housing Posts on Forex Blog
US Battles the Credit Crunch
Jul 28, 2008
The dual track of limiting naked short selling and increased government powers to help Fannie and Freddie seems to have worked for at least the short term. Since that fateful Tuesday, both stocks have rebounded nicely.
And now the US wants to keep that momentum going. Today, movement was made in 3 key areas.
1) SEC Expanding Curbs on Shorts
In a Wall Street Journal article today, they indicated that curbs to shorts may in fact expand. Other industries such home builders, insurance, and other financials may now be included.
The temporary limits covering 19 financials was set to expire at 11:59pm est Tuesday July 29.
The SEC held calls with a major fund association over the weekend to discuss the issue. Of great concern to funds was the ability for computer traded programs to adjust their software for the new rules. That would seem like a technical problem for the industry rather than a major hang up for the SEC.
2) FOMC to Improve Inflation Transparency
As of today, Committee officials use core inflation to set a sustainable price target for the next 3 years.
In a speech in Washington today, outgoing Fed Governor Mishkin outlined how that might be improved. He suggested 3 key changes.
a) Set a mandate rate like that used in England and Europe
b) Switch to 5 year forecasts
c) Use headline inflation rather than core inflation.
This speech is notable as Governor Mishkin is sometimes thought of as an inflation dove. The wide divergence between headline and core inflation in recent months makes the third point unlikely for the near term. However, a mandate rate (which he has long supported) and 5 year outlooks are plausible.
I am not convinced mandate targets are really useful. The Bank of England, the Royal Bank of Australia, and the ECB seem to be cornered by their rates. In each case, the bank is willing to exceed their mandate in the short term while they wait for their respective economies to slow enough to justify further rate action.
Had the Fed been similarly handcuffed, it is unlikely they would have cut rates as substantially or as fast as they did in the last year. (Though watching Jim Cramer's head explode on national TV would have been great entertainment).
3) Paulson Pushes Covered Bonds
In what could be a major strike against the credit crunch, US Treasurer Hank Paulson announced best practices for covered bonds.
What are covered bonds and why would they help?
Glad you asked.
Like the mortgage backed securities that got the US into this mess, they are mortgage pools backed by cash flow.
I can hear the groans an snores already, but stay with me.
Unlike the CDOs of recent years - the originating institution MUST keep the security on their own balance sheet. That is, they can not sell them off to others. Perhaps the biggest problem with the recent run in mortgage securities is that they were sold off to other institutions. Forcing them to stay with origination should enforce higher lending standards.
More specifically, covered bonds would have the following limits:
- balance stays on asset sheet of lender
- covered bonds can not exceed 4% of lender liabilities
- loans must have documented income
- mortgages over 60 days delinquent must come out of the pool
- investors in the pool must be updated monthly
Today, Europe's mortgage market largely functions under this model to the tune of $3 trillion. In contrast, their are virtually no covered bonds in the US.
Credit Crunch, housing, Fed, SEC, USD
Eurozone Slowing Down
Jul 9, 2008
Yesterday, German and Belgium finance ministers stressed the need for a balance between inflation and growth. In essences, they were suggesting that a slow down in the Eurozone would naturally reduce inflationary pressures.
Today, those comments were followed up with signs of a European wide slow down.
First, trade balances worsened in Germany and France.
Then, the Eurozone Q1 GDP was finalized at 0.7%, vs expectations for 0.8%. Still a healthy annualized growth rate of 2.2%,
But then the real kicker came in to play. The German IFO and suggested that annualized GDP at 1.6%. And this figure was based on the assumption oil prices stabilize at US $135 and the Euro remains around 1.57
In particular, they noted "the acceleration (in Q1 GDP) clearly overstated the underlying trend. Real GDP growth is forecast to slowdown considerably in the coming quarters, expanding at rates of 0.0% in Q2 and 0.3% in both Q3 and Q4"
The Ifo went on to report "The expansion of investment is likely to moderate considerably in the coming quarters as the demand outlook becomes dimmer, pressures on productive capacity are easing and external financing conditions are deteriorating."
And, most ominously, they warned of housing problems in other European countries. Noting, "the construction component of investment is depressed by the real-estate downturn observed in an increasing number of Euro-zone countries."
Outside of the Eurozone proper, the UK has gone into contraction in service, manufacturing, and construction.
And now Ireland, the Irish tiger, is also warning on a recession. Irish unemployment has climbed to 5.7%, property prices have dropped 10%, and the economy shrank by 1.5% in Q1.
Eventually, slow downs in the UK and Ireland will spillover to the Eurozone.
Forex markets could be facing a rather interesting situation later this year, as the Fed may be raising rates at a time when central banks across Europe are cutting.
Euro, GDP, housing, Ifo
The Calm Before the USD Storm?
Jun 24, 2008
Bring back Fed Speak.
The Fed will have to craft tomorrow's statement very carefully. Perhaps some good ole' Greenspan ambiguity would be best.
A spat of negative news today confirmed the US economy is facing difficult times. The Case-Shiller index showed a whopping 15.3% annual decline in home prices. The OFHEO report, which tracks mortgages backed by Freddie Mac and Fannie Mae, showed an annual drop of 4.6%. The Richmond Fed Survey dropped to a low of 4.5 And consumer confidence fell far more than expected, to a reading of 50.4 (vs expected 56.5).
Yet the dollar didn't fall of the face of the earth.
Instead, it remained within a fairly narrow range against the Euro, Pound, and Yen. Evidently, traders feel the Fed is turning hawkish.
Aside from a month of hawkish commentary, what fundamentals can rationalize a strong statement out of the Fed?
1. Uptick in Q1 GDP
I can't stress this one enough. Q1 GDP is expected to be revised up to 1.2% later this week. From an initial reading of 0.6% (later revised 0.9%), that is fantastic.
2. The ARM Conversion Wave
Years ago, the Economist put out a great article discussing the housing bubble pre-burst. In it, they included a graph detailing the ARM conversion wave. The wave had a considerable upswing in Spring 2007 (start of credit crisis), another bump Spring 2008, and a final massive bump in 2010. That suggests that housing will see at least a temporary reprieve for the next 18 months.
3. FDI Outflows are Dropping, Inflows are Picking Up
The OECD today reported that foreign outflows have dropped sharply among member nations. Outflows are now expected to come in at $1.14 trillion, down 37% from the $1.82 trillion in 2007. Indeed, lower than the $1.21 trillion in 2006.
And last week, the TIC showed a sharp increase of inflows of $115 billion vs expected $63.3 billion.
4. Durable Goods Orders
The last 2 reports have beat expectations. The latest report will come out almost 2 hours before the Fed statement. Another surprise (especially excluding autos) is a sure sign of US resiliency.
5. Politicians are Dragging Us Down
It is not a great stretch to suggest political speeches are helping to drag down consumer sentiment.
The Fed is charged with remaining out of politics. As such, they should be expected to ignore the constant down talking of the US economy that is coming out of the politicos.
6. The Greenspan Tarnishment
Former Fed Chairman has taken a lot of heat for leaving rates too low for too long. Bernanke must be conscious of this perception. He must show this Fed will not repeat the mistakes of the past.
Expect the Fed to leave rates unchanged with commentary highly suggestive of rate hikes in the near future.
GDP, housing, Bernanke, durable goods, Fed, FOMC, USD
Forex Events June 22 - June 25
Jun 22, 2008
This week will be dominated by US data. The key mover may be comments from the Fed rate decision at 2:15pm est Wednesday.
Events Monday and Friday are clearly Euro positive, Greenback negative. Watch for the Euro to test the 1.5800 resistance on Monday. If it finally breaks the range, we could see an end to the sideways trading of the last few months as the ECB is definitely going to hike rates July 3rd.
New Zealand and Japan, 2 key parts of the carry trade, report significant data late Wednesday evening. Surprises on either side could be an omen for future carry trade volatility.
All times eastern standard time
Monday June 23
4am German IFO - Current and Expectations
4am Euro-zone PMI Services (expect 50.4)
4am Euro-zone PMI Manufacturing (expect 50.2)
Tuesday June 24
4am Swiss UBS Consumption Indicator
9am Case Shiller Home Price Index (expect 168.8)
10am US Consumer Confidence (expect 56.7, a 16 year low)
7:50pm Japan Trade balance (exclude services)
Wednesday June 25
8:30am US Durable Good Orders (expect -0.9% excluding transport)
10am US New Home sales (expect 530k, a flat reading)
2:15pm Fed Rate Decision (expect hold at 2%)
6:45pm New Zealand Current Account (expect -7.5%)
Thursday June 26
7:30am US fed Vice Chairman Speaks at ECB
8:30am US Q1 GDP finalized (expect 1.2% from initial 0.6%, thats big folks. Note, upgraded from 0.6% to 0.9% previously)
10am US Existing Home Sales
6:45pm New Zealand Q1 GDP (expect 2.1%)
6:45pm New Zealand May Trade Balance (expect +150million)
7:30pm Japan CPI
7:50pm Japan Retail Trade (Domestic)
Friday June 27
2:50am France GDP (expect 2.2%)
4am Euro-zone Current Account
4:30am Great Britain Q1 GDP (expect 2.5%)
10:00am US university of Michigan Consumer Confidence (expect 56.8)
European Central Bank, CPI, Carry Trade, trade balance, housing, upcoming reports, consumer confidence, durable goods, Fed, IFO
US Economic Calendar June 9 - June 13
Jun 8, 2008
Monday June 9
Pending Home Sales (expect 82.6, down 0.4)
NY Fed Governor Timothy Geithner Speaks About Economy (8:15am est)
Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn Speak About Inflation (3:15pm)
Tuesday June 10
Manpower Employment Outlook for Q3
Imports (expect $209.1 billion, +$2.4 billion)
Exports (expect $149.7 billion, +$1.2 billion)
Trade Balance (expect -$59.4 billion, +1.2 billion)
Dallas Fed President Richard Fisher Speaks
Wednesday June 11
Quarterly Services for Q1
Beige Book for June 24-25 FOMC meeting
Fed Vice Chairman Donald Kohn speaks
Fed Governor Randolph Kroszner speaks
Thursday June 12
Retails Sales (expect -0.3%)
Retail Sales excluding Auto (expect +0.2%)
Friday June 13
CPI (expect +0.2%)
Core Index (expect +0.1% to 2.2%)
University of Michigan Preliminary Consumer Sentiment (expect 55)
CPI, trade balance, housing, upcoming reports, consumer confidence, Fed
US Non Farm Payroll Preview
Jun 5, 2008
Markets are expecting a loss of 60k jobs in tomorrow's Non Farm Payroll (NFP) report.
The DailyFX has a nice preview of the report. In general, they take a fairly negative view and hint that a 100k drop is not out of the question. Specifically, they highlight that each of the previous 3 recessions has seen jobs drop for 10 months or more. Further, previous recessions have seen monthly job losses spike above 300k. They reveal 10 indicators they are using to predict a number above expectations.
While I agree with their overall thesis, I do think they are jumping the gun.
1. Fed Comments - The Fed has made a number of comments indicating the economy may avoid a severe slowdown. It started last week with comments from Dallas Fed President Fisher and Fed Governor Mishkin's resignation. It continued this week with back-to-back days of comments from Chairman Ben Bernanke.
And today, in comments that may have flown a little under the radar with the RNBZ and ECB statements over the last 24 hours, Richmond Fed President Lacker reiterated that the US may avoid a severe slowdown and that inflation is becoming the main concern.
2. Macro reports this week - The ISM Non manufacturing, ADP, and Initial Jobless Claims all improved. Individually, each of those measures may be unreliable, but taken as a trio they can not be easily dismissed.
I believe economists may be missing a crucial factor in this slowdown - illegal immigration. Job losses are highest in construction and manufacturing. Those are 2 industries that have extensively tapped into the illegal immigrant labor pool. As jobs dry up, they will likely return to their native countries and never show up on job loss reports.
3. Foreclosures are becoming confined to 6 states. The six can broken into 2 groups - those with over development and risky loans (California, Florida, Arizona, and Nevada) and those suffering from job losses (Michigan and Ohio). Beyond those states, housing markets have begun to stabilize. While those states are big enough to remain a concern for the overall health of the US economy, it is important to realize that 44 other states are getting better.
I recommend you read the DailyFX NFP preview
This has been an eventful week in the forex markets - comments from central banks and jobs reports have seen sharp moves in the GBPUSD (200 point swing Monday), the EURUSD (2 big point swings this week - one uip, one down), and the Kiwi (down big against many currencies yesterday).
If you've ever felt you could be better at trading forex around economic news releases, this Elliot Wave Report is a must-read.
jobs report, housing, Fed, USD
Return of the Credit Crunch?
Jun 2, 2008
Just as invesstors thought it was safe to come out and play - the credit crunch returns.
Reverberations from last year's financial market crises awoke the sleeping giant US today. The S&P cut ratings of 3 major investment banks (Lehamn, Merrill Lynch, and Morgan Stanley), warned of a cut to another (Wachovia) and changed the outlook to negative on 2 others (JPMorgan Chase and Bank of America). The lone silver lining from the S&P was kind of a slap and a kiss as they stated that Citigroup was no longer on the verge of a downgrade, but one may still happen over the next 2 years.
In other crunch related moves, Wachovia fired CEO Ken Thompson Sunday - 1 month after stripping him of his position as chairman. Acting chairman Lanty Smith will take over as CEO at a time when losses are expected to grow for Wachovia.
Washington Mutual also joined the fire the headfigure train. WaMu announced that Kerry Killinger will end his reign as chairman starting next month.
But those issues are all lingering effects from the US credit crunch last year.
The real problem may now stem from a crises in the UK.
UK mortgage approvals fell to 58k in April, 7k lower than expected. That is the lowest reading since they started tracking approval numbers in 1999.
With echoes of Bear Sterns still in the minds of many, Bradford ' Bingley closed down a whopping 24%. Shares had fallen as far as 32%. Shares stumbled after a series of bad news - profit will likely fall, the CEO will retire, and rights will be sold at a steep discount. They are the UK's largest buy-to-let lender and 8th largest bank. Profits will likely come in at £150m a whopping £100m short of forecasts. Chairman Steven Crawshaw will retire due to a cardiovascular condition known as angina. (Note angina itself is not a disease, rather a symptom of other diseases such as coronary artery disease). Chairman Rod Kent will take over for Mr. Crawshaw.
But the most stunning news coming from Bradford 'Bingley was a drastic slash in the pricing for rights. TPG (aka Texas Pacific) will buy a 23% stake for $353 million, at a rate of £. That is far below the initial price of £82. The whopping last minute discount helped Citigroup and UBS - 2 banks already suffering terribly during the credit crunch - as both would have been stuck with extra shares from the offering. In April, TPG also injected cash into Washington Mutual.
Since March 2006, Bradford and Bingley has fallen from a market cap of £ 3.3 billion to £405 million. Yikes!
Despite the heavy bout of negativity, signs of a US recovery from the crunch were still to be found. ISM manufacturing rose to 49.6 - 1.1 above expectations. While this is till technically a contraction (above 50 is growth), their is reason to be optimistic as exports hit a 4 year high. In addition, construction fell 0.4%, beating expectations for -0.6 reading. And March was revised up from -1.1% to -0.6%.
The GBPUSD fell 200 points, briefly touching 1.96 before recovering to 1.9640 late in the day. The Yen was the strongest performer of the day - as forex traders fled the carry trade in the wake of credit crunch fears.
Credit Crunch, housing, GBP, USD
FX Calendar: June 2 - June 6
Jun 1, 2008
After a couple weeks of see-saw data from the Eurozone and US, the FX market is looking for a definitive direction this week. US Reports will likely dominate Forex headlines. US Employment numbers on Wednesday (ADP) and Friday (Non Farm payrolls) have the potential to be major movers.
The European Central bank and Bank of England announce rates Thursday. Both are expected to remain flat.
Monday June 2
4:30am est - UK Mortgage Approvals (expect 65k, +1k)
10:00am est - US ISM Manufacturing (expect 48.5, -0.1)
Tuesday June 3
5:00am est - Eurozone MoM PPI (expect 6.1%, +0.4%)
7:01pm est - UK Consumer Confidence (expect 67, -3)
7:15pm est - Japan Capital Spending (expect -9.8%, -2.1)
Wednesday June 4
4:00am est - Eurozone Composite PMI (expect flat at 51.1)
5:00am est - Eurozone Retail Sales (expect 0.2%, +0.6%)
6:00am est - UK PMI Services (expect 50.5%, +0.1%)
8:15am est - US ADP Employment Change (expect -30k, -40k)
10:00am est - ISM Non-Manufacturing Composite (expect 51, -1)
Thursday June 5
7:00am est - BOE Rates (expect unchanged at 5%)
7:45am est - ECB Rates (expect unchanged at 4%)
Friday June 6
8:30am est - Non Farm payroll (expect -51k, -71k)
8:30am est - Unemployment Rate (expect 5.1%, -0.1%)
Bank of England, ECB, PPI, interest rates, jobs report, ISM, housing, upcoming reports, consumer confidence
Data Bad, But Dollar rebounds on Oil Drop
May 27, 2008
First, the good news. Oil fell $3.34 (2.5%) today to close at $128.85.
Now the bad news. The Conference Board's Consumer Confidence Index fell more than expected to 57.2. That is the lowest reading since October 1992, which is really scary when we consider that neither the dot-com bust or 9/11 was bad enough to create such negative sentiment. Market participants had expected a reading of 61. Digging deeper, business conditions fell sharply while jobs sentiment remained fairly flat.
In housing, new home sales were up 3.3% from March. However, that number obfuscates the fact that March was revised from 526k to 509k. Year over year, new US home sales are down more than 40%. Given that February to June is the typical apex in new home sales, these weak numbers look concerning. The median price rose by 1.5% to $242.5k, but that too hides the extras thrown in by homebuilders to move units. Echoing the minor improvements in price and sales, April inventory fell to a 10.6 month supply (from 11.1 in March).
The Case-Shiller index was down 14% YoY, the biggest drop since the index was created in 1988.That number can probably be taken with a grain of salt, as it only measures the 20 largest cities and the index did not exist during the late 80s housing bust.
Again, despite the pessimistic news, the Oil number seemed to matter most, as the USD was up against most of the majors Tuesday.
Greenback, housing, oil, USD
A Bundle of US Data This Week May Move Dollar Trades
May 27, 2008
The US will see a number of potentially trade driving reports in this holiday shortened week.
On Tuesday May 27
The S&P Case-Shiller Index at 9am est.
At 10am, New Home Sales and consumer confidence will be reported.
Wednesday May 28
Durable goods will be reported at 8:30am est, before equity markets open.
Thursday May 29
Revised Q1 GDP and weekly jobless claims are reported at 8:30am est.
Also, Fed Chief Ben Bernanke speaks at 2:30pm in Basel Switzerland. And Fed Vice Chairman Kohn talks at 7pm.
On Friday May 30
Consumer sentiment will be reported at 10am est
Other notable forex movers will be the German Unemployment numbers May 29 and Canada's Q1 GDP.
In light volume May 26, the EURUSD held above the $1.5750 support. Given the upbeat comments from the Germans last week, and the negative mood from the US Fed, this week's data has the potential for sending the EURUSD above the $1.58 resistance - we shall see.
GDP, jobs report, housing, Bernanke, upcoming reports, consumer confidence, Fed
Dollar Drops on Homes, Oil
May 23, 2008
The US Dollar was down against most currencies on Friday. The usual suspects - surging energy prices and a further decline in housing - were to blame.
The National Association of Realtors reported that US Home sales slid 1% to 4.89 million units. That was better than the market expected number of 4.55 million units. However, the markets found no reason to be optimistic as supply continued to grow and prices kept dropping.
Home sales were down 17.5% YoY (5.93 million) and a whopping 30% from the peak of September 2005 (7.2 million). The lack of home buying has sent the supply up to 11.2 months - a record level. The median price for existing single family homes declined 8.5% YoY, to a little over $200k.
On the energy front - oil rose $2.67 to close at $131.65. Other futures marched along. Gas rose 6.43¢ to $3.3687, diesel was up 1.9¢ to $4.558, heating futures rose 7.11 ¢ to $3.8461, and nat gas rose 19.8¢ to $11.563.
Bring back the sanity! IMO, no way fundamentals support the energy numbers. Demand for gas is down, gas inventories stand at near all time highs, and several pipeline projects that will reduce risk premiums and make transportation more efficient. These new pipeline routes will begin to open in the next few years.
On the heels of this pessimistic data, the US Dollar finished lower against the Euro, Japanese Yen, Swiss Franc, and Australian Dollar. Notably, the USD was flat against the Pound and up slightly vs the Canadian Dollar.
Greenback, housing, oil, USD
Dollar bounces back on Oil, Jobs, and Bill Gross.
May 22, 2008
The dollar was up against most world currencies today as signs of recovery keep peaking out from the trough of bad news. After hitting $135 in overnight trading, oil slipped to $130.81. Phil Flynn, the famous energy trader, has an excellent article at OnTheBid suggesting the oil bull run may be over. In addition, jobless claims dropped to the lowest in 4 weeks.
Further fueling beliefs that the Fed may now battle inflation, PIMCO Chief Investment Officer Bill Gross came out with strong arguments for battling inflation. He asked others to join him "in lobbying for change in US leadership...and the market's assumption of low relative US inflation in comparison to our global competitors." PIMCO runs the world's largest bond fund.
Now the bad news. The oil spikes of 73, 79, and 90 all led to quarterly contractions. Crude prices have risen 35% since April! Yeah, thats a spike. While the Us has so far avoided outright contraction, the bull run in crude is sure to be felt. In addition, according to OFHEO, house prices fell 3.1% in Q1 2008 YoY, and 1.7% since Q4 2007
The National Association of Realtors will release April existing home sales at 10:00am est tomorrow. The expected number is 4.85 million, the lowest since the number started tracking in 1999. (I wonder how times the existing home sales figure was cited by realtors during the run up? 'Existing home sales are at an all time high! Get in ow or forever be priced out!' Blah). President Bush will speak a short time later at 10:35 est, so don't run away from your TV after the NAR report.
jobs report, housing, oil, USD
US Dollar Rises On Positive Data
May 19, 2008
An index of leading US economic indicators was up 0.1% on Monday, 0.2% better than the expected. In other good news for the greenback, housing showed a surprising rebound, as construction (+8.2%) and building permits (+4.9%) rose. In addition, Southern California, one of the largest US markets in terms of value, rose 22% from March to April. The data supports the belief of many traders that the US may avoid a recession altogether. While the recovery is slow and weak, the US has not had 2 quarters of negative growth.
The housing data should be taken with a grain of salt. Construction is being driven by new apartment complexes and Spring typically sees an upswing in home purchases In a mixed sign, much of the buying was for foreclosures. While each foreclosure came with the pain of a default, purchases help to set a bottom. I personally thought most buyers would wait a while longer. The fact that people are coming off the sidelines now is further proof the worst may be over for the US.
In late trading, EURUSD is at $1.5527, the GBPUSD is at $1.8510, and the USDJPY is at ¥104.15.
Greenback, housing, USD
Indian Rupee at 13 Month Low, Housing Hit Hard Q1
May 15, 2008
The Rupee was down 0.7% Thursday, hitting 42.75/76 against the dollar. This is the lowest level since mid April 2007. High oil prices plus weak housing data in the first quarter have steadily lead currency traders out of the Rupee.
Housing has suffered in India's major markets this year. Markets in Bangalore, Mumbai, Chennai, and Pune are reporting a 15-20% decline in prices. Other major locales such Delhi, Maharani Bagh, and Hauz Khas have seen 5-10% declines.
Oil is India's biggest import, as such the meteroic price increase has hit them especially hard. India' oil import bill was up more than 33% for their economic year of 07-08.
Read more at the India Times on Rupee and India Times on Housing
Rupee, India, housing
