by Calculated Risk on 11/11/2011 01:41:00 PM

Yesterday I commented that I thought Europe was probably already in a recession. Since then I have received a number of questions about this comment, especially asking about a recession in the U.S.

First, I do not follow Europe nearly as closely as the U.S., and I was just reacting to the European Commission report that the “recovery in Europe has come to a standstill”. My recession comment was just a guess based on stories out of Europe, and my level of confidence is not very high. So take my comment for what it is worth - very little!

Second, my best guess is the U.S. stays out of recession even if Europe is currently in a recession. Of course there are significant downside risks, especially if there is a disorderly end to the euro.

If we look at the channels of contagion, it seems the impact from Europe – barring a blow-up – will be fairly small. Of course, with sluggish growth, the U.S. is very susceptible to economic shocks, and it also appears that the U.S. is moving to more austerity in 2012 – and that is an additional concern (If Congress does nothing, taxes will increase on working Americans, and more).

What are the channels of contagion from Europe? First, the trade channel – the impact on U.S. exports – is pretty small. Although Europe is a major trading partner, exports only make up a small portion of U.S. GDP. Some of the impact from trade would probably be offset by lower oil prices – and of course lower interest rates as investors seek safety (the European crisis is a key reason the U.S. 10 year bond yield is around 2%).

A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. That is why I looked so closely at the Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices that was released on Monday. The survey showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S. (although lending standards are already pretty tight).

Another possible channel of contagion is less European lending to emerging markets and a slowdown in those economies – and then fewer exports from the U.S. to those emerging markets. This is possible, but we haven’t seen any evidence of this yet. And if emerging markets slowed sharply we’d probably see an offsetting sharp decline in oil prices (hasn't happened).

So, right now, I’m sticking with my general forecast for sluggish GDP and employment growth in the U.S.

by Calculated Risk on 11/11/2011 09:55:00 AM

The preliminary November Reuters / University of Michigan consumer sentiment index increased to 64.2, up from the October reading of 60.9, and up from 55.7 in August.


Click on graph for larger image.

Consumer sentiment is usually impacted by employment (and the unemployment rate) and gasoline prices.

Gasoline prices have declined about 50 cents per gallon from the highs in early May, but prices are still well above the levels of early this year. And the unemployment rate is also very high at 9.0%. Both negatives for sentiment.

In addition, sentiment was probably negatively impacted by the debt ceiling debate in August. Back in August I looked at event driven declines in consumer sentiment. If this decline was "event driven", then we should have seen little impact on consumption (looks correct) and a bounce back fairly quickly, but only to the already low levels of June and July. It looks like we are seeing some bounce back.

However sentiment is still very weak, although above the consensus forecast of 61.5.

by Calculated Risk on 11/11/2011 08:42:00 AM

Below is a table for several European bond yields (links to Bloomberg).

From the WSJ: Italian Senate Approves Budget Bill

Italy's senate approved the 2012 budget law Friday, paving the way for parliament to vote on the bill this weekend and for Prime Minister Silvio Berlusconi to resign. ... The government has scheduled a final cabinet meeting Saturday at 1700 GMT, or as soon as the parliamentary vote is completed.

The speed of the cabinet meetings suggests Mr. Berlusconi is collaborating with the national plan, backed by the head of state, to try to install a new emergency government before markets open on Monday.

The Italian 10 year bond yield has declined to 6.59%.

The Spanish 10 year bond yield has increased to 5.89%. The Spanish 2 year yield is up to 4.74%.

The French 10 year bond yield has increased to 3.48%.

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 11/10/2011 08:36:00 PM

New temporary PMs for Italy and Greece, a new European economic forecast (that is too optimistic, I think Europe is already in a new recession), and S&P goofs ...

From the NY Times: A Shaken Italy Is Poised to Name a New Government

Italy pulled back from the brink on Thursday, as lawmakers seemed poised to usher out Prime Minister Silvio Berlusconi and replace his government with a cabinet of technocrats most likely led by a former European Commissioner, Mario Monti.
...
Mr. Berlusconi was hoping to buy himself more time in power. But now, with the Senate expected to approve the measures on Friday and the Lower House on Saturday, Mr. Berlusconi is expected to step down by Monday.

Asked what had sped up the process, Stefano Micossi, an economist and the director of Assonime, an Italian business research group, put it simply: “The view of the precipice.”

From the Athens News: Papademos confirmed as new PM

... the former ECB vice-president [Lucas Papademos] was confirmed as the country’s next prime minister.

The formalities of the resignation of outgoing ministers and swearing-in of the new government are expected to be completed on Friday, with a view to the holding of vote of confidence in parliament possibly as early Monday.

"The Greek economy is facing huge problems despite the efforts undertaken," Papademos said in his first public remarks. "The choices we will make will be decisive for the Greek people. The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence."

From the NY Times: Europe’s Growth Forecast Is Lowered

Europe’s economic outlook received a fresh dose of gloom Thursday, when the European Commission warned that the Continent’s economies were stalled and faced the risk of a double-dip recession.
...
“The recovery in the European Union has now come to a standstill, and there is a risk of a new recession,” Olli Rehn, the European commissioner for economic and monetary affairs, told reporters in Brussels.

“This forecast is in fact the last wake-up call,” he added.
...
Even Germany, the economic engine of Europe, is now expected to record just 0.8 percent growth in 2012 — more than a percentage point lower than the European Commission predicted in its spring forecast. And none of the euro zone’s other three biggest economies — France, Italy and Spain — are projected to achieve 1 percent growth in 2012.

I think Europe is already in recession.

And from Bloomberg: S&P’s Faux Pas on French Rating Roils Markets

Standard & Poor’s roiled global equity, bond, currency and commodity markets when it sent and then corrected an erroneous message to subscribers suggesting France’s top credit rating had been downgraded.

by Calculated Risk on 11/10/2011 05:16:00 PM

From the FDIC: Century Bank of Georgia, Cartersville, Georgia, Assumes All of the Deposits of Community Bank of Rockmart, Rockmart, Georgia

As of September 30, 2011, Community Bank of Rockmart had approximately $62.4 million in total assets and $55.9 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $14.5 million. ... Community Bank of Rockmart is the 88th FDIC-insured institution to fail in the nation this year, and the 23rd in Georgia.

It feels like Friday!

by Calculated Risk on 11/10/2011 03:09:00 PM

From Freddie Mac: 30-Year Fixed-Rate Mortgage Averages 3.99 Percent

Freddie Mac today released the results of its Primary Mortgage Market Survey(® (PMMS®), showing average mortgage rates changing little from the previous week amid a mix of economic data reports as the 30-year fixed-rate mortgage averaged 3.99 percent, dropping below 4.00 percent for the second time this year. The 30-year fixed averaged 3.94 percent in the October 6, 2011 survey.

And an update to a a couple of graphs - the first comparing 30 year conforming mortgage rates to the MBA Refinance index (on a monthly basis), and the 2nd graph is weekly comparing the Refinance index to the Ten Year yield.

Click on graph for larger image.

This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

The Freddie Mac survey started in 1971. Mortgage rates are currently near the record low for the last 40 years.

It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates might not fall that far - 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73%.

The second graph compares refinance activity to the ten year yield.

The ten year yield is below the level during the 2008 financial crisis - thanks to weak economic growth and the European financial crisis.

Even with conforming 30 year mortgage rates slightly under 4%, there still hasn't be a huge pickup in mortgage refinance activity. This is because borrowers who can refinance, already have - and the rest either can't qualify or have negative equity (the new HARP refinance program will help a little).

Earlier:
• Weekly Initial Unemployment Claims decline to 390,000
• Trade Deficit declines in September as Exports increase

by Calculated Risk on 11/10/2011 12:11:00 PM

From RealtyTrac: U.S. Foreclosure Activity Hits 7-Month High in October

RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for October 2011, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 230,678 U.S. properties in October, a 7 percent increase from the previous month, but still down nearly 31 percent from October 2010.
...
“The October foreclosure numbers continue to show strong signs that foreclosure activity is coming out of the rain delay we’ve been in for the past year as lenders corrected foreclosure paperwork and processing problems,” said James Saccacio, chief executive officer of RealtyTrac.
...
Default notices (NOD, LIS) were filed for the first time on a total of 77,733 U.S. properties in October, a 10 percent increase from September, but still down 23 percent from October 2010. Default notices in states using the judicial process (LIS) reached an 11-month high of 39,282 in October, a 16 percent increase from the previous month, but still down 31 percent from October 2010.
...
Foreclosure auctions (NTS, NFS) were scheduled on 85,321 U.S. properties in October, up 8 percent from the previous month, but still down 38 percent from October 2010.
...
Lenders repossessed a total of 67,624 U.S. properties (REO) in October, a 4 percent increase from the previous month, but still a 27 percent decrease from October 2010.

It appears the pace of foreclosure activity is picking up again. I don't think we will see a huge increase in activity until the mortgage settlement is announced - and that might lead to more modifications too.

Earlier:
• Weekly Initial Unemployment Claims decline to 390,000
• Trade Deficit declines in September as Exports increase

by Calculated Risk on 11/10/2011 09:15:00 AM

The Department of Commerce reports:

[T]otal September exports of $180.4 billion and imports of $223.5 billion resulted in a goods and services deficit of $43.1 billion, down from $44.9 billion in August, revised. September exports were $2.5 billion more than August exports of $177.9 billion. September imports were $0.7 billion more than August imports of $222.8 billion.

The trade deficit was below the consensus forecast of $46.3 billion and the deficit for August was revised down.

The first graph shows the monthly U.S. exports and imports in dollars through September 2011.

Click on graph for larger image.

Exports increased in September, and imports have been mostly moving sideways for the last five months (seasonally adjusted). Exports are well above the pre-recession peak and up 16% compared to September 2010; imports have stalled recently and are up about 12% compared to September 2010.

The second graph shows the U.S. trade deficit, with and without petroleum, through September.

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.

Oil averaged $101.02 per barrel in September, and import oil prices have been declining slowly from $108.70 per barrel in May. The trade deficit with China declined slightly to $28 billion.

Imports have been moving sideways for the last several months - partially due to slightly lower oil prices. However the trade deficit with China continues to be a significant issue. Exports are still trending up.

by Calculated Risk on 11/10/2011 08:30:00 AM

The DOL reports:

In the week ending November 5, the advance figure for seasonally adjusted initial claims was 390,000, a decrease of 10,000 from the previous week's revised figure of 400,000. The 4-week moving average was 400,000, a decrease of 5,250 from the previous week's revised average of 405,250.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 400,000.

This is the lowest level for the 4 week average since April - although this is still elevated.

And here is a long term graph of weekly claims:


All current Employment Graphs

by Calculated Risk on 11/10/2011 07:32:00 AM

• The Italian 10 year bond yield fell to 6.89% after hitting 7.48% yesterday.

• From Bloomberg: Italy’s Senate Speeds Austerity Vote

Italy’s Senate rushed to pass debt- reduction measures that clear the way for establishing a new government that may be led by former European Union Competition Commissioner Mario Monti in a bid to restore confidence in Europe’s second-biggest debtor.

The Senate is set to vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies may vote the following day ... Monti may be nominated as soon as Nov. 13, newspaper Il Sole 24 Ore reported.

• From the NY Times: Debt Sale in Italy Steadies Markets

Italy raised €5 billion, or $6.8 billion, in an auction Thursday of one-year securities. The Italian Treasury sold the full allotment of bonds on offer, but it paid an average rate of 6.09 percent to do so, far above the 3.57 percent it paid for a similar offering on Oct. 3. It also marked the most Italy has had paid for such debt since September 1997, when the country still used the lira.

UPDATE on Greece: Reports are Former ECB Vice President Lucas Papademos will be named Prime Minister. From the Athens News:

"The new Greek interim government will be sworn in at 2:00 p.m. on Friday, according to sources.

Dr. Lucas Papademos, former governor of the central bank of Greece and former vice president of the European Central Bank (ECB), was on Thursday named as the new prime minister of Greece.

Papoulias gave Papademos a mandate to form the new interim government, a Presidency announcement said.

The 64-year-old Papademos, economic adviser to outgoing Premier Papandreou since 2010, was on Thursday named as the prime minister who will head a coalition government in Greece agreed by prime minister George Papandreou (ruling PASOK party leader) and main opposition New Democracy (ND) leader Antonis Samaras that is being formed to pass through parliament a second EU-IMF bailout package for Greece agreed at an extraordinary eurozone summit on October 26 before leading the country to early general elections in three months' time, with the most likely date being February 19.