by Calculated Risk on 7/13/2011 09:05:00 PM

The Euro zone summit meeting originally planned for Friday has apparently been delayed - probably until next week or until an agreement can be announced.

Meanwhile the bank stress test results will be released on Friday, and there is already disagreement about the results.

• From Reuters: Euro zone leaders summit on Greece seen next week-diplomats

Leaders of countries in the euro zone are likely to meet next week to discuss a second aid package for Greece as well as private-sector involvement in reducing the country's debt burden, EU diplomats said on Wednesday.

• From the Irish Times: Europe must be decisive on euro crisis, says Kenny

EUROPE HAS to respond “comprehensively and decisively’’ to the economic crisis, Taoiseach Enda Kenny told the Dáil. “Ireland will contribute to that,’’ he said.

Mr Kenny said there was no point in having a EU Council meeting tomorrow unless there was a decision, or set of decisions, on the European situation.

• From Bloomberg: Germany’s Helaba Snubs EU Stress-Test Regulator in Run Up to Publication

Germany’s Landesbank Hessen- Thueringen snubbed the European Union’s bank stress tests two days before the publication of results, refusing to give the European Banking Authority permission to publish all of its data.

The bank, known as Helaba, disputes the EBA’s measurements of Core Tier 1 capital, the factor by which banks are said to have passed or failed the tests, because they don’t include some instruments allowed by German regulators. The lender said it passed the exams with a capital ratio of 6.8 percent, counting contractual changes around state funds of 1.92 billion euros ($2.71 billion), not included in the EBA results.

• From the Irish Times: Irish bond yields soar to record highs on 'junk' status

by Calculated Risk on 7/13/2011 05:07:00 PM

From Moody's: Moody's Places US Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade

Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody's had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.
...
The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate.

No surprise.

by Calculated Risk on 7/13/2011 01:00:00 PM

• From Bloomberg: Greece’s Issuer Default Ratings Cut to CCC From B+ by Fitch on Lack of Aid

Greece had its long-term foreign and local currency issuer default ratings cut to CCC from B+ by Fitch Ratings because of the lack of an aid program for the debt-laden country.

• Did Bernanke shift on QE3?

From Binyamin Appelbaum at the NY Times: Bernanke Says Fed Would Consider New Stimulus Effort

The unexpected weakness is forcing the Fed to reconsider its determination early this year to refrain from new efforts to stimulate growth. While no additional actions appear imminent, Mr. Bernanke said in Congressional testimony Wednesday that the Fed would be prepared to act if necessary ...

Mr. Bernanke made clear Wednesday that a resumption of the central bank’s economic revival campaign faces a high hurdle. He said that the Fed would look for two conditions: economic weakness beyond current expectations and a renewed threat of deflation.

The first seems obvious to most people. The second, however, may the more important factor.

From Jon Hilsenrath at the WSJ: Bernanke Shifts Tone on Further Policy Easing

Chairman Ben Bernanke acknowledged in his House testimony today that the Federal Reserve might need to take additional steps to ease monetary policy. “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” he said.

This represents a slight shift in tone for the Fed chairman. In a press conference in June, Mr. Bernanke, in response to a question, laid out what the Fed COULD do if it saw a need to provide more stimulus to the economy. In his testimony Wednesday, he effectively said more stimulus MIGHT be needed, but only under certain conditions, namely persistent slow growth and a slowdown in inflation that again raises the prospect of Japan-style deflation.

This isn't like Jackson Hole last year when Bernanke telegraphed QE2. If this is a shift in tone, it is slight.

by Calculated Risk on 7/13/2011 10:00:00 AM

Note: Testimony starts at 10 AM ET.

Here is the CSpan feed

Here is the CNBC feed.

Prepared testimony from Fed Chairman Ben Bernanke: Semiannual Monetary Policy Report to the Congress

by Calculated Risk on 7/13/2011 09:00:00 AM

This is the new UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index^TM

Press Release: Pulse of Commerce Index Rebounds – Up 1.0 Percent In June

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation rose 1.0 percent in June on a seasonally and workday adjusted basis, a welcome rebound following declines in the previous two months. Despite the stronger performance in June, the economy continues to remain in idle with the PCI remaining below its level at the end of the first quarter.

“Over the past year the U.S. economy has been in ‘she loves me, she loves me not’ mode,” said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast. “Bad news has been alternating with good, leaving investors and forecasters nervous and unable to identify sustainable trends.”

Click on graph for larger image in graph gallery.

This graph shows the index since January 2000.

“The June PCI is anticipating industrial production to show modest growth of 0.17 percent for June when the number is released by the Government on July 15, 2011,” [said Craig Manson, senior vice president and Index expert for Ceridian]
...
The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking ...

This index has mostly been moving sideways all year. As Leamer noted, this "could be the start of a positive trend, but a one month spike does not make a trend, particularly in light of the many false starts experienced over the last year."

Notes: I've heard from other sources that trucking picked up a little at the end of June - perhaps because of lower fuel prices. This index does appear to track Industrial Production over time (with plenty of noise).

by Calculated Risk on 7/13/2011 07:21:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The seasonally adjusted Purchase Index decreased 2.6 percent from one week earlier. ... Refinance Index decreased 6.2 percent from the previous week, and was 42.1 percent lower than a year ago. The Refinance Index has decreased the past four consecutive weeks, reaching its lowest level since April 29, 2011.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.55 percent from 4.69 percent, with points increasing to 0.99 from 0.90 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image in graph gallery.

The four week average is still mostly moving sideways at about 1997 levels.

Of course this doesn't include the large number of cash buyers ... but this suggests purchase activity remains fairly weak.

by Calculated Risk on 7/12/2011 09:35:00 PM

I'm frequently asked why I'm not worried about the debt ceiling, and why the bond market doesn't seem to care.

The answer is the debt ceiling is a joke. It serves no purpose except political posturing.

The budget is about the deficit; the debt ceiling is about paying the bills - and the U.S. will pay its bills.

Here is what I wrote two months ago:

Congress will probably push this to the brink, but they will raise the debt ceiling before the country defaults. The first rule for most politicians is to get re-elected, and the easiest way to guarantee losing in 2012 is to throw the country back into recession. If that happened, I believe the voters would correctly blame the leaders of Congress, and I think Congress knows that too. Therefore it won't happen. I'm not worried and neither are investors.

We are almost to the "brink".

Let me add: In this case, voters would blame the Republican party, and if the debt ceiling is not raised, the "Republican" brand would become toxic and synonymous with fiscal irresponsibility. The leaders of Congress know that and they will scramble to find a solution. I doubt this is the end of the GOP :-)

Earlier I argued the smart thing to do would be to eliminate the debt ceiling. Maybe we are headed in that direction. Today, Senator Mitch McConnell proposed something along those lines (not clean though).

Senate Minority Leader Mitch McConnell (R., Ky.) unveiled a new proposal that would allow President Barack Obama to raise on his own the federal borrowing limit by $2.4 trillion in three installments before the end of 2012, unless two-thirds of Congress votes to block it.

Somehow the debt ceiling will be raised. Of course there is a huge battle ahead over the budget for the next fiscal year (the fiscal year starts on October 1st). It never ends.

by Calculated Risk on 7/12/2011 05:15:00 PM

Special Note: It now appears the NAR will release the benchmark revisions in August (ht Mary Ellen). These revisions are expected to show significantly fewer sales and lower levels of inventory for the last few years. Hopefully the new methodology will be fully disclosed. Also, hopefully the NAR will release sales and inventory for all revisions (not just the last year).

From DataQuick: Southland Home Sales Quicken, Median Price Highest This Year

Southern California home sales last month shot up more than usual from May to the highest level for any month since June 2010, when the market got its last big boost from homebuyer tax credits. Sales of lower-cost homes, driven by investors and first-time buyers, and even high-end sales continued to outshine traditional move-up activity in middle price ranges ...

A total of 20,532 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in June. That was up 11.6 percent from 18,394 in May but down 14.0 percent from 23,871 in June 2010, according to San Diego-based DataQuick.
...
Builders continue to suffer on a scale not seen in decades: The 1,395 newly built houses and condos sold last month marked a 36 percent drop from a year earlier and the lowest new-home total for a June in DataQuick’s records.
...
Distressed property sales accounted for just over half of the Southland resale market last month. Roughly one out of three homes resold was a foreclosure, while almost one in five was a “short sale.”

This is another report suggesting an increase in existing home sales in June compared to the reported 4.81 million sold in May on a seasonally adjusted annual rate (SAAR) basis (before the benchmark revisions).

On New Home sales: My understanding is DataQuick reports when the escrow closes, and the Census Bureau reports when a contract is signed. It usually takes about 6 months to close (builders usually build to contract with few speculative homes these days). So this low level is related to the Census Bureau reports for 6 months ago. Also, last year, June sales (reported at close) were boosted by the housing tax credit.

National existing home sales for June will be reported on July 20th, and new home sales will reported on July 26th.

by Calculated Risk on 7/12/2011 03:38:00 PM

Bloomberg reports that Moody's has downgraded Irish debt to junk (Ba1) with a negative outlook (further downgrades possible). This wasn't a surprise ...

“The key driver for today’s rating action is the growing possibility that following the end of the current EU/IMF support program at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals."

The Irish 10 year yield is up to a record 13.3%.

But most yields were down today (see table below).

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

by Calculated Risk on 7/12/2011 01:29:00 PM

From Eric Pryne at the Seattle Times: Apartment developers bypass suburbs, target Seattle (ht David)

More new apartments will come on the market in King and Snohomish counties in 2013 than in any year since 1991, one researcher projects.

This apartment boom, however, is different from those that preceded it.

This time it's focused almost entirely on Seattle. Developers, for the most part, are bypassing the suburbs.
...
Observers attributed the turnaround to a host of influences: foreclosed homeowners re-entering the rental market; an economic recovery that was sufficiently strong to allow some young adults to finally move into their own places; and growing disillusionment with homeownership.

Thanks to the recession, however, there was little new supply on the horizon to meet this surge in demand: In King and Snohomish counties, 2011 is shaping up as the worst year for new-project completions since at least 2004.

Now apartment developers are rushing to fill that gap, inspired in part by projections that growing demand will continue to push rents up — perhaps another 25 percent by 2015 ...

This article touches on several themes we've been discussing:
• Multi-family completions in 2011 will be at record lows (also total completions).
• Starts for multi-family will pick up sharply this year, but the new supply will not be on the market until 2012 or 2013.
• this lack of supply will put upward pressure on rents (and lower the price-to-rent ratio for homes).
• And there is more "disillusionment with homeownership"