by Calculated Risk on 3/14/2011 10:31:00 PM

WSJ reports: Japan's Prime Minister said there is a high risk of elevated levels of radiation from a reactor at the Fukushima nuclear power plant that exploded earlier, and urged people within 30 kilometers to stay indoors

CNBC: Japan Reactor Operator: TEPCO Unable to Cool Reactor and Fuel Pool of Daiichi No. 4 Reactor

From the NY Times: Crucial Containment Structure Damaged

by Calculated Risk on 3/14/2011 07:28:00 PM

By request ...

From the NY Times: Japanese Officials Say Another Explosion Was Heard at Nuclear Plant

From the WSJ (before explosion at #2): Japan Nuclear Plant Troubles Deepen

Japanese officials said late Monday there is a high possibility that all three of the stricken reactors at the Fukushima Daiichi nuclear complex in northeastern Japan are now experiencing some degree of melting of their reactor cores that contain fuels—a condition that, if it worsens, could lead to dangerous radiation leaks. This suggests that despite various attempts to cool the reactors since Friday's massive earthquake and tsunami, the temperatures inside them remained precariously high.

NHK English

by Calculated Risk on 3/14/2011 05:00:00 PM

From Landon Thomas at the NY Times: E.U.'s Latest Rescue Package Seen Falling Short-Again

Europe’s leaders cobbled together a new structure over the weekend that will allow its rescue fund, the European Financial Stability Facility, to disburse its entire €440 billion, or $615 billion, allotment if needed, and to buy bonds at government auctions. They also eased the conditions on Greece’s rescue loans by reducing interest rates and extending repayment terms.

But the EFSF can only buy bonds for countries that have taken bailout funds (Greece and Ireland). This leave Portugal out ... unless they ask for a bailout.

And this is just buying time. Landon concludes:

In 2013, for example, Greece’s debt will have increased to almost 160 percent of G.D.P. ... by 2014 it must begin paying interest equivalent to about 8 percent of its G.D.P. — a huge amount by any measure.

For now, Greece has time. But with growth expected to shrink again this year, by 3.4 percent, and with unemployment now at about 15 percent, how long the Greek government, or any government for that matter, can continue to expect so much public sacrifice to pay off its bankers remains to be seen.

Just buying time for now.

by Calculated Risk on 3/14/2011 11:53:00 AM

Sometimes it helps to make a list of issues and hopefully start to check them off. Unfortunately the list has been getting longer, and some of the downside risks will be with us for some time.

Here is a list - with a few short comments:

• Risks from the earthquake in Japan.

• Higher oil prices and a possible supply shock.

Although U.S. oil prices have fallen under $100 per barrel this morning, prices are still high and a risk to the economy. As Professor Hamilton noted over the weekend, the recent sharp decline in consumer sentiment is probably tied to the high price of gasoline.

In addition to the events in Libya, Saudi Troops Enter Bahrain to Help Put Down Unrest

• U.S. Housing Crisis.

House prices are at new post-bubble lows and still falling.

And there is probably more distressed supply coming with 11.1 million U.S. residential properties with negative equity and about 4.3 million mortgage loans are delinquent or in the foreclosure process.

Although foreclosure activity has slowed - because of foreclosure processing issues - distressed sales are expected to increase again later this year.

• The European financial crisis.

Although an agreement was reached late Friday night on the loans to Greece - to extend the term and lower the interest rate - and also to allow the EFSF to intervene in the primary bond market, this just buys more time.

The Greek ten year yield is down to 12.3%. The Irish ten year yield is at 9.4% - even with no interest rate cut for Ireland.

There was some speculation last week that Portugal would request a bailout over the weekend. That didn't happen. Here are the Portuguese 2 year, 5 year and 10 year bond yields from Bloomberg. All are lower today after rising sharply last week.

Here are the Ten Year yields for Spain, and Belgium. Both lower too.

• State and local government cutbacks.

• Possible Federal government cutbacks (even shutdown).

Although the "debt ceiling" debate is just political grandstanding, you never know what will happen (I doubt the U.S. will default). It sounds like another short term budget deal will be reached, and it is but it is possible that more cuts will be enacted this year - slowing growth in 2011.

• Inflation (a two sided coin).

Although I think core inflation will remain below the Fed's target all year, it is possible that inflation could pick up more - or that policymakers will overreact. I think it is likely the Fed will remove the "the measures of underlying inflation have been trending downward" sentence in the FOMC statement tomorrow (see FOMC Preview), but I think we are still a long ways from tighter policy.

by Calculated Risk on 3/14/2011 08:45:00 AM

From the NY Times: Second Explosion at Reactor as Technicians Try to Contain Damage

From the NY Times: Radioactive Releases in Japan Could Last Months, Experts Say

From the WSJ: Supplies Run Short for Quake Survivors

From the NY Times: In Tsunami’s Wake, Much Searching but Few Are Rescued

Libya: From McClatchy: Gadhafi's forces roll east, build pressure on U.S. to step in

Weekend on U.S. economy:
• Summary for Week ending March 11th
• Schedule for Week of March 13th
• Preview of Tuesday FOMC Meeting

by Calculated Risk on 3/13/2011 08:31:00 PM

By requests, a few links ...
From the LA Times: Japan quake toll could number in tens of thousands

From the NY Times: Death Toll Estimate in Japan Soars as Relief Efforts Intensify

From the NY Times: Partial Meltdowns Presumed at Crippled Reactors

Before and after satellite photos from the NY Times.

The Nikkei is off 5%. From the WSJ: Japan Stocks Drop 5% Early Monday

Update: From Bloomberg: Japan Adds $86 Billion to Stabilize Markets After Quake

Earlier on U.S. economy:
• Summary for Week ending March 11th
• Schedule for Week of March 13th
• Preview of Tuesday FOMC Meeting

by Calculated Risk on 3/13/2011 01:30:00 PM

My thoughts are with the Japanese ...

There will be a one day meeting of the Federal Open Market Committee (FOMC) this coming Tuesday. The FOMC statement will be released around 2:15 PM ET, and I expect no changes to the Fed Funds rate, or to the program to reinvest principal payments, or to the Large Scale Asset Purchase program (LSAP, aka "QE2").

Some questions are:
1) how will the statement differ from the January statement,
2) will there be any mention of "tapering" off QE2 purchases (as opposed to ending abruptly in June),
3) and will any members dissent?

1) Possible Statement Changes. I don't expect the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" to be changed any time soon.

There might be some minor changes to the first paragraph to mention the recent improvement in economic and employment data (and possibly mention additional downside risks from higher oil prices and maybe Japan). Also the FOMC statement will continue to note that "measures of underlying inflation are somewhat low", but they might modify or remove the sentence "the measures of underlying inflation have been trending downward."

2) Tapering off of QE2 Purchases? Back in January I heard speculation that the Fed might taper off the QE2 purchases of treasury securities to "promote a smooth transition in markets". That is what the Fed did with previous purchase programs.

However Jon Hilsenrath recently noted in the WSJ that there will probably be no tapering this time (He usually has excellent sources at the Fed):

"Though the idea of tapering has received some attention on Wall Street of late, officials seem unlikely to want to follow that course this time ..."

Hilsenrath also suggested the Fed will probably take a wait and see approach after June to see "how the economy performs later in the year without [QE2]."

As I noted in When will the Fed raise rates?, this suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 0 to 2 months later.
• Drop extended period language a couple months later
• Raise rates in early 2012.

That is probably the earliest the Fed would raise rates - and it could be much later.

3) Dissent? There was some discussion last month that one or two Fed presidents might dissent (both Dallas Fed President Richard Fisher and Philly Fed President Charles Plosser have expressed reservations about QE2). However it appears both will now support the completion of the $600 billion Large Scale Asset Purchase program, but probably oppose any further expansion.

Earlier on U.S. economy:
• Summary for Week ending March 11th
• Schedule for Week of March 13th

by Calculated Risk on 3/13/2011 08:15:00 AM

Earlier on the U.S. economy: Summary for Week ending March 11th

The key releases this week will be industrial production and the consumer price index on Thursday. The Federal Reserve FOMC meets on Tuesday. For housing, the NHAB housing market index will be released on Tuesday, and housing starts on Wednesday.

----- Monday, March 14th -----

----- Tuesday, March 15th -----
8:30 AM: NY Fed Empire Manufacturing Survey for March. The consensus is for a reading of 16.0, up from the reading of 15.43 in February. The regional manufacturing surveys have been showing strong growth in activity recently.

10:00 AM: The March NAHB homebuilder survey. The consensus is for a reading of 17, up slightly from 16 in February. Any number below 50 indicates that more builders view sales conditions as poor than good. This index has been below 25 for the last 3 1/2 years.

2:15 PM: FOMC Meeting Announcement. No changes are expected to either the federal funds rate or QE2.

----- Wednesday, March 16th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been very weak over the last couple months suggesting weak home sales through the first few months of 2011.

8:30 AM: Producer Price Index for February. The consensus is for a 0.6% increase in producer prices, and a 0.2% increase in core PPI.

8:30 AM: Housing Starts for February. After collapsing following the housing bubble, housing starts have mostly moved sideways at a very depressed level for the last two years.

This graph shows total and single unit starts since 1968.

Total housing starts were at 596 thousand (SAAR) in January, up 14.6% from the revised December rate of 520 thousand, however single-family starts decreased 1.0% to 413 thousand in January - the lowest level since early 2009.

The consensus is for a decrease to 560,000 (SAAR) in February.

----- Thursday, March 17th -----
8:30 AM: Consumer Price Index for February. The consensus is for a 0.4% increase for CPI in February - due to a surge in energy prices - but for core CPI to only show an increase of 0.1%.

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for a decrease to 385,000 from 397,000 last week.

9:15 AM ET: The Fed will release Industrial Production and Capacity Utilization for February.

Capacity utilization at 76.1% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007.

The consensus is for a 0.6% increase in Industrial Production in February, and an increase to 76.5% (from 76.1%) for Capacity Utilization.

10:00 AM: Philly Fed Survey for March. The consensus is for a reading of 32.0, down from the very strong 35.9 in February.

10:00 AM: Conference Board Leading Indicators for February. The consensus is for a 1.0% increase for this index.

----- Friday, March 18th -----
After 4:00 PM: The FDIC might have a busy Friday afternoon ...

Best wishes to All!

by Calculated Risk on 3/12/2011 07:48:00 PM

From the NY Times: Japan Pushes to Rescue Survivors as Quake Toll Rises

Entire villages in parts of Japan’s northern Pacific coast have vanished under a wall of water, many communities are cut off, and a nuclear emergency was unfolding at two stricken reactors as Japanese tried to absorb the scale of the destruction after Friday’s powerful earthquake and devastating tsunami.

... Much of the northeast was impassable, and by late Saturday rescuers had not arrived in the worst-hit areas. ... More than 300,000 people have been evacuated, including tens of thousands fleeing the zone around the nuclear plants in Fukushima Prefecture even before news that problems at one plant appeared to be escalating quickly.

Earlier on U.S. economy: Summary for Week ending March 11th

by Calculated Risk on 3/12/2011 11:21:00 AM

My thoughts are with the Japanese today.

There are several downside risks for the U.S. economy including high oil prices and the possibility of a supply disruption, spillover from the European financial crisis, cutbacks at the state and local government level, drag from Federal government fiscal policy, ongoing housing issues and inflation concerns. I am watching all of these issues and I'll touch on a few today ...

As expected, the European financial crisis is now front page news again. The debt ratings for both Greece and Spain were lowered again this week, and there was speculation that Portugal would seek a bailout soon. As a result, the yields on government bonds for Ireland, Greece, Portugal and several other European countries moved higher again this week. However, late Friday night, the Euro-zone leaders reached agreement to provide additional support for certain countries (here is the text of the agreement).

The Middle East and North Africa remain unsettled, with a civil war in Libya. There were large demonstrations in Yemen last night that ended with protestors being shot. However, the so-called “Day of rage” in Saudi Arabia barely materialized.

U.S. oil prices declined slightly to $101 per barrel on Friday. This is up about 20% compared to last March, and the increase in oil prices contributed to a higher trade deficit in January (see below), and probably contributed to the decline in consumer sentiment in the preliminary March Reuters / University of Michigan survey (graph below).

There were also two key housing reports last week. CoreLogic reported that 11.1 million residential properties with a mortgage were in negative equity at the end of Q4 (23.1% of properties with a mortgage), and they also reported that house prices were at a new post-bubble low in January.

On the positive side, retail sales were solid in February – and sales in January were revised up. Also small business optimism improved slightly in February.

Below is a summary of economic data last week mostly in graphs:

• Retail Sales increased 1.0% in February

Click on graph for larger image in graph gallery.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

On a monthly basis, retail sales increased 1.0% from January to February(seasonally adjusted, after revisions), and sales were up 8.9% from February 2010. The December 2010 to January 2011 percent change was revised from +0.3% to +0.7%. This was at expectations, and including the upward revision to January retail sales, this was a solid report.

• Trade Deficit increased in January to $46.3 billion

The Department of Commerce reported exports were up sharply, but imports surged in January. "January exports were $4.4 billion more than December exports of $163.3 billion. January imports were $10.5 billion more than December imports of $203.6 billion."

This graph shows the U.S. trade deficit, with and without petroleum, through January.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The petroleum deficit increased in January as both quantity and import prices continued to rise - averaging $84.34 in January, up from $79.78 in December. Prices will be even higher in February and March. The trade deficit with China was $23.3 billion (NSA) in January. Once again oil and China deficits are essentially the entire trade deficit (or even more).

• CoreLogic: House Prices declined 2.5% in January, Prices at New Post-bubble low

From CoreLogic: CoreLogic® Home Price Index Shows Year-Over-Year Decline for Sixth Straight Month

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index is down 5.7% over the last year, and off 32.8% from the peak.

This is the sixth straight month of year-over-year declines, and the seventh straight month of month-to-month declines. The index is now 1.6% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.

• CoreLogic: 11.1 Million U.S. Properties with Negative Equity in Q4

CoreLogic released the Q4 2010 negative equity report this week "showing that 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. Here are a couple of graphs from the report:

This graph shows the distribution of negative equity (and near negative equity). The more negative equity, the more at risk the homeowner is to losing their home.

About 10% of homeowners with mortgages have more than 25% negative equity.

The second graph from CoreLogic shows the aggregate dollar volume by percent of negative equity. Of the $751 billion in negative equity in Q4, over $450 billion of the aggregate negative equity dollars are for borrowers who are upside down by more than 50%. Just under $200 billion more is for borrowers who have 25% to 50% negative equity.

All of these borrowers are at high risk for foreclosure.

The third graph shows the break down of equity by state. Note: Data not available for Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming.

In Nevada, over 65% of homeowners with mortgages owe more than their homes are worth. Arizona and Florida are around 50%. Michigan, Georgia and California are all over 30%.

• NFIB: Small Business Optimism Index increases in February

From National Federation of Independent Business (NFIB): NFIB Small Business Optimism Index -- Slow and Steady: Continues Gradual Rise in February

This graph shows the small business optimism index since 1986. The index increased to 94.5 in February from 94.1 in January.

Although still fairly low, this is the highest level for the index since December 2007.

• Q4 Flow of Funds: Household Real Estate assets off $6.3 trillion from peak

The Federal Reserve released the Q4 2010 Flow of Funds report this week: Flow of Funds.

Here are a couple of graphs based on data in the report:

This is the Households and Nonprofit net worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles.

The next graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt has now declined by $542 billion from the peak. Studies suggest most of the decline in debt has been because of defaults, but some of the decline is from homeowners paying down debt.

Assets prices, as a percent of GDP, have fallen significantly and are only slightly above historical levels. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting more deleveraging ahead for households.

• Consumer Sentiment declines sharply in March

The preliminary March Reuters / University of Michigan consumer sentiment index declined to 68.2 from 77.5 in February, the lowest level since October 2010. This was well below the consensus forecast of 76.5.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices.

My initial guess is this decline was because of higher gasoline prices.

• Other Economic Stories ...
• BLS: Job Openings decline in January, Low Labor Turnover
• From Jon Hilsenrath at the WSJ: Fed Unlikely to Remove Its Economic Stimulus Just Yet
• From MarketWatch: Moody’s cuts Greece rating, stokes debt fears
• From Bloomberg: Portugal 5-Year Yield at Euro-Era Record on Bailout Speculation
• From Bloomberg: Spain's Rating Downgraded to Aa2 by Moody's Over Bank Cost Concerns
• AAR: Rail Traffic increases in February compared to February 2010.
• Ceridian-UCLA: February PCI Continues to Signal Slow Growth
• From Chris Foote, Kris Gerardi and Paul Willen at the Atlanta Fed: The seductive but flawed logic of principal reduction
• California Realtors: Only three out of five short sale transactions close
• Unofficial Problem Bank list increases to 964 Institutions

Best wishes to all!