, hence a gold star to Janet Yellen for courage to proceed. China and Europe are still in fundamentally absurd stages.
While watching this unfold, rent “The Great Race,” and toward the end enjoy the most magnificent pie fight ever staged.
Friday, July 3, 2015
Capital Markets Update
By Louis S. Barnes Friday, July 2, 2015
Today feels like a remake of Groundhog Day, Bill Murray trapped as a commentator on CNBC over and over for the monthly release of the same employment stats. But there is more in this week’s news than meets the woodchuck’s eye.
Jobs up (223,000). Incomes not (hourly wages flat in June, up 2.0% year over year). Unemployment down (more Americans escaping the workforce, possibly tunneling beside the woodchuck to the underground cash economy). Manufacturing is doing better (June ISM to 53.5 from 52.8). Manufacturing is also doing worse (factory orders down 1% in May, revised down .7% in April).
Add to that established pattern: a long weekend ahead with an unknown Greek gift on Sunday, so today money has gone to bonds for safety, rates down a little from yesterday. Had we gotten a better employment report, rates would have spiked today, Greece or no Greece. Bonds are now in a state of coiled tension, anticipating Fed liftoff in September. Up to that point, all makes some sense, if only by repetition month after month. But the repetition conceals deep uncertainty and contradiction.
At the Fed, speakers close to Chair Yellen hint that they would have lifted from 0% by now if it weren’t for the odd weakness last winter. Their urgency is plain, partly for bubble-interception, but mainly for the oldest of all their reasons to take away the punch bowl: if workers become sufficiently scarce, sooner or later wages will rise. And the Fed gives only passing mention to conditions ex-US.
A few at the Fed see signals of rising incomes, despite the BLS-zilch today. All still speak of “normalizing” the Fed funds rate between 3.5% and 4%, which would mean mortgage rates 6%-plus, not survivable for many years, not without rising incomes. The Fed is prepared to begin normalizing -- tightening, no matter how euphemized -- while every other central bank on Earth is adding to emergency easing.
The Fed has its logic, but reality intrudes. The US economy was vulnerable to wage-price spirals from 1945 until about 1995, but in that interval also largely free of labor competition from overseas (exceptions: the cheapest manufactures, and Japanese cars). In the last 20 years, overseas competition has crushed US workers.
China quintupled national credit outstanding in an emergency effort to escape the Great Recession. It escaped, but still has that debt, and is now in an emergency effort to re-balance its economy from runaway spending on infrastructure to a modern consumer economy. Last winter China began corporate privatization via opening its stock markets. Since October the Shanghai Composite leapt from 2,000 to 5,000, margin debt quintupling (that word again); new credit limitation in a month collapsed it to 4,000; and Sunday a fearful People’s Bank of China adopted its most extreme easing ever. The Shanghai is still sinking. More for ego and “reserve currency” pretense than common sense, China last winter did not devalue versus the dollar along with the rest of the world. But it cannot maintain PBoC emergency ease and a dollar peg simultaneously, not with the Fed in bolt-headed determination to tighten.
Then, all media are soaked in Greece, but 99% of stories are off the point. Two points: how Europe got into this mess, and the consequences.
Entry: when peripheral Europe joined Germany on the deutschemark-euro, the conversion exchange rate was too rich, which made the periphery (including France) feel rich and spend without behaving like Germans. Which was why they joined. The Germans, incredibly, expected the others to reform themsleves while simultaneously refusing to reform its own trade and budget surpluses. Nearly all “analysis” tries to assign blame. Give it up. ALL are to blame and deserve each other.
Consequences. Markets trade in fear of weekend surprises, and instability. That is the European problem: consequences are unknowable.
If you’re game for sweating the unknowable, stick with the big one: central-banking Groundhog Day. Nobody knows the risks in a central-bank dependent world, whether continuing emergency ease, stopping, or doubling down.
Today feels like a remake of Groundhog Day, Bill Murray trapped as a commentator on CNBC over and over for the monthly release of the same employment stats. But there is more in this week’s news than meets the woodchuck’s eye.
Jobs up (223,000). Incomes not (hourly wages flat in June, up 2.0% year over year). Unemployment down (more Americans escaping the workforce, possibly tunneling beside the woodchuck to the underground cash economy). Manufacturing is doing better (June ISM to 53.5 from 52.8). Manufacturing is also doing worse (factory orders down 1% in May, revised down .7% in April).
Add to that established pattern: a long weekend ahead with an unknown Greek gift on Sunday, so today money has gone to bonds for safety, rates down a little from yesterday. Had we gotten a better employment report, rates would have spiked today, Greece or no Greece. Bonds are now in a state of coiled tension, anticipating Fed liftoff in September. Up to that point, all makes some sense, if only by repetition month after month. But the repetition conceals deep uncertainty and contradiction.
At the Fed, speakers close to Chair Yellen hint that they would have lifted from 0% by now if it weren’t for the odd weakness last winter. Their urgency is plain, partly for bubble-interception, but mainly for the oldest of all their reasons to take away the punch bowl: if workers become sufficiently scarce, sooner or later wages will rise. And the Fed gives only passing mention to conditions ex-US.
A few at the Fed see signals of rising incomes, despite the BLS-zilch today. All still speak of “normalizing” the Fed funds rate between 3.5% and 4%, which would mean mortgage rates 6%-plus, not survivable for many years, not without rising incomes. The Fed is prepared to begin normalizing -- tightening, no matter how euphemized -- while every other central bank on Earth is adding to emergency easing.
The Fed has its logic, but reality intrudes. The US economy was vulnerable to wage-price spirals from 1945 until about 1995, but in that interval also largely free of labor competition from overseas (exceptions: the cheapest manufactures, and Japanese cars). In the last 20 years, overseas competition has crushed US workers.
China quintupled national credit outstanding in an emergency effort to escape the Great Recession. It escaped, but still has that debt, and is now in an emergency effort to re-balance its economy from runaway spending on infrastructure to a modern consumer economy. Last winter China began corporate privatization via opening its stock markets. Since October the Shanghai Composite leapt from 2,000 to 5,000, margin debt quintupling (that word again); new credit limitation in a month collapsed it to 4,000; and Sunday a fearful People’s Bank of China adopted its most extreme easing ever. The Shanghai is still sinking. More for ego and “reserve currency” pretense than common sense, China last winter did not devalue versus the dollar along with the rest of the world. But it cannot maintain PBoC emergency ease and a dollar peg simultaneously, not with the Fed in bolt-headed determination to tighten.
Then, all media are soaked in Greece, but 99% of stories are off the point. Two points: how Europe got into this mess, and the consequences.
Entry: when peripheral Europe joined Germany on the deutschemark-euro, the conversion exchange rate was too rich, which made the periphery (including France) feel rich and spend without behaving like Germans. Which was why they joined. The Germans, incredibly, expected the others to reform themsleves while simultaneously refusing to reform its own trade and budget surpluses. Nearly all “analysis” tries to assign blame. Give it up. ALL are to blame and deserve each other.
Consequences. Markets trade in fear of weekend surprises, and instability. That is the European problem: consequences are unknowable.
If you’re game for sweating the unknowable, stick with the big one: central-banking Groundhog Day. Nobody knows the risks in a central-bank dependent world, whether continuing emergency ease, stopping, or doubling down.
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